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2016 (7) TMI 1012 - ITAT BANGALORE

2016 (7) TMI 1012 - ITAT BANGALORE - TMI - Transfer pricing adjustment u/s 92CA - the assesseecompany raised the jurisdiction issue for invoking the provisions of chapter X of the Act - existence of relationship of AE between assessee-company and JII - Held that:- The definition of the term ‘AE’ is divided into two subsections (1) and (2). Sub-sec.(1) contains(means) definition of AE is .para meters of management control or capital of that enterprise. Sub-sec.(2) contains a deeming provision and .....

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lationship of AE, once the requirements of sub-sec.(2) are fulfilled, then the provisions of sub-sec.(1) renders otiose or superfluous. Now, it is well settled canon interpretation of statutes that while interpreting the taxing statute, construction shall not be adopted which renders particular provision otiose. When interpreting a provision in a taxing statute, a construction, which would preserve the purpose of the provision, must be adopted. - If more than one construction is possible, th .....

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s of chapter X of the Act have no application. In the result, the transfer pricing adjustment made by the TPO is not valid in law. - Decided in favour of assessee. - Addition u/s 14A - Held that:- Now, law is fairly settled that no disallowance under clause (iii) of sub-rule (2) of rule 8D can be made without rendering a finding as to how the claim of the assessee that no expenditure was incurred, is incorrect. When the assessee had not incurred any expenditure, the question of disallowance .....

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9 . Respectfully following the order of the Tribunal, we remit the issue back to the file of the AO for de novo examination of the claim in accordance with provisions of law.- Decided in favour of assessee by way of remand. - IT(TP)A No.163/Bang/2015 - Dated:- 24-6-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri Padamchand Khincha,CA For The Respondent : Ms. Neera Malhotra, CIT(DR) ORDER Per INTURI RAMA RAO, AM : This is an appeal f .....

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ckey readymade garments under license agreement with Jockey International Inc, USA [ JII ], a company incorporated in USA and the owner of the brand Jockey. In consideration for granting the right to use brand-name, the assessee-company paid consideration in the form of royalty at the rate of 5% of the sales. Return of income for the assessment year 2010-11 was filed on 5/10/2005 declaring income of ₹ 55,25,65,514/-. After processing the said return of income under the provisions of sec.14 .....

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der consideration, the assessee-company paid royalty of ₹ 6,78,29,024/- to JII towards royalty. The assessee-company sought to justify the consideration paid for international transactions entered with JII to be at arm s length. The assessee-company submitted transfer pricing study and the rate of royalty is 5% which is within the prescribed limit as prescribed by the RBI. 3. The AO referred the matter to the Transfer Pricing Officer [TPO]. The TPO by order dated 30/01/2014 passed under se .....

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s Sr No (a) Name of the Company (b) Safes (c) Royalty (d) Advertisement (e) Total (f) Percentage of (g)=(f)/© × 100 1 Lovable Lingerie Ltd 104.03 00.00 01.49 0149 1.33 2 LUX Industries Ltd 333.94 00.05 16.79 16.84 5.04 3 Maxwell Industries Ltd 211.39 00.00 05.68 05.68 2.68 4 Rupa & Co Ltd 519.93 00.00 40.64 40.64 7.81 Arithmetic mean 4.21 Thereafter, computed the adjustment as under: 6. Therefore adjustment to be made is calculated as given below: 1. Royalty paid by the Taxpayer C .....

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visions of Section 92CA(3) of the Act is determined at ₹ 142,183477. Since Jockey international Inc USA has neither incurred expenditure on its own account nor it has compensated the Taxpayer Company towards the advertisement expenditure incurred at the instance of the AE, out of international transactions towards royalty and advertisement amount 202007,861 is considered as excessive and proposed to be added to the total income of the Taxpayer Company. 8.0 Therefore, the Arm's Length P .....

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4,08,961/- under the provisions of sec.80JJAA of the Act. 5. Being aggrieved by the draft assessment order, the assessee-company filed objections before the Dispute Resolution Panel [DRP] contesting all the additions. It was contended by the assessee-company before the DRP inter alia that the said transactions do not constitute international transaction as the assessee-company and JII do not constitute Associated Enterprise (AE). It is submitted that the conditions specified u/s 92A(1) of the Ac .....

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s under: 5.5 The argument of the taxpayer is that it has not actually incurred the said expenditure and that the stipulated terms in the agreement are therefore only academic in nature. Assessee has filed a letter from Jockey International to substantiate its claim that the terms of the agreement have not been strictly enforced. From a reaching of the order of the TPO and the submissions of the taxpayer, we find force in the reasoning given in the order of the TPO in coming to the conclusion tha .....

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g the stand of the TPO in solar as invoking the deeming provisions of section 92B(2) of the Act. It is immaterial at this juncture to go into the facts as to whether these terms were actually met or not by the respective parties. It would suffice to say that prior agreement exists between the two parties and that the conditions for the application of sec 92B(2) of the Act are therefore satisfied to conclude that the two entities are deemed AEs and the transactions between them are consequently i .....

