TMI Blog2016 (5) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... the mark-up adjustments, are directed to be deleted. - Decided in favour of assessee Set of off unabsorbed depreciation - Held that:- Assessee is entitled to claim set off of unabsorbed depreciation against business income of the assessment years under consideration. See Associated Cables case [2013 (10) TMI 1363 - ITAT MUMBAI ] - I. T. A. /1119 /Mum/2014, I. T. A. 976/Mum/2014, ITA. No. 518 /Mum/2015, I. T. A. 335/Mum/2015 - - - Dated:- 4-5-2016 - Sh. Rajendra, Accountant Member And C. N. Prasad, Judicial Member For the Petitioner : Shri N. K. Chand-CIT For the Respondent : Shri Nishant Thakkar and Ms. Jasmin Amalsaduala ORDER Per Rajendra AM Challenging the orders of the Assessing Officers/Dispute Resolution Panel (DRP)the assessee and the Assessing Officers(AO. s)have filed the appeals raising various grounds for the above mentioned years. As the issues involved in all the cases are similar, so, we are adjudicating all the appeals by a single order for the sake of convenience. The details of the dates of filing of return, date of order of DRP and assessed income etc. can be summarized as under : A. Y. ROI filed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43crores. He deducted ₹ 15. 01 crores from the total sum i. e. ₹ 348. 44 crores. The TPO was of the opinion that the AMP expenditure incurred by the assessee had resulted in creation of marketing intangibles for its AE, that it should have been compensated by its AEs to the extent of excess AMP incurred vis a vis comparable companies. Accordingly, he applied Bright Line Test(BLT) to determine the ALP of the AMP expenses. The TPO considered the fact that the sales ratio of the Manufacturing Segment(MS)and Distribution Segment (DS) was at 33. 15% and 39. 59% respectively, that in the Manufacturing Segment the assessee had selected comparables namely Ador Multiproducts Ltd. , Colgate Palmolive (India) Ltd. , Fem Care Pharma Ltd. , Henkel India Ltd. and Reckitt Benckiser (India) Ltd. However, the TPO rejected all the comparables chosen by the assessee-except one. He introduced five new comparables namely Dabur India Ltd, Emami Ltd. , Godrej Consumer Products Ltd. , Jyothi Laboratories Ltd. , Procter Gamble Hygiene Healthcare Ltd. and Procter Gamble Home Products Ltd. The AMP to sales ratio of the comparables was 12. 53%. However, he mentioned that the six compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. 2. 2. Aggrieved by the order of the AO, the assessee filed objections before the DRP. It was stated that AMP expenditure incurred by it was not an international transaction at all, that the payment for AMP expenses were made to third parties in India, that there was no agreement between the assessee and the AEs in respect of brand building/AMP expenses, that such expenses were incurred in the course of carrying on its business in India, that the AMP expenditure was not incurred at the instance of the AE. s, that there was no agreement/ understanding/arrangement as to allocate/contribute towards reimbursement of any part of AMP expenditure incurred by the assessee for its business, that the TPO had not brought any evidence on record to prove the there was an arrangement between the assessee and the AE, that it had furnished a certificate from AE showing that there was no arrangement between the parent company and the assessee, that the benefits of AMP expenditure were solely derived by the assessee and no benefit was derived from the AE, that the advertisements by the assessee were for products of the assessee and not for brand of the group, that certain products were de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no express provision in the act deeming the AMP expenditure to be an international transaction, that the TPO had not shown any existence of an agreement/arrangement/understanding between the assessee and its AE s whereby the assessee was obliged to incur AMP expenditure in excess of the bona fide requirements of its own business, that the TPO had considered BLT for determining existence of international transactions and held that the assessee had provided brand promotion services to its AEs, that the assessee was risk bearing entity, that it had total turnover of ₹ 561. 17crores during the year under consideration, that the manufacturing turnover was of rupees for 47. 84 crores and that it had distribution turnover of ₹ 113. 33 crores, that the expenditure was incurred to promote its own products, that it had not advertise the brand owned by its AEs. He relied upon the cases of Maruti Suzuki India Ltd. (64 Taxmann. com 150), Honda Ciel Power Products (64Taxmann. com328), Whirlpool of India Ltd. (64 Taxmann. com 324), delivered by the Hon ble Delhi High Court. Referring to the case of Sony Ericsson Mobile Communication India private limited(231 taxmann 113), h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. 4. We have heard the rival submissions and perused the material before us. We find that the assessee had bench marked the International transactions in two different segments i. e. Manufacturing Segment(MS) and Distribution Segment (DS), that the financial of MS had net sales of ₹ 447. 84 crores and the DS had net sales of ₹ 113. 33 crores, that for the MS the assessee had adopted Cost Plus Method(CPM) as the most appropriate method, that gross margin of the assessee was bench marked against the gross margins of comparable manufacturing companies, that the arithmetic mean of the comparables was taken @83. 69% on input-cost, as against 146. 71% on input-cost of the assessee, that the it had claimed that transaction in the MS were at arm s-length, that for DS it had adopted RPM, that the gross margin in the DS was bench marked against the gross margin of the comparable distribution companies, that the arithmetic mean of the comparables was 33. 