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Zuari Cement Limited Versus Dy. Commissioner of Income Tax, TIRUPATI

2015 (5) TMI 861 - ITAT HYDERABAD

Disallowance of Community Development Expenses - Held that:- It is not proper to disallow the entire amount on the basis of non-availability of few vouchers even though assessee has provided evidence by way of ledger accounts and payment details. AO does not have any right to disallow the amount stating that business necessity was also not proved beyond doubt. This issue was also decided by the DRP, so AO cannot again come to the same point which was held in favour of assessee. In view of this, .....

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diture was incurred for purchase of gifts to advocates marriages, purchase of coolers gifted to 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 Inv .....

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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 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 bein .....

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r 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 .....

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hnology from foreign AE. There is foreign exchange expenditure also considered as 'technical know-how fee'. A detailed objections of the assessee were not even considered or discussed either by the TPO or by the DRP. Therefore, on the basis of an external CUP ALP of 0.91% itself is not correct. Therefore, the entire exercise undertaken by the TPO on this issue is erroneous and cannot be justified.

Transfer of economic value of Zuari trade mark to Italcementi Group trade mark - Under .....

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ice 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 se .....

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n the year under consideration and the facts pertaining to the quantification of the claim are not on record, we cannot entertain the additional ground, just because law on this was settled on legal principles. If at all assessee's claim to depreciation was allowed in AY.2007-08, then, assessee can claim consequential depreciation in this assessment year, before the AO, the additional ground is accordingly rejected. - Decided against assesse. - I.T.A. No. 471/HYD/2014 - Dated:- 17-4-2015 - SHRI .....

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pricing provisions and disallowances made under the corporate tax issues. 2. Briefly stated, assessee is engaged in the business of production and sale of Portland cement and has cement manufacturing facilities in Sitapuram and Yerraguntla in AP. As seen from the order of Transfer Pricing Officer [TPO], Italcementi Group made its debut in India in January, 2001 through partial acquisition of 2.1 million tonne Yerraguntla Cement Plant in Andhra Pradesh. This investment was initially made through .....

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uram in Andhra Pradesh as a sick company. After acquiring the company by infusion of fresh capital and technology, the said company was turned around, which was operating as a subsidiary company of assessee-company. Pursuant to the scheme of amalgamation sanctioned by the Hon'ble High Court 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 ton .....

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d 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 Enterprises [AEs] which were considered under TP analysis. Therefore, Ground No.2 to 12 pertain to TP issues. Under the corporate tax adjustments Ground No.13, 14 & 15 are on the three disallowances listed above. Ground No .....

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orporate tax issues first. Corporate Tax Issues: 4. As briefly stated, there are three expenditures which were disallowed by AO being contested by assessee in this appeal, whereas other disallowances made by AO are not objected. Among them, the first one is disallowance of Community Development Expenses of ₹ 76,36,096/- being contested in Ground No.13. 4.1 Assessee-company had incurred expenses of the above amount towards special activities like medical camps, installing water bores and bo .....

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e company. It was submitted that assessee employs employees from nearby villages and these expenditures are necessary to retain such employees and motivate them to work with the company for a longer term by providing necessary amenities in the villages. These expenditures are essential for smooth operations and are incurred wholly and exclusively for the purpose of business. It was further submitted that assessee has maintained proper bills and documentation in support of the expenditures and AO .....

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mited [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. .....

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esponsibility' concept. It is not proper to disallow the entire amount on the basis of non-availability of few vouchers even though assessee has provided evidence by way of ledger accounts and payment details. AO does not have any right to disallow the amount stating that business necessity was also not proved beyond doubt. This issue was also decided by the DRP, so AO cannot again come to the same point which was held in favour of assessee. In view of this, we in the interest of justice, re .....

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llowed an amount of ₹ 14,06,559/- stating that this expenditure was not warranted and had no nexus with the business and not supported by concrete evidence and also no identity of receivers. We are unable to understand the above four reasons given by AO. If we pursue the orders, it is very clear that expenditure was incurred for purchase of gifts to advocates marriages, purchase of coolers gifted to Joint Director (Mines), purchase of gifts to M.V.Mysoora Reddy's son's marriage fun .....

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nly 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/-. 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 .....

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y 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 Sitapuram, the school is being run mainly for the benefit of employ .....

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order and after excluding non-operating items, both revenue and expenditure, arrived at (operating cost / operating revenues) at 27.12%, whereas (operating profits / operating cost) was arrived at 33.37%. Assessee in its 3CEB report claimed Transaction Net Margin Method [TNMM] as the most appropriate method, analysed its transactions and compared two sets of comparable companies. Under the first set of comparables as noted down by TPO in Page 4 of the order, it compared 11 companies which are in .....

