TMI Blog2015 (5) TMI 861X X X X Extracts X X X X X X X X Extracts X X X X ..... o Joint Director (Mines), purchase of gifts to M.V.Mysoora Reddy's son's marriage function, purchase of silver plate gifted to Inspector of Factories, purchase of gifts to Railway employees, purchase of gift for ESI official daughter's marriage, purchase of gifts to other Govt. employees etc. Except the purchase of gold coins from Corporation Bank, Bangalore on 16-02-2008 for ₹ 3,85,166/- vide Invoice No.120 for which no details were furnished, rest of the expenditure has same identity etc. Since the business necessity was already decided by the DRP, AO's duty is only to examine the vouchers. In our opinion, except the amount of ₹ 3,85,166/- for which details were not available, rest of the expenditure cannot be disallowed on the reasons stated by AO. We therefore, direct the AO to allow the expenditure, except the amount of ₹ 3,85,166/ - Decided partly in favour of assesse. Disallowance of Contribution to Zuari School - Held that:- We were surprised about the reasoning given by the AO. He was directed by the DRP only to examine the necessary vouchers, AO should not question the wisdom of the DRP in allowing the expenditure u/s.37(1), subject to verification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire payment without there being any analysis on the CUP method cannot be accepted. In the guise of analyzing the transactions in the CUP method, the TPO has not brought any evidence on record to reject the 1% payment made to Italcementi Group. Moreover, while determining the price at NIL on the issue, the TPO surprisingly holds that assessee has transferred its 'Zuari Brand' to 'Italcementi Group'. We are unable to understand this logic. Italcementi Group never obtained, acquired or used Zuari Brand anywhere in the world, so that this cannot be considered for Transfer Pricing analysis. It is the Italcementi Group brand which is used by assessee-company. The TPO's analysis of AMP expenses are also not correct. The orders of the TPO/DRP on the TP issues are therefore set aside and the entire issue on TP analysis is restored to the file of AO for fresh consideration. - Decided in favour of assesse for statistical purposes. Allowability of depreciation of goodwill - additional ground raised - Held that:- As rightly held by the Hon’ble Supreme Court in the case of S.A. Builders Ltd., [2006 (12) TMI 76 - SUPREME COURT OF INDIA], additional ground cannot be considered, in the absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt of Andhra Pradesh on 29-06-2007, SVCL stood merged with assessee-company w.e.f. 01-01-2007. The TPO acknowledges that from a modest 0.5 million tonne capacity in 1995, Zuari has grown to a 3.5 million tonne capacity today. During the year, assessee filed return of income admitting total income of ₹ 389.75 Crores, the return was taken for scrutiny and eventually the final assessment was completed assessing total income at ₹ 485,23,81,680/-, consequent to various additions as under: (Rs) TP adjustments 94,30,82,932 Disallowance of Community Development Expenses 76,36,096 Disallowance of giveaways 14,06,559 Disallowance of Contribution to Zuari School 13,43,496 3. In the appeal preferred before us, assessee has raised 16 grounds and various sub-grounds. Ground No.1 2 are general in nature. While Ground No.3 4 are with reference to the method being adopted by the TPO for TP analysis, Ground No.5 to 12 are on various payments made to Associated Ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incurred on various 'corporate social responsibility' is allowed as business expenditure. i. CIT Vs. Madras Refineries Ltd., [266 ITR 170 (Madras)] ii. CIT Vs. Jayendrakumar Hiralal [327 ITR 147 (Gujarat HC)] iii. CIT Anr. Vs. Karnataka Financial Corporation [326 ITR 355] [(Kar. HC)] iv. CIT Vs. Infosys Technologies Limited [360 ITR 714 (Karnataka)] Assessee also relied on various ITAT decisions in support of the contention. 4.3 DRP however, accepted that this expenditure was incurred for the purpose of business which should be allowed u/s.37(1) of the Act. However, since AO has observed that no bills and vouchers were produced before him, it directed assessee to produce Books of Accounts including bills and vouchers and AO is directed to decide the issue on the basis of examination of the Books of Accounts. 4.4 As seen from the order, AO has examined few of the vouchers and came to conclusion that it does not contain proper invoices or vouchers and payee details are not available and in one case, even the amount of ₹ 5 Lakhs was paid to Kadapa Ratnalu Trust. AO was of the opinion that the Trust was not recognized u/s.12AA. What is required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure, except the amount of ₹ 3,85,166/-. This ground is partly allowed. Contribution to Zuari School: 6. The last item is the expenditure incurred in the nature of contribution to Zuari School amounting to ₹ 13,43,496/-. As per the copy of the MOU entered between assessee and DAV College Trust and management society, New Delhi, assessee-company was required to reimburse the expenditure on running the school after deducting the income realized as fees etc., from the students. AO, however, noticed that 'school' was not defined in the MOU and disallowed the expenditure stating that there is no clarity in the MOU itself. We were surprised about the reasoning given by the AO. He was directed by the DRP only to examine the necessary vouchers, AO should not question the wisdom of the DRP in allowing the expenditure u/s.37(1), subject to verification of the availability of vouchers. In our opinion, AO exceeded his jurisdiction in examining the MOU itself. Not only that, assessee also made contributions to another school at Sitapuram. This was being contributed earlier by SVCL which was later merged with assesseecompany. In both the places of Yerraguntla and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fees for technical know-how, fees for use of trade mark and fees for procurement etc., are a separate