37% on sales as against 61. 01% on sales of the comparables, that it had also bench marked the transactions using TNMM, that the operating expenses(other than the direct expenses) were allocated between the two segments on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment of ₹ 43. 84 crores in the second segment. We also find that the sales of the assessee had increased 19 time since the year 1999, that the average annual growth of the cosmetic industry in India was reported to be about 15-20%, that the TPO had not compared the market share of the assessee for the year under consideration. Now, if the expenditure incurred by the assessee is considered in the back ground of the growth achieved by it one has to agree with the argument of the assessee that it made rapid progress in the Indian market and AMP played an important role in it. The assessee was manufacturer and distributor of cosmetic products. The very nature of the business carried out by the assessee was such that to establish its product it had to spend huge expenses. The TPO had ignored the fact that expenditure was incurred for products launched especially for the Indian market and that the brand of the AEs was not promoted. The manufacturing unit of the assessee had shown a huge turnover. Thus, we do not find force in the arguments of the TPO / DRP that AMP expenses incurred by the assessee were primarily or secondarily aimed to benefit the AE. s. and that it was enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of income from international transactions having regard to arm's length price ]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 928 defines 'international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (b) and the 'includes' part. of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. This was negatived by the Court by pointing out; Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of persons acting in concert to come into being. 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred , for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, the existence of an international transaction will have to be established de hors the BLT, 70. What is clear is that it. is the 'price' of an international transaction which is required to be adjusted: The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment had to be made. The -burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71 Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore, what the Revenue has sought to do in the present. case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the opinion that AMP expenditure is not an international transaction and therefore we are not inclined to restore back the issue to the file of the AO. Considering the peculiar facts and circumstances of the case, first effective ground of appeal is decided in favour of the assessee and the additions made by the AO, including the mark-up adjustments, are directed to be deleted. 3. Second ground of appeal is about set of off unabsorbed depreciation, amounting to ₹ 1. 52 crores. While finalising the assessment order, the AO did not allow set off in relation to brought forward unabsorbed depreciation, though in the draft assessment order same was allowed. Relying upon the decision of the Mumbai Special Bench in the case of Times Guaranty Ltd. (131 TTJ 257), the AO made a disallowance. As the AO had not disallowed the brought forward unabsorbed depreciation in the draft assessment order, as stated earlier, so, the assessee did not agitate the issue before the DRP. 3. 1. Before us, the AR contended that the unabsorbed depreciation from AY. 1995-96 to AY. 1996-97 had become part of the unabsorbed depreciation for the AY. 1997-98, that the unabsorbed depreciation from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at where, in the assessment of assessee, full effect cannot be given to the depreciation allowance owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then subject to the provisions of sub-section (2) of section 72 and subsection (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years. The effect of these provisions is that the unabsorbed depreciation for a particular year becomes, by legal fiction, part of the depreciation allowance for the succeeding year and so on without any time limit. What section 32(2) as operative up to and including assessment year 1996-97 contemplates is that current depreciation is deductible, in the first place, from the income of the business to which it relates; if such depreciation amount is larger than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) as substituted with effect from 1-4-1997. In this context, it may be observed that amended section 32(2) as substituted by the Finance (No. 2) Act, 1996 (with effect from 1-4-1997) has been substituted by the Finance Act, 2001, with effect from 1-4-2002 and status quo ante has been restored with effect from assessment year 2002-03. The new sub-section (2) of section 32 as substituted by the Finance Act, 2001 with effect from 1-4- 2002 has restored the sub-section (2) of section 32 as it stood in the assessment year 1996-97. In other words, the restrictions imposed by the Finance (No. 2) Act, 1996 with effect from 1-4-1997 in the matter of set-off of unabsorbed depreciation has been dispensed with by substituting the section 32(2) by the Finance Act, 2001 with effect from 1-4-2002 and status quo ante, i. e. , status quo of section 32(2) as existed prior to the amendment made by Finance (No. 2) Act, 1996 with effect from 1-4-1997 has been restored. Further, the said issue has also been considered by ITAT, Mumbai Bench in the case of M/s Arch Fine Chemicals Pvt. Ltd. V/s ACIT in ITA Nos. 2414 and 2415/Mum/2012(AYs 2005-06 2006-07) order dated 9. 10. 2013 to which one of us ..... X X X X Extracts X X X X X X X X Extracts X X X X
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