TMI Blog2016 (6) TMI 493X X X X Extracts X X X X X X X X Extracts X X X X ..... s. He has observed that research was also conducted on behalf of Seagram Martell, findings for which were communicated by Mr. Aditya Gooptu to Seagram Martell. In order to avoid repetition, we are not referring to the detailed activities performed by assessee noticed by ld. TPO, which we have reproduced earlier, while considering the TPO’s findings. It would suffice to observe that assessee played a vital role in all the activities done to promote sales of Seagram Martell Duty Free Ltd. in India and the meager amount of US$ 2500 p.m. was not at all justified considering the services rendered by assessee. We could appreciate assessee’s contention of not including the reimbursement of expenses as part of the cost base if income of Marketing Support Services did not include these reimbursements but that is not so. Ld. TPO has included the same Unascertained liability - provision appearing in the accounts of the assessee company on account of transit shortages - Held that:- Respectfully following the decision of Hon’ble Delhi High Court in assessee’s own case, we restore the matter to the file of AO to pass the order in terms of the observations made by Hon’ble Delhi High Court note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2002-03 2003-04. Since common issues are involved for adjudication, all these appeals were heard together and are being disposed of by this composite order, for the sake of convenience. A.Y. 2002-03 (Assessee s appeal): 2. Brief facts of the case are that the assessee company was set up as a 100% subsidiary of Seagram India Ltd. in the year 1994. In the relevant assessment year under consideration, it was engaged in the business of blending, bottling and trading of Indian made foreign liquor (IMFL). The liquor was bottled and sold within India through government agencies and private distributors and also exported out of India. The AO had made a reference u/s 92CA(1) to Transfer Pricing Officer ( TPO ) to determine the Arm s length price ( ALP ) in relation to following international transactions with Associated Enterprises ( AEs ) reported in form 3CEB filed with the return of income: Name and Address of the Associated Enterprise Description of the International Transaction Book Value of the transaction (Rs.) Arm's length price computed by the assessee (Rs.) Seagram Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as governed by Representation Agreement dated 01.07.2000 between Seagram Martell Duty Free Ltd. and Seagram India Mfg. P. Ltd. (assessee). 5. Ld. TPO noted from the Representation Agreement that in addition to the functions noted earlier, the assessee was also performing following functions: (a) Negotiations of terms and conditions and credit limit with customers (b) obtaining orders from customers and forwarding them to Seagram Martell with draft proforma invoices containing proposed terms and conditions including prices, based on confirmations from the customers; (c) Advising Seagram Martell on delivery of goods. 6. Ld. TPO examined the economic analysis carried out by assessee in respect of marketing support services transaction and noted that TNM method was found to be the most appropriate TP method to test the overall profitability of assessee s service function. The assessee was taken as the tested party on the ground that it was bearing less risk as compared to the AEs. The PLI for the TNM method analysis was taken as net profit to total expenses (or cost) ratio, termed as NCP in the T.P. report. 7. Ld. TPO noticed that weighted average of PLI for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebited now), which needed to be taken into account for this segment. (b) The reimbursed expenses of about ₹ 4.8 crores are routed through assessee's accounts and are mentioned as part of international transaction of market support services in Form 3CEB. However, while preparing the segmented accounts, the Company Management (page 28 of the T.P. Report), excluded these reimbursements both from the receipts and the expenditure. For NCP Ratio calculation also, reimbursed expenses are not included in the cost . 11. Ld. TPO gave opportunity to assessee, observing in para 8 as under: 8.0 During the proceedings u/s 92CA. vide Order Sheet entry dt. 17.01.2004 assessee was informed that for market support services activity the agreement with Seagram Martell Hong Kong, lists comprehensive responsibility of SMPL for sale of liquor manufactured by Seagram Martell in duty free outlets in the SAARC Region. However, the commission received is fixed at US$ 2500 per month and is not linked to either cost incurred or sales made. Assessee's (ARs) were asked to clarify as to why in the economic analysis. reimbursed expenses of about ₹ 4.8 crores were excluded to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal and not intentional so as to warrant any markup on the costs so incurred by SMPL. Further, the cost of providing such assistance and incidental benefit arising to Seagram Martell. if any. is not a significant portion as compared to the operating costs of SMPL. Thus. cost of rendering any indirect benefit. if any to Seagram Martell should not warrant a mark-up. In this regard. we also submit that the above is in accordance with paragraph 7.36 of OECD- Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations: when an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark-up is appropriate for the performance of services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Display Material 