TMI Blog2019 (8) TMI 698X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Hence, the Transfer Pricing Officer has no jurisdiction to determine the arm's length price of AMP expenditure. Having held so, it is now necessary to deal with the contention of the learned Departmental Representative to restore the issue to the Assessing Officer for keeping it pending till the issue is settled by the Hon'ble Supreme Court. In our view, the aforesaid contention of the learned Departmental Representative is not acceptable. As per the prevailing legal position, the AMP expenditure incurred by the assessee in India cannot come within the purview of international transaction. That being the case, the adjustment made by the Transfer Pricing Officer cannot survive. Therefore, we do not find any necessity to restore the issue to the Assessing Officer. Grounds are allowed. Adjustment to the arm's length price of royalty paid to the A.E. - HELD THAT:- Undisputedly, in the impugned assessment year the assessee has benchmarked the royalty payment by applying CUP method. It is observed, the Transfer Pricing Officer has rejected the benchmarking of the assessee with some general observations. If the benchmarking done by the assessee is not acceptable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d proposition also applies to the assessee s claim of depreciation in the impugned assessment year. Accordingly, we direct the AO to compute depreciation keeping in view the decision of the Tribunal in the assessment year 2002 03. Thus, ground is allowed for statistical purpose. Disallowance of product development expenditure - HELD THAT:- While deciding assessee s appeal on identical issue in assessment year 2002 03, [ 2010 (1) TMI 1271 - ITAT MUMBAI] the Tribunal has allowed assessee s claim of deduction by treating the expenditure as revenue in nature. The same view was expressed by the Tribunal while deciding the appeals for the assessment years 2004 05, 2005 06 and 2008 09. In fact, while deciding Revenue s appeal against the decision of the Tribunal for the assessment year 2004 05, the Hon'ble Jurisdictional High Court [ 2014 (7) TMI 96 - BOMBAY HIGH COURT] has upheld the decision of the Tribunal. Therefore, respectfully following the consistent view of the Tribunal and the decision of the Hon'ble Jurisdictional High Court on the disputed issue, we delete the addition made by the Assessing Officer. This ground is allowed. Nature of expenses - expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht forward business loss before setting off unabsorbed depreciation - HELD THAT:- As it appears, this issue was not raised by the assessee before learned DRP. When a query to this effect was raised to the learned Authorised Representative, he conceded that the issue was not raised before learned DRP and further submitted that the assessee would file a rectification petition before the Assessing Officer in respect of the said issue. In view of the aforesaid submissions of the learned Authorised Representative, this ground is dismissed. Claimed set off of brought forward business loss against the interest income which was treated as income from other source - HELD THAT:- While deciding ground no.12 relating to characterization of interest income as income from other sources, we have restored the issue to the Assessing Officer for fresh adjudication. Thus, the issue raised in this ground is consequential to the decision to be taken by the Assessing Officer on the characterization of interest income. Therefore, this issue is also requires to be restored back to the Assessing Officer. It is relevant to observe, in the course of hearing, the learned Authorised Representative mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 3, the assessee has challenged the addition of ₹ 17,68,29,302, on account of transfer pricing adjustment relating to advertising, marketing and sales promotion (AMP) expenditure. 3. Brief facts are, the assessee, an Indian company, was incorporated in the year 1990and is engaged in the manufacturing and sale of ready to eat cereal products in India. It is a wholly owned subsidiary of Kellogg, USA, and operates as a licensed manufacturer in India by utilizing the technology and marketing intangibles of Kellogg, USA. During the year under consideration, the assessee entered into various international transactions with its Associated Enterprise (AE).After making a detailed analysis of international transactions with the AE in the transfer pricing study report, the assessee found them to be at arm's length price. The Transfer Pricing Officer after examining the transfer pricing study report as well as other materials on record issued a show cause notice to the assessee to explain why the arm's length price of the AMP expenditure should not be determined by applying Bright Line Test (BLT) method. In response to the show cause notice, the assessee filed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of the AE, however, he has not brought any material on record to demonstrate existence of such an arrangement. He submitted, all risk and rewards of manufacturing sale of the products in Indian market is that of the assessee and the assessee incurs the AMP expenditure to market and promote its own products. He submitted, the Transfer Pricing Officer has arrived at the value of the AMP expenditure by applying BLT method and only on the reason that the AMP expenditure incurred is significantly higher than that of the comparables on application of BLT. He submitted, the Transfer Pricing Officer has not brought any tangible evidence to demonstrate that the assessee was obliged to promote the brand of AE and thereby has incurred the AMP expenditure. He submitted, now it is well settled that determination of arm's length price of AMP expenditure by applying BLT is not valid. Further, he submitted, unless the Revenue demonstrates through cogent evidence that there is an arrangement between the assessee and the AE to incur AMP expenditure for promoting the brand of the AE, the AMP expenditure incurred in India cannot be brought within the purview of international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .467/Del./ 2015, dated 26.11.2015; and iii) Sennheiser Electronics India Pvt. Ltd. v/s ACIT, ITA no.269/ Del./2017, dated 19.11.2018; and 6. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. Undisputed facts are, the assessee is not merely a distributor of the products manufactured by the AE but the assessee itself manufactures its own products in India under license from the AE. It is also a fact that for marketing and promotion of its manufactured products in India, assessee has incurred AMP expenditure by making payments to third parties in India. Therefore, the basic issue which arises for consideration is, whether the AMP expenditure incurred by the assessee in India can come within the purview of international transaction as defined under section 92B of the Act. In this regard, the contention of the assessee before the Transfer Pricing Officer was, since the assessee has incurred the AMP expenditure for products manufactured and sold by it in India, it does not come within the purview of international transaction. Further, the assessee has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fairly well established that determination of arm's length price of AMP expenditure by applying BLT method is not valid.In a catena of decisions, the Hon'ble Delhi High Court while disapproving the decision of the Tribunal in L.G. Electronics India Pvt. Ltd. (supra) have held that BLT method is invalid as it is not prescribed in the statute. In this context, we may refer to the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra). Following the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) and various other decisions, different Benches of the Tribunal have also held that in absence of an express arrangement/agreement between the assessee and the AE for incurring AMP expenditure to promote the brand of the AE, AMP expenditure incurred by making payment to third parties for promoting and marketing the product manufactured by the assessee, does not come within the purview of international transaction. 8. At this stage, it is relevant to observe, while deciding identical nature of dispute in assessee s own case for the assessment year 2011 12, learned DRP in direction dated 28th December 2015, have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, such agreements were neither contemporaneous nor from the same sector. Thus, he held that the arm's length price of royalty payment is not at arm's length and determined the same at nil. However, since he has already made adjustment on account of AMP expenditure, he did not make any separate adjustment on account of royalty payment. Learned DRP also upheld the aforesaid decision of the TPO. 12. The learned Authorised Representative drawing our attention to the royalty agreement placed in the paper book submitted, the agreement is continuing for past several years. He submitted, as per the terms of the agreement, assessee from the very inception pays royalty to the AE @ 5% on domestic transaction and at 8% on export transaction. He submitted, since the assessee is using the technology, the brand and intangibles of the AE, it has to pay royalty to continue its manufacturing activities. He submitted, the payment of royalty in all other assessment years, except, the impugned assessment year has been accepted by the Transfer Pricing Officer to be at arm's length. Thus, he submitted, by applying the rule of consistency n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said approach of the Transfer Pricing Officer is not in accordance with statutory provisions, hence, unsustainable. In any case of the matter, except the impugned assessment year the payment of royalty in all other assessment years has been accepted by the Transfer Pricing Officer to be at arm's length. Therefore, applying the rule of consistency also, the payment of royalty @ 5%, as was paid in the earlier and subsequent assessment years, has to be accepted. More so, when the relevant facts relating to royalty payment permeating through different assessment years remain unchanged. In view of the aforesaid, we hold that royalty paid to the assessee by the AE has to be accepted. The ground raised is allowed. 15. In grounds no.5 and 6, the assessee has challenged on account of unutilized MODVAT/CENVAT credit. 16. Brief facts are, in course of assessment proceedings, the Assessing Officer noticing that the assessee is following exclusive method of accounting for valuation of stock called upon the assessee to explain why the unutilized CENVAT credit amounting to ₹ 45,43,850, as on 31st March 2009, should not be included in the cost of invento ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide order dated 22nd December 2016, passed in ITA no.6274/Mum./2011 Ors. Facts being identical, respectfully following the earlier decision of the Tribunal in assessee s own case, as referred to above, we direct the assessee to make necessary adjustment to the opening stock, closing stock, sales and purchases on account of MODVAT credit. These grounds are allowed for statistical purposes. 20. Ground no.7 is not pressed, hence, dismissed. 21. In ground no.8, the assessee has challenged re computation of depreciation by reducing from Written Down Value (WDV) the amount of depreciation which was not actually allowed to the assessee in the assessment years1998 99, 2000 01 and 2001 02. 