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2015 (12) TMI 514 - ITAT MUMBAI

2015 (12) TMI 514 - ITAT MUMBAI - TMI - Disallowance u/s 14A - Held that:- DRP directed the Assessing Officer to exclude bank charges and other financial charges while determining the figure of the interest expenditure for quantifying the disallowance under Rule 8D of the Rules. The Revenue has challenged the aforesaid direction of the DRP. After considering the rival stands, we find no infirmity in the decision of the DRP, which is in conformity with the phraseology of Rule 8D(2)(ii) of the Rul .....

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mat and liquid. These factual aspects have not been negated by the Revenue and, therefore, the decision of the DRP cannot be faulted with. Apart from the aforesaid, we have carefully perused the discussion made by the AO in the draft assessment order and find that no specific reason has been propounded to demonstrate that the profits declared in the Guwahati unit was otherwise untrue except by comparing it with the level of profit of the Pondicherry unit, which ostensibly was not manufacturing t .....

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DER Per G S Pannu, AM The captioned are cross-appeals by the assessee and the Revenue, directed against the order of the Assessing Officer dated 30/12/2013 passed under section 143(3) r.w.s. 144C(13) pertaining to the assessment year 2009-10, which is in conformity with the order passed by the DRP-1, Mumbai dated 30/10/2013. The assessee as well as Revenue has raised the following grounds of appeal:- Grounds of Assessee's Appeal:- " 1) The learned DRP erred in confirming the allocation .....

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learned DRP and the Assessing Officer erred in disregarding the method of allocation consistently adopted by the Appellant and in re-allocating 50% of the following overheads of the non-eligible undertakings of the Appellant, while computing the deduction U/S 80lB/ 80lC of the Act:- Miscellaneous Expenses Conveyance and Travelling Expenses Rent, Rates and Taxes Advertisement and Publicity Schemes and Promotions 4) The learned DRP erred in directing the Assessing Office to restrict the claim for .....

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s being the reimbursement of advertisement expenses made by the Appellant Company to its Associated Enterprise during the year. 7) The learned DRP erred in directing the Assessing Officer to make an addition of ₹ 6,27,920/- in respect of guarantee commission in respect of the guarantee given on behalf of Godrej Sara Lee (Bangladesh) Pvt. Ltd. 8) The Assessing Officer erred in not following the directions of the learned DRP in respect of provision for diminution in value of investments whil .....

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(1) of the Income Tax Act. 1.1 On the facts and the circumstances of the case and in law, the Disputes Resolution Panel erred in rejecting the average yield method adopted by the TPO to determine the credit rating of the AE for computing the Arms Length Price(ALP) of Guarantee Fee charged from the AE on providing the guarantee. 2. On the facts and the circumstances of the case and in law, the Disputes Resolution Panel erred in directing the AO to exclude Bank Charges and Other Financial Charges .....

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e." 3. On the facts and the circumstances of the case and in law, the Disputes Resolution Panel erred in directing the AO, without any supportive justification, to not to apply the average rate of profit margin within the 80-IC/80-IE/80-IB eligible Units of Guwahati with that of Pondicherry belonging to the assessee company. Thereby erred in allowing the assessee to claim higher deduction u/s. 80-IC/80- IE/80-IB in respect of 2 Guwahati Units to the extent of ₹ 52,79,23,037/- as compa .....

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rutiny assessment. In an assessment finalized under section 143(3) r.w.s. 144C(1) dated 30/12/2013 in accordance with the directions of the DRP dated 30/10/2013, the total income has been assessed at ₹ 68,31,94,653/-, after making certain additions/disallowances, which are subject matter of controversy in the cross appeals of the assessee and the Revenue. 3. In so far as Ground of appeal Nos. 1 to 2 of assessee's appeal and Ground of appeal Nos.2 and 2.1 of Revenue's appeal are con .....

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Assessing Officer to reduce the bank charges and other financial expenses, which are not in the nature of interest, while computing the disallowance under rule 8D(2)(ii) of the Rules. Accordingly, in the final assessment order dated 30/12/2013, the disallowance was scaled down to ₹ 14,25,150/-. 4. In this back ground, the Ld. Representative for the assessee submitted that in the preceding assessment year of 2008-09, similar issue came up before the Tribunal and vide order dated 11/3/2015 i .....