class of transactions, therefore, they have to be analysed separately, as each transaction has a bearing on profits. Accordingly, the transactions entered into by and between the taxpayer and its AEs are considered separately for the purpose of transfer pricing analysis. Ld.TPO noticed that assessee paid an amount of ₹ 12,53,26,000/- to Ciments Francais S.A., as technical know-how and research and other service fee. This payment was paid on an agreement dt.02-08-2000 for getting technical know-how for a period of three calendar years from that effect date. As per renewal of clause at 12.2 it is mentioned that agreement was automatically be renewed subject to Government/Statutory approval for a period of one calendar year at a time in support of the transaction. Assessee has furnished a copy of agreement dt.06-06-2007 effective from 01-01-2007 for payment of royalty @ 2% on sales made to outside parties and 1% on sale to group companies. Even though assessee justified the payment, Ld.TPO however, considered that there is no addition of new technical know-how and compared wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable to ZCL, for use of its trade mark at ₹ 41,60,00,000/- and made the adjustment of the above in the impugned year. 9. In addition, TPO also analysed the payments from the intra group services of procurement fee of ₹ 7,11,82,000/-. Considering that there is no need for any services, he disallowed the entire amount. Likewise, consultancy fees paid of ₹ 38,10,000/- to Bravo Consultancy SPA and ₹ 42,10,94,000/- to CTG SPA were also considered and disallowed the same reason and on the basis of the benefit test, in its entirety. Assessee's objections were rejected and the above amounts were disallowed. Another disallowance made by the AO was with reference to reimbursement of expenses under various heads totaling to ₹ 51,72,995/-. Thus, in all, an amount of ₹ 99,64,85,214/- was treated as adjustment u/s. 92CA. Assessee filed various objections before the DRP but more or less concurred with TPO vide its order dt.25- 11-2013. Assessee is aggrieved. 10. Assessee's objections are multi-fold. Ground No.1 2 are general in nature. Ground No.3 4, is the method adopted by the TPO and Ground No.5 to 12 are on various disallowances made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007 and objected to the method adopted by the TPO stating that the transaction is inextricably linked with the manufacturing operation, thereby aggregation of transaction with application of TNMM as a MAM cannot be ignored. It was further contended that there were no cogent reasons as to why CUP should be adopted and both TPO and DRP erred in determining the ALP at NIL. It was the submission that use of trade mark is a business decision and there are benefits to assessee for use of Italcementi Group trade mark and demonstrated by the support of growth in sales volume over a five year period and increase in customer base in the five years and furnished the copies of evidences furnished to the TPO, in support of the submissions. It was further submitted that a publicly available information analysis was undertaken by assessee on the rate of royalty being charged by licensor to a licensee and that analysis came to the range of 1.93%. Therefore, the payment made by ZCL @ 1% on sale was to be considered as arm's length and TPO's determination at NIL cannot be supported, in view of the decision of the Hon'ble High Court of Delhi in the case of CIT Vs. EKL Appliances Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the payments made by assessee to the AEs are just a fraction of the total turnover of assessee, these transactions are invariably inter-linked to the manufacturing and trading of cement by the assessee-company. Therefore, the approach of the TPO in considering the CUP method for analyzing independent transactions is not fully justifiable. Apart from that, the methodology used in various analysis is also faulty. As far as the royalty payment on sales is concerned, as rightly pointed out by the Ld.Counsel, there are no comparable companies which are offering similar services. The TPO's comparison on transactions of assessee subsidiary company much prior to the year under consideration cannot be justified. Therefore, on that basis itself, the comparison cannot be considered as an internal CUP. Moreover, the need for not charging royalty from SVCL was also explained as the subsidiary company was a sick company and in the process of reviving the company, assessee has not charged any royalty to its subsidiary company. Therefore, on FAR analysis, SVSL's past record with that of present transactions of assessee-company is not correct. Then, coming to external comparables, we were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallow these expenditures, we have no other go than to set aside the entire order of the TPO which is based on wrong presumptions and propositions. DRP unfortunately, even though consisted of three senior officers, did not apply its mind to the valid objections raised by assessee. In view of this, without deciding the merits of various issues, we set aside the orders and direct the TPO to re-consider the entire order and analyse them in fresh, first by determining the most appropriate method and then analyzing the transactions under the provisions of the TP. The orders of the TPO/DRP on the TP issues are therefore set aside and the entire issue on TP analysis is restored to the file of AO for fresh consideration. The grounds raised are accordingly allowed for statistical purposes. Additional Ground: 15. Pursuant to scheme of amalgamation sanctioned by the Hon ble High Court of A.P. on 29-06-2007, entire business and all assets and liabilities at re-valued values of the erstwhile SVCL stood merged with assessee w.e.f. 01-07-2007. Accordingly it was submitted that Goodwill amounting to ₹ 17,991.98 Lakhs arose as a result of amalgamation. Assessee submitted that thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X
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