9911796707
TMI Blog2016 (5) TMI 969X X X X Extracts X X X X X X X X Extracts X X X X ..... that same was not at arm's length price(ALP)During the assessment proceedings, the AO found that assessee had entered into international transactions (IT. s)with its Associated Enterprise(AE). For determining the ALP of such transactions, he made a reference to the Transfer Pricing Officer (TPO). 2. 1. During the Transfer Pricing proceedings, the TPO observed that the assessee had entered into a technical assistance and royalty agreement with CSOL on 09. 03. 93for availing benefits of technical knowhow developed by the AE relating to the manufacturing, processing, distributing and marketing of products as well as benefits of continuing research and development (R&D) undertaken by CSOL, that it had also entered into an agreement with AE on 20. 12. 2000, that the assessee had agreed to pay royalty to the AE @ 1. 25%, that it had paid royalty to the tune of Rs. 6. 35crores, that it also paid Rs. 730. 41 lakhs for the use of trade mark. The TPO was of the opinion that royalty paid by the assessee (Rs. 7. 30crore)on trademarks could not be allowed. In the appellate proceedings, the First Appellate Authority(FAA) upheld the disallowance. 2. 2. During the course of hearing before us, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mark usage, by the other group companies using the Brand Cadbury in other parts of the world. On the other hand, if we examine the argument taken by the TPO with regard to OECD guidelines. On this point the assessee's payment is coming to a lesser figure, as discussed in detail by the CIT(A). 41. We are not going into the arguments advanced by the DR/TPO on geographical differences, and payments made to Harshey, as these arguments gets merged in the interpretation and details available in the table supplied by the assessee and taken note of by the TPO and the CIT(A). 42. We are also not referring to the case of Maruti Suzuki Ltd. as we find that in so far as the instant case is concerned, there is really no relevance. 43. On the basis of the above observations, we are of the opinion that the royalty payment on trademark usage is within the arms' length and does not call for any adjustment. " Respectfully, following the above order, and the order for subsequent AY. s we decide the Ground of Appeal No. 1 in favour of the assessee. 3. The second ground of appeal is about disallowance of AMP expenses (Rs. 71. lakhs)towards the cost allocable to CSOL for the benefit accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... colate confectionary segment, that it was the market leader in so far as it related to the chocolate market in India, that it was commanding 70% of the market share, that in order to maintain its leadership and further maintain its market share it was required to incur an expenditure on AMP for the products manufactured by it, that the expenditure was incurred wholly and exclusively for its business in the licensed territory, that the products manufactured by the assessee were in the impulse-purchase category, that for such products higher advertising and marketing was a pre-requisite to increase product awareness, that the AMP expenditure was incurred for creation of product-awareness of new products and recall-value of existing product in the minds of Indian customers primarily, that it had a local marketing strategy of making advertisement campaigns and slogans in the local language, that local advertisement campaigns were driven towards creating consumer appeal, that given the number of new multi-national players in the industry it was important to advertise its products, that the intellectual property owner of the Cadbury brand were the overseas AE. s, that they were responsib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r/profits achieved, that the entire expenditure was focused on the Indian consumer, that the said fact was evident from the local flavour/language/concepts, that there was neither any reason nor any contractual obligation to recover money from the AE. s. The assessee relied upon the case of Maruti Suzuki India Ltd, decided by the Hon'ble Delhi High Court. 3. 2. During the course of appellate proceedings, the FAA directed the assessee to submit the average expenditure incurred by the companies in the FMCG sector/ comparables. The assessee filed details by its letter dated 14/12/2011. The FAA observed that the average of expenditure of the companies in the FMCG segment was 8. 89% on sales is against such expenditure of the assessee at the rate of 10. 45%. He held that the companies chosen by the assessee were not the same that could be considered for benchmarking, that if the amount correspond - ing to the difference in average marketing and advertisement expenses of those companies(@8. 89%)and that of the assessee (@10. 45%) would be at 1. 56%. He applied the difference to the total sale (Rs. 766. 21 crores) and determine the adjustment to Rs. 11. 