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is clearly in the two foreign subsidiaries of the assessee and dividend from the foreign company is taxable, therefore, to that extent the DRP has already directed the Assessing Officer to recomputed the disallowance. The issue before us is limited to the extent of disallowance in respect of the investment in the wholly owned Indian subsidiaries. The assessee has raised two contentions in this respect that the investment in question is out of the assessee's own fund and that too in subsidia .....

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unt of interest expenditure has to be as per the funds available with the assessee and the finding on the issue of disallowance u/s 14A for the earlier years is relevant for the purpose of deciding this issue for the year under consideration. Similarly, the issue of disallowance on account of administrative expenses has to be decided keeping in view the finding of the earlier assessment years on this account. Accordingly, in the facts and circumstances of the case, we set aside this issue to the .....

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ent year 2008-09 (supra). The Ld. Departmental Representative has not controverted the factual matrix brought out by the assessee and accordingly the issues raised in Ground of Nos. 1 &2 in the appeal of the assessee are restored to the file of the Assessing Officer to be decided afresh in accordance with the decision of the Tribunal dated 11/3/2015 (supra) for assessment year 2008-09. 5. Regarding the issue in Revenue's appeal in Cross-Ground Nos. 2.& 2.1, the DRP directed the Asses .....

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ound of appeal No. 3, assessee-company has assailed the action of the Assessing Officer in reworking the deductions u/s. 80IB/80IC of the Act by re-allocating certain administrative and selling & marketing expenses of the non-eligible units to the eligible units. It was a common point between the parties that this dispute was a recurring issue and in the past years the issue had been decided by the Tribunal in favour of the assessee. In the lead case for assessment year 2006-07, the Tribunal .....

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eads to the extent of ₹ 12.72 crores representing the indirect expenses were allocated by the assessee between the eligible business and non-eligible business in the ratio of turnover and this basis adopted by the assessee was accepted by the A.O. except in the case of advertisement & publicity expenses amounting to ₹ 4.23 crores, schemes and promotions expenses amounting to ₹ 0.83 crores, miscellaneous expenses amounting to ₹ 0.72 crores, conveyance and traveling exp .....

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manufacturer out of the trading profit. He, however, appears to have overlooked the fact that goods procured from the third party were sold by the assessee company as a part of trading activity under the same brand name and the benefit of the said expenditure thus was available equally to the trading segment. Incidentally, the A.O. also impliedly accepted this position while observing in his order that such expenses on advertisement & publicity and schemes have to be allocated to some exten .....

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id expenses on the basis of turnover was quite reasonable. The allocation so made by the assessee also cannot be said to have resulted in allocation of large amount of expenses to the non-eligible business as alleged by the A.O. since the gross profit ratio as shown by the assessee in the trading segment was 12.92% and even after allocating advertisement, schemes and promotions expenses on the basis of turnover, the profit of trading segment was 6.59%. 9. Similarly, the other indirect expenses o .....

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the reallocation of the said expenses made by the A.O. on adhoc basis was not supported or substantiated by him and the same, in our opinion, cannot be accepted as a reasonable basis. In the case of Consolidated Coffee Ltd. v. State of Karnataka (supra) cited by the ld. counsel for the assessee, it was held by the Hon'ble supreme Court that when a bifurcation of expenses is not possible, some reasonable test will have to be adopted and that adoption of the method of apportioning on the basis .....

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sturb the same and make reallocation on adhoc basis. We, therefore, delete the addition made by the A.O. by restricting the claim of the assessee for deduction u/s 80IB/80IC of the Act by reallocating the common indirect expenses and allow ground No. 1 & 2 of the assessee's appeal." 6.1 The aforesaid decision was followed by the subsequent Benches of the Tribunal for assessment year 2005-06 and 2008-09 vide orders in ITA Nos. 7227/M/2011 and 598/M/2013 dated 19.2.2014 and 11.3.2015 .....

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n @ 60% on the cost of UPS & Printers. Following the precedent, ground of appeal raised by the assessee is allowed. 8. By way of Ground No. 5, assessee company has assailed an addition of ₹ 11,72,710/- on account of determination of arm's length price of the exports made to its associated enterprises. The assesseecompany had adopted Comparable Uncontrolled Price (CUP) method in order to benchmark its selling prices of exports made to associated enterprises, and it was asserted that .....

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p before the Tribunal for assessment year 2008-09 (supra), and the stand of the assessee was upheld in following words: "25. We have considered the rival submissions as well as relevant material on record. The assessee bench marked its selling price using comparable uncontrolled price (CUP ) method. The TPO found that the assessee has aggregated all the exports made to a particular country for the purpose of bench marking against the comparable transactions with unrelated parties in those c .....

