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Diageo India Private Limited, Dy. CIT, Range-7 (3) , Mumbai Versus Dy. CIT, Range-7 (3) , Mumbai, Diageo India Private Limited

Transfer pricing adjustment - addition on AMP expenses - Held that:- Considering the facts-like absence of an agreement between the assessee and the AE. s. for sharing AMP expenses, payment made by the assessee under the head AMP to the domestic parties, failure of the TPO prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon’ble Delhi High Court delivered in the case of Bausch and Lomb (India) Pvt. Ltd (2015 (12) TMI 1332 - DEL .....

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rendering brand promotion services, that it should have recovered 94 crores plus markup from AEs in addition to sales support services - Held that:- While deciding the issue of adjustment on account of AMP expenses, we have held that expenditure incurred by the assessee under the head AMP was beyond the purview of section 92 of the Act, as it was not an international transaction. As no adjustment could be made with regard to AMP expenses, so, there is no justification for mark up of AMP and resu .....

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t approve the segmented results, that he selected 15 comparables, that after considering the objections of the assessee, he selected ten comparables, that he adopted margin of 2. 13% and proposed an addition of ₹ 13. 56 Crores, that the DRP passed certain directions while dealing with the objections raised by the assessee, that it had directed the AO to recalculate the margin taking into account the adjustment on account of AMP expenses, that while passing the final order the AO had made n .....

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the assessee, variation in stock was found, that the assessee had submitted a letter from the excise official of the state government, that the AO and the DRP were of the opinion that the letter was of no help to the assessee to reconcile the difference, that the assessee was not provided the copy of the statements, that it also had no access to the documents that resulted in addition, that the DRP held that there was no infringement of the principles of natural justice. In our opinion, approach .....

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he opinion that in the interest of justice issue should be restored back to the file of the AO for fresh adjudication - Decided partly in favour of assessee by remanding - Disallowance of club expenditure - Held that:- his issue now stands covered in favour of the assessee in assessee’s own case for assessment year 2006–07, wherein identical issue raised by the assessee has been allowed by the Tribunal. We also find that the issue before us is also covered in favour of the assessee by the ju .....

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y u/s. 40(a)(ia) of the Act, that TDS on royalty was deposited with the Government Treasury in the AY 2011-12, it was submitted by the assessee that royalty had to be allowed in the year in which TDS had been deposited i. e. 2010-11. As far as the year under consideration is concerned the expenditure has not been claimed. Whether it is allowable in the AY. 2011-12 has to be decided in that year. Therefore, the ground raised by the assessee is treated as infructous. - I. T. A. 7545/Mum/2012, I. T .....

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roducts manufactured by the assessee include Smirnoff, Capt Morgan-rum, Christian brothers-rum, black-and-white and VAT 69. To manufacture the Scotch Whisky it imports raw material from its Associated Enterprises (AE. s). For manufacturing other alcoholic beverages for which the raw material is procured locally from unrelated parties. It depends on distributors who have licensed to sell MIFL to retailers. It sells its products through a wide network of distributors situated across the country. I .....

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sales agency service to its AE. s. The assessee aggregated all the international transaction in that segment and applied Transactional Net Margin Method(TNMM). It had chosen Berry-ratio or PBIT to operation costs as an appropriate profit level indicator (PLI). Seven companies were considered as comparable by the assessee and the arithmetical mean of Berry-ratio at 1. 01, based on the data for the three financial years, was arrived at. 2. As the assessee has entered into international transaction .....

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ed and distributed by it-though same were not owned by it. He held that it represented an understanding or agreement referred to in section 92B r. w. s. 92F, that incurring of huge expenses by the assessee for promoting the brands owned by its AE. s was an international transaction, that arms length price(AMP)had to be decided for such transactions, that the various brands played a very significant role in assessee s business, that the assessee was spending excess on advertisement and promotion .....

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ihan Maharastra Sugar syndicate Ltd (BMSSL) and GM Breweries Ltd. (GMBW)with average of 1. 13% of AMP expenses to net sales. He observed that on an average the comparables spent 1. 13 of the sales on advertisements, whereas the assessee had incurred expenditure at the rate of 45. 92% of its sales. Based on the bright line of 1. 13% on the sales for expenses on advertising and promotions the arm s length cost to be incurred for marketing and advertisement by the assessee on its turnover of ₹ .....

