TMI Blog2019 (10) TMI 994X X X X Extracts X X X X X X X X Extracts X X X X ..... Even, without taking cognizance of the aforesaid additional evidence, the original as well as amended agreement make it abundantly clear that assessee has also availed technical knowhow from CAUSA. Departmental Authorities dont dispute the genuineness or authenticity of the amended agreement. What they are disputing is the date from which the amended agreement is effective. If the departmental authorities in the subsequent assessment years have allowed payment of royalty both for trademark and technical knowhow, there is no reason why it should not be allowed in the impugned assessment year, since, it cannot be said that the assessee was manufacturing Halls brand products without obtaining the required technical knowhow. Accordingly, we hold that payment of royalty to CAUSA is at arm s length. The ground is allowed. Technology Royalty paid to Cadbury Enterprises Pte Limited (CEPT) - HELD THAT:- Since facts as well as reasoning of lower authorities are quite similar as in the case of royalty payment made by assessee to CAUSA, applying the same analogy, we delete the impugned addition. One more reason to delete the adjustment is that the assessee has entered into two separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the ratio of cited decisions, we hold that no interest disallowance would be justified on the facts and circumstances. So far as the disallowance of direct / indirect expenses is concerned, we are of the view that since Rule 8D was applicable to this AY, the findings given in earlier orders of Tribunal would not apply to this year and the disallowance has to be worked out in terms of the Rule 8D. AO, in draft assessment order, at para 6.4, has noted that the submissions made by assessee in defense of suo-moto disallowance could not be accepted as against the submissions of the Ld. Sr. Counsel that the requisite satisfaction was not recorded by Ld. AO before proceeding to apply Rule 8D - there was no particular method of recording satisfaction in the quantum assessment order and therefore, unable to accept this specific plea of Ld. Sr. Counsel - restore the matter of direct / indirect expense disallowance to the file of Ld. AO for re-adjudication in the light of suo-moto disallowance offered by the assessee. As held earlier, no interest disallowance would be justified, keeping in view the assessee s financial parameters. Ground No. 14 stand partly allowed. Reduction in de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders of Tribunal in assessee s own case for various Assessment Years and there is no change in material facts and therefore, similar view may be taken in the matter. Both the representatives broadly converge on this point. For ease of reference, the decisions rendered by Tribunal for various years could be tabulated in the following manner: - No. Citation Assessment Year 1. ITA No. 7408/Mum/2010 order dated 13/11/2013 (Cross-Appeals) 2002-03 2. ITA No. 3510/Mum/2011 order dated 13/05/2015 (Cross-Appeals) 2003-04 2004-05 3. ITA No. 5470/Mum/2011 order dated 18/05/2016 (Cross-Appeals) 2005-06 4. ITA No. 1512/Mum/2013 order dated 28/11/2018 (Cross-Appeals) 2006-07 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. 4. Erred on the facts and circumstances of the case and in law, in disallowing the technology royalty of ₹ 8,761,354 paid to Cadbury Adams USA LLC on the ground that license to use the technology was not obtained directly from the licensor but from a sub-licensor and that if the payment gets subsumed in trademark royalty, the same can be allowed only upto 1%. 5. Erred on the facts and circumstances of the case and in law, in disallowing the technology royalty of ₹ 14,251,888 paid to Cadbury Enterprises Pte Limited on the ground that license to use the technology was not obtained directly from the licensor but from a sub-licensor. Service fees to Cadbury Schweppes Asia Pacific Pte Limited 6. Erred on the facts and circumstances of the case and in law, in completely disallowing the service fees of ₹ 107,314,992 paid to Cadbury Schweppes Asia Pacific Pte Limited, Singapore on the ground that the Appellant has failed to establish that the services have been rendered at requisite amount. 7. Erred on the facts and circumstances of the case and in law, in not accepting the economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses in respect of the unit of the Appellant in Baddi 15. Erred in arbitrarily allocating the following common expenses incurred by the Appellant to the factory of the Appellant at Baddi for determining the profits eligible for deduction under section 80-IC of the Act and reducing the deduction claimed under section 80-IC of the Act to ₹ 546,757,710 as against the deduction claimed by the Appellant amounting to ₹ 786,797,851: Direct marketing expenses; Expenses incurred on other employees at Head Office; Indirect expenses relating to directors; Sales and distribution expenses; Interest; Increase / (Decrease) in the stock. 