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he transactions being at arm's length and compared with the uncontrolled price. It is pertinent to note that the product sold by the assessee are insecticide products in the various forms i.e. coil, liquidvaporizing products, liquid repellants etc. There is no dispute that some of the products are sold as a package along with the accessories which are necessary for using these insecticide products. For instance a heater is required along with good knight vaporizer as well as mat and, therefo .....

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ng strategy to promote other products of the assessee in a particular market. Therefore, all the products are falling in the category of insecticides and used as supplementary to each other then these products may be priced by taking a portfolio approach by the assessee and not considering the profit motive from each and every single product within the portfolio. We note that in the case of Boskalis International Vs. Dy. Director of Income Tax (supra), the Tribunal while considering a similar is .....

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m a continuous transactions of supply of amenity or services the transactions can be permitted as closely linked transactions for the purpose of transfer pricing and in terms of Rule 10A(d). Aggregation and clubbing of the closely linked transaction are permitted under the Rules and it is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation it is to be considere .....

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it involved in the transactions then those transactions can safely be regarded as closely linked transactions. The OECD guidelines has referred a portfolio approach as business strategy consisting of tax payers bundling certain transaction for the purpose of earning an appropriate return across portfolio rather than single product. For instance some products may be marketed by the tax payer with a low profit or even at loss because they create a demand for other products or related services of t .....

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id to be closely linked if the transactions are interlinked and terms and condition as well as prices between the parties are determined based on the totality of the transactions and not on individual and separate transactions. 12. In the case in hand the Assessee has taken a number of dredging equipments from more than one associate enterprises. In the business decisions when number of transactions are entered into between two parties then it is a very important and material factor to consider .....

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of transactions with each associated enterprise. In other words the transactions carried out with different associate enterprises cannot be clubbed or aggregated because they cannot be termed as closely linked or continuous so as to influence the price in aggregate or the profit of the parties arising from these transactions. Hence, in principle we accept argument of the ld.AR that the various dredging equipments hired from the associate enterprises can be aggregated for the purpose of determina .....

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ine the ALP by aggregating the various transactions between the Assessee and each associate enterprise separately and not by clubbing the transactions with all associate enterprises. 26. There is no dispute that if the number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply or services the transactions can be classified as closely linked transactions for the purpose of transfer pricing and in terms of Rule 10A(d) of the income Tax Ru .....

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proach as business strategy consisting of tax payers bundling certain transaction for the purpose of earning an appropriate return across portfolio rather than single product. The assessee is selling various insecticide products used in the household at various strata of the society and, therefore, the products of the assessee are clearly falling under the one portfolio of same category of product and, therefore, the assessee can have a portfolio approach as a business strategy. A similar view h .....

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he addition made by the Assessing Officer is deleted." 8.2 Following the aforesaid precedent, the ground No. 5 in the appeal of the assessee is allowed. 9. By way of Ground No. 6, assessee-company has assailed the disallowance of ₹ 20,00,000/- representing reimbursement of advertisement expenses by the assessee to its associated enterprise. In brief, the relevant facts are that the assessee company paid ₹ 20,00,000/- to Koninklinjke Douwe Egberts, Netherlands, towards reimbursem .....

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nst the proposed disallowance by contending that -(a) it paid the impugned amount as its share in the advertisement expenses incurred at the group level; and (b) the reimbursement of cost was based on assessee-company's proportionate share in net sales value of the global business, in relation to the costs of such services incurred under each of the brands of the group. The DRP affirmed the addition proposed by the Assessing Officer for the reason that the assessee had failed to establish ho .....

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sentative for the assessee contended that the impugned sum has been unjustly disallowed. Explaining the factual aspect, it was pointed out that 'Sara Lee' is a world leader in the household and body care business and markets products under various global brands. It was asserted that the group incurs costs globally to develop and market the said brands, and also provides marketing assistance and support concerning the products under the 'Sara Lee' brand. The assessee-company paid .....

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y cost, etc. It was therefore, pointed out that the sharing of cost by the group concerns has, in fact, benefited the assessee as there is a excess recovery of ₹ 35.13 lacs for the year under consideration. 9.3 On the other hand, Ld. CIT-DR vehemently pointed out that the authorities below have disallowed the claim of the assessee by clearly noticing that the assessee had failed to establish the basis on which the expense was incurred. In nut-shell, Ld. CIT-DR has relied upon the findings .....