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test (BLT) in making AMP adjustment where percentages of AMP expenses of the assessee was compared with the percentages of AMP expenses of comparables and access had been held towards strengthening the brands owned by the AEs, that BLT was not method specified under the act or under rule 10 B of the rules, that the TPO had wrongly applied CUP method, that under CUP there should be high-level of comparability with the comparables in respect of quality, quantity, time, contractual terms, geograph .....

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s were also directly raised on the parent company by third parties, that only for convenience purposes a very small portion of the same was paid by the assessee and was subsequently recovered from the parent company, that AMP expenses mainly benefited the assessee in form of increase in sales of the assessee. The assessee submitted the figures of sales, AMP expenses of the assessee and the group as a whole and argued that sales of the assessee as well as the AMP expenses were negligible compared .....

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urred on brands owned by the assessee while making the adjustment on account of AMP expenses, that the AMP expenses included advertisement expenses and sales promotion/sales related expenses, that sales related expenses were in nature of trade discount, incentive schemes to distributors, retailers, cost of free merchandise, that the same were incurred only to increase the sales of the assessee and not to enhance the value of brands of the AE. s, that sales related expenses should be excluded fro .....

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of excise duty. After considering the submissions of the assessee and the records available, the DRP held that the argument of the assessee that the AMP expenses did not constitute an international transaction was misconceived, that it was not the actual payment of advertising charges to the third parties that had been considered by the TPO as an international transaction, that the relevant transaction was the benefit conferred by the assessee to its parent company by way of promoting the brand .....

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of the comparable companies submitted by the assessee itself, that brand building carried out by the assessee for its AE. s was an international transaction and the assessee was entitled to a reasonable compensation for such AMP expenses. With regard to the assessee s contention that the major part of sales made by it were of products manufactured in India and that such products were developed specially for the Indian market, the DRP observed that it did not take away from the basic fact that b .....

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up was heavily dependent on brand recognition and brand valuation, that the assessee was incurring heavy losses every year and the loss before taxation for the year was about 16 crores on a turnover of ₹ 210 crores, that the expenditure indicated that the primary reason for the loss was heavy expenditure on AMP, that a portion of AMP expenses actually conferred the benefit on the assessee for which it was entitled for compensation. With regard to applying BLT, the tribunal held that the co .....

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not an international transaction, that the assessee had incurred the expenses for promoting its own business and not for promoting the business of the AE. s, that advertisement and marketing expenditure included a substantial amount of expenditure which could not be said to be for promoting any of the brands owned by the AE. s, that expenditure incurred as discount and rebate given to the retailers could not form part of AMP. He referred to the judgments of Maruti Suzuki(64taxmann. com. 150), Wh .....

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AE. s. , that the assessee should have been compensated for nurturing the brands owned by the AE. s, that the Brands and trade marks were owned by the AE. s. , that assessee was a distributor, that it had spent huge amount towards AMP expenses. In the rejoinder the AR contended that the assessee was not a mere distributor, that it was a manufacturer also. 5. We have heard the rival submissions and perused the material before us. Undisputed facts of the case are that the assessee had entered in .....

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ses incurred under the head AMP. In short, he held that benefit conferred by the assessee on its AE. s, by way of promoting the brands and increasing value of their brands, was an international transaction and ALP of said transaction had to be determined, that an addition of ₹ 94 Crores was made by the on account of AMP Expenses. It is also not denied that the assessee is having a fully operational manufacturing, marketing and distribution system in India. The manufacturing unit of the ass .....

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(supra), 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. A reading 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 fr .....

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ons 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. Secti .....

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the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost. or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purpo .....

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her 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 - bene .....

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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 illu .....

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atived 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 written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understa .....

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"acted in concert" and in that context referred to the 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 Securiti .....

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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 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 .....

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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 ex .....

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evenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same. " 62. In the present case, the mere fact that B&L, USA through B&L, South Asi .....

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y 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 wildgoose 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 existenc .....

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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 -inlight 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 internation .....