95 crores. He further held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing entity, that the expenditure was incurred to promote its own products, that it had not advertised 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 Ltd. (231 taxmann 113), he stated that matter should not be remanded back to the file of the TPO in view of the said decision. He further argued that the assessee had made investment as per the policy declared by government of India, that the money had come through automatic investment route. He referred to the press note of 2002. (Page 84 of the paper book). The Departmental Representative (DR)stated that in the case of LG Electronics (140ITD41)the special bench of the Tribunal had held that AMP was a separate IT, that it had approved the BLT for the purposes of determination of ALP of international transaction of AMP, that the Hon'ble High Court of Delhi, in the case of Sony Ericsson Mobile Communication, (supra)had held AMP to be an international transaction, that B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian Income Tax Act, 1922, could be made in this regard-as it was a somewhat similar section and dealt with the trans-border transactions. The provisions of the said section broadly provided that where a non-resident carried out business with the person resident in the taxable territory and it appeared to the AO that on account of a close connection between such persons the business was so arranged that the business conducted by the resident with the non-resident either yielded no profit or, less than ordinary profit, which may be expected to arise in that business then, the AO was empowered to tax profits which were derived or which may reasonably be deemed to be derived from the business in the hands of a person resident in the taxable territory. Thus, it can safely be concluded that TP provisions were part of tax administration even during the 1922 Act daysthough at infancy stage. The present provisions were been incorporated vide Finance Act, 2001. Same were further amended vide Finance Act, 2002 and are being amended from time to time to meet the new challenges thrown up by the dynamism of the current commercial and business realities. Having regard to the object for wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the comparables it is necessary to consider various factors. If factors like growth rate, nature of business, number of products launched, territories serviced and turnover/profits achieved have necessarily to be considered for determining the AMP expenses. The entire expenditure was focused on the Indian consumer and it is evident from the local flavour/ language/concepts. It is also an undeniable fact that new players were entering India after liberalisation-era started. 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 post liberalisation period and AMP played an important role in it. Here, we would also like to mention that there exists a fundamental and basic distinction between the provisions of section 37 and section 92 of the Act-as the first is expense oriented and the second is pricing oriented. The FAA tried to incorporate the ingredients of Section 37 while dealing with the TP adjustments, when he talked of the'higher expenditure'and'justification'of such expenditure. In our opinion, the approach of the FAA was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring/incurring AMP expenditure under the head by an assessee on behalf of its AE, it cannot be held that it should have recovered some amount from the AE as the expenditure by it indirectly helped in augmenting the brand value owned by its overseas AE. In the case under consideration, the assessee was incurring expenditure for its products whereas the AE was looking after the ground at global level. If the AMP expenditure incurred by them benefited indirectly in the local/ international market it would not mean that it was an IT. The basic purpose of introducing the various provisions of chapter X, as stated earlier, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India. 3. 4. 3. We find that in the cases of Maruti Suzuki(supra), Whirlpool India(supra), Bausch & Lomb Eyecare(India)Pvt. Ltd(ITA 643 of 2014 of Hon'ble Delhi HC), the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. " 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. . Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i. e. , 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an* exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions", Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods. " In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. " The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. 3. 4. 4. With regard to the submissions of the AR that the issue of AMP should be restored back to the file of the AO, we want to mention that law as a concept is supposed to evolve with passage of time-it cannot be static always. Nonavailability of a particular decision of the higher forum cannot justify the restora -tion of issue/cases to the file of AO in each and every case. Unnecessary litigation has to be avoided and issues have to be settled for once and all. We are of the opinion that after the judgments of Maruti Suzuki and Bausch & Lomb (supra)there is no scope of any other interpretation about the AMP expenditure. In the case under consideration, the AO/TPO has not brought anything on record that there existed and agreement, formal or informal, between the assessee and the AE to share/reimburse the AMP expenses incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction-in-question an IT remains unfulfilled. Conducting FAR analysis or adopting an appropriate method i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal for the earlier years, we decide ground number four against the assessee. 