4,221,607 Other Events 2,494,166 Consumer Promotional Material 2,234,397 Martell Grant National 2,025,434 Paper POS 1,759,514 Public Relations 1,655,184 Market Research 1,342,950 Advertising 969,577 Bar Colletral 387,420 Packaging Development 85,940 Courier Charges 57,069 Total 48,071,661 18. The assessee had also furnished the details of these reimbursements specifying the names of the parties to whom payments were made and clarifications on nature of expenses before ld. TPO. 19. Ld. TPO had also required the assessee to furnish the details of sales achieved by Seagram Martell during FY 2001-02 for India and other SAARC countries. The assessee pointed out that since the activities of assessee we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coordinated with advertising agency for organization of Chivas Regal Golf Polo activities in India. Research was conducted on behalf of Seagram Martell. findings for which were communicated by Mr. Gooptu to Seagram Martell. Mr. Verma played a role in selection of the venues. invitees for the Golf Polo events. Both Mr. Gooptu and Mr. Verma were fully involved in these events. Mr. Verma was involved in coordination with ITDC and the agency hired by Seagram Martell to develop ITDC shops at Bangalore and Hyderabad. For each and every activity financed through reimbursed expenses. involvement of either Surjit Verma or Aditya Gooptu. i.e. of SMPL was there. It cannot be denied that SMPL played a vital role in all the activities done to promote sales of Seagram Martell Duty-free Ltd. (SMDF) for which expenses of ₹ 4,80.71,661/- were incurred. 23. He pointed out that this effort made by assessee definitely required a mark up on the cost. He pointed out that independent parties dealing at arm s length would not work for free. He pointed out that the cost incurred by assessee in turn represents the magnitude of effort of assessee also. The reimbursed cost, therefore, should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55823545+Rs. 44,60,301 = ₹ 6,02,83,846 95% of the above = ₹ 57269654 95% of the amount receivable using NCP of 7.99% is more than the amount actually received i.e. ₹ 4,95,18,093/-. The Arm s length price of the Market Support Services receipts is therefore ₹ 6,02,83,846. The difference works out to ₹ 1,07,65,753 It needs to be noted that the difference between ALP and the transaction value arises on two counts: Costs incurred by SMPL but not reimbursed ₹ 64,25,995/- (Difference of ₹ 7751884 and ₹ 1325889) Shortfall in profit ₹ 43,39,758/- (Difference between ₹ 4460301 (Rs. 59450+Rs.610931) Total ₹ 1,07,65,753/- 26. The AO, accordingly gave effect to the directions of ld. TPO and further made addition on following counts: - Loss on foreign exchange fluctuation - Provision for professional expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' of the appellant. 7. That the Ld. CIT(A) erred in sustaining the levy of interest under section 234B and D of the Act . 30. At the time of hearing, ld. counsel for the assessee did not press ground nos. 2 4. Accordingly, ground nos. 2 4 stand dismissed, being not pressed. 31. Apropos ground no. 1 ld. counsel pointed out that ld. CIT(A) has determined the cost incurred by assessee towards marketing support service, as under: S. No. Nature of expenses Value taken by TPO Head of expenses as appearing in the P L Apportionment on the basis of head count computed by the appellant Finding in this order 1 Reimbursement expenses 48071661 0 0 4,80,71,661 2 Communication expenses 42,52,144 1,05,06,755 52,534 5,26,388 3 Finance charges 4,44,088 33,94,492 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d referred to the following recital of the agreement: (b)SML possesses the necessary expertise, know-how and the resources for promoting the Products and their sale, in the Markets in the territory and is capable and willing to act as the interface between the Company and its customers in the Territory; 34. He also referred to the following covenants of the agreement: 1.2. SML shall provide the following services (the Services ) to the Company for promoting the sale arid supply of Products in the Markets in the Territory; 1.2.1 Promoting sales of Products in the Markets in the Territory; 1.2.2 Canvassing orders for the Products; 1.2.3 Providing administrative assistance to the Company in Product advertising, addressing customer grievances regarding features and standards of the Products providing clarifications to customers and prospective customers in the Territory, organization and conduct of various promotion/ marketing events and liaison with third parties such as advertising agencies, event managers and other sponsors if any, on behalf of the Company without in any way having the authority to finally bind the Company to the terms and condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. The assessee had also recognized revenues on a net basis in its financial account, which had been duly audited by the auditor. The assessee had computed the margin of operative profit on the total cost on the basis of net revenue by way of mark-up received from the associate concern. The payment made by the assessee to third party vendor/media agencies for and on behalf of the principal had not been included in the total cost for determining the profit margin, though , on the other hand, the Tp75hacrmcruded the Payment reimbursed by the assessee's associate enterprise to the assessee on account of payment made to Third party vendor/media agencies. It was not in dispute that the assessee was engaged in undertaking advertising services for its customers/AEs in the capacity of an agent. As part of its business operation, the assessee facilitated placement of advertisement for its AE in the print/electronic etc. media and for that purpose, the assessee was required to make payment to third parties for rendering of advertisement space on behalf of its customers or AEs. It was, thus, clear that the assessee's business was not sale of advertising slots to its customers or asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were met by the assessee in its own right as an independent entity. Resources of the entire enterprise were used to meet such legal obligations and support the market service function. Therefore, the assessee was entitled to get mark up on the actual cost incurred inclusive of reimbursed expenses. 