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ransaction 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 is to resort to a quantitative adjustment by first determining wh .....

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tanding that this is not one of the deemed international transactions listed under the Explanation to Section 928 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e. g. , the sample agreements produced before the Court by the Revenue) 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 .....

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r 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 & .....

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ket 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 t .....

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he foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)-"the-fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". Considering the f .....

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e TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. First effective ground of appeal (GOA1-16) is decided in favour of the assessee and the additions made by the AO are directed to be deleted. 6. Now, we will take up the second adjustment i. e. While completing his order, the TPO linked AMP expenses and recovery of AMP expenses on sales support service and held that the assessee was rendering brand promotion services, that it should have recovered 94 crores .....

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ge mean of 20. 04%. The assessee challenged the comparables select by the TPO and submitted seven comparables with Barry ratio as PLI. The TPO rejected two comparables and then aggregated the comparables selected by the assessee and selected by him. He arrived at average mean of 18 comparables of 30. 14%. He made an adjustment towards markup of ₹ 28. 33 crores. 7. Before the DRP, the assessee argued that it provided sales support service to AE only for assistance in selling products bottle .....

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scientific search process was adopted by the TPO to identify the comparables, that assessee had submitted seven comparables, that while comparing the data of 18 comparables the TPO incorrectly converted the berry ratio of the file comparables into operating margin of 56% and arrived at average margin of 30. 14%, that the TPO had wrongly interlinked AMP expenses and recovery of AMP expenses on sale support services, that the expenditure was incurred for different business of the assessee i. e. sa .....

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e markup on the excess AMP expenses. The DRP rejected three comparables selected by the TPO and accepted the objection of the assessee about incorrectly using berry ratio with the profit margin of other comparables. He directed the AO to work out the PLI of OP/TC for the comparables submitted by the assessee and to apply the correct profit margin. 8. Before us, the AR and the DR advanced the same arguments that were made for the ground related to the AMP expenses. While deciding the issue of adj .....

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account of purchase of raw materials from the AE. It was found that the assessee and the contract bottling unit(CBU)had purchased goods worth ₹ 12. 64 crores and ₹ 0. 92 crores respectively from the AE. The TPO held that the internal TNMM adopted by the assessee was not proper, that the assessee could not support the segmental account with documents, that it had incurred AMP expenses worth ₹ 96. 37 crores and had not recovered anything from the AE. s, that the segmental results .....

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e contended that internal accounting system followed by it directly captured the segment result of the transaction with AE. s and non-AE. s where concentrates were purchased, that the TPO had rejected the segmental result as the same were not audited. During the course of hearing for the DRP the assessee submitted the audited segmental results. It was further argued that internal TNMM should be preferred over the external TNMM due to high degree of comparability that the approach of TPO in apply .....

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t on raw material on account of double adjustment. The DRP agreed with the finding of DRP for the AY. 2007-08 and directed the AO to recalculate the margin taking into account the adjustment on account of AMP expenses and thereafter the margin of the assessee was to be compared with that of comparables. Finally, it was held that if the margin of the assessee was at arm s length then no addition on account of purchases was to be made. 11. Before us, the AR stated that all the details of purchases .....

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as purchasing raw material for manufacturing whisky from the AE. s. , that for manufacturing other alcoholic beverages the raw material was procured locally from unrelated parties, that the TPO did not approve the segmented results, that he selected 15 comparables, that after considering the objections of the assessee, he selected ten comparables, that he adopted margin of 2. 13% and proposed an addition of ₹ 13. 56 Crores, that the DRP passed certain directions while dealing with the obje .....

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esh adjudication who would decide the issue afresh after affording a reasonable opportunity of hearing to the assessee. Third effective ground (GOA22-24)of appeal is decided in favour of the assessee, in part. 13. Next ground of appeal relates to addition made on account of surplus stock. An action under section 133-A of the Act was carried out at the premises of Konkan Agro Marine Industries Private Limited situated at Aurangabad, as a part of search operation initiated against the Jaiswal grou .....

