TMI Blog2014 (4) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, the order of the CIT(A) upheld – Decided against the revenue. Allowability of 50% of expenses - Renovation of office complex and other expenses to electric installation – Held that:- The CIT(A) taking into consideration the submissions placed, along with the evidence and details, pertaining to the issues of various renovation jobs, allowed benefit to the extent of 50% on the interior designs work and supply and installation of electrical items - the CIT(A) has allowed only 50%, though, on adhoc basis, the expense, which are quite reasonable – thus, the order of the CIT(A) upheld – Decided against the revenue. Disallowance of expenses on rural development – Held that:- The assessee has placed reliance on CIT v Madras Refineries Ltd. [2003 (11) TMI 47 - MADRAS High Court] - this case has not been considered by the CIT(A) - the issue should be held against the assessee, following the order of the coordinate Bench in the preceding year, but the fact that the assessee factory is located in the village belts at Induri, near Mumbai and Malana, in Madhya Pradesh - The upliftment of these areas, though not directly relatable to the business of the assessee but is certainly a matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in concluding that M/s. Cadbury India Limited has received several benefits on account of payment of Technical Knowhow Royalty and whether the Ld. CIT(A) was justified in concluding that Royalty for Trademark at 1% and Technical Knowhow at 1.25% for ht entire FY 2001-02 is at Arm's Length. 2. Whether on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in treating 50% the expenses incurred on Architect Interior Design amounting to Rs. 21.94 Lacs and expenses incurred on Supply Installation of Electrical Items amounting to Rs. 14.44 Lacs as Revenue?" 3. The facts in brief are that the assessee is in the business of manufacture, distribution and marketing of malted food drinks, cocoa powder, chocolates, toffees, drinking chocolates and sugar confectionaries. The assessee, having its head office at Mumbai, is having its factories at Thane, Induri and Malanpur and marketing offices located at Delhi, Chennai, Kolkata and Mumbai. 4. The assessee is a subsidiary of M/s Cadbury Schewepps PLC, U.K. Cadbury group has presence in more then 200 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o CIL (Indian Co.) all knowhow, advice and assistance at all such time that may be mutually agreed between the parties. 8. The TPO, gathering information from other Cadbury units across the globe required the assessee to submit a reply, as to why 1% of gross sales be not taken to be at arm's length instead of 1.25% taken by the assessee in the case of technical knowhow. 9. Looking into the facts of the case, the TPO found out that the assessee has used TNMM for computing ALP of the International transactions by comparing the net margin of the company at entity level, with that of companies engaged in food products, beverages and tobacco business. According to the TPO transactions pertaining to payment of Royalty is not separately and independently benchmarked. He further noted that companies identified by the assessee company i.e. DFM Foods Ltd., Bakeman Industries Ltd., Modern Food Industries (India) Ltd., Parrys Confectionary Ltd and Ravalgaon Sugar Farm Ltd., did not pay any technical fee/royalty. According to him, these companies could not be used in the analysis for benchmarking the royalty payments. Since the total sales of the company is at Rs. 645 crores and internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 04.02.2005 submitted the copy of email sent to it from CSOL, which is as under: S No. Overseas Company Territory Royalty rate/ Fee Net Basis Type of Agreement (1) (2) (3) (4) (5) 1 Cadbury Adams Canada Inc. Canada Export Territory 2.50% Trade mark licence-Exclusive transferable 2 Cadbury Food Co. Ltd., China Not specified but excludes exports 3.5% Trademark licence sole non-transferable rights 3 Cadbury Egypt S.A.E. Republic of Egypt Export territories listed 2% Trade mark licence exclusive 4 Cadbury France France and such other territories 2.00% Trade mark licence 5 Cadbury Ghana Limited Ghana 2.00% Combined technical services trademark user agreement 6 PT Cipta Rasa Primatama The Republic of Indonesia 2.50% Trade mark licence - Exclusive non-transferable 7 Cadbury Kenya Limited Kenya, Uganda and Tanzania and any other territories 2.00% Trade mark licence 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chocolate, malted foods and sugar confectionery products which are being manufactured and sold by our company in India and certain other countries. It requested to issue the automatic approval effective 01.04.2001". The Reserve Bank of India, Exchange Control Department, vide letter dated 25.06.2001, has given the approval to enter into Technical Collaboration for manufacture/use of trademarks. The Press Note No.9 (2000 series), of the Government of India, Ministry of Commerce Industry, Department of Industrial Policy Promotion (SIA) allowed payment of royalty upto 2% for exports and 1% for domestic sales under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. From the