TMI Blog2020 (6) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be justified and proper. See EKL APPLIANCES LTD [ 2012 (4) TMI 346 - DELHI HIGH COURT] and FRIGOGLAS INDIA PVT. LTD. VERSUS DCIT, CIRCLE-9 (2) , NEW DELHI [ 2016 (5) TMI 548 - ITAT DELHI] We note that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said issue. However, vide rectified directions dated 18.02.2016 rejected the approach of the TPO of using external TNMM. The TPO is yet to give effect to the rectified DRP Directions. Therefore, Ld Counsel prayed the bench that ld TPO may be directed to give effect to the rectified DRP Directions. In the interest of justice and fair play, we direct the TPO to give effect to the rectified DRP Directions. For statistical purposes, the ground raised by the assessee are allowed. Apportionment of expenses between fiscal units, non-fiscal units and head office - HELD THAT:- As decided in own case [ 2018 (4) TMI 1129 - ITAT KOLKATA] allocation done by the assessee on the basis of number of employees who are directly linked with the factory operation is more logical. The residual cost is incurred at the head office and is not capable of being identified with any of the units which are running by the assessee. It is only because of this difficulty that the Assessing Officer and the assessee resorted to allocation of residual cost. When it comes to allocation of residual cost, it cannot be done arbitrarily. The allocation should have due regard to the efforts put at the head office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IGH COURT] and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. This additional ground raised by the assessee is allowed. - ITA No.404/Kol/2015, 625/Kol/2016, 529/Kol/2015, 518/Kol/2016 (Assessment Year: 2010-11 to 2011-12) - - - Dated:- 17-6-2020 - SHRI S.S. GODARA, JM AND DR. A.L. SAINI, AM Appellant by: Shri Deepak Chopra, Advocate And Shri Rohan Khare, Advocate Respondent by: Dr. P. K Srihari, CIT(DR) ORDER Per Dr. A.L. Saini, AM: These are the cross appeals filed by the revenue and assessee pertaining to assessment year 2010-11 and 2011-12, and are directed against the separate fair assessment orders passed by the A.O./ TPO, which incorporates the findings of the Dispute Resolution Panel (in short DRP ). 2. The appeal filed by the revenue in ITA No. 529/Kol/2015 for A.Y. 2010-11 is barred by limitation by 54 days. The revenue filed a petition for condonation of delay requesting the bench to condone the delay. We have heard both the parties on this preliminary issue and having r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for computation of mark up percentage of 22.34% over the alleged Agency Cost incurred by the assessee. This ground covers ground no.5 of assessee`s appeal in ITA No. 625/Kol/2016 for A.Y.2011-12 and ground No.7 of revenue`s appeal in ITA No. 518/Kol/2016 for A.Y.2011-12. 4.That on the facts and in the circumstances of the case, the DRP erred in not considering the specific objections raised by the appellant with respect to overall adjustment of ₹ 21,842,032/- made to transaction of Export of raw materials and finished products . (This covers ground No.6 of assessee`s appeal in ITA No.625/Kol/2016, for A.Y. 2011-12) Grounds relating to Corporate Tax issue 1.Apportionment of expenses between fiscal units, non-fiscal units and head office of ₹ 261,160,962/-. This ground covers ground No.8 of revenue`s appeal in ITA No.529/Kol/2015 for A.Y. 2010-11 and ground nos. 1 and 2 of revenue`s appeal in ITA No.518/Kol/2016 for A.Y.2011-12. 2.Eligibility of income from sale of scraps whilst calculating deduction u/s 80IC of the Act of ₹ 20,723,924/-. This ground covers ground no. 9 raised by the revenue in ITA No. 529/Kol/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, marketing and sale of licensed products in the licensed territory. 7. The Transfer Pricing Officer on perusal of the above details, noticed that the assessee has not provided details w.r.t certain products/brands which were in existence for many years before the acquisition of the assessee by the Benckiser Group. Accordingly, in the notice u/s 92CA(2) dated 06.01.2014, the assessee was asked as to why royalty was charged in such cases. The notice of the TPO is reproduced below: 9. Please refer to payments made towards royalty on products manufactured by you. Various details have been filed in this regard. It is also seen that the royalty agreements signed by you represent a bundle of intangibles. However, the details filed by you in the case of products as given in table below do not show any patents registered against them S.No. Product Brand Royalty 1 Robin 3,17,30,459/- 2 Teepol 26,26,458/- 3 Disprin 76,00,559/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o RBIL. The average operating profit on cost of the comparable companies were calculated at 16.04 while the operating profit on cost of the tested was calculated at 18.46% based on the above it is concluded that the transaction of royalty