TMI Blog2010 (8) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, foreign currency exchange business, income from studios etc. The return filed by the assessee was selected for scrutiny. The Assessing Officer had made the reference under section 92CA(1) of the Income-tax Act as the assessee has entered into international transactions with Associate Enterprises (AE). The Transfer Pricing Officer (TPO), Mumbai passed the order determining the Arm s Length Price (ALP) of the transactions regarding the excess credit period allowed to the AE, which was computed at Rs. 81,50,001. 3.2 The assessee-company operates group and individual tour throughout the Indian sub-continent, Latin America, Africa for clients all over the world. The assessee is a part of Cox Kings, which is an established travel company in the world, which is having offices in UK, USA Japan. Various services, which were offered by the assessee are destination management, out bound tourism, business travels etc. The assessee has also having offices in major cities of the country. 3.3 M/s. Cox King Ltd., UK held 36 per cent of equity shares of Cox King India (P.) Ltd. The assessee, in the audit report had identified Cox King Japan Ltd., Japan; Cox Kings Ltd., UK and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar Rs. 6,000,000 Total Inbound commission Rs. 41,652,139 5.1 The shopping commission received from shop is on account of commission received from shops, for the purchases made by the Cox Kings Travellers in India. 6. The TPO finally accepted the ALP worked out by the assessee by TNMM method. The TPO has reservation in respect of the credit period given to the AEs and unrelated parties. The TPO has examined the credit period given to the AEs as well as unrelated enterprises. The submissions and instances are given in Para 2 of the order of the TPO. 7. The assessee contended that the credit period allowed to unrelated parties are up to 180 days in case of Uttras International and for 103 to Terramar German; therefore, as the maximum credit period allowed is 186 days, while working out the ALP for extended credit period to AE and an interest free period of 186/190 days should be allowed. The TPO was not convined with the contention of the assessee. 8. The TPO was of the opinion that the assessee has shown more favour in giving credit period to the AEs than unrelated parties. The assessee has paid interest of Rs. 26,331,669 on its borrowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ( ii )The AE, USA received advances with respect to 4 tour packages which the TPO totally ignored while calculating the weighted average credit period. For disallowance of interest, both credit debit entries have to be considered. 5.3.2 In order to correct the above mistakes the appellant furnished the calculation of weighted average credit period in the case of Terramar, Germany as 120.67 days while in the case of Ultras International it was 180.07 days as also for AEs as per Annexure A. Therefore, the weighted average credit period of 100 days for uncontrolled transaction was wrongly calculated by the TPO. The weighted average credit period in the cases of Cox Kings, Japan 194.24 days. Since the weighted average credit period in the appellant s AEs at UK and USA is less than 120 days of unrelated enterprise of Germany, there is no case of shifting of profit from India to foreign destinations in both the above two AEs. However, in the case of its enterprise in Japan, the appellant allowed excess weighted average credit period of 74.24 (194.24-120) days. The interest for such excessive period with respect to Japan AE has been calculated at Rs. 11,08,045 as per enclosed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss credit to UK counterpart and the average billing and collections for Cox Kings is only 74 to 86 days which is below 100 days. He also pointed out that in preceding year no disallowance is made by the TPO. He, therefore, pleaded that there is no reason to make the addition of the alleged excess period allowed to the AEs. 9.3 Per contra , the ld. DR supported the order of the TPO and argued that admittedly, the assessee has allowed excess credit period to AEs when the assessee has utilised borrowed funds and also paid huge interest. It is argued that the TPO has also considered the credit period allowed to unrelated parties and after considering the average credit period, only the interest element on the excess credit period is worked out at the rate 15 per cent which, the assessee was paying on the loans borrowed from the Bank. It is further argued that even it is claimed by the assessee that given average credit period to AE is approximately 71 days, not exceeding 100 days; but nothing on record to support the contention of the assessee. The ld. DR therefore, pleaded for restoring the order of the Assessing Officer on this issue. 