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he certificate. He observed that the certificate certified the stock position as on 71 2008 i. e. four days from the date of the search. Accordingly, an addition of ₹ 1. 47 crores was made to the total income of the assessee. The assessee was asked to include the excise duty and VAT payable on the aforesaid materials. An addition of ₹ 17. 17 lakhs on that account was made separately. 14. Before the DRP, it was stated that as per the State Excise rules an excise officer was stationed .....

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rder of the AO and the submission of the assessee, the DRP held that the assessee had relied only on the certificate of the excise officer, that the certificate was inadequate to establish the error on part of the AO in evaluating the stock, that the certificate did not specify the errors committed with regard to specific materials, that the impact and the result of the so-called errors had also not been specified, that certificate was general in nature to be adopted as an evidence, that the add .....

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the case under consideration, that the AO was justified in making the addition of ₹ 1. 47 crores. It was further held that the levy of excise duty and VAT were not called for as the former was charged only on finished goods and later on sales. The DRP deleted the addition of ₹ 17. 71 lakhs made by the AO. 15. Before us, the AR stated that the letter of the Excise officer was a vital document, that by not giving the statements of the assessee and other papers the AO had grossly viola .....

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that the assessee was not provided the copy of the statements, that it also had no access to the documents that resulted in addition, that the DRP held that there was no infringement of the principles of natural justice. In our opinion, approach of the DRP was suffering from fundamental defect-it ignored the principles of natural justice. Non-supply of the copy of statements and documents that led to an addition of Rs. more than one crore, in itself is sufficient to set aside the order of DRP. P .....

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appeal no. 25 is decided in favour of the assessee, in part. 16. Next ground i. e. GOA-26 was not pressed considering the smallness of the tax effect involved. Hence, same stands dismissed. 17. Ground no. 27 is about disallowance of club expenditure of ₹ 5, 50, 445/-. Before us, Representatives of both the sides agreed that the issue stands settled in light of the order of the Tribunal dated 19. 7. 2013 (ITA/7932/Mum/2011-AY 07-08). We are reproducing the relevant portion of the order of t .....

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risdictional High Court in CIT v/s Raychem RPG Ltd. , [2012] 346 ITR 138 (Bom. ). Thus, in view of the judgment of Hon'ble Jurisdictional High Court cited supra and the decision of the Tribunal in assessee s own case for assessment year 2006-07, the ground no. 23, raised by the assessee is treated as allowed. Respectfully, following the above judgment we decide ground no. …. (take from file of 08-09) in favour of the assessee. 18. The last Ground, dealing with levy of interest of levy .....

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. 53 crores paid to Diageo, North America. During the assessment proceedings the AO found that the P&L statement of the assessee as on 31. 3. 2009 reflected royalty payment of 5, 53, 53, 485/-, that the royalty payment was debited in the books of the account for the first time, that there was no royalty paid/payable by the assessee in the earlier AY. s, he directed the assessee to file submissions in that regard. It was submitted that royalty was payable to the AE under intellectual property .....

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ement entered into by it with the earlier owner of Smrin off brand which was effective till 31. 3. 2006 wherein the brand owner had agreed to waive the royalty payable by the assessee . It also submitted a copy of the amended agreement increasing the royalty payment from 1-5% w. e. f. 1. 7. 2008 and contended that during the year under consideration it had debited the amount of royalty @ 5% on net domestic sales of Smrin off for the period 1. 7. 2008 to 31. 3. 2009. The AO directed the aa to jus .....

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ear under consideration, that the disallaownace u/s. 37(1) would not have any tax implication. 21. The assessee took the matter to the DRP. After considering the submission of the assessee and the draft order of the AO, the DRP held that the royalty agreement was made effective from an earlier date 1. 4. 06, that the assessee had been exploiting the brand trade marks, copy rights, etc, since 1. 4. 2006 from the AE, that prior to that form the earlier owner of Smrinoff brand, that there are claim .....

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in respect of the technology and know how which caused the royalty rate to increase from 1 to 5%, that the AO was justified in holding that the payment/ liability of payment of royalty to the AE was not for the business purposes. 22. Before us, the AR argued that the TPO did not suggest any adjustment under the head corporate guarantee, that the AO/DRP held that the expenditure was not incurred wholly and exclusively for the business purposes, that waiving off of the royalty in the earlier year .....

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