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xpayer with that of the comparables selected by the taxpayer, itself. This method of analysis has been upheld by the Chennai bench of ITAT in the case of Asendas and by the Bangalore bench in the case of Tally Solutions. In these cases, the Hon Benches of Tribunal had occasion to conclude that the TPO was correct in determining the price or the value of the international t r ans act ion usin g a st and ard and accept abl e method and then sel ect ing the most appropriate method prescribed under .....

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t of royalty is intrinsically linked with the marketing expenses as per the contents of the licence Agreement. There is no dispute that the brand JOCKEY and its logo are the advertising tools for the taxpayer. It is also a fact that the taxpayer, Page Industries Ltd is the exclusive licensee of Jockey International Inc USA. It is engaged in the business of manufacturing and distribution of the Jockey brand innerwear/ leisure wear for men and women in lndia/Sri Lanka, and Maldives. 7.3 As per the .....

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ckey products. The taxpayer was also awarded the best 'licensee of the year' by Jockey International Inc., as recognition of its outstanding achievement in establishing and strengthening the Jockey brand as a market leader in India In the year 2005 and 2009. In 2010, it received 'International Licensee of the decade' award for achieving record growth year after year, offering world class products and maintaining global quality standard across all operations. As per the license ag .....

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given in the License Agreement. 7.4 It becomes clear from a further reading of the terms of the License Agreement that the licensee or the taxpayer is expected to undertake certain amount of advertisement and promotion expenditure. The relevant portion of the TPO's order is reproduced below: The License agreement has stipulated a minimum of 40% on this kind of expense. In page 29 in para 18(b), the Licensee agrees to expend within each license year for advertising and promotion, not less tha .....

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to support such brand and image advertising, marketing and promotional activity. Such payments shall be paid by the licensee to Jockey within 30 days after the end of each license quarter. Said amount shall be credited against Licensee's Minimum Advertising Expenditures. In para 18(e) it is mentioned that all artwork and designs involving the Jockey Mark or any reproduction thereof shall, not withstanding their creation or use by the Licensee be and remain the property of Jockey and Jockey s .....

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tion of second and fourth quarters of each License Year, the difference between Royalties paid and Target Sales for the previous two quarters. 3.1.4 Therefore, I am of the view that the Taxpayer should have also included in 3CEB expenditure which the Taxpayer Company has incurred on Advertisement and Sales Promotion also. 7.5 It is amply clear from the terms of the agreement that the conditions prescribed that Page Industries is expected to market the Jockey Brand for which royalty is paid by it .....

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. This is also evident from the bill boards and advertisements put up at retail stores where only Jockey name and its logo are used with the black background and no trace of Page Industries visible anywhere on the Board. The marketing strategy and the expenditure of the taxpayer involve activities relating to advertising and marketing the brandname, trademark along with the products of JOCKEY. The fact that Page Industries has been awarded "The Best Licensee of the year for 2005 and 2009 in .....

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mparables that the assessee has used to arrive at the same. Since royalty is part of the brand building expenditure, we find no infirmity In the TPO clubbing the royalty paid with the AMP expenditure for the purposes of benchmarking. The TPO has taken the support of Tribunal decision of Chennai Bench of ITAT rendered in the case of Ascendas (India) Private Limited, to support the adoption of the Bright Line method for arriving at the value of the AMP expense reasonably expected to be spent by co .....

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is-a-vis the comparables, the TPO has used the CUP method as the most appropriate method for the purpose of comparison. As stated earlier, the mention of cost plus method is only a typographical error. We therefore, uphold the use of the CUP method as the most appropriate method adopted by the TPO. 5.2 The DRP also confirmed the disallowance under the provisions of sec.80JJA by holding the disallowance is as per the manner laid down by the Rules. The disallowance of ₹ 20,50,175/- under rul .....

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. Central Board of Direct Taxes (CBDT) 's Circular No. 5/2014 dated 11 February 2014 has stated that that disallowance of expenditure for earning exempt income under section 14A read with Rule BD would be attracted even if the corresponding exempt income has not been earned during the financial year. The circular states that the legislative intent of section 14A is to allow only that expenditure which is relatable to earning of taxable. income. It therefore follows that the expenses relatabl .....

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angalore (hereinafter referred as the AO for brevity), learned Deputy Commissioner of Income-tax (Transfer Pricing) -VI, Bangalore (hereinafter referred as TPO for brevity) and the Honourable DRP-II ( AO , TPO , and DRP collectively referred as lower authorities for brevity) have erred in passing the orders: a) Without proper application of mind. The orders passed being bad in law are liable to be quashed. b) without considering all the submissions and/or without appreciating properly the facts .....

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o the TPO without demonstrating as to why it was necessary and expedient to do so; and b) making reference to the TPO without disposing the jurisdictional issue as to whether there exists an associated enterprises ("AE") relationship between the Appellant and Jockey International Inc.("Jockey Inc.") 3. The lower authorities have erred in: a) not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating t .....

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satisfied. b) not appreciating that Jockey Inc. was reported as associated enterprise in the Form 3CEB only out of abundant caution. Ground relating to treating Advertisement, Marketing and Promotions ("AMP") expenditure as an international transaction 5. Assuming without admitting that AE relationship exists, the lower authorities have erred in concluding that AMP expenses is an international transaction and computing ALP for the same, without appreciating that the AMP expenses were .....

