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The Tax Publishers ACIT v. Seagram Manufacturing (P.) Ltd. (Now Pernod Richard India Pvt. Ltd.) & Vice-Versa [ITA Nos. 4783 & 4784/Del/2007 & ITA Nos. 4779 & 4780/Del/2007, dt. 12-4-2016] : 2016 TaxPub(DT) 3288 (Del-Trib) TP addition on reimbursement of promotional expenditure of AEs--Whether a limited role agent or more larger of that of a marketing agent *Facts:* Assessee had reimbursed its AEs Seagram Martell for certain promotional events in India. Assessees role was that of a limited agent, thus the said reimbursement was not treated as part of cost of the TNMM margins. As for the marketing support activities the AE paid the actual cost + USD 2500 as the commission. On inquiry the TPO took a stand that the TNMM percentage of PLI was wrongly applied as the reimbursement was not considered in the numerator as well as in the denominator. It was found that two employees supported the promotional events of Seagram Martell in India whose costs and some overheads were forming part of the USD 2500. The Role of assessee being a limited agent was not found acceptable and since the marketing spend was a large amount of INR 4.95 crores no one would have rendered services of this large a volume without a higher remuneration. Thus additions were made by the TPO for INR 1.07 crores. Commissioner (Appeals) gave part relief to the assessee by reducing the mark ups on the reimbursement of the TPO. This went in cross appeals to the ITAT: Held by the ITAT that the order of the Commissioner (Appeals) requires no modification. The TP addition stands sustained. The reasoning that these were only reimbursement does not fit into the scheme of TP or ALP requirements. The AE might have advanced monies for the events, still the co-ordination activities and all the support activities being substantial requires margin being fixed on the same. Following part of the judgment establishes that reimbursements are also to form part of TP ALP benchmarking. 37. We have considered the submissions of both the parties at length and have perused the orders of authorities below. The short point for our consideration, after elaborate consideration of facts, is whether the cost reimbursed to assessee by its AE's is to be included in the cost base for determining the NCP of assessee or not. The claim of assessee is that assessee was getting advances from its AE's for performing certain functions on behalf of AE's only. These functions included organization of various functions such as Golf Championship, Polo Championship sponsored by AE's. The Marketing support services implies that assessee is providing support services for building up the market for its AE's. It cannot be disputed that had this activity had been performed by an independent entity, would have been compensated not only towards the cost incurred by it but also a mark up on the same would have been realized. The comparables selected by assessee and accepted by learned TPO, which were performing Marketing support services, there is nothing on record to suggest that all such comparables were also being reimbursed for certain specific functions carried out by them. Under such circumstances, in order to bring the tested party and comparables at level playing field, it is necessary that reimbursed cost should be considered in the cost base as well as part of income so as to neutralize any variation in the cost incurred by assessee towards carrying out marketing support services. Admittedly, at first place assessee has incurred all these expenses and then got reimbursed by its AE's. All risks incidental to these expenses were at assessee's account and not AE. Learned Commissioner (Appeals) has very rightly excluded any allocation towards finance charges because assessee had received advance from its AE's. The statement given by Mr. Surjit Verma, referred to earlier, in the observation of learned TPO, clearly showed that both employees coordinated with various agencies which were to conduct or organize these events. He has observed that research was also conducted on behalf of Seagram Martell, findings for which were communicated by Mr. Aditya Gooptu to Seagram Martell. In order to avoid repetition, we are not referring to the detailed activities performed by assessee noticed by learned TPO, which we have reproduced earlier, while considering the TPO's findings. It would suffice to observe that assessee played a vital role in all the activities done to promote sales of Seagram Martell Duty Free Ltd. in India and the meager amount of US$ 2500 p.m. was not at all justified considering the services rendered by assessee. We could appreciate assessee's contention of not including the reimbursement of expenses as part of the cost base if income of Marketing Support Services did not include these reimbursements but that is not so. Learned TPO has included the same. 38. The decision in the case of Cheil Communications India (P) Ltd. (supra) relied upon by assessee is of little assistance because there assessee made payments to third parties for and on behalf of AE and AE reimbursed that amount to assessee. Assessee was acting as agent of AE. The assessee simply acted as an intermediary between the AE and third party in order to facilitate placement of advertisement. No risk was borne by assessee. However, in the present case, assessee was rendering overall market support Services to AE and only part of the expenses were reimbursed. 39. We are further in agreement with the following findings of learned Commissioner (Appeals): In view of the foregoing analysis, I am inclined to agree with the findings of the TPO that the reimbursed expenses should be part of the cost base of the appellant for computing return on the total cost, for the following additional reasons, in addition to what has been cited by the TPO: (i) The resources of the entire enterprise of the appellant had been put to use for discharging the comprehensive functions assigned to the appellant as per the agreement. (ii) Sales promotion activities of similar nature were also organized for the domestic segment of the appellant and claim of such expenses have been allowed as business expenses. There is no reason as to why a separate treatment is to be given to the reimbursed amounts in the segmented accounts as both these expenses aim at achieving similar results. In any case, the reimbursed expenses did impact the sales of the AE positively. (iii) The appellant has been using the same agencies for the sales promotion purposes both for the domestic segment as well as for the AE segment. Credits are extended to SMPL on its own credibility or standing and not on the basis of the credibility of the AE. This makes these expenses an integral part of the market support function. (iv) Perusal of some of the advertising bills reveals that the appellant while making payments collected TDS. All obligations relating to collection of TDS, obtaining TAN, filing TDS returns and all other consequential legal Obligations are met by the appellant in its own right as an independent entity. Resources of the entire enterprise are used to meet such legal Obligations and support the market service function. Under these circumstances, the appellant is entitled to get a mark-up on the actual cost incurred inclusive of reimbursed expenses. (v) Under TNMM, the appropriate cost base is to be taken into account while determining the arm's length nature, of compensation received for discharging a particular function. Exclusion of a relevant cost item would distort the bench marking analysis vis-a-vis the results of the comparables. No such exceptions have been brought out by the appellant for the comparables. Cost incurred inclusive of reimbursed expenses.