22. Brief facts are, during the assessment proceedings the Assessing Officer while examining assessee s claim of depreciation, noticed that such depreciation has been claimed by the assessee on the opening WDV as on 1st April 1997, without reducing the depreciation allowable for the assessment years 1997 98 to 2000 01. When called upon for explaining the above, the assessee submitted that since the assessee had not actually claimed the depreciation in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Therefore, except assessment year 1999 2000, in no other assessment year depreciation was actually allowed. Considering the aforesaid fact, the Tribunal, while deciding assessee s appeal for the assessment year 2002 03 (supra) had approved the decision of the learned Commissioner (Appeals) in holding that deprecation for the year 1997 98, 1998 99, 2000 01 and 2001 02, cannot be forced upon the assessee for the purpose of computing depreciation of the current year. In fact, learned DRP while considering the objections of the assessee has also directed the Assessing Officer to compute deprecation on the basis of WDV as on 1st April 2002, after reducing the deprecation actually allowed in the preceding assessment years. As it appears, the Assessing Officer has not carried out the aforesaid direction of learned DRP. In our view, the aforesaid proposition also applies to the assessee s claim of depreciation in the impugned assessment year. Accordingly, we direct the Assessing Officer to compute depreciation keeping in view the decision of the Tribunal in the assessment year 2002 03. Thus, ground is allowed for statistical purpose. 26. In ground no.9, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Jurisdictional High Court in ITA no.40 of 2012, dated 18th June 2014, has upheld the decision of the Tribunal. Therefore, respectfully following the consistent view of the Tribunal and the decision of the Hon'ble Jurisdictional High Court on the disputed issue, we delete the addition made by the Assessing Officer. This ground is allowed. 32. In ground no.10, the assessee has challenged disallowance of ₹ 17.70 lakh. 33. Brief facts are, during the year under consideration the assessee had paid an amount of ₹ 17.70 lakh to Strategic Systems Pvt. Ltd., which was debited to the Profit Loss account towards legal and professional fees. After calling for necessary details the Assessing Officer was of the view that such expenditure pertains to acquisition of software and not upgradation of software. Further, he observed, while completing the assessment for the assessment years 2005 06, 2006 07, 2007 08 and 2008 09, similar expenditure claimed by the assessee was capitalized. Thus, following the past assessment orders, the Assessing Officer disallowed assessee s claim of expenditure by treating it as capital in nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d December 2016, the Tribunal has held that since the issue fulfills all the conditions of section 10(6A) of the Act, the royalty payment cannot be grossed up under section 195A of the Act. In this context, he drew our attention to the relevant observations of the Tribunal. Thus, he submitted, facts being identical, the disallowance made by the Assessing Officer should be deleted. 41. The learned Departmental Representative relied upon the observations of learned DRP. 42. We have considered rival submissions and perused material on record. As could be seen from the order passed by the Tribunal for the assessment year 2007 08 (supra), the disallowance made under section 40(a)(i) of the Act was deleted since the assessee had fulfilled the conditions of section 10(6A) of the Act. In fact, in the impugned assessment year also, learned DRP has directed the Assessing Officer to verify whether conditions of section 10(6A) of the Act have been fulfilled and thereafter allow relief to the assessee. It is the contention of the learned Authorised Representative before us that in the impugned assessment year the assessee has fulfilled the conditions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reliance was placed on the judgment of Bombay High Court in Lok Holdings 309 ITR 356. However, the same got rejected by AU on the premise that such interest income was not derived from the business activity of the assessee. CIT(A) allowed the issue in favour of assessee by relying upon various judicial pronouncements. Aggrieved, the Revenue is in appeal before us. AR has contended that there is complete nexus of interest income with the business activity of the assessee and the same has accrued only due to parking of surplus funds in normal course of business in short term Bank deposits. Per query from the Bench, the Ld. AR placed a note on interest income qua its nexus with business activity of the assessee. The assessee is engaged in the business of manufacturing and distribution of ready to eat cereals. It procures raw material and necessary ingredients from vendors and sells manufactured products to distributors. The AR has contended that the assessee collects sales proceeds within a week's time whereas it enjoys credit period of more than 45 days from its vendors. It enjoys a longer credit period from its vendors as against shorter credit period given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this ground is consequential to the decision to be taken by the Assessing Officer on the characterization of interest income. Therefore, this issue is also requires to be restored back to the Assessing Officer. It is relevant to observe, in the course of hearing, the learned Authorised Representative made a without prejudice submission that irrespective of the head under which the interest income is assessed, the character and essence of the interest income is in the nature of business income, hence, the brought forward business loss has to be set off against such income. In support of such contention, he relied upon the decision of the Hon'ble Jurisdictional High Court in Sham Progretti S.P.A. v/s ACIT, 132 ITR 70 (Del.). In our view, in course of proceedings before the Assessing Officer the assessee can raise such contention and if such contention is raised by the assessee, the Assessing Officer has to consider the same on merit. With the aforesaid direction, this ground is allowed for statistical purpose. 53. In ground no.15, the assessee has raised the issue of set off of unabsorbed depreciation against the interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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