above, it is seen that the approval was sought by the company and granted by the Reserve Bank of India, under the Exchange Control Policy of the Government of India. The branding fee payment, as a general rule is allowed by a Press Note No.9 issued by Ministry of Commerce and Industry. This approval indicates that such payments are not prevented or blocked by the Government, considering the present Exchange Control Policy. There is no intervention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own, does not support the Arm's Length nature of the payment, accordingly, rejected. (ii) It further contended that, "The Transfer Pricing Regulations introduced in India requires complying with Arm's Length Principle by testing the controlled transactions with that of comparable uncontrolled transactions. In other words, it is respectfully submitted that transactions entered into inter-se between associated enterprises-controlled transactions cannot be applied to test the compliance with Arm's Length principle"'. 16. The TPO rejected the reply of the assessee, observing that controlled transactions cannot be used for computing ALP, as per OECD guidelines in para 1.70, which classified, that evidence from enterprises engaged in controlled transactions with associated enterprise may be useful in understanding the transactions with associated enterprise may be useful in understanding the transaction under review or as a pointer to further investigation. The dealings between associated enterprises, for comparison, can also be used in the cases of last resort where: (i) There is sufficient data available to demonstrate their reliability. (ii) Related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with the Arm's Length Principles/' The assessee has used Transactional Net Margin Method for computing the Arm's Length Price of the International Transactions by comparing the Net Profit Margin of the company :at entity level with that of other companies engaged in Food Products1 Beverages and Tobacco Business. The transaction pertaining to payment of Royalty is not separately and independently benchmarked. The company has identified DFM Foods Ltd., Bakemans Industries Ltd., Modern Food Inds. (India) Ltd., Parrys Confectionery Ltd. and Ravalgaon Sugar Farm Ltd. From the Prowess/Capitaline Database, it is seen that none of these companies are paying any technical fees/royalty. Therefore, these companies cannot be used in the analysis for benchmarking the royalty payments. The total sales of Cadbury India Ltd. is nearly Rs.645 crores and all international transactions, are of value of 14.50 crores, which is only 2.24% of the turnover. The use of Transactional Net Margin Method, at entity level, for benchmarking such a small transaction, will not be the most appropriate method, because, such a transaction does not in a big way affect the profitability of the company. In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI, does not refer to effective date of payment, therefore, the royalty for the period of July, 2001 to March, 2002 only, is allowable as Tax Deduction for the year. For these months, the Brand Royalty is computed at Rs. 51,819,324/-and the same worked out as per the computation provided in Press Note No.1 amounts to Rs. 5O,331,678/-'. He, therefore, computed the royalty payment on trademark usage at Rs. 5,03,31,678/-. 17. The TPO, therefore, suggested a net adjustment of Rs. 2,46,61,370/- on payment of both kinds of royalties, i.e. royalty on technical knowhow and royalty on trademarks as: S. No. Transaction As per books ALP as per TPO Difference 1. Royalty on tech. knowhow 5,66,24,003 4,52,99,202 1,13,24,801 2 Royalty on trade marks 6,36,68,247 50,33,678 1,33,36,569 Total 12,02,92,250 9,56,30,880 2,46,61,370 18. The AO, in accordance with the above, made addition to the tune of Rs. 2,46,61,370/- to the income of the assessee. 19. The assessee approached the CIT(A), before whom the assessee reiterated its submissions made before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, the economic owner must have the rights to use and exploit the asset in the first instance. Thereafter the extent to which the exploitation and economic control over the intellectual property is possible subject to the legal contractual relationship between the two parties which governs the terms and conditions. The Appellant explained that Overseas AE is the intellectual property owner of the trademarks and without access to this trademarks, the Appellant would be unable to exploit the intellectual property in the Indian market. With respect to the exploitation of the intellectual property, it was submitted that the Appellant has merely been granted the right to use the trademarks on the licensed products manufactured in accordance with the prescribed specifications. The Appellant thereafter undertakes marketing and selling of the products using the brand "Cadbury". It was further explained that economic and commercial value of, a 'brand' is typically driven by the income-stream it generates. However, the Appellant has merely contributed approximately 1% of the total sales of CSOL over the years from 2001-2008. This clearly indicates the Appellant has hardly