2. Briefly stated, the assessee being resident corporate assessee is stated to be engaged in the business of manufacturing and marketing of malted foods, drinks and chocolates. The assessment was framed on 18/10/2012 pursuant to the directions of Ld. DRP determining the income at ₹ 139.98 Crores, after certain additions / disallowances / adjustments as against returned income of ₹ 85.49 Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ius Ltd. was holding 42.74% of the assessee s shareholdings. The remaining 2.41% was held by Indian Public. The assessee was stated to be incorporated in the year 1948 as Cadbury Fry (India) Pvt. Ltd. for processing of chocolates and Bournvita. Over the years, it expanded to cover a range of products in the chocolate, sugar confectionery and malted food drinks segment. The chocolate business contributes about 75% of assessee s turnover whereas malted food drinks contribute remaining 25%. Cadbury India was operating in food segment of fast-moving consumer goods (FMCG). It has manufacturing units at Thane, Induri, Malanpur etc. and it exports its products to various other countries like Bangladesh, Sri Lanka, Middle East, Nigeria, South Africa, USA, Malaysia, West Indies etc. The assessee reflected a sale of ₹ 1351.55 Crores during the year under consideration. 3.2 The determination of ALP of following international transactions are the subject matter of present appeal before us: - Transfer Pricing Adjustments Amount (Rs.) 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to SCOL at zero. In other words, he has disallowed royalty payment on trademark at 1% while allowing royalty payment on technical knowhow at 1.25% of net sales. The reasoning on which the Assessing Officer has denied royalty payment on trademark are basically that as per the terms of earlier agreement approved by the Government, the assessee can pay royalty for technical knowhow at the maximum rate of 2%, whereas, the assessee has paid royalty both for technical knowhow and trademark aggregating to 2.25%. He has also referred to the Press Note issued by the Government clarifying that royalty payment cannot exceed 2% and further the royalty payment for technical knowhow subsumes royalty payment for trademark. In this context, the Transfer Pricing Officer has also referred to similar dispute arising in the preceding assessment years. It is evident that the learned Commissioner (Appeals) has upheld the disallowance of royalty payment of trademark simply relying upon the order passed by him in assessee s own case for assessment year 2005 06. As could be seen from the material available on record, the assessee has entered into agreement with its current company in the year 1993, for ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, in ITA no.5470/Mum/2012, dated 18th May 2016, which is as under: 2.3. We have heard the rival submissions and perused the material before us. We find that while deciding the appeal for AY 2002-03(supra) the Tribunal has decided the issue as under:- 37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38.From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know-how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the assessee was incorrect. According to the TPO, the best method to ascertain ALP in the interest case was CUP, as the transactions were controlled. This was reasonable, as no data was available from independent source to benchmark the transactions. 39.On going through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground raised is allowed. Respectfully following the aforesaid view of Tribunal in assessee s own case, we delete the impugned adjustment of ₹ 1300.22 Lacs as made by Ld. AO in the final assessment order. Nothing has been shown to us that the aforesaid ruling is not applicable to the year under consideration. Ground No.3 stand allowed. Technology Royalty paid to Cadbury Adams USA LLC (CAUSA) 3.4.1 The Ld. TPO noted that as per trademark license agreement dated 01/06/2006, CAUSA was authorized to sub-license the rights of the trademark only and there was no reference to presume that the same included the right to sub-license the technology and know-how. Since the maximum rate of trademark royalty prescribed by the Government was 1%, the royalty of 2.7% paid by the assessee to CAUSA was to be allowed to the extent of 1% only. The same resulted into TP addition of ₹ 87.61 Lacs. The Ld. DRP confirmed the stand of Ld. TPO, against which the assessee is under appeal before us. 3.4.2 We find that this issue is covered by the decision of this Tribunal for AY 