TMI Blog2016 (5) TMI 969X X X X Extracts X X X X X X X X Extracts X X X X ..... , reversing his order, we decide second ground in favour of the assessee. Disallowance of deduction in respect of payment for additional excise duty payable by third-party manufacturers - Held that:- provision made by the assessee for the amount payable to third party manufacturers/convertors on account of excise duty payable by them as per the agreement had not been crystallised or ascertained during the year under consideration as the sum was not paid by the third party manufacturers/convertors but was disputed by them, which dispute was not settled in the year under consideration. The said liability was a contingent liability and it was not while computing the business income of the assessee for the year under consdiration. In that view of the matter, we uphold the impugned order of the ld. CIT(A) confirming the disallowance made by the A. O. - Decided against assessee 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) - Held that:- When the AO has accepted the payment in question for goodwill then in view of the judgment of the Hon’ble Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance. 2. 2. During the course of hearing before us, the Authorised Representative(AR) stated that identical issue was decided in favour of the assessee by the Tribunal while adjudicating the appeal for 2002-03(ITA No. 7408/Mum/ 2010 7641/ M/10;dt. 13. 11. 2013; para 37-43; Pg-No. 15-16), that the said order was followed by the Tribunal, while deciding the appeals for AY. s 2003-04 and 04-05, that in the TP order for the AY. 2010-11 and 2011-12, the TPO had not made any disallowance for the identical payment. The Departmental Representative (DR)left the issue to the discretion of the Bench. 2. 3. We have heard the rival submissions and perused the material before us. We find that while deciding the appeal for AY 2002-03(supra) the Tribunal has decided the issue as under:- 37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38. From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1. 25% and trademark usage at 1. 25%, were overl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP expenses (Rs. 71. lakhs)towards the cost allocable to CSOL for the benefit accruing to it. On perusal of the accounts of the assessee, the TPO noticed that the assessee had debited advertisement and marketing expenses amounting to ₹ 85. 15crores, that it was 11. 11% of the sales recorded by the assessee during the year, that industry average under the said head worked out to 6. 55% only. The TPO directed the assessee to file the details of AMP expenses, sales and royalty paid for a period of last 10 years. After analysing the details, the TPO concluded that the assessee was paying higher and higher royalty to the AE, that the AMP had also recorded steady growth over time and so had the sales, that the marketing expenditure which was ₹ 20. 13crores in the AY19 96-97 had increased to ₹ 85. 15crores for the year under appeal, that the royalty had increased from ₹ 2. 07 crores to ₹ 13. 56crores for the same period. He held that high degree of correlation between the royalty payment and sales on one hand and marketing and advertisement expenditure and sales on the other was not a matter of coincidence, that it was coming out as a feature of business un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its products, that the intellectual property owner of the Cadbury brand were the overseas AE. s, that they were responsible for brand positioning, design and the overall strategic direction, that the AE. s had provided strict brand guidelines to ensure that overall strategy and vision associated with the brand was adhered to by the assessee in India, that the AE. s would also do their brand related exercise at their own cost for over all brand positioning and management on global basis which would also benefit the assessee in an indirect manner, that the expenditure the AE would incur as brand owner had substantially benefitted the assessee from a commercial stand point, that one of the key benefit to the assessee was the brand itself, that it signified quality and thereby allowed the assessee to charge a premium price, that the increased sales might have benefitted the AE by way of increased royalty at 1% on the incremental sale, that same was insignificant as compared to the incremental quantum of profits earned by the assessee on the increased sales with higher profitability, that the correct way of looking at business need was to see the turnover as a result of the license, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied the difference to the total sale (Rs. 766. 21 crores) and determine the adjustment to ₹ 11. 95 crores. He further held that the said amount would possibly be the amount of contribution that the AE should be paying to the assessee if the concept of bright line was applied, that the TPO had taken much conservative approach by considering only the amount of expenditure incurred by the assessee on AMP, that he had applied ratio of royalty paid for use of know-how to sale and had arrived at the total adjustment of ₹ 71 Lacs only, that the assessee had contended that average profitability(PBT to sales ratio) at 10. 85%were much higher compared to the average profitability of the comparables at 3. 57% in the FMCG sector, that higher rate of profitability could not be justification of disproportionate and higher expenditure, that there could not be any justification to incur such expenditure which was benefiting it as well as it s AE, that in an ALP situation for any benefit which had been enjoyed by the AE and which was payable in monetary terms had to be adequately compensated to the assessee. The assessee had contended that the companies in the FMCG sector were, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 BLT was not approved by the Court, that the Hon ble court had laid down certain important principles of TP, that the court had laid emphasis on conducting detailed functional analysis that would include AMP functions/expenses, that the court had observed that selection of comparables also required to be matched with the functions and obligations performed by tested parties including AMP expenses, that bundled transaction approach had to be followed in such cases and that detailed functional analysis had to be conducted. He referred to eight cases, decided by the Delhi Tribunal, wherein the issue of AMP expenditure was restored back to the file of the AO in light of the judgment of Sony Ericsson. With regard to the decision of Hon ble Delhi High Court in the case of Maruti Suzuki, the DR stated that up to the date of decision i. e. 11/12/2015, the departmental authorities did not have the benefit of the decision, that they were following the order of the LG Electronics (supra)using BLT, that in some cases BLT had been followed and the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 which provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra group transaction. So, intra-group transaction is the first pre-condition for invoking the TP provisions. Calculation of ALP is the next and logical step. But, if the first step itself is missing, the AO cannot go to the second stage. In other words, the AOs cannot climb the second storey of a building without reaching to the first storeyif the existence of an IT and calculation of ALP can be compared with a doublestoreyed building. 3. 4. 1. We find that the assessee is the market leader of the chocolate market in India, that it was commanding 70% of the market share in the year under appeal, that it had debited AMP expenses, amounting to ₹ 85. 