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2019 (8) TMI 698

..... t year 2011-12, learned DRP in direction dated 28th December 2015, have deleted the adjustment made by the Transfer Pricing Officer on account of AMP expenditure by recording a factual finding that the Transfer Pricing Officer has failed to demonstrate that there is an agreement/arrangement between the assessee and the AE for incurring AMP expenditure. While doing so, DRP has relied upon the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. [2015 (12) TMI 634 - DELHI HIGH COURT] . Thus, viewed in the light of the ratio laid down in the decisions cited by the learned Authorised Representative, including the decision of the Hon'ble Delhi High Court in Martuti Suzuki India Ltd. (supra), it has to be concluded that the AMP expenditure incurred by the assessee in India cannot come within the purview of the international transaction. 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' .....

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..... the Tribunal [2011 (5) TMI 967 - ITAT MUMBAI] has held that adjustment on account of MODVAT credit has to be made both in respect of closing stock, opening stock, purchases and sales. The same view has been expressed by the Tribunal while deciding assessee’s appeal for the assessment years 2006-07, 2007-08 and 2008-09 Re-computation of depreciation by reducing from Written Down Value (WDV) the amount of depreciation which was not actually allowed to the assessee - HELD THAT:- 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 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:- Wh .....

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..... THAT:- No details of bank deposits could be provided by AR despite specific request being made by the bench due to which we are unable to ascertain the fact that whether these deposits have direct nexus with the business of the assessee, The Ld. AR has attributed the parking of funds to general credit float enjoyed by the assessee without brining anything on record to substantiate the same. Hence, we deem it fit to restore the matter back to the file of AO to examine the nature of Bank FDR particularly the tenure of the deposit and also verify the fact of 'credit float' enjoyed by the assessee and decide the issue afresh in accordance with law. The assessee is directed to cooperate with the lower authorities forthwith to substantiate his submissions. The ground of revenue's appeal is allowed for statistical purposes Set-off of brought 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 wo .....

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..... iation. This ground is allowed. In the result, assessee’s appeal is partly allowed. - ITA no.2866/Mum./2014, ITA no.2888/Mum./2014 - 19-7-2019 - Shri Saktijit Dey, Judicial Member And Shri N.K. Pradhan, Accountant Member For the Assessee : Shri Dhanesh Bafna a/w Ms. Hirali Desai For the Revenue : Shri Rajneesh Yadav ORDER PER SAKTIJIT DEY. J.M. Captioned cross appeals arise out of order dated 26th February 2014, passed under section 143(3) r/w section 144C(13) of the Income-tax Act, 1961 (for short "the Act"), for the assessment year 2009-10, in pursuance to the directions of the Dispute Resolution Panel-1, Mumbai. ITA no.2866/Mum./2014 Assessee s Appeal 2. In grounds no.1, 2 and 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 marketi .....

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..... O was upheld. 4. The learned Authorised Representative submitted, the AMP expenditure incurred by the assessee does not come within the purview of international transaction as defined under section 92B of the Act. He submitted, not only the AMP expenditure was paid to third parties in India but it was incurred wholly and exclusively for the products manufactured and marketed by the assessee in India. The learned Authorised Representative submitted, though, the Transfer Pricing Officer has inferred existence of international transaction with regard to AMP expenditure by stating that there was an arrangement between the assessee and the AE for promotion of the brand 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 compar .....

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..... e application of BLT method. He submitted, since the issue is now pending before the Hon'ble Supreme Court, the matter may be restored back to the Assessing Officer for deciding the issue keeping in view the decision of the Hon'ble Supreme Court. In support of such contention, the learned Departmental Representative relied upon the following decisions:- i) Nikon India Pvt. Ltd. v/s DCIT, [2017] 81 taxmann.com 300 (Del.); ii) Suzuki Motorcycles India Pvt. Ltd. v/s DCIT, ITA no.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 AM .....

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..... of the Transfer Pricing Officer in determining the arm's length price of AMP expenditure is fallacious. 7. Moreover, there is no doubt that the Transfer Pricing Officer has determined the arm's length price of AMP expenditure by applying BLT method. While doing so, he has heavily relied upon the Special Bench decision of the Tribunal, in LG Electronics India Pvt. Ltd. (supra). Now, it is 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 expend .....

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..... could not furnish any comparable royalty agreement to demonstrate that royalty payment was at arm's length. Further, he observed, the royalty agreement of the assessee is for more than 10 years and the comparable agreements produced before him were of short duration of two to three years. Further, 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 acti .....

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..... methods. However, without applying any prescribed method he has simply determined the arm's length price of royalty payment at nil. The aforesaid 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 CEN .....

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..... peal for the assessment years 2006-07, 2007-08 and 2008-09, 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 depr .....

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..... sment 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 assessee has challenged the disallowance of product dev .....

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..... ectfully 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. 34. The learned DRP, though, upheld the decision of the Assessing Officer, however, he directed the Assessing Officer to allow depreciation. 35. The learned Authorised Represen .....

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..... 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 10(6A) of the Act. In view of the aforesaid, we direct the Assessing Officer to verify the aforesaid claim of the assessee and if assessee s claim is found to be correct, in the sense that all the conditions of section 10(6A) of the Act have been fulfilled, no disallowance under section 40(a)(i) of the Act can be made, as held by the Tri .....

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..... siness 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 to its customers. The resultant float is parked in short term bank deposits. The period of these deposits ranges from 30 to 90 days. Reliance has been placed on the judgment of Hon'ble Bombay High Court in the case of CIT Vs. Lok Holdings 308 ITR 356. It is also observed that no details of bank deposits could be provided by AR despite specific request being made by the bench due to which we are unable to ascertain the fact that whether these deposits have .....

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..... 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 income assessed under the head income from other sources. 54. It is observed, while deciding the objection of the assessee on the aforesaid issue, learned DRP in Para-12.5 of its directions has held that unabsorbed depreciation being part of current year s depreciation is eligible for set-off against income under any other head including income from other sources. Accordingly, the Assessing Officer was directed to allow set-off of unabsorbed depreciation. However, as it appears, the Assessing Officer has not implemented the aforesaid direction of learned DRP which, in our view, is unacceptable. Accordingly, we direct .....

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