2006-07 wherein it has been held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude licensing / sub licensing of technology. It is the contention of the learned Sr. Counsel for the assessee that the amendment agreement executed on 24th December 2007, shall operate retrospectively from 1st January 2006, to emphasize this fact, the learned Sr. Counsel for the assessee has sought to produce letter dated 26th April 2016, issued by Mondelez International as additional evidence. From a perusal of the aforesaid letter, it appears that it has been issued to clarify that as per the original agreement executed on 1st June 2006, effective from 1st January 2006, the parties to the agreement intended to transfer and avail technical knowhow / knowledge relating to the licensed product along with trademark. Considering the submissions of the learned Sr. Counsel for the assessee that in subsequent assessment years royalty paid by the assessee @ 2.7% of sales was accepted by the Transfer Pricing Officer, the letter dated 26th April 2016, sought to be produced by the assessee as additional evidence, in our view, is of much significance since it will have a crucial bearing in determining whether CAUSA has authorised the assessee to use technical knowhow along with trademark, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for payment of Trademark Royalty Technical royalty and therefore, the matter would stand on a better footing. Hence, Ground No. 5 stand allowed. Service Fees paid to Cadbury Schweppes Asia Pacific Pte Limited, Singapore (CSAPL) 3.6.1 Ground Nos. 6 to 8 are related with Transfer Pricing (TP) adjustment on account of service fees paid to another AE viz. CSAPL. The assessee is stated to have entered into service agreement with the said entity on 21/10/2005 valid w.e.f. 01/04/2005 to avail certain services in the areas of Business Strategy, Value Based Management, financial planning and accounting, supply chain coordination planning, Human Resources, Legal, Marketing etc. The consideration under the agreement was fixed fee of SGD of 3.6 million per annum chargeable on quarterly basis. The assessee benchmarked the same using entity level TNMM, the assessee being the tested party. The assessee submitted that operating margin of 10.20% earned by the assessee were higher than average margin of 4.72% reflected by comparable entities and therefore, all international transactions would be at Arm s Length. However, Ld. TPO opined that for intra-group t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en separately benchmarked by the assessee rather entity level TNMM method has been used to determine the ALP of all the international transactions. We are of the considered opinion that the initial onus was on assessee to furnish the requisite details viz. nature of services availed, cost allocation keys, justification of costs and establish that the services were actually availed by the assessee. Thereafter, the onus would be on revenue to dislodge assessee s claim by bringing on record evidences to establish that the said payment, under normal circumstances between unrelated parties, would not have been exchanged between the respective entities. Therefore, with a view to enable the revenue to take consistent stand in the matter, we would be inclined to follow the directions given in AY 2006-07, which could be extracted in following manner: - 27. We have considered rival submissions and perused materials on record. The dispute is with regard to payment of ₹ 13.02 crore to one of the A.Es towards availing of various services under an agreement executed with the A.E. On a perusal of the order passed by the Transfer Pricing Officer and the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us, deserve to be examined on their own merit before deciding the issue one way or the other. More so, when as per assessee s claim in the subsequent assessment years the Transfer Pricing Officer himself has allowed a part of the service charges paid by the assessee to CSAPL, though, the quantum is in dispute. If in the subsequent assessment years the Transfer Pricing Officer has accepted the fact that the assessee has availed services from CSAPL under the very same agreement, there is no reason to dispute assessee s claim of availing services in the impugned assessment year if the assessee can demonstrate such fact by furnishing proper documentary evidences. In that event, the Transfer Pricing Officer certainly cannot determine the arm's length price at nil by applying the benefit test. Therefore, on overall consideration of facts and circumstances of the case, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due opportunity of being heard to the Assessing Officer. The Assessing Officer / Transfer Pricing Officer must pass a speaking and well reasoned order dealing