con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... call", "popularize products in the market" "counter competition" etc. It was reemphasized based on the advertising mandated filed by the Appellant, that creating "brand" awareness was not the objective of the advertisements since "Cadbury" brand is already well known respected in India. It has been submitted that the Overseas AEs provide strict brand guidelines so as to ensure that the overall strategy and vision associated with the brand is adhered to by the Appellant in India. The appellant has also submitted the copy of branding guidelines before me to corroborate the above. It has also been highlighted by the Appellant that while the increased sales may have benefited the. Overseas AEs by way of increased royalty at 1% on the incremental sales, the same is insignificant as compared to the incremental quantum of profits earned by the Appellant on the increased sales and the taxes paid thereon to the Indian Government Treasury. The Appellant has contended that the correct way of looking at royalty payment is to see the turnover achieved by the Appellant as a result of the license. It has been contended that the payment of Rs 635.68 lakhs to achieve a turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant had benchmarked its Royalty for trade mark and technical know how under the TNMM. Its operating margin on operating revenue came to 13.28% whereas those of its comparables in confectionary industry came to 2.17% only. TNMM is a profit based method. A royalty rate for the related party is determined indirectly by selecting a royalty rate that would give the licensee post royalty operating profits that are similar to what an unrelated party would earn by using the intangibles. The theoretical basis of the TNMM takes the stance that, if intangible property is contributing to an entity nature, the entity will earn profits in excess of what could be observed in the absence of such intangible property. Applied to the facts of this case, the appellants 13.28% margin vis a vis average margin of comparables at 2.17% clearly establishes that the intangible property (Trademark and Technical Know How) has contributed to its excess profits. The TPO has no objection to the selection of comparable companies for benchmarking but has taken the stand that since they (comparables) are not paying trademark royalty and technical know how fees, hence cannot be used for benchmarking this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment for technical knowhow and use of trademarks. It has been submitted that royalty on technical knowhow was being paid by the assessee company to its parent AE since the signing of the agreement dated 19.03.1993 which was valid upto 08.03.2000, which was extended by SIA vide approval upto 08.03.2000, which was extended by SIA vide approval upto 14.09.2000. He further submitted that since agreement dated 20.12.2000 upto present date, the assessee company has been paying royalty on technical knowhow at the rate of 1.25%. This is being in accordance with the agreements signed on various dates. 27. He further submitted that the assessee started to pay royalty on use of trademark after taking approval of the Board of Directors on 26.04.2001 and consequential approval by the RBI. It was submitted that the assessee had been paying royalty from 12.02.2002 to its parent AE. 28. The DR, advancing the objection made by the TPO submitted that the agreements entered into by group companies in other parts of the world had been paying composite royalty, which came to 2%, whereas, the assessee had been paying royalty ranging between 1% to 1.25% and that the agreements entered into by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a clinching evidence, leaving no further room for doubt or controversy, in such a case no useful purpose would be served by following evidence/material to AO to obtain report and in such exceptional circumstances, said requirement may be dispensed with". He therefore, submitted that there is no occasion for restoring the TP issue to the file of the AO to look into the issue of AMP, which is not impugned before us. 35. The Senior Counsel, therefore, submitted that the CIT(A) was correct in holding that the payments made under both the types of royalties were at arms length and no adjustment addition needs to be made. 36. The DR in the rejoinder submitted that the in the interests of justice the issue needs to be restored to the file of the TPO. 37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38. From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on renovation of office complex and other expenses pertaining to electric installation, treating the same to be revenue. 47. The facts are that the assessee undertook refurbishing of the Cadbury House and claimed an aggregate expense of Rs. 2,39,38,000/-, which is as under: Party Name Description Amount (Rs.) Dalal Consultants Upgradation of Cadbury House 21,73,793 Dalal Consultants Upgradation of Cadbury House 5,73,924 Nitin Parulekar Architects Architects, interior design work 88,860 Hitesh Shah Associates Plumbing/removing window frams/debris, etc. 30,160 Hitesh Shah Associates Plumbing/removing window frams/debris, etc. 30,160 Hitesh Shah Associates Fixing Ms Steel support/bamboo scaffolding 29,040 Roshan Electrical Contractor Supply Installation of electrical items 14,44,694 Interscape Civil, Exterior and Plumbing works 1,60,63,652 S.R. Network UTP CAT 5 cable/connectors/cords/cabling work 10,45,103 Geeta Network Repairing with upholst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment made to Roshan Electric Contractors at Rs. 14,44,694/-. 