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2018 (5) TMI 1938

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..... efute 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 assessee’s alternative submissions as raised before Ld. first appellate authority qua expense disallowance and also re-adjudicate the issue of interest disallowance in the light of assessee’s submissions. The assessee, in turn, is directed to substantiate his stand in this regard. Needless to add that the provisions of Rule 8D, as per settled judicial pronouncements, could be applied only from AY 2008-09 and were not applicable in the impugned AY. The assessee’s cross-objections stands allowed for statistical purposes. - I.T.A. No. 6073/Mum/2014, Cross Objection No. 243/Mum/2014, I.T.A. No. 2778/Mum/2011, Cross Objection No.126/Mum/2011 - Dated:- 4-5-2018 - SHRI MAHAVIR SINGH, JM AND SHRI MANOJ KUMAR AGGARWAL, AM For the Appellant : Arvind V. Sonde, Ld. AR For the Respondent : V. Jenardhanan, Ld. DR ORDER Per Manoj Kumar Aggarwal (Accountant Mem .....

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..... r 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-10(3), Mumbai [AO] u/s 143(3) on 05/12/2008. 2.2 Facts in brief are that the assessee being resident corporate assessee engaged in manufacturing & trading of diversified products was assessed at ₹ 187.74 Crores after certain disallowances as against returned income of ₹ 184.95 Crores filed by the assessee on 28/10/2004. The disallowance of ₹ 7.63 Lacs representing gain on repayment of deferral loan and Adjustment of ₹ 144.39 Lacs (part) made u/s 92CA(3) are the subject matter of this appeal. 2.3 Both the representative, at the outset, converge on the point that disallowance of ₹ 7.63 Lacs made by Ld. AO u/s 41(1) representing gain on repayment of deferral Sales Tax Liability stood covered in assessee s favor in assessee s own case for AY 2003-04 by the order of Hon ble Bombay High Court [370 ITR 728] and also by the .....

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..... 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 paid by the assessee has recorded a faster growth and therefore, AE stood benefitted from working of the business of the assessee in a major way. In the light of the same, AMP expenses which were the driving force for enhancing the business were to be shared by overseas AE in proportion to benefit accruing to it. The assessee submitted that entire expenditure was related to business of the assessee and there was no agreement, whatsoever, with its AE in this regard and therefore, the provisions of Section 92(2)/92B were not applicable to the aforesaid transactions. However, not convinced, Ld. TPO apportioned the AMP expenses in the ratio of royalty payment to total payment i.e. 0.96% and accordingly, proposed impugned disallowance of ₹ 131.36 Lacs in its order u/s 92CA(3) dated 31/12/2007. Incorporating the same, quantum assessment dated 05/12/2 .....

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..... 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 incurred by the assessee during this period and therefore, since the benefit thereof has been derived by the group as a whole, the same has to be properly benchmarked / allocated. Our attention is drawn to Page No. 133 of Transfer Pricing [TP] study carried out by the assessee to submit that there were inter-company transactions relating to AMP expenditure within the meaning of Section 92B. It was fairly submitted that since Ld. TPO has not segregated the routine and non-routine AMP expenditure and applied Bright Line Test [BLT] and therefore, the issue may be remitted back to the file of lower authorities for proper benchmarking thereof. Reliance has been placed on following judicial pronouncements for various submissions / contentions:- No. Name Citation / Ref. No. Dated Authority (i) Sony Ericsson Mobile Communications India Pvt. Ltd. ITA No. 16/2014 .....

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..... 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 incurring of said expenditure, has in any way, resulted into brand building or creating marketing intangibles for the assessee. 5.3 Proceeding further, the contention of the assessee that has incurred the said expenditure to promote its own products in the market has remained uncontroverted. It is also uncontroverted that the aforesaid payments were primarily made to independent third parties without rendering any services to its AE. 5.4 Further, we find that Ld. TPO has computed the said adjustment by applying Bright Line Test without carrying out any analysis of the impugned expenditure to corroborate his stand. The aforesaid methodology, as per settled legal position, is not a recognized methodology and not one of the prescribed methods as envisaged by Rule 10B. 5.4 Upon due consideration, we find that the facts of the above case are quite similar to f .....