is at Arm s length as the Arithmetic mean of the comparable price is less than operating margin earned by RBIL. The approach adopted by the taxpayer to benchmark the transaction of Royalty which is different in scope, risk and return has to be benchmarked appropriately and the most appropriate method is CUP as the data for different types of royalty is available. This office has conducted a search for the similar agreements as that of the taxpayer from the publically available database. From perusal of those agreements, it was found that there is one agreements which can be considered as a comparable to the assessee which is as given below: S. No Licensor Licensee Liensed property Royalty rate Comments 1 Jazor Laboratory Group Incorporation Bruce Jezior and Manloe Lanbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce dated 06 January 2014, your goodself has sought to rejected TNMM, as adopted by the assessee, to benchmark the payment of royalty transaction and instead suggested to adopt CUP on the grounds that the assessee's transaction on royalty is different in scope, risk and return. We would like to submit that the assessee has benchmarked the transaction oj payment of royalty by applying TNMM at entity level. We would like to submit that without the payment of royalty for the products it would not be possible for the assessee to carry on its business, hence the royalty transaction is nothing but an important integral part of all other international transactions, and thus the assessee qualifies for application of TNMM for benchmarking its royalty transaction. We would invite the attention of your goodself to para 5.02.3 at page 48 of the Transfer Pricing Study Report submitted via submission dated 07 July 2014, wherein the assessee has categorically explained why CUP cannot be considered as the most appropriate method for benchmarking the transaction of payment of royalty. The relevant portion has been reproduced below for your ready reference: CUP Method T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Audited Financial Statement) 22,83,09,91,385 Less (a) Sales of Raw Material or Packing Material 6,66,80,033 (b) Export to Associated Enterprises 10,21,81,297 (c) Excise Charges 28,66,70,314 Net Sales on which Royalty is paid 22,37,54,59,740 Royalty @ 1.5% x 22,37,54,59,740 33,56,31,896 Actual Royalty Paid 1,118,772,987 Adjustment 78,31,41,091 37. WITHOUT PREJUDICE TO THE ABOVE CONTENTION, even if it considered, at later appellate proceedings, that the TNMM is required to be considered as the most appropriate method on the facts of the case, the procedure for analysis carried out by the assessee is erroneous and faulty. In the analysis, the assessee has compared the profit margins earned by itself with the profit margins earned by entities considered as comparable, after making a search in the databases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set. Because the licensee assumes the risks and challenges of commercialization, the licensee will expect to capture some of the benefits produced by the technology. The simplest way to split the TIC between the licensor and licensee is to use a rule of thumb. Caves, who did a study of technology licenses, writes that in an imperfect license market, the monopolist of a technology cannot fully approximate maximum rent...the bargaining appears to yield between one-third to one-half to the licensor with a mean of about 40 percent. Various court cases (all of which dealt with CUTS, not CPM) confirm Cave's position as a reasonable rule of thumb. In Bausch Lomb, the Court favored a 50-50 split between the licensor and licensee. In Eli Lilly v. Commissioner, 84 T.C. 996 (1985), the court provided a 45-55 split.lt is also possible to use a bargaining model to evaluate how the TIC will be split. To implement a bargaining model, it is necessary to determine the threat points. The threat point is the point at whichthe party will walk rather than deal. To determine the threat points it is necessary to identify the specific alternatives available to each party. For example, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two items is determined to be Rs.Nil under the CUP Method. Thus, the total income of the assessee is required to be adjusted upwardly by ₹ 39,55,843/- on this account. Total Adjustment in respect of Royalty is 78,70,96,934/- ( 78,31,41,091 + 39,55,843/- ) 10. Thus, during the TPO proceedings, as noted above, the assessee was asked as to why royalty was charged in respect of certain products/brands which were in existence years before acquisition of the assessee by Benckiser Group. The assessee gave detailed submission in respect of various products. Assessee company stated that it has adopted the TNMM method for benchmark the royalty payment. Assessee company also explained that none of the brands with respect to products manufactured by assessee company is owned by it. However, the TPO rejected the contention of the assessee and adopted the benefit test