TMI Blog2016 (3) TMI 1105X X X X Extracts X X X X X X X X Extracts X X X X ..... siderations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services Investments in REC bonds included in the computation of disallowance under section 14A r.w.r. 8D - Held that:- Issue is remitted to the file of the Assessing Officer for factual verification and resultant adjustment in the disallowance under section 14A r.w.r. 8D. If this investment does not result in a tax exempt income, it cannot be taken into account in computation of disallowance under rule 8D. The Assessing Officer will, therefore, modify the disallowance accordingly. Deduction under section 36(1)(va) - claim declined pertaining to the payment of employees’ contribution for the provident fund before the due date of filing of the income tax return - Held that:- This issue is now squarely covered, in favour of the assessee, by Hon’ble jurisdictional High Court’s judgment in the case of CIT Vs Ghatghe Patil Transport Ltd [2014 (10) TMI 402 - BOMBAY HIGH COURT ]. In this view of the matter, the impugned disallowance is hereby deleted. Disallowance on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any specific adjudication by us. 5. In ground no. 2.1, the assessee has challenged correctness of arm s length price adjustment of ₹ 69,76,105 in respect of purchase of raw material, Bisoprolol- an active pharmaceutical ingredient (API) purchased from the assessee s associated enterprises, namely Merck CIE KG, Switzerland. In a connected grievance for the assessment year 2010-11, which is raised in ground no. 2.1 in the appeal for that assessment year, the assessee is aggrieved that the Transfer Pricing Officer was in error in proposing an arm s length price adjustment of ₹ 1,03,05,503 in respect of the same active pharmaceutical ingredient, and the DRP was also in error in confirming this adjustment to the extent of ₹ 67,69,943 in respect of the same. Ground no. 1 taken by the Assessing Officer s appeal for the assessment year 2010-11 also raises a connected issue regarding DRP falling in error to direct adoption of simple arithmetic mean, rather than weighted average mean, for computation of average CUP price. In ground no. 2 of the same appeal, an issue is raised regarding DRP s directing to de facto restricting the arm s length price adjustment with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Resolution Panel. While the DRP upheld the application of CUP as the most appropriate method, and the course thus adopted by the TPO, the DRP did direct that appropriate adjustment for the quality difference be given. This was to be done in the light of the directions given by the CIT(A) for the assessment year 2004-05. However, the directions given by the CIT(A) for the assessment year 2004-05 were with respect to adoption of simple arithmetic mean rather than weighted average. The contention regarding the API imported by the assessee being of superior quality was categorically rejected by the CIT(A), in his order for the assessment year 2004-05, in paragraph 9.4.1 at page 22 (Page 139 of paper-book III filed before us). Be that it as may, the Assessing Officer, in response to these directions, computed a relief of ₹ 35,35,560 since the ALP based on the simple arithmetic mean was ₹ 47,079, as against the ALP based on weighted arithmetic mean which was ₹ 36,831, and this difference of ₹ 10,248 per kg, for 345 kgs. of imports worked out to ₹ 35,35,560. The balance ALP adjustment, i.e. ₹ 1,03,05,503 minus ₹ 35,35,560, of ₹ 67,69,943 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental Representative, on the other hand, relies upon the stand of the authorities below. He points out that there is no independent evidence of superiority of the product. As for the lab report, he submits that the samples for analysis were not independently obtained and that, even on these handpicked samples, there is a small variation only on two parameters. He submits that there are no reasons to proceed on the basis that the products manufactured in Indian facilities are any but inferior in quality. It is also submitted that there is no cogent basis for the claim of product superiority. As regards the higher sale price of the end products, according to the learned departmental representative, such higher prices per se cannot lead to the conclusion that the raw materials are of better quality. 10. We see merits in learned counsel s plea. Under 10B(1)(a)(ii), the price of the comparable uncontrolled transaction is adjusted to account for differences, if any . which could materially affect the price in the open market . It is thus not even necessary that the differences in the product involved in comparable uncontrolled transaction are very significant or even real, beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the same products, as manufactured in India, manufactured in a location like Germany, which is bound to have or is perceived to have, much more stringent regulatory framework and quality control. That apart, in the case of a more trusted global corporation, where much more in the international reputation is at stake, the quality of product is perceived to be much more reliable. Even in the case of Glaxo Smithkline Inc Vs Her Majesty the Queen [(2008) TCC 324] , where the comparison was between the same generic drug manufactured by a local manufacturer in Canada vis- -vis Glaxo s manufacturing facilities in Singapore, around 10% of quality adjustment was allowed. As the assessee has settled the matter with the tax authorities, upon the case having been restored to the file of the Tax Court of Canada by Canadian Supreme Court, this aspect has reached finality. In Indian context, the quality adjustment at around 40% has been allowed at the stage of transfer pricing scrutiny proceedings itself. In any event, it is an undisputed position that on two significant features, namely particle size (sieve analysis) and bulk density test, the product imported by the assessee is demonstrably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arm s length price under the CUP method. However, as we direct so, we must add that only such transactions, as are in respect of a reasonable quantity- at 20 kg as adopted by the TPO, will be taken into account so as to ensure that these are bonafide commercial transactions in the regular course of business. We see no reasons to disturb this quantity filter of 20 kgs., nor any arguments in respect of the same have been addressed before us. The average of comparable uncontrolled prices will have to be recomputed in the light of these directions. 