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..... ying 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 company of the assessee is reaping the benefit of higher royalty year after year as a result of higher sales realized by assessee through higher and higher expenses by way of publicity and sales promotion undertaken by assessee without the overseas AE bearing any cost thereto He stated that it constitutes arrangement between the two entities wherein the entire cost is borne by assessee, whereas the parent company J&J US is getting its share of benefit from those increased sales. The TPO worked out the cost at the rate of 4.22% of the publicity and sales promotion expenses which comes to ₹ 6.88 crores. However, the TPO stated that the cost is restricted to 200.82 lakhs (being 1.23% of ₹ 163.27 crores) in view of disallowance/adjustment in income made on account of royalty on technical know-how, the income tax, R&D cess and service tax .....

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..... od 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 10B specifically provides the procedure to be followed for determining Arm's Length Price. We observe that the TPO while suggesting the disallowance of 200.82 Lakhs out of the expenses incurred by assessee on publicity and sales promotion has not followed any of the method and therefore the said adjustment/disallowance suggested by TPO is outside its jurisdiction. During the course of hearing, ld. DR submitted that the matter could be restored to TPO to decide afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India (P.) Ltd. (supra). Since no specific submissions were made and considering the fact that the assessee justified the payment of technical know-how royalty at the rate of 4% of net sales which is lower than Arm's length rate of 4.84% and the said fact, we have also discussed her .....

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..... 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 (iv) Yum Restaurants (India) (P.) Ltd. v. ITO 380 ITR 637 In the above-mentioned decisions, it has categorically been held that in the absence of agreement between the assessee and its AE obliging the assessee 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. Another aspect of the issue is absence of machinery provisions as observed by Hon ble Delhi High Court, in Bausch & Lomb Eyecare (India) (P.) Ltd. [381 ITR 237] where Hon ble Court after considering various judgments has elaborately discussed the issue in the following manner:- 51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the .....

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..... r 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 connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision .....

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..... 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 promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose .....

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..... 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 share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the .....

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..... blem 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 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expendi .....

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..... 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 Court and therefore valid in the present context. 5.6 So far as the decisions relied upon by revenue are concerned, we find that the decision of Hon ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. was rendered in the context where the assessees were distributors of products manufactured by the foreign AE. The said assessees themselves were not manufacturers. More over none of the said assesses appears to have questioned the very existence of international transaction with foreign AE. It was also not disputed that the said international transaction of incurring AMP expenditure could be subject matter of TP adjustments in terms of Sec.92 of the Act. Therefore, the same is distinguishable on facts. Similarly, the decisions rendered in BMW India Private Limited and Perfetti Van Melle India Pvt. Ltd. has been rendered in a sit .....

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..... ing 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, the Ld. CIT(A) erred in holding that the Transfer Pricing Officer had not adopted any prescribed method, as he failed to take note of the fact that the assessee had also not benchmarked AMP transaction by of the prescribed methods. 6.2 The grounds raised by assessee in cross objections reads as under:- 1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not deleting the disallowance of ₹ 61,31,140 made by the learned AO under section 14A of the Act. The assessee company prays that the disallowance made by the learned AO under Section 14A of the Act merits to be deleted. 2. Without prejudice to the above, on the facts and circumstances of the case and in law, the Learned CIT(A) erred in not considering the alternative computation of disallowance under Section 14A of the Act submitted by the assessee company wi .....

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..... n 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 assessee contested the same with success before Ld. CIT(A) vide impugned order dated 28/03/2014 where the aforesaid adjustment was deleted on the reasoning that the export benefit was directly related to provision of R & D services and secondly, DEPB benefit was part of operating income as per the judgment of Mumbai Tribunal rendered in Welspun Zucchi Textiles Ltd ITA No. 7371/Mum/2010. Aggrieved, the revenue is in further appeal before us. The Ld. DR has placed reliance on the stand of Ld. TPO whereas Ld. AR contended that the issue stood covered in assessee s favor by the decision of the Tribunal and therefore, the decision of the Ld. CIT(A) was fair & reasonable in the circumstances. 7.3 Upon due consideration, we find that the export benefits were received by the assessee in connection with export of R & D services and had direct and intim .....

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