approach to compute the arm`s length price of royalty paid.Theld TPO whilst relying on contemporaneous data of an agreement which did not even relate to theyear in question restricted the percentage of royalty paid to 1.5%, as narrated above. Besides, the TPO as done in assessment year 2010-11, whilst applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectual property rights, products/ brands, designs model rights, know how from its AEs. The same has resulted in the significant growth in all segments despite tough competition only due to the active involvement and contribution from the Licensors. However, the TPO in its order held that the assessee has not produced any evidence of any support/ know how received with respect to 'Mincream' and 'Robinson Barley' brands/ products to support payment of ₹ 3,505,809 as royalty and thus the ALP was taken at NIL by using the CUP method. The TPO made the adjustment since the assessee was not able to produce any evidence of receipt of any technical know-how etc. for the products, 'Mincream' and 'Robinson Barley' up to the date of limitation of passing the transfer pricing order. In this regard, we submit that RBIL have benchmarked the transactions of payment of royalties as per TNMM method and a comparison on company wide basis of the net operating margin of RBIL is higher than that of comparable independent companies. We submit that the application of 'benefit test' is unwarranted, because payment of royalty has not been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire business of the assessee depends upon the technology provided by the AE and without the license to use such technology, the assesses would not be able to continue its business. Premium value of products allows the assessee to increase the sales and charge higher price which leads to higher profitability and that growth in the revenue of the assessee clearly demonstrates the benefit derived by the assessee from the use of technology. On the basis of the same licensing agreement the royalty was paid in earlier years. In earlier years the payment of the royalty has not been held to be non-bona fide expenditure by TPO. the TPO s conclusion that there is no benefit to the assessee from the payments of royalty is unsustainable. In view of the foregoing discussion we hold that payment of royalty satisfies the benefit test. In view of the above, we submit before your Honors that in the interest of equity and justice it would be highly prejudicial if the bona fide payments made by RBIL in form of royalty with respect to subjected brands are treated to be NIL. In this regard, we also submit that the TPO also erred in not following the principle of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it the royalties are at arm s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be proper. The same is, accordingly, directed to be deleted. Note: For assessment year 2011-12, the ld DRP did not pass a detailed order but it relied on its directions for A.Y.2010-11. 12.Aggrieved by the order of the DRP/AO, the Revenue as well as assessee is in appeal before us. 13. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. Before us, ld Counsel for the assessee reiterated the submissions made before the authorities below and relied on the findings of the ld DRP. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the ld TPO, which we have already noted in our earlier para and is not being repeated for the sake of brevity. We note that in assessment year 2011-12, the ld TPO proceeded by rejecting the combined transaction approach un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken. We are of the view that the above cited precedent on principle of consistency is squarely applicable to the assessee under consideration. In the facts of the assessee's case, the Ld. TPO has not pointed out the change in facts or any provision of law which led him to take a view contrary to the view taken by his predecessors in previous years. We note that the assessee has been paying royalty to its Associate Enterprises (AEs) for a number of years which has been allowed in the assessment of earlier years. Therefore, the TPO cannot take a contrary view and dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub- clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction; 16. The Organization for Economic Co-operation and Development ( OECD‟, for short) has laid down transfer pricing guidelines for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm‟s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act . It was further held in this case that it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned . In CIT v. Walchand Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y dismissed with no order as to costs. (ii) Frigoglass India Pvt Ltd V DCIT [2016] 180 TTJ 401(Del-trib) 9. On the issue of royalty, the Ld. AR submitted that the assessee has entered into royalty agreement with its AE - Frigoglass SAIC (Head Office) on account of receipt