TMI Blog2013 (4) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for statistical purposes. Expenditure relating to market research service - whether charges paid to selling agents and discount on sales are to be excluded from the alleged advertisement, marketing and sales promotion expenditure as being not relatable to advertisement and marketing expenditure? - Held that:- We find that the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013 (6) TMI 217 - ITAT DELHI] held that the expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totalling ₹ 5,500.86 lakhs as the same do not fall within the ambit of advertisement, marketing and sales promotion expenses and hence not to be considered for computing the cost/value of international transaction. In view of our decision in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also in terms of the revised/ change in Accounting Standard-15 issued by ICAI which was to be followed during the year, is an allowable deduction in the hands of the assessee. The said claim being based on the valuation of the actuary is both scientific and one of the recognised method of accounting and quantifying the said post retiremental medical benefits. In such cases though actual and exact quantification may not be possible, however, the liability so recognised by the assessee could not be said to be unascertained and contingent. The assessee having followed the mercantile system of accounting was compulsorily required to account for the said post retirement medical benefits as the same was quantified and had accrued during the year. The claim of the assessee was thus allowable irrespective of the fact that the assessee had made a provision in the books of account but had claimed the said deduction in the computation of income. It is well settled proposition that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee had earned any profit or suffered any loss as held by the hon' ble apex court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtisement, marketing and sales promotion expenses incurred by the appellant for sale of its products to the dealers. 2.4 That the Assessing Officer erred on facts and in law in holding that advertisement, marketing and sales promotion expenses incurred by the appellant resulted in promotion of brand owned by the associated enterprise, thereby creating marketing intangibles whose ultimate benefit inured to the associated enterprise. 2.5 That the Assessing Officer erred on facts and in law in holding that the appellant has developed marketing intangible for the associated enterprise in India by performing all functions and by bearing all economic costs and risks. 2.6 That the Assessing Officer erred on facts and in law in not appreciating that advertisement and marketing expenses incurred by the appellant is not on behalf of or for the benefit of the associated enterprise, any benefit to the associated enterprise being only incidental. 2.7 That the Assessing Officer erred on facts and in law in not appreciating that the advertisement, marketing and sales promotion expenses incurred by the appellant, did not result in creation of any marketing intangibles ; much le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses for the purpose of calculating alleged advertisement, marketing and sales promotion expenditure of the appellant : S. No. Name of expenses Amount (Rs. in lakhs) 1. Market research 664.24 2. Service charges paid to selling agent 10.03 3. Discount sales 60.52 2.15 That the Assessing Officer erred on facts and in law in not appreciating that the associated enterprise was not under obligation to reimburse expenditure on development and scientific research amounting ; services charges paid to selling agent ; discount on sales incurred on trade discount given to the dealers and market research expenses incurred by the assessee for sale of its products to the dealers. 2.16 That the Assessing Officer erred on facts and in law in holding that advertisement and promotion expenses incurred by the assessee ought to be restricted to 0.95 per cent. of the sale as against 11.29 per cent incurred by the assessee. 2.17 That the Assessing Officer erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts and in law in not allow ing deduction for incremental balance amounting to ₹ 36,87,481 lying in excise PLA under section 43B of the Income-tax Act, 1961 (' the Act' ). 4. That the Assessing Officer erred on facts and in law in dis allowing consumer market research expenses of ₹ 5,67,49,531 under section 37(1) of the Act alleging the same to be capital in nature. 5. That the Assessing Officer erred on facts and in law in making disallowance of ₹ 11,09,89,913, claimed in respect of the provision made for post retirement medical benefits to employees on the basis of actuarial valuation, in accordance with the revised accounting standard 15, relating to accounting of employee benefits, on the ground that same is an unascertained liability. 6. That the Assessing Officer erred on facts and in law in observing that the aforesaid provision made for post retirement medical benefits to employees has resulted in double deduction to employees in as much as deduction has also been claimed by the assessee in respect of medical insurance premium paid during the relevant year(s). 7. That the Assessing Officer erred on facts and in law in levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al against the said order of the Assessing Officer and raised several grounds of appeal. 5. Ground No.1 raised by the assessee being general is dismissed as such. 6. Ground No. 2 raised by the assessee is against the transfer pricing adjustment amounting to ₹ 102,83,55,523 in relation to advertisement, marketing and sales promotion expenses (hereinafter referred to as AMP expenses ) incurred by the assessee. 7. Grounds Nos. 2.1 to 2.22 relate to different aspects of transfer pricing adjustment made in the case of the assessee. Both the authorised representatives appearing before us admitted that the issue of transfer pricing adjustment made on account of advertisement, marketing and sales promotion expenses now stands covered by the majority view in the Special Bench of the Delhi Tribunal in L. G. Electronics India P. Ltd. v. Asst. CIT in ITA No. 5140/Del/2011 relating to the assessment year 2007-08, reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] in which the assessee was one of the intervener. 8. The learned authorised representative for the assessee has furnished on record tabulated details issue-wise being adjudicated by the Special Bench of the Tribunal vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted under the Laws of India and is 40 per cent. owned by Horlicks Ltd., U.K., which was part of GSK group. The Transfer Pricing Officer vide para 5 thus held that it is an associated enterprise within the meaning of section 92A(2)(a) of the Income-tax Act. The Transfer Pricing Officer vide para 6 of his order acknowledged the assessee to have adopted transactional net margin method (TNMM) for transfer pricing analysis with operating profit/total cost ratio as profit level indicator. 