15. As regards the question of simple arithmetic mean versus weighted average, we find that proviso to Section 92C(2) categorically states that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices . There is no room for importing the concept of weighted average here. The law refers to arithmetical mean and the arithmetical mean is, in plain words, a mathematical representation of the typical value of a series of numbers, computed as the sum of all the numbers in the series divided by the count of all numbers in the series . We are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also noted that the assessee claims to make payment for technical consultancy services and the fact that it also reimburses certain direct third party costs incurred on its behalf to its AEs, and thus concluded that no separate payment is warranted for these services. The evidences, by way of emails, reports, manuals, brouchers and details of visit by AE s personnel, were rejected as too vague and as not pertaining to the relevant financial period. It was in this backdrop that the TPO proposed an ALP adjustment reducing the value of these services to nil value. When assessee carried the matter before the Dispute Resolution Panel, the DRP also confirmed the stand of the Transfer Pricing Officer. The DRP was of the view that the agreement, by itself, could be not treated as conclusive about the worth of the services rendered. What is to be really seen is whether any significant intra group services were actually rendered. As regards the evidences in support of the services having been rendered, the DRP noted that these evidences have been rejected by the TPO on account of following reasons: The services claimed to have been rendered to the assessee are the same as claimed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to why the assessee could not have followed such direct-charge method to make payments to the AE, i.e. by paying as and when a specific service is received, instead of making a provision for a lump sum amount payable through an agreement for certain services which are not backed up with any reliable evidence. Moreover, the fact that the 'assessee is not an exclusive recipient of such services, which are also made available by the AE to other group companies, raises a valid question with regard to the justification and the quantum of such expenses being borne by the assessee. 4.13 The assessee is aggrieved that the TPO has not adopted any specific method to benchmark the ALP of the transaction. To this, we would like to state that the benchmarking of ALP of a transaction particularly in the nature of intra-group services is germane to the actual existence of the services concerned, which is found, to-be absent in this case, hence there was apparently no occasion for the TPO to take the next step of benchmarking the same by adopting a MAM. Our attention has been drawn to an extract from the OECD guidelines to justify the payment made to AE, but in our considered view, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that of the comparables cannot be reason enough to hold that the payment for technical services is at arm s length price. The evidences furnished by the assessee were rejected, one by one, as general, vague, inconclusive and even as something which can be done by any member of the assessee s team by having a check list for verification . He then posed a question by observing that the moot question that needs to be asked is whether for rendering such auditing (services), the assessee will employ an outsider and proceeded also to add If at all the answer is yes, then the next question arises as to what would be consideration to a person in 3rd party scenario . His answer to the question that he thus posed was there would hardly be any substantial payment . Summing up, the TPO concluded that no services are rendered on the facts of this case, and that when no services are availed, there is no question of benchmarking the transactions, and, in such cases, determination of ALP at Rs NIL has been upheld by the Hon ble ITAT in the following cases- Deloitte Consulting Pvt Ltd Vs DCIT [(2012) 137 ITD 21 (Mum)], Gemplus India Pvt Ltd Vs ACIT (ITA No. 352/Bang/2009; order dated 21st O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television channel. The example may seem to be so simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has too much relevance in the arm s length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. In case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That s not, however, his case. He only states that these services are not worth the amount paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance .001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was payment of ₹ 58,20,571 towards management services . On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head management services was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of the view that while the assessee has made a payment of ₹ 20,35,907 towards financial management and reporting services, but the services rendered are negligible compared to the cost incurred . The TPO was also of the view that a minor clarification or seeking of cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon ble jurisdictional High Court in the case of CIT Vs EKL Appliances Limited (345 ITR 241), Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same . 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO s case that the payments for these services were not made for specific services under the contract but he is of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of ascertaining the arm s length price. 27. In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accord 28. Ground no. 2.2 of the assessee, for both the assessment years before us, is allowed. 