of ICM Technology and for use of trademark. It was submitted that CUP method could not be applied in the case as neither the AE nor the assessee have entered into similar royalty arrangements with third parties and the data for external comparable transactions between independent parties in India was not available. It was submitted that the only method which could be correctly applied was TNMM (which has been applied by the assessee). It was further submitted that the benchmarking approach adopted by the assessee has been wrongly rejected and that the application of CUP method was erroneous.It was submitted that FIPL s principal activity being manufacturing of glass door refrigerators, the international transactions form an integral part of FIPL s business of manufacture and sale of glass door refrigerators. Accordingly, for the purpose of economic analysis, the assessee combined the international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. AR made a reference to the comparative profitability chart from FY 2005-06 to FY 2009-10 and submitted that the profitability has been increasing on an year to year basis because of availing of the services of Frigoglass SAIC and, therefore, since the benefits received from FIPL from receipt of such services outweigh the payment for such services, the assessee was justified in making payments for royalty. 10. It was also submitted that royalty has been paid only as per the terms of the agreement. The Ld. AR submitted that the disallowance for royalty was ultimately made on the ground of commercial expediency and he placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd. 345 UTR 241 (Del) and that of the ITAT Hyderabad B Bench in the case of DCIT vs Air Liquide Engineering in I.T.A. No. 1040/Hyd/2011 for the proposition that so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it was no concern of the TPO to disallow it on any extraneous reasoning. He submitted that on the facts of the case, the payment of royalty deserves to be allowed in Toto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties characterization of the transaction and re characterise it in accordance with its substance. An example of this circumstance would be an inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealing at arm s length. 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred wholly, necessarily and exclusively for the purposes of business in order to merit deduction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 17. Here, in the present appeal, what we see is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be applied if the relevant information is not available. No such comparable transaction has been brought on record by the Assessing Officer or even by the DRP. No such comparable case has been placed by the revenue even now. 20. Hence, following the ratio of the Hon'ble Delhi High Court in CIT vs EKL Appliances (supra), we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is liable to be deleted. Hence, ground nos. 4.1 and 4.2 are allowed. 18.Taking into account the facts narrated and the case law cited above, we note that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm s length. Considering these facts the proposed disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) should be made? In response, the assessee submitted that RBIL is engaged in the business of manufacturing and trading of Fast Moving Consumer Goods ( FMCG )/ products. The RBIL manufactures and distributes various brands of household products, and over-the-counter pharmaceutical products. Some of the key products are Dettol Soap, Disprin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortem insecticide, Collin etc. The RBIL manufactures products at its own facilities and also engages third party contract manufacturers for manufacturing some products. The detailed list of products and the their brands have been submitted before TPO. It is to be noted that, the name of all products sold by Reckitt Benckiser, in India bear the name of the brand (e. g. the products of brand Airwick , Airwick spray, Airwick aerosol, Airwick Freshmatic, Airwick-Car Air Freshner etc.). The assessee has incurred certain expenses on advertisement, amounting to ₹ 302.43 crores (which includes sales promotion expenses, rebates and discount etc.) during Financial Year (FY) 2009-10, details of which are tabulated as under: Financial Year ('FY') 2009-10, details of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39003 285687 13.65% Godrej Consumer Products Ltd. 10168.9 126788.12 8.02% Jyothy Laboratories Limited 2620.25 57476.16 4.56% Marico India Limited 351.12 2024.3 17.35% Nirma Limited 54.35 3329.18 1.63% Coroma Plus Industries Limited 7019716 300719404 2.33% Hipolin Limited 549.44 3609.67 15.22% Jocil Limited 9.64 16820.65 0.06% Jyothy Laboratories Limited 2620.25 33982.65 7.71% Pee Cee Cosma Soap Limited 7.82 2876.19 0.27% Standard Surfactants Limited 2.12 4234.18 0.05% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee s case. This ground is accordingly 24. Aggrieved by the order of the DRP/TPO, the assessee is in appeal before us. 25.We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP and other materials brought on record. Learned Counsel for the assessee submitted before us that the facts of the case of the Special Bench ruling in LG Electronics (supra) is different from the facts of the present case of the assessee. Assessee Company is engaged in only product promotion and not brand promotion and hence benefit of AMP accrues to the assessee and not to its AE(s).The Bright Line Test ( BLT ) is not one of the prescribed methods under the Act and hence cannot be applied in the assessee`s case under consideration. The various expenses in the nature of sales promotion expenses, business promotion expenses (including free gifts/freebie/bonus packs etc.) market research expenses has to be excluded from the computation of AMP expenditure. Ld Counsel also pointed out that addition of any profit mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng/agreement between RBIL and its AE, as different from that which was existed in LG Electronics case(supra). Therefore, assessee company`s case cannot be compared with LG Electronics case(supra). 26. We note that incurrence of the AMP expenses, being a domestic transaction cannot be touted as an instance of profit-sharing exercise. We note that the TPO failed to appreciate that, though a 'transaction' under section 92F(v) includes arrangement or understanding; it per se involves a bilateral arrangement or contract between the parties. A unilateral action by one party in absence of any understanding or contract or binding obligation could not be termed as transaction . In the assessee`s case, RBIL has incurred AMP expenditure in respect of its business operations in India and in order to boost its sales in India. Thus, no transaction could be said to exist in respect of such AMP expenditure incurred by the assessee. At the cost of repetition we state that there is no term or condition or provision in either of the Licensing Agreements to the effect which create any sort of obligation on RBIL to carry out marketing and promotional activities in order to promote the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. Absence of a machinery provision 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 question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions . Since the reference is to price and to uncontrolled conditions it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensated for? 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 40A (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 expenditure is excessive or unreasonable having regard to the fair market value of the goods. In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions so as to attract the provisions of transfer pricing of the Income Tax Act, 1961. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE s therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support guidance from the judgment of Hon ble Delhi High Court in the case of Maruti Suzuki India Limited vs. CIT reported in 381 ITR 117 wherein it was held as under: 51. The result of the above discussion is that in the considered view of the court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .01.2105 the assesse was asked to explain the same and the assesse was also show caused to as why not the margin be in respect of support Services Company be calculated in this regard. 31. In response to that the assessee in its letter dated 16.01.2015 submitted before TPO as follows: 5.07 Chargeback of expenses by RBIL to AEs During the financial year 2010-11, RBIL has incurred certain expenses on behalf of RB group companies. The same has been cross-charged to RB group companies. We understand that these expenses have been charged-back based on actual cost incurred by RBIL on behalf of AEs. We further, understand that the expenses incurred by RBIL on behalf of RB group companies, the function performed by RBIL relates to mere facilitation of payment on behalf of group entities. In this regard, RBIL is a facilitator and it provides no additional service. Accordingly, the 'cost only' reimbursement by RB group companies to RBIL could be regarded as the arm's length price for the above expenses. In view of the above, we submit that the 'cost only' reimbursement by AEs to the Company could be regarded as the arm's length price for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 4 IDC (India) Limited (formerly cyber media) 10.60% 5 I C R A Management Consulting Services Ltd. 16.14% Average 22.34% In view the above the assesse would have 22.34% on such recoveries. The value is calculated as under 22.34% on transaction purported to be recoveries ie. 22.34% of ₹ 19,30,38,246/- =4,31,24,744/- Thus the income of the assesse is to be upwardly adjusted by ₹ 4,31,24,744/- on this count. 