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2018 (5) TMI 1938

..... to incur AMP expenditure on behalf of its AE, no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure, it could not be held that the same was incurred to promote the brand of foreign AE Computation of margins from R & D activities - HELD THAT:- export benefits were received by the assessee in connection with export of R & D services and had direct and intimate connection with the said receipts and therefore, there was no reason to exclude the same for the purpose of computation of margins from R & D activities. Further, the said benefit arose from usual activities carried by the assessee and part & parcel of the same transaction and therefore, formed part of operating income only. The revenue has not controverted the stated fact or brought on record any contrary judgment to refute the findings of Ld. first appellate authority. Therefore, on factual matrix, we find to reason to interfere with the stand of Ld. first appellate authority in this regard. The grounds stands dismissed. Disallowance u/s 14A - HELD THAT:- We deem it fit to restore the matter back to the file of Ld. AO to reconsider the assess .....

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..... urred purely in respect of its own operations in India. 2(ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the adjustment of ₹ 1,31,36,000/- made by the Transfer Pricing Officer and Assessing Officer in respect of cost allocation to the associated enterprise Colgate USA out of the advertising and marketing expenses debited by the assessee in different years. 2(iii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the royalty payment to the associated enterprise has been increasing along with the advertisement and marketing expenses and as such, the apportionment of cost incurred by the assessee for the benefit accruing to the overseas associated enterprise was required. The cross objections raised by assessee reads as under:- The Commissioner of Income Tax (Appeals)-15, Mumbai erred in considering that the transactions relating to advertisement and marketing expense between Colgate- Palmolive (India) Limited and third parties are outside the purview of Indian Transfer Pricing Regulations. The assessment for impugned AY was framed by Ld. Assistant Commissioner of Income Tax- .....

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..... same, the assessee has been saddled with addition thereof by Ld. AO in assessment order dated 05/12/2008. 3.2 Ld. TPO noted that the assessee [CPIL] was 51% subsidiary of Colgate Palmolive Inc., USA and was engaged in manufacturing and marketing of diversified pharmaceutical products. It reflected turnover & Profit before tax at ₹ 1075.76 crores & ₹ 177.36 crores respectively. The assessee reflected various sale / purchase transactions with its 30 Associated Enterprises [AE] as extracted on Page numbers 2 & 3 of Ld. TPO s order which were subjected to computation of ALP. 3.3. Besides above transactions, Ld. TPO upon perusal of financial accounts noticed that the assessee debited AMP expenses amounting to ₹ 136.83 crores which constituted approx. 13% of the sales achieved by the assessee as against industry average rate of 6.39%. The Ld. TPO further noted that the royalty payment made by the assessee reflected steep growth from 0.15% in AY 1999-2000 to 0.96% in AY 2005-06 which, in absolute term increased from 1.50 Crores in AY 1999-2000 to 10.32 crores in AY 2005-06. The same led Ld. TPO to conclude that the relevant sales on which royalty was being p .....

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..... expenses incurred by the appellant. c) Moreover, the appellant has not made any brand royalty payments to its AEs during the relevant assessment year. Hence, based on the above reasoning, there does not appear to be any marketing intangibles being created by the appellant on behalf of the AE in USA and the appellant s A&M expenses are being incurred purely in respect of its own operations in India. Accordingly, no adjustment is proposed to be made with respect to A&M expense. The addition of ₹ 13,16,000/- so made is deleted. Aggrieved, the revenue is in further appeal before us whereas the assessee, by way of cross objections, has contended that the aforesaid transactions are out of the purview of Transfer Pricing provisions as contained in Chapter-X. 4.1 The Ld. Departmental Representative [DR] drew our attention to the fact that the assessee was licensed manufacturer exposed to less than normal risks and it was responsible to carry out AMP functions which were the key drivers for a FMCG entity. The Ld. DR further submitted that overall brand value of the group reflected steep growth during the years 2000 to 2006 which were the result of heavy AMP expenses being incu .....

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..... ng on behalf of its AE. Secondly, nothing has been brought on record to suggest that incurring of AMP expenditure has, in any manner, resulted into brand building exercise or creating marketing intangibles for the AE or AE stood benefitted by stated expenditure in any manner. The only argument advanced by the revenue is that the brand value of the Assessee Group, as a whole, has reflected healthy growth during the period 2000 to 2006. However, no evidence to demonstrate that there was any co-relation between the aforesaid growth vis-à-vis quantum of AMP expenditure incurred by the assessee has been placed on record. In our opinion, no addition could be made on mere assumption of certain facts. 5.2 So far as the reimbursement of AMP expenses as urged by the revenue is concerned, upon perusal of transactions as reported in Transfer Pricing [TP] study carried out by assessee, we find that these expenses are in mostly in the nature of meeting expenses, travelling expenses, hotel expenses which has been received as well as paid by the assessee on the same basis i.e. third party cost. The nature of these expenses, per-se, do not instill confidence in us to conclude that the incurr .....

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..... goods in India either of its own or through any of its subsidiary. Hence, the entire advertisement and marketing expenses incurred are purely for assessee's own benefit and there is no element of any service being rendered to J&J US. It was also stated that assessee-company is an independent risk bearing entity and any cost incurred towards advertisement and marketing would be for the sole benefit of assesseecompany, as it enjoys the increased sales of products as a result of such marketing activities. The assessee also furnished details of publicity and sales promotion expenses before TPO. However, TPO did not accept the contention of the assessee and stated that the said growth in net sales so achieved through higher and higher publicity and sales promotion and expenses have resulted into higher payment of royalty which the assessee is paying at a fixed percentage of sales to its parent company. Thus, there is a co-relation between the royalty payment and sales on the one hand and publicity and sales promotion expenses on the other hand and it is not a matter of coincidence. The TPO after considering the submissions of assessee has stated that J&J US, the parent comp .....