15crores to its P L. a/c, that the net turnover of the assessee was of ₹ 766. 21crores, that it was 11. 11% of the sales recorded by the assessee during the year, that it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents 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 not in accordance with the basic philosophy of TP provisions. In our opinion, it is the assessee who has to decide how much to spend for earning his income. The tax authorities are prevented from entering into the proverbial shoes of the assessee to decide the justification of the expenditure. The Act stipulates that in certain conditions only the socalled higher expenditure can be questioned. The FAA had not proved that the expenditure incurred by the assessee for advertisement etc. was covered by those sections. If it was the case then the transaction would not fall under section 92 of the Act. Therefore, in our opinion he had adopted a totally incorrect approach, while dealing the allowability of AMP expenditure. 3. 4. 2. We further hold that the claim of the assessee is factually correct that it had incurred the AMP expenditure for creating product awareness and to recall the value of existing products and that it had a local marketing strategy of making advertisement/slogans in the local languag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP have been analysed thread bare. We would like to reproduce relevant portion of the judgment of Bausch Lomb Eyecare(India) Pvt. Ltd. (supra) and same reads as under: 53. Areading of the heading of Chapter X['Computation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is any other transaction having a bearing on its profits, incomes or losses , for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared 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 not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target 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 Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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 something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imburse 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 is the second stage of TP adjustments. The first thing is to find out whether the disputed transaction in is IT or not. Without crossing the first threshold second cannot be approached, as stated earlier. In the case under consideration, we are of the opinion that AMP expenditure is not an IT and therefore we are not inclined to restore back the issue to the file of the AO. Considering the facts and circumstances of the case under consideration, we are of the opinion that the FAA was not justified in upholding the order of the TPO. Therefore, reversing his order, we decide second ground in favour of the assessee. 4. Next ground of appeal deals with disallowance of deduction in respect of payment for additional excise duty payable by third-party manufacturers (TMPs). The AR fairly conceded that the identical issue was decided against the assessee by the Tribunal, while deciding the appeals for the earlier years (ITA/282/Mum/2000-AY. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as paid total consideration of ₹ 33, 35, 00, 000/-. In the valuation report submitted by the assessee out of the total consideration, the assessee has allocated a sum of ₹ 18, 49, 30, 000/- towards market know how. The assessee claimed depreciation on the market know how being tangible assets. The AO has questioned the claim of the assessee and held that it is not acceptable. The AO accordingly, disallowed the claim of the depreciation on the marketing know how. On appeal, the ld. CIT(A) has confirmed the action of the AO. 14. Before us, the ld. Sr. Counsel of the assessee has submitted that the issue is now covered by the series of judgments including the judgment of the Hon ble Delhi High Court in the case of CIT V/s HINDUSTAN COCO COLA BEVERAGES P. LTD [2011] 331 ITR 192 (Del) wherein the Hon ble High Court after considering the facts that the specific payment for goodwill represents the consideration for marketing and trading reputation, trade style and name, marketing and distribution, territorial know-how, including information of the territory and allowed the depreciation on such payment on intangible assets. He has also relied upon the decision of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce works out to ₹ 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 goodwill then the judgment of Hon ble Supreme Court in the case of M/s SMIFS SECURITIES LTD (supra) is applicable on the issue. The Honbl Supreme Court has decided the issue of depreciation on goodwill as under : Whether goodwill is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said section ? Answer In the present case, the assessee had claimed deduction of ₹ 54, 85, 430 as depreciation on goodwill. In the course of hearing, the explanation regarding the origin of such goodwill was given as under : In accordance with the scheme of amalgamation of YSN Shares and Securities (P. ) Ltd. with Smifs Securities Ltd. (duly sanctioned by the hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares and Secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 by the Income-tax Appellate Tribunal ( the ITAT , for short). We see no reason to interfere with the factual finding. One more aspect which needs to be mentioned is that, against the decision of the Income-tax Appellate Tribunal, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. For the afore-stated reasons, we answer question No. (b) also in favour of the assessee. Question No. (c) Without going into the controversy of allowbility of depreciation on other tangible assets when the AO has accepted the payment in question for goodwill then in view of the judgment of the Hon ble Supreme Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 2007-08that the AO. s had been empowered to determine the amount of expenditure incurred in relation to exempt income in accordance with a prescribed method if the AO was not satisfied with the correctness of the claim of the assessee, that the rule 8D was not applicable retrospectively. The assessee relied upon the decision of the Hon ble Bombay High Court delivered in the case of Godrej and Boyce Manufacturing Ltd. (43 DTR 177). After considering the submission of the assessee and the assessment order, the FAA worked out the disallowance at ₹ 2, 00, 52, 715/- and thus partly allowed the appeal. 6. 2. Before us, the AR stated that while deciding the appeal for the AY. 2004-05 (supra)the Tribunal had at paragraphs 38-40 at pages 18-19 had dealt with the issue, that in earlier years the disallowance was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame 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 this Tribunal in series of decisions that reasonable basis should be adopted for making disallowance of expenditure under section 14A, we are of the opinion that the reasonable disallowance would be 2% of the exempt income. Accordingly, we modify the orders of authorities below. Respectfully following the above, we are of the opinion that the disallowance should be restricted to 2% of the exempt income. Accordingly, ground number six is decided in favour of the assessee, in part. I. T. A. /5876/Mum/2012, AY: 2005-06: 7. The solitary ground of appeal, raised by the AO, is about disallowance u/s. 14A of the Act. He has objected to the reduction of disallowance by the FAA. In the earlier paragraph, we have dealt with the issue of disallowance to be made with regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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