33. Aggrieved by the addition made by the ld TPO, the assessee filed objections before the ld DRP. The ld DRP confirmed the order of TPO, observing as follows: DRP Directions: The assessee has rendered services to its AE. The assessee was procuring material from the third parties for its AE for its usage and consumption. The assessee has recovered costs from the AE for such services. The contention in respect of the recovery of only costs as third parties were involved is not tenable if the assessee was the channel for such procurement services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections ]. Accordingly, the TPO vide order dated 21.01.2016 restricted the cost to the agency cost and hence the adjustment was reduced from INR 4.31 crores to INR 2.71 crores. The assessee is in appeal before us to adjudicate the agency cost. We have gone through the order of TPO/DRP and noticed that there is no adjudication by the TPO or DRP as to what serviceswere rendered. As per ld Counsel, the expenses in question were in respect of system upgrade of the Assessee which costs were reimbursed to the Assessee by the AE. Hence, there was no element of any service that the Assessee rendered to the AE. The assessee submitted, 3 volumes of documents before the TPO and DRP to establish that these were cost to cost reimbursements and therehas been no adjudication on the same. Therefore, in the interest of justice and fair play we think it fit and appropriate to remit this issue back to the file of the TPO to adjudicate the issue taking into account 3 volumes of documents already submitted by assessee. For statistical purposes, the ground raised by the assessee and revenue are allowed. 36.Summarized ground No. 4 reads as follows: 4.That on the facts and in the circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this order, the Tribunal has inter alia observed as under: 4. As far as Ground No.3 raised by the revenue is concerned, it is seen that the details of the bad debts written off, given at Page No.128 and 129 of the assessee s Paper Book read with Page 145 of the Paper Book. The details of bad debts written off, as given in Page 145 of the P.B is as follows: The deduction claimed by the assessee was in respect of Unit 1,2,3 4. The Unit 1 commercial operation commenced only on 02.02.2004 which is evidenced by the audit report in Form 10CCB which is placed at Page 90 of the assessee s Paper Book. The Unit No.2 commenced commercial operation only w.e.f. 03.04.2004 which is evidenced by Form No.10CCB, placed at Page 79 of the assessee s Paper Book. The Unit No.3 commenced commercial operation only on 08.12.2004 as it is evidenced by the Form No.10CCB, copy of the Page 101 of the assessee s Paper Book. The Unit No.4 commenced commercial operation w.e.f, 02.02.2005 which is evidence by Form No.10CCB from placed at Paper Book page 68. It can thus perusal of the bad debts written off would show that all the debts pertained to assessment year 2002-03 and earlier Financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. (emphasis supplied) . As per Section 80IA(5) r/w Section 80IB(13) and 80IC(7), for the purposes of computing the quantum of allowable deduction u/s 80IB, the profits and gains of the eligible unit of the assessee has to be computed as if such eligible business were the only source of income of the assessee during the year. The above expenses, even though booked centrally in the head office books, have been incurred for all the units of the assessee company. Hence; in order to arrive at the true and correct value of the profits gains deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re A of this order. 6. On appeal by the assessee, the CIT(A) accepted the basis of apportionment of the residual cost as made by the assessee with the following observations: 7.3.3. With regard to change in the basis of allocation of residual cost by the AO. I find merit in the appellant s argument that the residual costs pertain to those cost which could not be allocated or identified with single function or unit due to the general utility to all the functions and units of the company. The basis of allocation of this cost is the number of executive. These costs include the residuary costs of all the support functions which have not been allocated to the Cost of Goods Sold. As per the appellant, at corporate office level there were 101 persons during the FY 2004-05 out of which, persons were working in supply function which is directly linked to factory operation. This worked out to 21.78%. The ratio of sale of fiscal units to overall sales was 26.10%. The effective percentage of residual cost thus worked out to 5.68% (21.78% * 26.10%), which the appellant applied for allocating the residual cost to the eligible units. For allocation expenses, the appellant has take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate Bench we dismiss the appeals of Revenue for A.Y. 2010-11 and A.Y. 2011-12. 