29. In ground no. 3, the assessee is aggrieved of the disallowance of ₹ 4,72,86,219 being 70% of the expenses claimed on account of distribution of free samples. In the assessment year 2010-11, in a connected grievance i.e. ground no. 6, the assessee is aggrieved of a similar disallowance, on the basis i.e. 70% of claimed deduction, for an amount of ₹ 3,39,59,527. 30. We find that identical issue, for the assessment year 2007-08, has been set aside to the file of the Assessing Officer vide coordinate bench s order dated 2nd August 2013. We see no re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition made to the closing stock as on 31st March 2008 (assessment year 2008-09) though however the same was pointed out that the same has to be granted in terms of the observations of the DRP in their orders as well as the order of the Tribunal, in appellant s own case for the earlier years. 37. As regards this issue, learned counsel for the assessee has submitted the following note and she submits that she has no objection to the matter being restored to the file of the Assessing Officer for adjudication de novo by way of a speaking order, in accordance with the law and after giving an opportunity of hearing to the assessee: 1. An addition of ₹ 1,36,67,817/- was made in the assessment order for the assessment year 2008-09 under Section 145A of the Act representing the balance of Unutilized Modvat Credit outstanding at the year end (31-03-2008). The Commissioner of Income Tax (Appeals) in his Order also has confirmed the said addition on the ground that in the assessment year 2007-08 the Hon'ble Dispute Resolution Panel also confirmed the same and also that there were no change in the facts. 2. The AO in the draft Order had disallowed an amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be constitutionally invalid, is stayed by Hon ble Supreme Court. As the said decision is stayed by Hon ble Supreme Court, we see no reasons to interfere in the matter. The disallowance must stand confirmed for the time being. 43. Ground no. 6 is, accordingly, dismissed. 44. In ground no. 7, the assessee is aggrieved of the addition on account of interest on income tax refund of ₹ 19,33,153. In ground no. 8 for the assessment year 2010-11, the same issue is raised with respect to taxability of interest on income tax refund, amounting to ₹ 64,18,102. 45. Learned counsel, however, fairly accepts that the issue is covered against the assessee, by a special bench decision of this Tribunal in the case of Avada Trading Co Pvt Ltd Vs ACIT [(2006) 100 ITD SB 131 (Mum)]. 46. Ground no. 7 is accordingly dismissed. Ground no. 8 for the assessment year 2010-11 must also stand dismissed for the same reason. 47. No specific arguments were addressed in support of ground nos 8 and 9, and, accordingly, these grounds are dismissed. In any case, these grounds only seek consequential relief. 48. In the result, appeal of the assessee for the assessment year 2009-10 is par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d wholly and exclusively for the purpose of assessee's business and should be allowed as business expenditure. This was the explanation furnished to the query of the AO as to the nature and type of services which had been provided by the HSBC. 6. Another submission of the assessee company was that buyback enhances the earnings per share of the company in the future and creates long-term shareholder value and also prevents outflow of funds in the shape of dividends by reducing capital base of the company. The AO, however, was not satisfied with this explanation and, according to him, expenses were incurred for the buyback of the shares, which is directly related to the capital of the assessee. Therefore, he treated it as capital expenditure. 7. The Tribunal differed with the AO and CIT(A) holding that the expenditure in question was not in relation with the share capital of the assessee company. For coming to this conclusion, the Tribunal has relied upon the judgment of the Supreme Court in the case of CIT vs. General Insurance Corporation (2006) 205 CTR (SC) 280 : (2006) 286 ITR 232 (SC). In that case, the issue involved was regarding expenses by way of stamp duty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in classifying the expenditure under two categories : (a) When the expense incurred relates to the issue of fresh shares, which leads to an inflow of fresh funds into the company, such expenditure is to be treated as capital expenditure. (b) On the other hand, where no such flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure, as in such a case the company would not acquire benefit or addition of enduring nature. 11. In the present case, consultancy fee for advisory services was paid by the assessee company for buyback of shares. Instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal rightly held that the assessee had not acquired the benefit or addition of enduring nature because after the buyback, benefit or addition of enduring nature would not arise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature. 12. The contention of learned counsel for the Revenue that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed by irrelevant consideration. This expenses may or may not be necessary in that sense but that does not matter. As long as the expenses are incurred wholly and exclusively for the business, whether necessarily or not, these expenses are deductible in nature. We find guidance from a passage from the judgment of House of Lords in the case of Atherton vs. British Insulated Helsbey Cables Ltd. (1925) 10 Tax Cases 155 (HL), referred to with approval by the Hon ble Supreme Court in the case of CIT vs. Chandulal Keshavlal Co. (1960) 38 ITR 601 (SC), which reads as follows: It was made clear in the above cited cases of Usher s Wilshire Brewery vs. Bruce (supra) and Smith vs. Incorporated Council of Law Reporting (1914) 6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of business may yet be expended wholly and exclusively for the purpose of the trade; and it appears to me that the findings of the CIT in the present case, bring the payment in question within that description. They found (in wor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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