37. We have considered the submissions of both the parties at length and have perused the orders of authorities below. The short point for our consideration, after elaborate consideration of facts, is whether the cost reimbursed to assessee by its AEs is to be included in the cost base for determining the NCP of assessee or not. The claim of assessee is that assessee was getting advances from its AEs for performing certain functions on behalf of AEs only. These functions included organization of various functions such as Golf Championship, Polo Championship sponsored by AEs. The Marketing support services implies that assessee is providing support services for building up the market for its AEs. It cannot be disputed that had this activity had been performed by an independent entity, would have been compensated not only towards the cost incurred by it but also a mark up on the same w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. However, in the present case, assessee was rendering overall market support Services to AE and only part of the expenses were reimbursed. 39. We are further in agreement with the following findings of ld. CIT(A): In view of the foregoing analysis, I am inclined to agree with the findings of the TPO that the reimbursed expenses should be part of the cost base of the appellant for computing return on the total cost, for the following additional reasons, in addition to what has been cited by the TPO: (i) The resources of the entire enterprise of the appellant had been put to use for discharging the comprehensive functions assigned to the appellant as per the agreement. (ii) Sales promotion activities of similar nature were also organized for the domestic segment of the appellant and claim of such expenses have been allowed as business expenses. There is no reason as to why a separate treatment is to be given to the reimbursed amounts in the segmented accounts as both these expenses aim at achieving similar results. In any case, the reimbursed expenses did impact the sales of the AE positively. (iii) The appellant has been using the same agencies for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (24,58,773/- + 44,00,000/-). 43. Ld. CIT(A) partly allowed the assessee s appeal, confirming the disallowance to the extent of ₹ 51,59,990/-. 44. At the time of hearing ld. counsel for the assessee fairly conceded that this issue is covered against the assessee by the decision of Hon ble Delhi High Court in assessee s own case in ITA nos. 898/2009 others dated 6.10.2015, wherein the Hon ble High Court has observed as under: 25. The question is not whether on account of the reversal of the provision made by the Assessees on the first day of the following year, there would be no loss as such to the Revenue. The question is whether making a provision for transit breakages would be allowable as a business expenditure. In light of the law explained in the above decisions, the Court is satisfied that the view taken by the ITAT in the present case is not erroneous in law. 26. To summarise the legal position as far as the Assessees are concerned: (a) There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages so as to justify creating of provision for such breakages. (b) The provision would, in the circumstances, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1999-2000 is contained at pages 116 to 121 of PB, wherein Tribunal in para 5 has observed as under: 5. The remaining issue in appeal for assessment year 1998- 99 is I regard to treating the interest income of ₹ 3,40,680/- earned on loans given to employees, as income from other sources against income shown by assessee as business income. The Assessing Officer and the CIT(Appeals) held that the income earned on loans given to employees by the assessee is income from other sources. The contention of the assessee was not accepted that the loan was given to its employees for keeping harmonious relationship and the interest charged by assessee was on a reduced rate. 50. Thus, it is evident that the issue was considered for AY 1998-99 and not 1999-2000 as submitted by assessee. Further, the interest income earned only on loans given to employees were considered. Therefore, we direct the assessee to furnish the details of interest earned on loans given to employees before AO and the AO will treat the said interest under the head business income and the balance interest is to be confirmed as income from other sources, as assessee has not furnished any details. In terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was to begin after six years from the date the loan was drawn. He, therefore, concluded that the loss of ₹ 63,60,000/- had been claimed in respect of liability which had not arisen during the previous year. The assessee relied on the submissions made for AY 2001-02 and also son the order of ITAT in its own case for AY 1998-99 and 1999-2000. It was further pointed out before him that even for AY 2001-02 the CIT(A) had allowed its claim in this regard. The AO, however, following the assessment order for AY 2001- 02, denied the claim of assessee, inter alia, observing that the order of ITAT had been challenged in appeal before the Hon ble High Court. 