43. Summarized ground No. 2 of corporate tax issue reads as follows: 2.Eligibility of income from sale of scraps whilst calculating deduction u/s 80IC of the Act of ₹ 20,723,924/-. This ground covers ground no. 9 raised by the revenue in ITA No. 529/Kol/2015 for A.Y. 2010-11 and Ground no. 3 raised by the revenue in ITA No. 518/Kol/2016 for A.Y. 2011-12. 44. When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 23.12.2014, passed by the Hon ble Calcutta High Court in assessee s own case in GA No. 1420 of 2014, ITAT No. 41 of 2014, whereby the issue of eligibility of income from sale of scraps have been discussed and adjudicated in favour of the assessee. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the, Hon ble Calcutta High Court, a copy of which is also placed before the Bench. 45. The ld. DR relied upon the orders of the authorities below. 46. We see no reason to take any other view of the matter then the view so taken by the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48.Summarized ground No. 3 of corporate tax issue reads as follows: 3.Excess disallowance of interest income allocated to eligible units ₹ 23,400,187/-. This ground covers ground no. 4 of assessee s appeal in ITA No. 404/Kol/2015 for A.Y. 2010-11 49.When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 14.09.2018, passed by the Tribunal in assessee s own case in ITA No.2113,2150,2114 2151/Kol/2013 ITA No. 760 762/Kol/2014 for A.Y. 2006-07, 2008-09, 2009-10, whereby the issue of excess disallowance of interest income allocated to eligible unitshave been discussed and remanded the matter back to the AO for factual verification. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the Tribunal, a copy of which is also placed before the Bench. 50. The ld. DR relied upon the orders of the authorities below. 51. We see no reason to take any other view of the matter then the view so taken by the co-ordinate Bench of ITAT Kolkata in assessee s own case vide order dated 14.09.2018. In this order, the Tribunal has inter alia observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidence share holders. This ground relates to A.Y. 2011-12 54.The assessee has raised this additional ground stating that the Assessing Officer ( AO ) erred in not extending the benefit of applicable Double Taxation Avoidance Agreements between India - UK and India - Spain ( DTAA ) respectively qua the rate of tax towards payment of dividend to the shareholders namely Reckitt Benckiser Pic., UK and Lancaster Square Holdings, Spain. The AO also failed to appreciate that in terms of section 90(2), dividends being the income in the hands of the non-resident could not be subjected to tax by applying DDT at a rate in excess of the rate prescribed under the DTAA and hence, erred in subjecting the Appellant to additional income tax in terms of section 115-0 of the Act and the AO also erred in not granting refund of the excess Dividend Distribution Tax paid by the Appellant. We are of the view that this issue should be remitted back to the file of the ld AO for factual verification. The assessee is directed to file before AO, the amount of dividend paid, copy of agreement and other relevant documents, as required by AO.Therefore we direct the AO to examine relevant Double ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where word Cess is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee. 58. We note that Coordinate Benches of this Tribunal in the following cases held that education cess should be allowed as an expense. The relevant judgments are given below: (i) M/s ITC Limited -vs.-ACIT (ITA No. 685/Kol/2014) The assessee s additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to ₹ 423618317 u/s 37 of the Act. We note that hon ble Rajasthan high court s decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x liability when all the relevant facts form part of records. We thus allow assessee s additional ground to be raised. 12. Coming to merits of the hon ble Rajasthan high court s decision in Chambal Fertilisers Chemicals Limited V/s. JCIT(D.B Income Tax Appeal No. 52/2018, dated 31-07-2018 taking note of CBDT s Circular No. 91/58/66 dated 18-05-1965 as well as co-ordinate bench s order in ITC Limited V/s. ACIT( ITA No. 685/Kol/2014 dated 27- 112018 hold that such a claim of education cess is very much allowable in computing total income under the provisions of the Act. 59. The Ld Departmental Representative relied on the earlier decision of ITAT dated 27- 02-2019, wherein this Tribunal had disallowed the claim on the basis of two contentions: (i) Education cess is an additional surcharge and hence forms of income tax and (ii) Decision of Kalimati Investment Company Ltd. -vs.- ITO (ITA No.2706,4508/M/2010,2552,2553/M/2011) and Sesa Goa Ltd. -vs.- JCIT (ITA No. 72/PNJ/2012) squarely applicable against the assessee. 60. We accept the submissions of the assessee concurring with the decisions of Rajasthan High Court and binding favourable decisions of Jurisdictional Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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