with all the submissions of the assessee. Accordingly, this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for depreciation u/s 32 and therefore, upheld the stand of Ld. AO. We find that Tribunal, in AY 2003-04, at para-17 allowed depreciation claim applying the ratio of decision of Hon ble Supreme Court rendered in M/s Smifs Securities Ltd. [2012 348 ITR 302]. Similar view has been taken in subsequent years. Therefore, respectfully following the consistent view of the Tribunal on this issue in assessee s own case, we allow assessee s claim of depreciation. Ground No. 13 stands allowed. Disallowance u/s 14A 5.1 During assessment proceedings, it transpired that the assessee earned exempt income of ₹ 16.18 Crores which mainly comprised-off of dividend on mutual funds. The assessee, inter-alia, submitted that Rule 8D was not applicable to year under consideration. It was also submitted that assessee s surplus funds were invested in Liquid Mutual Fund and the same were withdrawn as per business requirements. The attention was also drawn to the fact there were two persons in the Treasury department to manage mutual funds investment on regular basis and the total salary paid to them was ₹ 9.20 Lacs therefore, a part of the same could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. Sr. Counsel that the requisite satisfaction was not recorded by Ld. AO before proceeding to apply Rule 8D. We are of the considered opinion that there was no particular method of recording satisfaction in the quantum assessment order and therefore, unable to accept this specific plea of Ld. Sr. Counsel. However, keeping in view the factual matrix as well as submissions made before us, we deem it fit to restore the matter of direct / indirect expense disallowance to the file of Ld. AO for re-adjudication in the light of suo-moto disallowance offered by the assessee. As held earlier, no interest disallowance would be justified, keeping in view the assessee s financial parameters. Ground No. 14 stand partly allowed. Reduction in deduction u/s 80-IC by reallocating expenditure of Baddi Unit 6.1 It transpired that the assessee claimed deduction u/s 80-IC for ₹ 78.67 Crores in respect of manufacturing unit situated at Baddi , Himachal Pardesh . It was the observation of Ld.AO that expenses claimed against sale of Baddi Unit in comparison to the expenses claimed against sale of remaining units was disproportionate. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles which were fair and transparent and enable the determination of true profits of each individual unit. Therefore, the indirect expenses of ₹ 451.54 Crores were uniformly allocated in the ratio of sale of Baddi units and remaining units which reduced the profits of Baddi Unit to ₹ 57.55 Crores and the same after adjustment of depreciation, expenses disallowed u/s 40(a)(ia), Donations, cess on royalty us 43B, expenses disallowed in earlier years etc. got further reduced to ₹ 54.67 Crores. In other words, the reallocation of expenditure by Ld. AO resulted into reduction of 80-IC deduction from ₹ 78.67 Crores to ₹ 54.67 Crores. The same, upon confirmation by Ld. DRP, is under challenge before us. 6.2 Upon careful consideration, we find that identical issue of expense allocation arose in assessee s own case for AY 2007-08, wherein the matter was concluded in the following manner: - 30. Learned Counsel of the assessee submitted that the Assessing Officer has allocated following items to Baddi unit on the basis of sales ratio as under: - (i) Interest (ii) Operation and Establishmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther factories. Because of the product mix, cost of the material for Bournvita is lower than the cost of the materials for manufacturing chocolates. In Bournvita, the materials used are malt extract, dairy fat, skimmed milk powder, liquid glucose, sugar, cocoa powder etc. while in chocolates the materials used are crumb (which is an extract of cocoa, milk and sugar of which is higher) cocoa, sugar, dry fruits, wafers etc. depending on the quality of chocolate. The employee cost in Baddi factory is lesser than other units since Baddi factory is situated in backward area and therefore, labour cost is cheaper. Further, new staff and labour are appointed in Baddi while in other units, old staff and labour are working since long and have proportionately higher salary. Excise exemption is available to Baddi unit under excise law. Accordingly, the sale price at Baddi Unit is total sale price while in other factories, sale price is sale price minus excise duty and thereby, the ratio of cost on sale is lower at the Baddi factory. Due to the excise exemption, the net profit at Baddi unit is greater by approximately 10-12% than other unit ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