12. The Transfer Pricing Officer noted that the assessee in respect of international transactions, i.e., exports of malted food/biscuit to the associated enterprise had deviated from its earlier stand by selecting companies whose advertising, marketing and distribution expenses as a percentage of sales is greater than 5 per cent. wherein the earlier years similar companies were rejected. The assessee was asked to resubmit its analysis and the reply of the assessee in respect of 18 comparables cases is reproduced under para 7.1 of the order of the Transfer Pricing Officer. Thereafter vide para 7.2 the Transfer Pricing Officer noted that the assessee had sales turnover of ₹ 1,26,413.57 lakhs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred by the assessee on behalf of the associated enterprise in India and amount paid by the assessee to India as contribution for advertisement expenditure by the associated enterprise. Accordingly, I have examined all the advertisement marketing and sale promotion expenditure (in short AMP expenditure) incurred by the assessee in India. 14. The assessee was thus show caused as to why it should not be inferred that it had incurred both routine and non-routine advertisement and marketing expenses on brand promotion and development of marketing intangibles for the associated enterprises (in short AE ). The Transfer Pricing Officer also analysed the results of comparables relied upon by the assessee The questionnaire issued by the Transfer Pricing Officer is reproduced at page 7 to page 18 of the order of the Transfer Pricing Officer. The submission of the assessee in reply is reproduced under paras 7.11 and 7.12 at pages 18 to 42 of the order of the Transfer Pricing Officer. 15. The first plea of the assessee was that the advertisement, marketing and sales promotion expenditure of ₹ 14,275.01 lakhs considered by the Transfer Pricing Officer includes certain exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic enterprise, the question of transfer of the marketing intangibles or payment by the associated enterprise to the domestic enterprise for transfer of such intangibles does not arise. The main plea of the assessee was that it had incurred expenditure for brand promotion in India to cater to local requirements and the said expenditure was not at the instance of associated enterprise. If any benefit did arise to the associated enterprise but without any arrangement or understanding could not be termed as international transaction. The next plank of argument before the Transfer Pricing Officer by the assessee was that rebates/incentives were paid to other Indian parties and the second requirement in the application of transfer pricing regulation, i.e., existence of international transaction and transaction of payment between associated enterprises, one of whom is non-resident, was not fulfilled and thus the provisions of section 92B(1) of the Act could not be invoked. The alternate plea of the assessee was that various expenses incurred were for the promotion of not only Horlicks but other brands, i.e., Viva, Maltova and Boost. The assessee elaborately explained the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as international transaction under section 92D(1) read with clause (v) of section 92F of the Act. The Transfer Pricing Officer applied comparables and determined the arm' s length price of reimbursement received by the assessee for brand promotion and marketing intangibles of the associated enterprise in India by adding a mark-up at 13.04 per cent. to the net advertisement, marketing and sales promotion expenditure incurred by the assessee after deducting brand development expenditure of ₹ 38.82 crores and computed arm' s length value of the subsidy at ₹ 10,390.26 lakhs. The income of the assessee was thus enhanced by the said figure and the assessee was held not to be entitled for deduction under section 10A, 10AA, 10B or under Chapter VI-A in respect of the amount of income which has been enhanced. 18. The assessee filed its objections on January 28, 2011 in form No. 35A before the Dispute Resolution Panel. The directions under section 144C(5) of the Act were issued by the Dispute Resolution Panel, New Delhi, vide its order dated September 23, 2011. The Dispute Resolution Panel directed the Assessing Officer to allow expenditure of ₹ 94.40 lakhs s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign associated enterprise, now let us examine as to whether such transaction can be called as international transaction. It was submitted by learned counsel for the assessee and some of the interveners that even if it is treated as a transaction, it still does not fall within the definition of ' international transaction' as per section 92B of the Act. It was argued that section 92B refers to a transaction between two or more associated enterprises ' in the nature of' purchase, sale or lease of tangible or intangible property, etc. It was sub mitted that the expression ' in the nature of' has been clarified by way of insertion of the Explanation to section 92B by the Finance Act, 2012 with retrospective effect from April 1, 2002, but the case under consideration does not fall in any of the sub-clauses of clause (i) of the Explanation to section 92B so as to be called as an international transaction. 73. Coming a step ahead of actual international transaction as per section 92B(1), learned counsel submitted that the Legislature also deems certain transactions as international transactions as per sub- section (2) of section 92B. Elaborating sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the foreign associated enterprise, out of the expenses incurred by the assessee in India, cannot be termed international transaction. As there was no transaction between the assessee and its foreign asso ciated enterprise in so far as incurring of advertising, marketing and promotion expenses is concerned, the learned authorised representative argued that the same ceased to be an international transaction. It was argued that the present so-called transaction of brand building for the foreign associated enterprise by the assessee is neither covered under sub-section (1) nor (2) of section 92B and hence the same cannot be recognised as an international transaction. 75. The learned Departmental representative contended that a careful look at sub-section (1) of section 92B would indicate that the term ' international transaction' has been defined in widest possible manner. Normally a provision is either exhaustive or inclusive. Section 92B was claimed as a classic example of a combination of both. It was explained that the provision can be seen into three parts. The first part is exhaustive as opening with : ' international transaction' means a transaction . . . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the advertising, marketing and promotion expenses incurred for its own business purpose but also for the expenses towards creating or improving the marketing intangibles of the foreign entity. This excess claim of deduction was stated to have a direct bearing on the profits of the assessee, thereby bringing it within the ambit of an international transaction. 78. The third way of looking at this as an international transaction was its inclusion under the relevant part of section 92B(1), which runs as under : and shall include a mutual agreement or arrangement (there is an oral understanding) between two or more associated enterprises (between the assessee and foreign associated enterprise) for the allocation or apportionment of . . . any cost or expense incurred or to be incurred (brand promotion expenses) in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises (benefit, service or facility of which shall be available to the foreign associated enterprise). It was stated that there is an agreement between the assessee and its foreign associated enterprise under which only the assessee was to incur all advertising, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an international transaction within the meaning of section 92B, the same cannot be subjected to the transfer pricing pro visions. The expression ' international transaction' has been defined under section 92B, which has two sub-sections. The first sub-section talks of actual international transaction and the second sub-section refers to a deemed international transaction. 82. The case of the Revenue is that it is an international transaction in terms of sub-section (1) of section 92B. Let us see the prescription of this provision, which is as under : ' 92B. Meaning of international transaction.-(1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or pro vision of services, or lending or borrowing money, or any other trans action having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in an inclusive manner. 85. Turning to the definition of international transaction as per sub-section (1) of section 92B, it is noticed that it uses both the words ' means' and ' includes' . When we examine the Explanation to this section clarifying the meaning of the expression ' international trans action' and ' intangible property', then it becomes clear that both have again been defined in inclusive manner. Even though sub-clauses (a) to (c) and (e) of clause (i) of the Explanation defining ' international transaction' are exhaustive, but sub-clause (d) being the ' provision of services' is again inclusive as ' including' provision of market research, market development, marketing management, . . . It is of critical importance to observe that the expression ' international transaction' itself has been defined in this Explanation only in an inclusive manner. As a result of insertion of the Explanation with retrospective effect, otherwise the exhaustive definition of ' international transaction' given in sub-section (1) has been converted into an inclusive one. Clause (ii) of the Explanation also de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. We are not persuaded by this submission. It is pertinent to note that the expression ' international trans action' as per clause (i) of the Explanation has been ' clarified' to ' include' five sub-clauses. Thus the meaning assigned to ' international transaction' as per clause (i) of the Explanation is simply inclusive and not exhaustive. There is hardly any need to burden this order with the ratio decidendi emanating from a plethora of judgments that the scope of an inclusive definition always extends beyond the specified inclusions. 90. Now, we will examine as to whether this transaction falls within any of the sub-clauses of clause (i) of the Explanation to section 92B. Learned counsel for the assessee contended that the view point of the learned Departmental representative that the transaction of brand building is in the nature of ' provision of service', is not ten able. He submitted that Indian entity is engaged in the business of manufacturing and selling of electronic goods, etc. and not in rendering services of advertisement and promotion of a brand to its customers. His contention was that in order to bring any transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered as marketing intangibles, there remains no doubt about the brand building being a provision of service in the present context. In the light of the above discussion we are of the considered opinion that the transaction of brand building by the assessee for the foreign associated enterprise is in the nature of ' provision of service' . Having held such transaction to be an international transaction in the nature of ' provision of service', we do not consider it expedient to deal with the contention of the learned Departmental representative that it is also an international transaction having a ' bearing on the profits, income, losses or assets' of the assessee on one hand and/or towards allocation or apportionment of any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, on the other. 93. Now, we take up the contention of the learned authorised representative that there was no transaction between the assessee and its foreign associated enterprise in so far as incurring of advertising, marketing and promotion expenses is concerned and furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign associated enterprise ; the foreign associated enterprise is non-resident ; such transaction is in the nature of provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building as an international transaction in the facts and circumstances of the present case. 22. In view of the majority decision of the Special Bench in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB], we hold that the transaction in question is an international transaction which is liable to be considered under the provisions of section 92B of the Act and the Assessing Officer was justified in treating the transaction of brand building as an international transaction in the facts and circumstances of the case. Grounds Nos. 2.1 to 2.7 are thus dismissed. 23. The additional grounds of appeal raised by the assessee in relation to the computation of the arm' s length price of the international transaction not referred to the Transfer Pricing Officer by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve urged that the overall net profit rate of the assessee should be considered, which will naturally absorb the effect of incurring such brand building expenses. If the overall profit rate is higher, it will mean that the expenses incurred by the assessee on brand building were compensated by the foreign associated enterprise in terms of the lower price of goods charged from the Indian associated enterprise, necessitating no separate further addition on the alleged presumption of the assessee having incurred any advertising, marketing and promotion expenses towards brand building. The learned authorised representative relied on the case of the hon'ble Supreme Court in CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC), to canvass the view that the assessee cannot be expected to earn maximum profit. It was submitted that the action of the Revenue in firstly taxing higher rate of net profit on sales and thereafter further increasing the income by making addition on account of advertising, marketing and promotion expenses, runs contrary to the cardinal principle laid down in that case. He explained that in that case the Revenue opined that the assessee should have transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactional net margin method on entity level and the second that when on doing this exercise, the overall net profit was found to be better than other comparables, then no addition was called for by subjecting the advertising, marketing and promotion expenses to the transfer pricing provisions. 