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eciating that once the net profit margin is tested on the touchstone of arm's length price under TNMM, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arms length. Aggregation of Royalty and Advertisement Expenditure 7. The lower authorities have erred in: a) aggregating royalty and advertisement expenditure for determining ALP without appreciating the fact that both the transactions are distinct and ha .....

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UP Method as well as Cost Plus Method as the most appropriate method at different places in the order. The Honourable DRP has erred in concluding that CUP Method is most appropriate method on the ground that mentioning of Cost Plus Method by the TPO is only a typographical error, without seeking any clarification from the TPO.In either case, it has not been justified how CUP Method is the most appropriate method in the facts and circumstances of the case. Grounds relating to computation of ALP 9 .....

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Appellant incurred additional AMP expenses for new events, campaign and launches of new product, which had a substantial impact on the revenue of succeeding years and thereby it was incumbent to adopt multi-year average; and d) considering only advertisement expenses in the case of comparables whereas considering marketing and sales promotionsexpenses in the case of Appellant for computing the AMP ratio. 10. The lower authorities have erred: a) not appreciating the fact that the royalty paid wa .....

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ciating that the tax authorities cannot question the commercial decisions of the Appellant as long as the expenditure incurred is for the purpose of own business requirements. 12 The lower authorities have erred in not allowing the benefit of arm's length range while computing ALP. Grounds related to Corporate tax Disallowance under section 14A 13 The learned AO and DRP have erred in: a) disallowing a sum of ₹ 20,51,175/-a/s 14A r/w/r 8D without appreciating that the Appellant did not .....

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nnot exceed the exempt income earned during the year under consideration. Disallowance under section 80JJAA 14 The AO and the DRP have erred in: a) disallowing deduction u/s 80JJAA to the extent of ₹ 74,08,9 16 on the ground that the deduction cannot be given in respect to additional wages paid in the preceding years; b) not appreciating that the Appellant had complied with all the conditions to be eligible to deduction under section 80JJAA; and c) disallowing the deduction u/s 80JJA witho .....

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payment of dividend distribution tax. b) not detailing the basis of determining shortfall in payment of dividend distribution tax. c) Levying a sum of ₹ 295,531 as interest for delayed payment of DDT. On the facts and circumstances of the case, interest under section 115P is not leviable. The appellant denies its liability to pay interest under section 115P. Even otherwise, the interest levied is excessive. d) Levying a sum of ₹ 4,49,95,680/- as interest under section 234B. On the f .....

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are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. 9. Ground Nos. 1 to 12 relates to transfer pricing adjustment u/s 92CA of the Act. In these grounds of appeal, the assesseecompany raised the jurisdiction issue for invoking the provisions of .....

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cts in the territory and to use manufacturing know how, merchandising and marketing knowhow and use of Jockey marks. 2) Entire manufacturing establishment/infrastructure/ manufacturing costs and related risks are borne by the licensee. Essentially, the brand owner has ensured the branded goods conforms to the quality bench-marks and the usage of the brand label to ensure the brand value. The non-compete clause restricts, the manufacture and usage of Jockey labels in liens d products within the s .....

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e termed as AE within the meaning of provisions of sec.92A(1) and 92A(2) of the Act. The relevant provisions of these sections are reproduced hereunder: Meaning of associated enterprise. 92A.(1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise , in relation to another enterprise, means an enterprise- (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterpr .....

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se holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not .....

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person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise ha .....

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by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of s .....

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ause (g) of subsec.( 2) of sec.92A of the Act. It is not the case of the AO that the present case falls within parameters of sub-section (1) of sec.92A of the Act. In this background, we are called upon to adjudicate whether both the entities are AEs within the meaning of sec.92A of the Act. The definition of the term AE is divided into two subsections (1) and (2). Sub-sec.(1) contains(means) definition of AE is .para meters of management control or capital of that enterprise. Sub-sec.(2) contai .....

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management or control or capital of both the enterprises shall not make them associated enterprise unless the criteria specified in sub-sec(2) are fulfilled. The resultant of the amendment is thus explained that unless the requirements of sub-sec.(2) are fulfilled, the sub- section (1) cannot be applied at all. This implies that in order to constitute relationship of an AE, the parameters laid down in both subsections (1) and (2) should be fulfilled. If we were to hold that there is a relationsh .....

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[(1975) 36 STC 191, 198 (SC)], in interpreting a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to the one which would render it otiose or sterile. In that view of the matter, courts should not adopt construction which would upset or even impair the purpose in introducing a particular provision in the sta .....

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sues. 12.1 Ground No.13 relates to disallowance of an amount of ₹ 20,15,175/- u/s 14A read with rule 8D of the IT Rules. During the course of assessment proceedings, the AO noticed that the assessee-company earned dividend income of ₹ 6,86,839/- from shares and mutual funds which is exempt under the provisions of sec.10(34) of the Act. It is the claim of the assessee-company that there was no expenditure which is incurred to earn the dividend income. The AO held that no dividend can .....

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