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m's Length. Relying on the principle of 'substance over form' as held by Hon'ble Supreme Court in the case of Union of India Vs. Gosalia Shipping P. Ltd., [113 ITR 307 (SC)], AO rejected the method of TNMM, consequently, the TP study conducted by the taxpayer. He also held that aggregation of transactions were not allowed and relied on the decisions of the co-ordinate bench in the case of Star India P. Ltd., Vs. ACIT [2008-TIOL-426-ITAT-MUM] and also UCB India Pvt. Ltd., [317 ITR .....

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s 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 .....

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now-how and compared with financial results of Sri Vishnu Cements Ltd., under the CUP method, to hold that there is no justification for payment of royalty. Accordingly he came to the conclusion that there is no need to pay any amount. Not only that, he also compared some external comparables and came to the conclusion that average pay out on account of technical services by those comparable companies was at 0.91% of net sales. Therefore, based on these two internal and external CUP analysis, TP .....

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of licensed products has to be paid to Ciments Francais S.A., on quarterly basis. AO analysed the same under the CUP method and noticed that there is no need for paying any amount to Italcementi Group for use of trade mark as assessee's own trade mark of ZCL was well established. He analysed the evolution of ZCL brand equity and noticed that assessee itself had entered into an agreement with M/s. Jindal Vijayanagar Ltd., for a fixed license of ₹ 1,00/- per metric tonne for using the tr .....

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d under the provisions of Section 92CA. Not only that he further analysed the cobranding of ZCL and 'Italcementi' Group and came to the conclusion that Italcementi Group got benefit by piggy riding on ZCL brand, which has tremendous value in the market and therefore, the same requires to be compensated at arm's length. He took the 10% of ALP expenses between 2001 and 2008 and arrived at the compensation payable to ZCL, for use of its trade mark at ₹ 41,60,00,000/- and made the .....

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ons 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 .....

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ilar or identical in nature that reflects the characteristics of the services provided by the AEs to the assessee. It was further submitted that neither assessee nor AEs provide similar services under comparable circumstances to any independent third party. Therefore, application of CUP method is not tenable and given the facts of the case will not give reliable results. Assessee relied on the orders of the ITAT in Air Liqauide Engineering India Pvt. Ltd., in ITA No.1040/H/2011 and Lumax Industr .....

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pany under the order of Hon'ble High Court of AP. Therefore, comparing with costs occurred about three years prior to the impugned period, was also not correct. Further, it was contended that TPO has taken a wrong information and ignored certain data in between which comparing annual earnings as can be seen from the table itself extracted in the order. Since TPO has not based his ultimate decision of SVCL, Ld.Counsel also referred to the three companies taken as external comparables, in arri .....

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entered in the year 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 .....

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@ 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., 11.1 Coming to the alleged transfer of economic value of Zuari trade mark to Italcementi Group trade mark, it was contended that there was no migration of economic value as the Zuari brand was owned by the company and is being used in all the sales. It was further contended that AE .....

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oach in AY.2008-09 and made the adjustment of ₹ 31.74 Crores and in AY.2009-10, the adjustment was ₹ 41.60 Crores. Therefore, the action of the TPO/DRP is irrational on the reason that proposing the transfer pricing adjustment for transfer of Zuari trade mark year after has no basis, without appreciating the fact that the transfer can take place only once. With reference to the consultancy fees for manufacturing a new plant, first objection was that the amount was not claimed as expe .....

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and wrongly determined the ALP at NIL. Likewise, the Ld.Counsel made detailed submissions on reimbursement of expenses and other various disallowances made by the TPO. Detailed submissions were filed issue- wise. 12. Ld.DR further referred to various observations of the TPO and findings of the DRP to submit that the adjustments made are warranted on the facts of the cases. He supported the orders of the TPO/DRP. 13. We have considered the issue and pursued the evidences on record, including the .....

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arious 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 t .....

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which is not a 'royalty' for getting the technology from foreign AE. There is foreign exchange expenditure also considered as 'technical know-how fee'. A detailed objections of the assessee were not even considered or discussed either by the TPO or by the DRP. Therefore, on the basis of an external CUP ALP of 0.91% itself is not correct. Therefore, the entire exercise undertaken by the TPO on this issue is erroneous and cannot be justified. 14. Leave alone that amount, even the .....

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p. 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. Ev .....

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on to uphold any of the contentions raised by TPO in his order. Likewise, the disallowance of various service fees including reimbursements made by assessee to AE. Since we do not find any valid reason for TPO to 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 .....

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poses. 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 though Goodwill has been duly recognised in the books of accounts and depreciation on the same was al .....

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or tax purposes. Since the law is settled, assessee has preferred to raise additional ground. 15.1 Assessee relied on various precedents, that of : i. Jute Corporation of India Vs. CIT [187 ITR 688 (SC)] ii. National Thermal Power Co. Ltd., Vs. CIT [229 ITR 383 (SC)] iii. CIT Vs. Pruthvi Brokers & Shareholders [349 ITR 336 (Bombay HC)] for the proposition that assessee shall not be debarred in raising additional ground of appeal and there is no provision in the Act placing restriction on the .....

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