Yum Restaurants (India) Pvt. Ltd. v. ITO

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers2015 TaxPub(DT) 4429 (Del-Trib)div class=Section1> Yum Restaurants (India) Pvt. Ltd. v. ITO INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPAdjustment for advertisement, marketing and sales promotion (AMP)--The assessee had a license arrangement with YRAPL for operation of various KFC and PH outlets in India, which was later assigned in favour of YAFPL with effect from August, 2008. The assessee operated these restaurants through various franchisees. Additionally, the assessee also operated company-owned KFC outlets in India. Certain International transactions were reported in Form No. 3CEB, which were referred by the AO to the TPO. On perusal of the international transaction of Reimbursement of expenses, the TPO observed that the assessee made a contribution of 5% of its sales to a company, namely, YRMPL, which is a no-profit no-loss entity with the only function of carrying out AMP activities for KFC and PHD brands. He opined that MNC group has created this layer of domestic entity to camouflage the international transaction of creation of marketing intangibles in India in favour of its Associated Enterprise (AE) by incurring AMP expenses and the provision of attended services. On being called upon to explain as to why transfer pricing adjustment on account of AMP expenses be not made for creating marketing intangibles in favour of its AEs, the assessee made submissions, which had been incorporated by the TPO in his order. The assessee gave a comparable case of Jubilant for justifying the ALP of its AMP expenses. Not convinced, the TPO held that the AMP expenses incurred by the assessee in this regard were a mere brand building exercise done for the benefit of the AE, which ought to have been reimbursed with necessary mark-up. He, therefore, deduced a figure of reimbursement of cost at Rs.4,79,48,122 and by adding mark-up of 9.98%, he proposed TP adjustment of Rs.5,27,33,344 on this account. The AO for giving effect to the TPO's order and passing a draft order, he further noticed that the excess funding to YRMPL should have been proportionally distributed amongst all the franchisees and foreign company, which was not done. By invoking the provisions of section 40A(2)(b), he made an addition of Rs. 6,05,01,229. The DRP entertained and accepted an alternative plea made on behalf of the assessee that the two additions of the AMP expenses, viz., one on account of the TP adjustment and the other made by the AO, led to the double addition and to that extent, such double addition was not called for. The AO, in his final order, made addition of Rs. 5.27 crore which was proposed by the TPO on account of AMP expenses. The remaining amount of Rs.77,67,895 (Rs.6.05 crore minus Rs. 7.257 crore) was also added to the assessee's income. Both assessee and Revenue filed appeals on their respective stands. *Held:* It could be seen that the TPO did not have the benefit of the Special Bench order in the case of LG Electronics (supra) and the DRP failed to apply it correctly to the facts of the case, by making sweeping observations generally without considering the effect of relevant factors laid down by the Special Bench. In such circumstances, the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of the AO/TPO for a fresh determination of disallowance, if any, on account of transfer pricing adjustment for AMP expenses in the light of the decision of the Special Bench in the case of L.G. Electronics (supra). The question of disallowance under section 40A(2) of the Act would be decided by the AO after having found out the amount of TP adjustment on account of AMP expenses. Income Tax Act, 1961, Section 92C *Followed:*LG Electronics India (P) Ltd. v. ACIT 2013 152 TTJ (Del)(SB) 273. *REFERRED :* FAVOUR : Matter remanded. A.Y. : 2009-10 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPSelection of comparables--Though MFMC Ltd. company did not find place in the list of comparables in the assessee's TP Study Report, however, the assessee pleaded before the TPO for its inclusion. The TPO refused to pay any heed to this argument as it was selected randomly without relying on a rational search process. The proceedings before the DRP also did not change the fortune of the assessee on this score, which ultimately culminated into the exclusion of this company from the final list of comparables. The assessee filed appeal before Tribunal seeking to include this company in such list. *Held:* MFMC Ltd. was a HR Services Company. As against this, the assessee under this segment was engaged in providing Liaison Services, market development and On-going support to the licensees outside India, as was evident from Service Agreement. Obviously, the nature of services provided by the assessee to its AEs was no match with those provided by MFMC Ltd. When this fact was confronted to the AR, he also candidly admitted the functional dissimilarity, however, maintaining that it should nevertheless be directed to be included. One fails to appreciate the rationale of this contention for the apparent reason that unless a company passes the test of functional comparability in the first instance, it cannot be taken up for further comparison. Under these circumstances, it was held that the authorities below were justified in not including this company in the list of comparables, though on a different reason. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2015 TaxPub(DT) 4429 (Del-Trib)div class=Section1>