21.4. There is a basic fallacy in the first sub-argument, which lies in not properly appreciating the modus operandi of applying the transactional net margin method. This method provides for benchmarking of ' an' international transaction by considering the operating profit from the concerned international transaction vis-a-vis certain basis as given in rule 10B(1)(e), being total cost, sales, capital employed, etc. Here it is significant to note the meaning of the term ' transaction' as given in rule 10A(d). It provides that : transaction includes a number of closely linked ' transactions' . Plural of transactions becomes singular when the transactions are closely linked to each other or are identical. These closely linked transactions can be processed as one transaction under any of the prescribed methods. If an Indian enterprise has made sale of similar goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n method can be correctly applied on entity level if all the international transactions are of sale by the assessee to its foreign associated enterprise and there is no other transaction of sale to any outsider and also there is no other international transaction. But if there are several unrelated international transactions, as is the case before us and the assessee or the Transfer Pricing Officer has applied the transactional net margin method in a wrong manner on entity level for testing any of such transactions, then the remedy lies in correcting such mistake rather than drawing legally unsustainable conclusions by taking such mistake as a correct legal position. 21.6. Now, we espouse the second sub-argument that when on applying the transactional net margin method on entity level for the transaction of import of raw material the overall net profit is better than other comparables, then no addition is called for by subjecting the advertising, marketing and promotion expenses to the transfer pricing provisions. We have held in an earlier paragraph that when there are different unrelated international transactions, the application of transactional net margin method on entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no question of making any addition on account of arm' s length profit from such international transaction of sale to foreign associated enterprise because the actual overall profit is more than the arm' s length profit. It may also be possible that the actual profit of the Indian associated enterprise was ₹ 140 but the advertising, marketing and promotion expenses have been so claimed as deduction so as to include a part representing brand building for the foreign associated enterprise to the tune of ₹ 20. In such a case, notwithstanding the fact that the assessee' s overall profit at ₹ 120 is more than the arm' s length profit earned by comparable cases at ₹ 100, still there will be a requirement for mak ing adjustment of ₹ 20 on account of advertisement expenses incurred by the assessee towards the brand building on behalf of the foreign associated enterprise. If we accept the assessee' s contention that since ₹ 120, being the profit declared by the assessee from the international transaction is more than the arm' s length profit of ₹ 100 and hence no further adjustment on account of advertising, marketing and prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade costly but the economies in other areas are achieved thereby leading to higher profit. The crux is that purchase cost is only one of several other important factors having a bearing on the overall profit. All other costs, including the advertising, marketing and promotion expenses are independent of such cost of import of raw material, having some correlation with the overall profit. In our considered opinion there is no logic in not applying the transfer pricing provisions on advertising, marketing and pro motion expenses, if the international transaction of import of raw material from the foreign associated enterprise has been subjected to the transfer pricing provisions. As the transactions of import of raw material and advertising, marketing and promotion expenses are distinct from each other, having independent effect on the overall net profit of the Indian associated enterprise, both are required to be separately processed as per the transfer pricing provisions. 21.10. It was also contended on behalf of the assessee that if the overall profit of the Indian entity is more than the comparable cases then it should be presumed that the foreign enterprise supplied goods a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of entries made in the books of account, then the provisions of section 92 will be ignored. It can be understood by way of a simple example. If the arm' s length price of an international transaction in the nature of expense is ₹ 100 and the amount of actual expense recorded in the books of account is ₹ 80, then the arm' s length price of such expense at ₹ 100 will be ignored, because acting upon such the arm' s length price will lead to lowering of the total income by ₹ 20, which is not permissible as per sub-section (3). If however the arm' s length price of such expense turns out to be lower at ₹ 60, then sub- section (1) of section 92 will apply and the total income of the asses see will be computed by considering the arm' s length price of expense at ₹ 60, making a northward sojourn to the total income by ₹ 20. 