5. Fifth ground is about disallowance of appreciation on marketing know-how (in pursuance of worldwide stock and asset purchase agreement entered into by Pfizer US and the parent company of the assessee). The AR stated that while deciding the appeals for the AY. s. 2003-04 and 2004- 05(ITA/3510/Mum/2011&ITA/4205/Mum/2011)had adjudicated the identical issue in favour of the assessee. We would like to reproduce the relevant portion of the order and same reads as under: 12. The ground no. 5 is regarding disallowance of depreciation on marketing knowhow. 13. The assessee acquired on going non-chocolate confectionary business of M/s. Warner Lambert (I) Pvt. Ltd in pursuance of worldwide stock and asset purchase agreement between Pfizer and Cadbury Schweppes Plc of UK, the respective parent companies of the parties. The assessee has paid total consideration of Rs. 33, 35, 00, 000/-. In the valuation report submitted by the assessee out of the total consideration, the assessee has allocated a sum of Rs. 18, 49, 30, 000/- towards market know how. The assessee claimed depreciation on the market know how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than a mere commodity. The said object should be in exclusive position of the right holder and at the exclusion of others. The assessee has not shown any evidence that it has acquired anything from Warner Lambert to this effect. Secondly, the report of Bansi Mehta and & Co, also states that market value can be taken as 3 months advertising cost. This also shows that this know how is general in nature and not in exclusive possession of' anybody. Moreover, it can be an intangible asset which would depreciate in value with usage and time. In view of this the assessee's stand is not accepted and allocation of 184. 93 lakhs under the head intangible asset viz. market knowhow is rejected. This amount is considered as towards goodwill and no depreciation is allowed on this. Hence, depreciation @12. 5% (for less than 180 days) claimed by the assessee onthis asset is disallowed. The disallowance works out to Rs. 23, 11, 625" (emphasis is ours) 17. It is clear that the AO has denied the claim of depreciation by treating the amount paid by the assessee as consideration towards goodwill. Thus, the AO has treated the said payment towards goodwill. Once, the payment is accepted for go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other business or commercial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income-tax (Appeals) ("the CIT(A)", for short) has come to the conclusion that the authorised representatives had filed copies of the orders of the High Court ordering amalgamation of the above two companies ; that the assets and liabilities of M/s. YSN Shares and Securities P. Ltd. were transferred to the assessee for a consideration ; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assesseecompany in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, that the total exempt receipts were at Rs. 5. 29 crores, that percent contribution to the net profit of the exempt income was7. 82%, that 7. 82% of the common expenses of Rs. 32. 73 crores would be a justifiable disallowance. Finally, he made a disallowance of Rs. 2. 55 crores, invoking the provisions of section 14 A of the Act. 6. 1. Aggreived by the order of the AO, the assessee preferred an appeal before the FAA. Before him the assessee made elaborate submissions and relied upon number of cases. It was argued that administrative expenses amounting to Rs. 2. 13 Lacs(salary paid to the manager and executive of the Treasury Department) incurred during the year could only be considered to have been incurred for earning of exempt income, that disallowance u/s. 14A should be restricted to Rs. 2. 13 Lacs. The FAA issued a show cause notice on 24/10/2011 asking the assessee to explain as to why disallowance u/s. 14 A should not be computed in accordance with the formula mentioned therein. The assessee submitted that the formula mentioned in the notice was akin to the method prescribed by the rule 8D of the Income Tax Rules, 1962(Rules), that it was only with effect from AY. 2007-08t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctively amounting to Rs. 1, 76, 271/- u/s 14A of the Act. 40. We have heard the ld. DR as well as Ld. Sr. Counsel for the assessee and considered the relevant material on record. The AO has allocated Head office expenses in the ratio of net profit and exempt income which cannot be accepted as there is no basis of such allocation of the Head office expenses in proportionate of the income the administrative expenses cannot be apportioned equally on the regular business income and exempt income because the exempt income is earned from mere investment which does not require the same degree of attention and regular administrative management as in the case of regular business activity of the assessee. Therefore, we do not find any basis of allocation adopted by the AO. At the same time, the ld. CIT(A) has accepted the claim of the assessee on the basis of the submissions without taking into consideration any record or material in support of the claim that only one hour is spent by the officers of the assessee in the treasury department for this purposes. Accordingly, in the facts and circumstances of the case and in the interest of justice as well as consistent with the view taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