Yum Restaurants (India) Pvt. Ltd. v. ITO

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPAdjustment for advertisement, marketing and sales promotion (AMP)--The assessee had a license arrangement with YRAPL for operation of various KFC and PH outlets in India, which was later assigned in favour of YAFPL with effect from August, 2008. The assessee operated these restaurants through various franchisees. Additionally, the assessee also operated company-owned KFC outlets in India. Certain International transactions were reported in Form No. 3CEB, which were referred by the AO to the TPO. On perusal of the international transaction of Reimbursement of expenses, the TPO observed that the assessee made a contribution of 5% of its sales to a company, namely, YRMPL, which is a no-profit no-loss entity with the only function of carrying out AMP activities for KFC and PHD brands. He opined that MNC group has created this layer of domestic entity to camouflage the international transaction of creation of marketing intangibles in India in favour of its Associated Enterprise (AE) by incurring AMP expenses and the provision of attended services. On being called upon to explain as to why transfer pricing adjustment on account of AMP expenses be not made for creating marketing intangibles in favour of its AEs, the assessee made submissions, which had been incorporated by the TPO in his order. The assessee gave a comparable case of Jubilant for justifying the ALP of its AMP expenses. Not convinced, the TPO held that the AMP expenses incurred by the assessee in this regard were a mere brand building exercise done for the benefit of the AE, which ought to have been reimbursed with necessary mark-up. He, therefore, deduced a figure of reimbursement of cost at Rs.4,79,48,122 and by adding mark-up of 9.98%, he proposed TP adjustment of Rs.5,27,33,344 on this account. The AO for giving effect to the TPO's order and passing a draft order, he further noticed that the excess funding to YRMPL should have been proportionally distributed amongst all the franchisees and foreign company, which was not done. By invoking the provisions of section 40A(2)(b), he made an addition of Rs. 6,05,01,229. The DRP entertained and accepted an alternative plea made on behalf of the assessee that the two additions of the AMP expenses, viz., one on account of the TP adjustment and the other made by the AO, led to the double addition and to that extent, such double addition was not called for. The AO, in his final order, made addition of Rs. 5.27 crore which was proposed by the TPO on account of AMP expenses. The remaining amount of Rs.77,67,895 (Rs.6.05 crore minus Rs. 7.257 crore) was also added to the assessee's income. Both assessee and Revenue filed appeals on their respective stands. Held: It could be seen that the TPO did not have the benefit of the Special Bench order in the case of LG Electronics (supra) and the DRP failed to apply it correctly to the facts of the case, by making sweeping observations generally without considering the effect of relevant factors laid down by the Special Bench. In such circumstances, the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of the AO/TPO for a fresh determination of disallowance, if any, on account of transfer pricing adjustment for AMP expenses in the light of the decision of the Special Bench in the case of L.G. Electronics (supra). The question of disallowance under section 40A(2) of the Act would be decided by the AO after having found out the amount of TP adjustment on account of AMP expenses.

Income Tax Act, 1961, Section 92C

Followed:LG Electronics India (P) Ltd. v. ACIT 2013 152 TTJ (Del)(SB) 273.

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2009-10

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPSelection of comparables--Though MFMC Ltd. company did not find place in the list of comparables in the assessee's TP Study Report, however, the assessee pleaded before the TPO for its inclusion. The TPO refused to pay any heed to this argument as it was selected randomly without relying on a rational search process. The proceedings before the DRP also did not change the fortune of the assessee on this score, which ultimately culminated into the exclusion of this company from the final list of comparables. The assessee filed appeal before Tribunal seeking to include this company in such list. Held: MFMC Ltd. was a HR Services Company. As against this, the assessee under this segment was engaged in providing Liaison Services, market development and On-going support to the licensees outside India, as was evident from Service Agreement. Obviously, the nature of services provided by the assessee to its AEs was no match with those provided by MFMC Ltd. When this fact was confronted to the AR, he also candidly admitted the functional dissimilarity, however, maintaining that it should nevertheless be directed to be included. One fails to appreciate the rationale of this contention for the apparent reason that unless a company passes the test of functional comparability in the first instance, it cannot be taken up for further comparison. Under these circumstances, it was held that the authorities below were justified in not including this company in the list of comparables, though on a different reason.