55. The CIT(A) has allowed only 50%, though, on adhoc basis, the impugned expense, which according to us are quite reasonable. 56. We, therefore, sustain the order of the CIT(A) and reject the ground of appeal, as filed by the department. 57. Ground no. 2 is therefore, rejected. 58. In the result, appeal filed by the department is dismissed. ITA No. 7408/Mum/2010: (Assessee appeal): 59. The following grounds have been raised: "GROUND NO. 1- Expenditure incurred on rural development Rs. 1,07,891/-. On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the Additional Commissioner of Income Tax, Range 5(1), Mumbai ("the AO") of disallowing Rs. 1,07,891/-, being expenditure incurred on rural development in villages near the Appellant's factory, on the alleged ground that the said expenditure has no nexus with the business carried out by the Appellant without considering the fact that such expenditure incurred out of commercial expediency, it enhances the corporate image of the Appellant Company and also promote its business. GROUND NO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It may not be out of place to mention, that in the case of Indian Rayon Industries Ltd. (supra) (now known as Aditya Birla Nuvo Ltd.), (where one of us was a party to the decision), in ITA No. 5421/Mum/2005 have allowed a similar expense. 63. In these circumstances, in the interest of justice and the current need for being a better corporate citizen, the issue is restored to the file of the AO, who shall reexamine the nature of expense in the light of Madras Refineries Ltd. case (supra) and Aditya Birla Nuvo Ltd. (supra) and allow the expense, if the assessee has incurred expenditure for upliftment of local village community, as a good corporate citizen. 64. Issues raised in Grounds No. 2 to 4 are dealt with and are covered by the various orders of the coordinate Benches of the ITAT, in the case of the assessee. Since the grounds are covered on identical issues, we for the sake of brevity are not deviating from the inferences drawn by the coordinate Benches. 65. Ground no. 2 pertains to Miscellaneous income and trade discounts amounting to Rs. 99,44,920/- and Rs. 5,13,72,467/-. 66. At the time of hearing, the AR pointed out that the issue is covered by the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the orders of the revenue authorities and have also perused the order in ITA No. 975/Mum/2005 (supra). We find the issue is covered and we do not find any reason to deviate from the order in the assessee's own case. We hold accordingly. 69. Ground no. 2 is therefore allowed. 70. Ground no. 3 pertains to reduction of gross interest from the computation of deduction u/s 80HHC. 71. At the time of hearing, the AR pointed out that the issue is covered by the order in ITA No. 975/Mum/2005 in paras no. 7 and 7.1, which reads as under 7. The sixth dispute is regarding reduction of 90% of interest from profit of business as per Explanation (baa) while computing deduction under section 80 HHC. Assessee had received interest on FDRs, ICDs and others aggregating to Rs.5,21,04,545/-. The AO excluded 90% of the same from the profit of the business while computing deduction under section 80 HHC which in appeal was confirmed by CIT(A). Assessee has disputed the decision of authorities below to exclude 90% of the gross interest and not net interest income. 7.1 We have heard both the parties, perused the records and considered the matter carefully. Earlier the Hon'ble Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verters' margin of profit. However, the excise authorities disputed the said basis of valuation and claimed that excise duty on products manufactured by third party manufacturers/converters is payable on the basis of Cadbury's whole sale trade price less PME. Accordingly, the excise department issued a show cause cum demand notice and directed the manufacturers/converters to pay excise duty on the basis of normal price worked out from the prices charged by the assessee company to their wholesale dealers. The said third party manufacturers/converters disputed the basis adopted by the Excise authorities for levy of excise duty and the said dispute became the subject matter of appeal before the Excise Duty Appellate Authorities. Although the primary liability to pay the excise duty was that of the third party manufacturers/converters, the said excise duty liability was to be paid by the assessee company as per the agreements as and when was payable. Since the said dispute was not settled in the year under consideration, the assessee company retained the liability in respect of the disputed amount to the extent of Rs.61,44,628/- in view of its contractual obligations towards the third ..... X X X X Extracts X X X X X X X X Extracts X X X X
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