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..... the expenses as assessee company has created brand in India which is owned by parent company by incurring the expenditure. 40. We have considered the order of the TPO/AO and the submissions of ld. Representatives of the parties. We observe that the TPO has suggested disallowance on the ground that the AE of the assessee viz J&J US is reaping the benefit of higher royalty amount as a result of higher sales realized by assessee by incurring higher expenses by way of publicity and sales promotion undertaken by assessee and therefore the parent company of the assessee-company should share some of the expenses. It is a fact that TPO while suggesting any disallowance/adjustment has to state that the transactions between the assesseecompany and its AE is not at Arm's Length. The TPO is to determine the Arm's length by following one of the method and /or most appropriate method as prescribed in section 92C(1) of the Act. The TPO cannot suggest adjustment/disallowance on the basis of his assumptions that the payment is excessive though it is at arm's length. Similar issue was also considered by ITAT Mumbai Bench in the case of Kodak India (P.) Ltd. (supra). Further, Rule 10 .....

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..... icate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of ₹ 200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johnson & Johnson, USA. (iii) The impugned order holds that transfer pricing adjustment done by disallowing the payment, on the basis of an assumption that it is excessive, is an action completely dehors the provisions of transfer pricing adjustment found in chapter X of the Act. The determination of the ALP has to be done only by following one of the methods prescribed under the Act. (iv) In view of the above, as the Revenue has not acted in accordance with the clear mandate of law, the questions as proposed does not give rise to any substantial question of law. Thus, not entertained. 5.5 Similar view has been taken by Hon ble Delhi High Court in catena of subsequent decisions, few of which are as follows:- (i) Maruti Suzuki India Ltd. v. CIT 2015 64 Taxmnn.com 150 (ii) CIT v. Whirlpool of India Ltd. 381 ITR 154 (iii) Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl.CIT 381 ITR 237 ( .....

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..... xistence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connect .....

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..... hat the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promo .....

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..... diture of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the sha .....

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..... tive of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. …… 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B .....

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..... decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law".' Although we are conscious of the fact that Special Leave Petition against the same has been admitted by Hon ble Apex Court [77 Taxmann.com 54], however, we find that the operation of the said judgment has not been, in any manner, stayed by Hon ble .....

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..... incentives do not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. 3. In the facts and circumstances of the case, the Ld. CIT(A) erred in his findings that there are no direct benefits flowing from the appellant s Advertisement and Marketing expenses to its Associated Enterprises, since the expenses are incurred solely for the promotion of appellant s products in the Indian market. 4. In the facts and circumstances of the case, the Ld. CIT(A) erred in concluding that the AMP expenses do not benefit AE when the assessee itself admits that the brands under which it sells the goods is owned by the Associated Enterprise. 5. In the facts and circumstances of the case, the Ld. CIT(A) erred in not taking note of the fact that during the previous year, the assessee imported finished goods amounting to ₹ 36,76,26,555/- (as per Appendix to Form 3CEB) from its Associated Enterprises which were sold in India under the brand name belonging to Colgate Palmolive, US and hence, the Associated Enterprise is directly benefitted on account of the brand promoted by the assessee in India. 6. In the facts and circumstances of the case, .....

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..... certain Research & Development Services [R & D services]. The said services were being charged at mark-up of 5%. The assessee was entitled for duty benefit of 10% of export value of R & D services from Government of Indian under Served for India Scheme . After considering the said duty benefit, the net margin (operating Profit / Total Cost) of the assessee worked out to 15.87% as against mean margin of 15.60% of ten comparables as selected by the assessee. However, Ld. TPO opined that the benefit of said duty benefit could not be considered for the purpose of comparison. The another point of difference was inclusion of two comparables namely Rites & Water & Power Consultancy Services India Ltd. as selected by Ld. TPO by relying upon the order for AY 2006-07, which as per assessee s submissions were functionally not comparable. In the final analysis, Ld. TPO has worked out mean margin of seven comparables including these two comparable as 14.82% and accordingly, considering assessee s margin of 5%, worked out TP adjustment of ₹ 5.69 crores against the same which was the subject matter of appeal before Ld first appellate authority. 7.2 Aggrieved, the assess .....

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..... o the fact that the investment was made out of surplus funds generated by the assessee. However, not convinced, Ld. AO computed aggregate disallowance of ₹ 83.54 Lacs u/r 8D(2) which comprised of interest disallowance u/r 8D(2)(ii) for ₹ 34.39 Lacs and expense disallowance u/r 8D(2)(iii) for ₹ 49.14 Lacs. 9.2 Upon further appeal, Ld. CIT(A) has allowed part relief against interest disallowance as stated in Para-4 of the impugned order but confirmed expenses disallowance u/r 8D(2)(iii). Aggrieved, the assessee is in further appeal before us. 9.3 The Ld. Sr. Counsel fairly submitted that the expenses disallowance u/s 14A may be restricted to ₹ 5,37,840/- as per alternative computations submitted by the assessee before Ld. first appellate authority whereas interest disallowance was not called for in the circumstances. Both the representative pleaded that the issue may be remitted back to the file of Ld. AO for re-adjudication on factual matrix. 9.4 Upon due consideration, we deem it fit to restore the matter back to the file of Ld. AO to reconsider the assessee s alternative submissions as raised before Ld. first appellate authority qua expense disallowance and .....

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