55. The Ld. CIT(A), inter alia, following the decision of Hon ble Jurisdictional High Court of Delhi in the case of CIT Vs. Woodward Governor India Pvt. Ltd. 294 ITR 354, allowed the assessee s claim. 56. Ld. counsel for the assessee pointed out that now the decision of Hon ble Delhi High Court in the case of Woodward Governor India Pvt. Ltd. (supra), has been affirmed by the Hon ble Supreme Court in 312 ITR 254 (SC). 57. Ld. DR has not brought on record any particular aspect of the entire issue to take any contrary view. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,808/- being 10% of such expenditure. 60. Ld. CIT(A) following the decision of Hon ble Supreme Court in the case of Empire Jute Company Vs. CIT 124 ITR 1 held that the expenses were relatable to the carrying on or conduct of the business more profitable and were integral part of the profit earning process. He further observed that the memory of consumers is short and especially in a fast evolving liquor market, the consumers are required to be reminded on a regular basis the positioning of the products to maintain the competitive advantage against all other competing products available in the market. He relied on the decision of Hon ble Calcutta High Court in the case of CIT Vs. Berger Paints (India) Ltd. 254 ITR 503 and held that brand expenses did facilitate the profitable operations of the assessee s business. 61. At the time of hearing ld. counsel for the assessee submitted that the ITAT in the case assessee s sister concern has held that the expenses on advertisement and sales promotion are allowable as revenue expenditure u/s 37(1). 62. We have considered the rival submissions and have perused the record of the case. We find that the ITAT Delhi Bench G vide its or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. DCIT, [2008] 114 ITD 448 (Del.), 11. CIT Vs. Modi Revlon Pvt. Ltd., [2012] 26 taxmann.com 133 (Del.), 12. CIT Vs. Monto Motors Ltd., [2012] 19 taxmann.com 57 (Del.), 13. CIT Vs. Salora International Ltd., [2009] 308 ITR 199 (Del.) 10.2 On the other hand, learned DR placed reliance on the order of the Assessing Officer. 10.3 We have heard the rival submissions and perused the details of the expenditure incurred placed at pages no. 76 to 79 of the paper book. From the details, it is clear that the expenditure is incurred only towards sales promotion and on advertisement issued. The issue whether the advertisement expenditure is revenue or capital is adjudicated by the Hon'ble Jurisdictional High Court in the case of CIT Vs. Monto Motors, 206 TAXMAN 43 (Del.) vide para 4, which is reproduced below: Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisements are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 2. That the Ld. CIT(A) erred on facts and in law in sustaining the disallowance of ₹ 153,428 being provision for professional charges. 3. That the Ld. CIT(A) grossly erred in law in sustaining the disallowance of ₹ 782,854 on account of provision for transit breakages. 3.1. That the Ld. CIT(A) grossly erred in law in concluding that there was no certainty in respect of breakages and as such there was no accrual on any legal liability. 3.2. That the Ld. CIT(A) gravely erred in law in concluding that the provision for transit breakages was purely contingent in nature. 4. That the Ld. CIT(A) erred in law in sustaining the addition of ₹ 782,854 being provision of transit breakages in order to compute book profit under section 115JA of the Act. 5. That the Ld. C1T(A) erred in sustaining the levy of interest under section 234B and D of the Act. 66. Ld. counsel for the assessee did not press ground no. 2. Hence, ground no. 2 stands dismissed being not pressed. 67. Ground no. 1: Identical ground has been taken by the assessee as ground no. 1 in AY 2002-03. On identical set of facts in AY 2002-03 we have upheld the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT (A) erred in law and on facts in deleting the disallowance of commission of ₹ 76,90,395/-, made by the AO on account of commission paid to M/s Sunrise Bottles. 73. Ground nos. 1 to 4 taken by the revenue in AY 2003-04 are identical(excepting quantum) to ground nos. 1 to 4 as taken in AY 2002-03. For the very same reasons herein also we dismiss ground nos. 1 to 4. 74. Ground no. 5: Brief facts are that assessee had claimed commission on sales at ₹ 1,46,76,978/-. The AO noticed that out of this an amount of ₹ 76,90,395/- was claimed to have been paid to M/s Sunrise Bottlers Pvt. Ltd., Chandigarh. The AO required the assessee to furnish confirmation for the same. However, no confirmation was filed on the ground of paucity of time. The AO, accordingly, made a disallowance of ₹ 76,90,395/-. 75. Before ld. CIT(A) the assessee had produced sample copies of debit notes raised by this party as well as reconciliation sheets showing computation of the commission payable which also included reimbursement of toll tax and other government dues. Ld. CIT(A) noted that these payments were made by a/c payee cheques and TDS had also been deducted in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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