The Tax Publishers

ACIT v. Seagram Manufacturing (P.) Ltd. (Now Pernod Richard India Pvt. Ltd.) & Vice-Versa [ITA Nos. 4783 & 4784/Del/2007 & ITA Nos. 4779 & 4780/Del/2007, dt. 12-4-2016] : 2016 TaxPub(DT) 3288 (Del-Trib)

TP addition on reimbursement of promotional expenditure of AEs--Whether a limited role agent or more larger of that of a marketing agent

Facts:

Assessee had reimbursed its AEs Seagram Martell for certain promotional events in India. Assessees role was that of a limited agent, thus the said reimbursement was not treated as part of cost of the TNMM margins. As for the marketing support activities the AE paid the actual cost + USD 2500 as the commission. On inquiry the TPO took a stand that the TNMM percentage of PLI was wrongly applied as the reimbursement was not considered in the numerator as well as in the denominator. It was found that two employees supported the promotional events of Seagram Martell in India whose costs and some overheads were forming part of the USD 2500. The Role of assessee being a limited agent was not found acceptable and since the marketing spend was a large amount of INR 4.95 crores no one would have rendered services of this large a volume without a higher remuneration. Thus additions were made by the TPO for INR 1.07 crores. Commissioner (Appeals) gave part relief to the assessee by reducing the mark ups on the reimbursement of the TPO. This went in cross appeals to the ITAT:

Held by the ITAT that the order of the Commissioner (Appeals) requires no modification. The TP addition stands sustained. The reasoning that these were only reimbursement does not fit into the scheme of TP or ALP requirements. The AE might have advanced monies for the events, still the co-ordination activities and all the support activities being substantial requires margin being fixed on the same.

Following part of the judgment establishes that reimbursements are also to form part of TP ALP benchmarking.