10. There is no dispute about the meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated the weighted average period of 100 days that is enjoyed by the unrelated parties and this fact remain uncontroverted. Moreover, as per the facts on record, weighted average credit period in case of Cox Kings UK is at 74 days, Cox Kings, USA is at 103.5 days and Cox Kings Japan is at 194 days. Hence, working made by the TPO at least in respect of AE, UK and AE USA is less than 12 days than unrelated AE of Germany. But so far as the AE, Japan is concerned, the assessee has allowed excess period of 74 days as the ld CIT(A) has worked out the average period at 12 days. We, therefore, of the opinion that the excess average credit period determined by the Ld. CIT(A) is correct and does not need any interference. Now, the next issue remains whether addition can be sustained to the extent worked out by the Ld. CIT(A)? Now, the fundamental question is whether the adjustment is to be made on standalone basis or before comparing margin on the transactions with AEs viz-a-viz unrelated parties. If later is followed, only such adjustment can be made as are in the excess of the margin on transactions with AEs minus after adjustment in respect of the credit period. A plain reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company expects the benefits to be available over a period of five years and accordingly, a proportionate amount of Rs. 1,22,33,618 has been charged to the current year s profits. In the opinion of the Assessing Officer, as the expenditure is incurred by the assessee to publicise brand name and products throughout the length and breadth of the country, so that it will remain in the minds of customers and public and also will come into existence an asset or advantage of the enduring benefit of the business for some years; he, therefore allowed 1/5th of Rs. 5,63,00,672 treating the said expenditure as deferred revenue expenditure which was worked out to Rs. 1,12,60,134 and the balance was disallowed and added to the income of the assessee. The assessee challenged the said issue before the ld. CIT(A) and the ld. CIT(A) was of the view that the Assessing Officer was not correct to disallow the advertising expenditure on the reason that it would give enduring benefit to create goodwill over a period of time. According to the ld. CIT(A), the expenditure was incurred for efficient carrying on the business and for earning more profits in the competitive market and to facilitate the cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als (P.) Ltd. ( supra ), the said assessee company has incurred advertisement expenditure and had claimed deduction of advertisement. In that case, the assessee had changed accounting system from cash system to mercantile system. The Assessing Officer rejected the claim on the ground that the advertisement expenses claimed by the assessee did not match the receipts. He, therefore, allowed part of the expenditure. In the said case, the Tribunal held that the assessee would be benefited for a long period but at the same time held that the mere fact that the assessee might have derived benefit in future years could not stand in the way of granting the relief on the entire expenditure. The Hon ble High Court approved the decision of the Tribunal allowing the entire expenditure. 14.2 In the case of Core Health Care Ltd. ( supra ), the Hon ble Supreme Court remanded the matter to the High Court to decide on the question whether advertisement expenditure incurred by the assessee to create brand a image with enduring benefit are allowable as revenue expenditure. 14.3 In the case of Silicon Graphics Systems (P.) Ltd. ( supra ), the Tribunal had decided the issue of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee are partly allowed and that of the revenue are dismissed. 17-18. Next issue relates to disallowance of software expenses and this issue arises in the assessee s appeal; more particularly ground nos. 6 and 7. The Id counsel for the assessee submitted that he is not pressing this issue as software expenses allowed in the assessment year 2001-02. As the ground nos. 6 and 7 are not pressed; therefore, the same are dismissed as not pressed. 19. Next issue relates to disallowance under section 14A which arises from ground nos. 8 to 10. The Id counsel for the assessee submitted that as per the instructions of the assessee, he is not pressing the said issue. 20. As the issue in respect of disallowance under section 14A was not pressed by the ld. counsel for the assessee; therefore, the relevant ground nos. 8 to 10 are dismissed as not pressed. 21. Next issue is in respect of disallowance of interest on advances to associate company and this issue is arises from the assessee s appeal; more particularly ground nos. 11 to 13. 22. The assessee has given interest free loans to M/s. Ezeego. The Assessing Officer has noted that assessee company has borrowed fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) and submits that noting is placed on record by the assessee to show that how there was commercial expediency in giving advances/loans to M/s. Ezeego. Moreover, nothing is on record to show that the advances were made from the interest free funds when admittedly; the assessee has paid huge interest. 24. On rival submissions, we find that this issue needs reconsideration. Though the assessee has taken a plea that on commercial expediency, advances were given to M/s. Ezeego which is a subsidiary company of the assessee and also business sharing agreement with the assessee company. The assessee has also taken a plea that the advances were made from interest bearing funds. We are not in agreement with the assessee; as admittedly, the assessee has paid huge amount of interest on the borrowings; but at the same time, we consider it fit to restore this issue to the file of the Assessing Officer for fresh adjudication to examine afresh whether there was commercial expediency for making payments/advances on behalf of M/s. Ezeego as relevant evidence is not before us. Accordingly, the relevant ground nos. 11 to 13 are allowed for statistical purpose. 25. The next issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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