21.12. We have noticed above that sub-section (1) of section 92 read with rule 10B requires computation of income from ' an' international transaction having regard to its arm' s length price. It means that each international transaction is required to be subjected to the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved at is taken as the arm' s length price in respect of the property transferred, etc., in the international transaction. In a like manner all the methods including transactional net margin method provide for determining the arm' s length price of an international transaction. The main focus of the learned authorised representative was on restricting the application of the provisions of Chapter X to other international transactions when one transaction has been processed under the transactional net margin method. It has been argued so on the ground that under the transactional net mar gin method, the net profit of the entity is considered which includes the effect of all other transactions also. The natural consequence of the learned authorised representative' s argument on this issue is that if the arm' s length price of an international transaction is determined by the transactional net margin method then no other international transaction can be subjected to the transfer pricing provisions. From here it follows that if any other method, such as comparable uncontrolled price or resale price method, etc., is applied for determining the arm' s length price of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the hon ble jurisdictional High Court in the case of Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi), the learned authorised representative contended that rule 10AB, specifying the sixth method, cannot have retrospective operation when it has been made applicable from the assessment year 2012-13. 22.2. Coming back to his point, it was argued that the Transfer Pricing Officer/the Dispute Resolution Panel have determined the arm' s length price in respect of advertising, marketing and promotion expenses by applying the bright-line test, which is not one of the five recognised methods under the Indian legislation. As determination of the arm' s length price has not been done as per any of the methods under section 92C, the learned authorised representative contended that the same should be set aside. He relied on an order passed by the Mumbai Bench of the Tribunal in C. A. Computer Associates P. Ltd. v. Deputy CIT [2011] 8 ITR (Trib) 142 (Mumbai) dated January 28, 2010, in which the assessee paid royalty to its parent-company. The Transfer Pricing Officer rejected the arm' s length price of royalty payment as shown by the assessee on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vasa Setty [1981] 128 ITR 294 (SC) and another judgment of the hon'ble Supreme Court in the case of PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC). In the light of these judgments it was submitted that the hon'ble Supreme Court has clearly held that where machinery provision fails, the charge cannot be attracted under the substantive provision. Since the Revenue' s case hinges on the computation of the arm' s length price of advertising, marketing and promotion expenses on the basis of a bright-line method which is not prescribed under section 92C, the learned authorised representative contended that the entire exercise must fail. 22.4. Per contra, the learned Departmental representative emphasised on the word ' any' as used in section 92C(1). His contention was that the word ' any' in sub-section (1) cannot be read as restricting itself to any one of the five methods but it may also be a combination of two or more of such methods. He relied on certain Tribunal orders to buttress his point that the arm' s length price can be determined by any method even though it is not specifically one of such five methods. He invited our attention towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntending that this method cannot be applied as the transaction is not in the nature of rendering of service. His contention was that unless an assessee itself is regularly engaged in the provision of service which is provided to the associated enterprise, the cost plus method under section 10B(1)(c) cannot apply. 22.8. We have considered the rival submissions. Before proceeding further it is imperative to note that we have dealt with the contention of the learned authorised representative about the application of bright-line test by the authorities below by holding that such method has been employed to determine the cost/value of international trans action and not its the arm' s length price. Another contention has been raised by the learned authorised representative that unless an assessee itself is regularly engaged in the business of providing services, there can be no provision of service to the other associated enterprise. This contention has also been dealt with and rejected by holding that the present international transaction is in the nature of ' provision of service' . Now we will proceed to see if it has to be any of the prescribed methods or it can even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined by any of the following methods, being the most appropriate method . . .' Here also the word ' any' is succeeded by the word ' following', which implies that it can be any of the five methods prescribed in the following part of the rule. When we read sub-section (1) of section 92C in entirety along with rule 10B(1), there remains no doubt that the arm' s length price is required to be determined by any single method out of the five prescribed methods. It is further pertinent to note the prescription of rule 10C which deals with the determination of most appropriate method to be applied for determining the arm' s length price. Sub-rule (1) provides that the most appropriate method for the purpose of section 92C(1) shall be the method which is best suitable to the facts and circumstances of each case. Sub-rule (2) which assumes significance in the present context provides that : ' In select ing the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account' . Use of the definite article ' the' in sub-rule (2) along with the most appropriate method, makes it abundantly clear that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; cost plus method' to the facts of the instant case by firstly identifying the cost/ value of service provided to the assessee and thereafter adding mark up. The mere fact that the Dispute Resolution Panel did not specifically mention it in so many words, will not ipso facto mean that it did not apply the cost plus method, when the essence of the working matches with the methodology provided in that method. 23.2. At this stage, it will be apt to note the directive of cost plus method as per rule 10B(1)(c), which is as under : ' (c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined ; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the third steps what is required to be determined is the rate of normal gross profit mark-up as arising to the enterprise from an uncontrolled transaction or to an unrelated enterprise in a similar situation. Here it is significant to note that a comparable uncontrolled transaction to be considered for benchmarking the normal gross profit mark-up has to be similar to the international transaction under consideration. Consequently, the profit mark-up under steps 2 and 3 should in the present case be the rate which an independent third party earns for creating marketing intangible for and on behalf of the foreign enterprise. In the present case, the Dispute Resolution Panel suggested 13 per cent. mark-up. The Dispute Resolution Panel went wrong in applying steps 2 and 3 by arbitrarily determining the rate of mark-up at 13 per cent. without showing as to how much an independent comparable entity has earned from an international transaction similar to one which is under consideration. 