37. We have considered the submissions of both the parties at length and have perused the orders of authorities below. The short point for our consideration, after elaborate consideration of facts, is whether the cost reimbursed to assessee by its AE's is to be included in the cost base for determining the NCP of assessee or not. The claim of assessee is that assessee was getting advances from its AE's for performing certain functions on behalf of AE's only. These functions included organization of various functions such as Golf Championship, Polo Championship sponsored by AE's. The Marketing support services implies that assessee is providing support services for building up the market for its AE's. It cannot be disputed that had this activity had been performed by an independent entity, would have been compensated not only towards the cost incurred by it but also a mark up on the same would have been realized. The comparables selected by assessee and accepted by learned TPO, which were performing Marketing support services, there is nothing on record to suggest that all such comparables were also being reimbursed for certain specific functions carried out by them. Under such circumstances, in order to bring the tested party and comparables at level playing field, it is necessary that reimbursed cost should be considered in the cost base as well as part of income so as to neutralize any variation in the cost incurred by assessee towards carrying out marketing support services. Admittedly, at first place assessee has incurred all these expenses and then got reimbursed by its AE's. All risks incidental to these expenses were at assessee's account and not AE. Learned Commissioner (Appeals) has very rightly excluded any allocation towards finance charges because assessee had received advance from its AE's. The statement given by Mr. Surjit Verma, referred to earlier, in the observation of learned TPO, clearly showed that both employees coordinated with various agencies which were to conduct or organize these events. He has observed that research was also conducted on behalf of Seagram Martell, findings for which were communicated by Mr. Aditya Gooptu to Seagram Martell. In order to avoid repetition, we are not referring to the detailed activities performed by assessee noticed by learned TPO, which we have reproduced earlier, while considering the TPO's findings. It would suffice to observe that assessee played a vital role in all the activities done to promote sales of Seagram Martell Duty Free Ltd. in India and the meager amount of US$ 2500 p.m. was not at all justified considering the services rendered by assessee. We could appreciate assessee's contention of not including the reimbursement of expenses as part of the cost base if income of Marketing Support Services did not include these reimbursements but that is not so. Learned TPO has included the same.

38. The decision in the case of Cheil Communications India (P) Ltd. (supra) relied upon by assessee is of little assistance because there assessee made payments to third parties for and on behalf of AE and AE reimbursed that amount to assessee. Assessee was acting as agent of AE. The assessee simply acted as an intermediary between the AE and third party in order to facilitate placement of advertisement. No risk was borne by assessee. However, in the present case, assessee was rendering overall market support Services to AE and only part of the expenses were reimbursed.

39. We are further in agreement with the following findings of learned Commissioner (Appeals):

In view of the foregoing analysis, I am inclined to agree with the findings of the TPO that the reimbursed expenses should be part of the cost base of the appellant for computing return on the total cost, for the following additional reasons, in addition to what has been cited by the TPO:

(i) The resources of the entire enterprise of the appellant had been put to use for discharging the comprehensive functions assigned to the appellant as per the agreement.

(ii) Sales promotion activities of similar nature were also organized for the domestic segment of the appellant and claim of such expenses have been allowed as business expenses. There is no reason as to why a separate treatment is to be given to the reimbursed amounts in the segmented accounts as both these expenses aim at achieving similar results. In any case, the reimbursed expenses did impact the sales of the AE positively.

(iii) The appellant has been using the same agencies for the sales promotion purposes both for the domestic segment as well as for the AE segment. Credits are extended to SMPL on its own credibility or standing and not on the basis of the credibility of the AE. This makes these expenses an integral part of the market support function.

(iv) Perusal of some of the advertising bills reveals that the appellant while making payments collected TDS. All obligations relating to collection of TDS, obtaining TAN, filing TDS returns and all other consequential legal Obligations are met by the appellant in its own right as an independent entity. Resources of the entire enterprise are used to meet such legal Obligations and support the market service function. Under these circumstances, the appellant is entitled to get a mark-up on the actual cost incurred inclusive of reimbursed expenses.

(v) Under TNMM, the appropriate cost base is to be taken into account while determining the arm's length nature, of compensation received for discharging a particular function. Exclusion of a relevant cost item would distort the bench marking analysis vis-a-vis the results of the comparables. No such exceptions have been brought out by the appellant for the comparables. Cost incurred inclusive of reimbursed expenses.