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ch the impugned amount of ₹ 20.00 lacs has been reimbursed to its associated enterprise, so as to determine as to how the stated expenditure of ₹ 20.00 lacs could be considered as an arm's length price. The explanation rendered by the assessee before us is on the same lines as was made before the lower authorities. In our considered opinion, the explanation rendered by the assessee continues to suffer from the same vices, as has been noted by the income tax authorities. Apart fro .....

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O in making an addition of ₹ 6,27,920/- in respect of earning on account of arm's length rate of guarantee commission relating to the guarantee given by the assessee to Citi Bank on behalf of its associated enterprise - Godrej Sara Lee (Bangladesh) Pvt. Ltd. 10.1 In this context, brief facts are that assessee had given guarantee to banks on behalf of its subsidiary in Bangladesh. The subsidiary had raised loans from the bank for which guarantee had been given by the assessee to the con .....

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ng adjustment was called for. It was also explained that the financial guarantee was advanced by the assessee for strategic reasons in furtherance of its business prospects. The TPO, however, differed with the assessee who compared the guarantee commission rate in two different geographical locations, namely, in India and Bangladesh and the difference between the two rates was treated as the benefit to the associated enterprise. Accordingly, the TPO made an addition of ₹ 14,82,960/- on thi .....

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t the loan in question was availed by the associated enterprise and disbursed in Bangladesh only. Therefore, it directed the AO to rework the addition on this count by considering the rate borne by the associated enterprise in Bangladesh, which resulted in scaling down of the adjustment to ₹ 6,27,920/- instead of ₹ 14,82,960/- proposed in the draft assessment order. In the final assessment order dated 30/12/2013, an addition of ₹ 6,27,920/- has been made. The aforesaid addition .....

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#39;s own case for assessment year 2006-07 and 2005-06 vide orders dated 22/11/2013(supra) and 19/2/2014 (supra) respectively. The Ld. CIT-DR appearing for the Revenue has also not controverted the factual matrix that the issue relating to determination of arm's length price of the guarantee commission has been dealt with by the Tribunal in assessee's own case in assessment years 2005-06 (supra) and 2006- 07(supra). As a consequence of the aforesaid, we restore this matter back to the fi .....

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t of ₹ 1,24,81,000/- representing Provision of diminution in the value of investment, while computing the book profits under section 115JB of the Act. 11.1 In this context, the brief facts are that before the DRP assessee pointed out that the Assessing Officer erred in not granting deduction of ₹ 1,24,81,000/- in respect of the Provision for diminution in value of investment written back while computing the book profit under section 115JB of the Act. The assessee explained before the .....

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e same was pending disposal with the AO. In the aforesaid light, the DRP noted that if the AO was to carry out the amendment under section 154 in the assessment year 2005-06, thereby adding back such Provision, then the consequential effect would have to be given in the instant assessment year, otherwise it would amount to same addition in two assessment years. Therefore, the DRP directed the AO to verify the facts and if the amount was found to be added back in the assessment year 2005-06, then .....

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is found that the claim stands disallowed in assessment year 2005-06, then the AO may grant the deduction in the instant assessment year as per law. Thus, in principle, we affirm the stand of the DRP on this aspect and direct the Assessing Officer to effectuate the same as per law. Thus, on this aspect assessee succeeds for statistical purposes. 12. The only other ground remaining is Ground of appeal No.3 in the appeal of the Revenue, which arises from the action of the CIT(A) whereby the recom .....

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-eligible. In this context, the Assessing Officer examined the profit to sale ratio of the different units and found that the profit margin of the two units situated at Guwahati was abnormally high as compared to the profit margin of the units situated at Pondicherry. Therefore, in the draft assessment order dated 28/2/2013, the claim for deduction under section 80-IC of the Act in respect of the two units in Guwahati was allowed to the extent of ₹ 8,36,17,721/- as against the claim of  .....

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of Pondicherry unit, which was manufacturing mosquito repellent coils. The assessee also pointed out before the DRP that the adjustment was proposed by the Assessing Officer without appreciating the submissions made and by merely following the stand in the assessment year 2008-09. The DRP found that the aforesaid dispute was similar to the assessment year 2008-09 and it upheld the stand of the assessee. As per DRP, on facts, such an addition was not merited. Accordingly, in the final assessment .....

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