23.5. At this juncture, we consider it expedient to refer clause (ii) of section 92F which defines ' arm' s length price' to mean ' a price which is applied or proposed to be appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer Pricing Officer was not justified in restricting himself only to the two com parable cases as against certain other comparable cases cited by the assessee without verifying or discussing the comparability or other wise of such cases cited by the assessee. These observations have been made in the context of determining the cost/value of international transaction which was worked out by the authorities below at ₹ 161.21 crores. Certain relevant factors have also been discussed by us in that part of the order which should be taken into consideration before determining the cost/value of the transaction. Resultantly, we have set aside the cost/value of international transaction at ₹ 161.21 crores and restored the matter to the file of the Assessing Officer/ Transfer Pricing Officer for determining such value afresh after allowing a reasonable opportunity of being heard to the assessee. This determination would provide the figure of first step as per the cost plus method, being the cost/value of the international transaction. As the Dispute Resolution Panel also did not correctly proceed to compute the correct rate of mark-up as per law, in our considered opinion the end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the considered opinion that there is no merit in the contention of the learned authorised representative that the entire proceedings be declared as null and void simply because of some procedural lapse in determining the arm' s length price of the international transaction. 25. In view of the abovesaid ratio laid down by the majority view in the Special Bench of the Tribunal and in view of the issue being set aside to the Transfer Pricing Officer and the issue before us being identical, we respectfully following the ratio laid down by the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] also set aside the present issue for adoption of the prescribed method for determining arm' s length price in relation to the advertisement, marketing and sales promotion expenditure to the file of the Transfer Pricing Officer. The Transfer Pricing Officer while deciding the issue as directed by the Special Bench would give reasonable opportunity of hearing to the assessee. The assessee is at liberty to furnish complete list of comparables before the Transfer Pricing Officer in order to adjud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench. After excluding the aforesaid selling expenses aggregating to ₹ 5,500.86 lakhs, the remaining expenses of ₹ 8,679.75 lakhs (constituting 6.87 per cent. of the total sales) only is required to be considered for the purpose of benchmarking analysis as undertaken by the Transfer Pricing Officer. The learned Departmental representative for the Revenue placed reliance on the orders of the authorities below. 28. We have heard the rival contentions and perused the records. The claim of the assessee is that the total advertisement, marketing and sales promotion expenditure considered by the Transfer Pricing Officer while determining the arm' s length price included certain expenses which are in relation to the sales made by the assessee and are not related to the brand promotion. The claim of the assessee is with regard to the expenses totalling ₹ 5,500.86 lakhs as tabulated below : Sl. No. Name of expenses Amount (Rs. Lacs) 1. Discount sales 60.52 2. Market research 664.24 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that only such com parable cases should be chosen as are using the foreign brand. We find that choosing cases using the foreign brand ex facie cannot be accepted. It is but natural that the advertising, marketing and pro motion expenses of such cases will also include contribution towards brand building of their respective foreign associated enterprises. In such a situation the comparison would become meaningless as their total advertising, marketing and promotion expenses will stand on the same footing as that of the assessee before the exclusion of expenses in relation to brand building for the foreign associated enterprise. The correct way to make a meaningful comparison is to choose comparable domestic cases not using any foreign brand. Of course when effect will be given to the relevant factors as discussed above, it will correctly reflect the cost/value of international transaction. 31. The plea of the assessee in this regard was that the expenditure was incurred on foreign brand name, i.e., Horlicks and also on domestic brands such as Boost, Viva, Maltova, etc., and the expense as a percentage on sales of foreign brand was 10.37 per cent. and on domestic brand was 14.02 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions in paras hereinabove. Grounds Nos. 2.20 to 2.22 are thus allowed for statistical purposes. 34. The issue in ground No. 3 raised by the assessee is against the disallowance under section 43B of the Act. The brief facts relating to the issue are that the assessee during the year under consideration had claimed deduction at ₹ 36,87,481 on account of difference in excise duty deposited/balance with the Excise Department at the end of current financial year and previous financial year. The explanation of the assessee before the Assessing Officer was as under : During the relevant previous year, the assessee reduced an amount of ₹ 36,87,481 from its income being the difference between the excise deposit with Excise Department (balance of Central excise duty lying in PLA) as on March 31, 2007 and as on March 31, 2006, which represents payment made to the excise authorities that can be used by the assessee to offset payment of duty on the final products. The total balance in the account-current as on March 31, 2007 was ₹ 2,03,50,951 and as on March 31, 2006 was ₹ 1,66,63,470 as per schedule 9 of the audited accounts already provided at page 11, v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was lying in the PLA account. 37. The learned Departmental representative for the Revenue though admitted that the issue was decided in favour of the assessee by the earlier order of the Tribunal in the case of the assessee itself but placed reliance on the order of the Assessing Officer in this regard. 38. We have heard the rival contentions and perused the record. The issue arising vide ground of appeal No. 3 is against disallowance made under section 43B of the Act on account of excess payment made on account of excise duty. The assessee during the year under consideration had claimed expenditure of ₹ 36,87,481 being the difference between the excise deposit with the excise department i.e. the balance in the central excise lying in PLA Account as on March 31, 2007 and as on March 31, 2006. The said sum of ₹ 36,87,481 represents the excess payment made to the excise authorities, which as per the assessee could be used to offset the payment of excise duty on the final products. The difference in the total balance of two accounts, i.e., on March 31, 2007 and March 31, 2006 of ₹ 36,87,481 was claimed by the assessee as a deduction under the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) had allowed similar claim of excise duty paid in advance under the provisions of section 43B of the Act and held as under (headnote) : (ii) That with regard to the deduction of ₹ 14,71,387 on account of excise duty paid in advance as business expenditure, the procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods were removed from the factory premises. The duty, thus, already stood deposited in the accounts of the assessee maintained with the treasury and the amount, thus, stood paid to the State. The submission of the Department that it was only on removal of the goods that the amount credited to the personal ledger account could be claimed as deductible under section 43B of the Income-tax Act, 1961, could not be accepted. 41. Further, the hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. [2013] 255 CTR (Delhi) 140 also deliberated upon the payment made towards excise duty in personal ledger account and consequent allowance under section 43B of the Act and held as under : A plain reading of section 43B clarifies that : (a) deduction claimed by the assessee must be ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 43B. The Tribunal was therefore justified in holding that the amounts deposited by the assessee in the excise personal ledger account could not be disallowed under section 43B.-CIT v. Shri Ram Honda Power Equipment Ltd. [2013] 352 ITR 481 (SC) (Civil Appeal No. 5721 of 2012, dated September 19, 2012) followed ; CIT v. C. L. Gupta and Sons [2003] 259 ITR 513 (All) ; [2003] 180 CTR (All) 530 concurred with. 42. The hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. [2013] 255 CTR (Delhi) 140 in turn relied upon the ratio laid down by the hon'ble Supreme Court in CIT v. Shri Ram Honda Power Equipment Ltd. [2013] 352 ITR 481 (SC), wherein it has been laid down that the PLA credit was excise duty paid. The said observation was made where the assessee was following net method of valuation of closing stock. In view of the above said ratio laid down by the hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. [2013] 255 CTR (Delhi) 140, CIT v. Modipon Ltd. (No. 2) [2011] 334 ITR 106 (Delhi), the hon'ble Punjab and Haryana High Court in Raj and San Deeps Ltd. [2007] 293 ITR 12 (P H) and also the Special Bench of the Tribunal in the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the same had to be discharged at a later date. Further reliance was placed on the ratio laid down in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC). Copy of the actuarial certificate was also filed before the Assessing Officer, which is reproduced under para 7.2 at pages 26 and 27 of the assessment order. The revised Accounting Standard-15 was also referred to by the Assessing Officer and part of it is reproduced at pages 29 to 31 of the assessment order. The Assessing Officer show caused the assessee as to why the said liability should not be disallowed as the same was purely an unascertained liability. The assessee in reply clarified that during the financial years 2005- 06 and 2006-07 medical insurance premium of ₹ 2.59 crores and ₹ 2.67 crores respectively was debited to the profit and loss account which included the premium paid for the retired employees also. The assessee was claiming the actual medical insurance premium paid by it for covering the health of his current as well as retired employees, which was allowed as such and consequently the liability worked out by actuary could not be said to be unascertained liability as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The said liability, as per the learned authorised representative for the assessee, accrued to the employees on the basis of their appointment, i.e., the additional benefit after the retirement from service also. The learned authorised representative for the assessee was of the view that same was akin to warranty obligation. Reliance was placed on the ratio laid down in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) where certain similar expenditure was held allowable. Further it was pointed out that the hon' ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) had allowed the benefit of leave encashment to the employees. The learned authorised representative for the assessee drew our attention to pages 26 and 27 of the assessment order under which the actuarial valuation has been referred to by the Assessing Officer. The learned authorised representative for the assessee further pointed out that the Assessing Officer had disallowed the claim because as per the Assessing Officer it was an unascertained liability and further how it was allowable under the Income-tax Act. The plea of the learned authorised representative for the assessee was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees. It was stressed by the learned authorised representative for the assessee that the Assessing Officer had discretion to reject the method of accounting where the change was not bona fide and was not followed regularly. Reliance was placed on the undermentioned judgments : 1. CIT v. Whirlpool of India Ltd. [2011] 242 CTR (Delhi) 245; 2. CIT v. Indo Rama Synthetics Ltd. [2009] 180 Taxman 35 (Delhi) ; 3. CIT v. Virtual Soft Systems Ltd. [2012] 341 ITR 593 (Delhi) ; 4. CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) ; 5. CIT v. West Coast Paper Mills Ltd. [1992] 193 ITR 349 (Bom) ; and 6. CIT v. Standard Radiators P. Ltd. [2006] 286 ITR 207 (Guj). 48. The learned authorised representative for the assessee also referred to Note No. 6 of auditor' s report placed at page 180. Further reference was made to the revised Accounting Standard-15 placed at pages 836 to 902 and actuarial valuation report placed at page 914 of the paper book. The learned authorised representative for the assessee also placed reliance on the details of post retirement medical benefit, placed at page 840 to 849 of the paper book and also insurance premium paid, placed at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised representative for the assessee pointed out that the said expenditure was not debited to the profit and loss account but a provision for the same was made. However, entries in the books of account does not decide the deductible or otherwise of the said expenditure. Reliance was placed on Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC). The learned authorised representative for the assessee further pointed out that under the provisions of section 145 of the Act read with section 211(3) of the Companies Act, where the company was following mercantile system of accounting, the said provision had to be made as per the revised Accounting Standard-15. In respect of the objection raised by the learned Departmental representative for the Revenue that the assessee was paying insurance premium from year to year which would take care of the medical benefits of the employees both the present and retiring, it was pointed out by the learned authorised representative for the assessee that the medical insurance was annual premium paid by the assessee and the same would lapse from year to year. Further it was pointed out by the learned authorised representative for the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s provided service in exchange for employee benefits to be paid in the future ; and (b) An expenses when the enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. 52. The scope of the said Accounting Standard-15 was mandatorily to be applied by an employer in accounting for all employee benefits, except employee share-based payment. Clause-4 defines employee benefits include : (a) Short-term employee benefits, such as wages, salaries and social security contributions (e.g., contribution to an insurance company by an employer to pay for medical care of its employees), paid annual leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees ; (b) Post-employment benefits such as gratuity, pension, other retire ment benefits, post-employment life insurance and post-employment medical care ; (c) Other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GlaxoSmithKline Consumer Healthcare Limited. Re : Actuarial valuation-Post retirement medical assistance as on March 31, 2007. The actuarial value of liability of the company towards post retirement medical assistance to the retired/retiring officers as per the company' s scheme up to the date of valuation mentioned above has been calculated and the results of valuation are as given below : 1. Basis : (a) Discount rate 8.00 per cent. p.a. (b) Mortality L.I.C. (1994-96) Ult. (c) Rate of withdrawal As applicable to the group. (d) Projected unit credit method adopted. 2. Details of staff : The individual details in respect of 366 officers covered by these benefits and 140 retired officers have been made available for the purpose. 3. Benefits : The medical assistance is granted for due to accident or sickness and is limited as under : Directors : ₹ 1,50,000 per year Managers : ₹ 1,50,000 per year Executives : Rs.1,00,000 per year The company has assured the benefits with National ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an incremental liability after considering/reducing the amount of medical insurance premium paid to insurance companies. The said liability incurred, thus, did not include the amount of premium paid for which deduction was already claimed. (e) The deduction was claimed because of change in the method of accounting and where there is a bona fide change in the method of accounting, the claims on the basis of the changed method, even if pertaining to earlier years, would be allowable deduction in the year of change, more so since the liability in regard thereto has not been claimed deduction in such earlier years. (f) Since the liability on account of medical assistance pertaining to services rendered in the earlier years has been accounted or claimed in the relevant year for the first time, in view of the bona fide change in the method of accounting (pursuant to mandatory Accounting Standard-15 (revised), for which no deduction was claimed in the earlier years nor would be claimed again in the year of payment, the said liability is allow able deduction in the relevant year itself. The deduction on account of liability towards medical reimbursement expenses aggregating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was that every year the company worked out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employee' s service either due to retirement, death or termination of service-the exact time of occurrence of the latter two events being not determinable with exactitude before hand. A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under : (i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid ; (ii) Just as receipts, though not actual receipts but accrued due are b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be followed during the year, is an allowable deduction in the hands of the assessee. The said claim being based on the valuation of the actuary is both scientific and one of the recognised method of accounting and quantifying the said post retiremental medical benefits. In such cases though actual and exact quantification may not be possible, however, the liability so recognised by the assessee could not be said to be unascertained and contingent. The assessee having followed the mercantile system of accounting was compulsorily required to account for the said post retirement medical benefits as the same was quantified and had accrued during the year. The claim of the assessee was thus allowable irrespective of the fact that the assessee had made a provision in the books of account but had claimed the said deduction in the computation of income. It is well settled proposition that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee had earned any profit or suffered any loss as held by the hon' ble apex court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC). It was further held by the hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income-tax (Appeals) in ITA No. 149/Del/ 2012 in order. We set aside the order of the Commissioner of Income- tax (Appeals) in ITA No. 4921/Del/2010. For doing so, we also get support from the following decisions of the hon'ble Supreme Court and the hon'ble Delhi High Court. 5.1 The hon'ble Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) has held as under : Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if property ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognised in trade circles and there is nothing in the Bonus Act which prohibits such a practice. Such a pro vision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed a reserve . Therefore, the estimated liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC), the Supreme Court was examining the provision-made by the assessee towards gratuity under the Income-tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), crystallised its analysis at page 599 and made the following observations : ' It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as follows : . . . 5. The provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under section 28 or section 37 of the Act. ITA 873/2008 and 1156/2008 pages 6 of 25 7. The Division Bench of this court, while considering deductibility of a provision for warranties made by an assessee, which dealt in computers in the case of CIT v. Hewlett Packard India P. Ltd. [2009] 314 ITR 55 (Delhi), by its judgment passed in Appeal No. ITA 486/2006 dated March 31, 2008, uph ..... X X X X Extracts X X X X X X X X Extracts X X X X
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