TMI Blog2020 (8) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... diture - reduction of share capital of the company - revenue or capital expenditure - HELD THAT:- In the instant case, as recorded by the AO, the assessee incurred mainly of professional charges, legal charges, postage, printing etc. Herein there is a reduction of share capital which has resulted in decrease in fund. The appellant has neither acquired any benefit of enduring nature nor has such expenditure resulted into any asset. We are of the considered view that the ratio laid down in Selan Exploration Technology Ltd. [ 2009 (9) TMI 989 - DELHI HIGH COURT] after considering the decision in Brooke Bond India Ltd. [ 1997 (2) TMI 11 - SUPREME COURT] squarely applies to the present case. Following the same, we delete the disallowance. TP Adjustment - upward adjustment in respect of advertisement, marketing and sales promotion ('AMP') expenses - 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed its return of income for the assessment year (AY) 2008-09 on 29.09.2008 declaring income of ₹ 878,582,710/- under normal provisions and ₹ 2,831,882,739/- under u/s 115JB of the Act. During the course of assessment proceedings, the AO noticed that the appellant has earned tax-free interest income of ₹ 49,908,623/-. This interest was earned from various tax-free bonds like Konkan Railway Corporation, Indian Railway Finance Corporation, HUDCO, Unit Trust of India and NABARD. In response to query raised by the AO to explain why the provisions of section 14A(2) and (3) and Rule 8D shall not be applicable, the appellant filed a reply. However, the AO was not convinced with the said reply on the ground that the appellant has not maintained separate books of accounts for earning the exempt income and it is having a common funds for earning taxable as well as non-taxable income. Therefore, the AO computed the disallowance u/s 14A r.w. Rule 8D at ₹ 66,18,230/-. The break-up of the said disallowance is ₹ 37,03,813/- under Rule 8D(2)(ii) and ₹ 29,14,417/- under Rule 8D(2)(iii). 4. Before us, the Ld. counsel for the appellant submits that all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. A perusal of the balance sheet of the appellant as at March 31, 2008 clearly indicates that the Shareholders Funds (Share Capital and Reserve and Surplus) are at ₹ 162,20.62 Lacs, whereas the investments are at ₹ 72,58.77 Lacs. In HDFC Bank Ltd. vs. DCIT [2016] 67 taxmann.com 42 (Bom), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and CIT v. Reliance Utilities Power Ltd. [2009] 313 ITR 340 (Bom) held as under : 15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities Power Ltd . (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd. (supra) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. Having considered the facts of the case and following the above decision, we confirm the disallowance of ₹ 29,14,417/- made by the AO. 7. Thus the 1st ground of appeal is partly allowed. 8. The 2nd ground of appeal 2. On the facts and in the circumstance of the case and in law, the AO/ DRP erred in disallowing a sum of ₹ 18,38,936/- incurred in connection with the reduction of share capital of the company considering the same as capital expenditure. That the sum of ₹ 1,86,38,936/- be allowed as business expenditure and the disallowance be deleted. 9. During the year under consideration, the appellant has reduced the face value of its equity share from ₹ 10/- to ₹ 1/- per share, pursuing the Capital Reduction Scheme. Accordingly, the capital of the appellant reduced from ₹ 136 crores to ₹ 13.6 crores. The appellant incurred total revenue expenditure of ₹ 1,86,38,936/- comprising mainly of professional charges, legal charges, postage, printing etc. The appellant contended before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rightly allowed such expenditure as revenue expenditure. In Selan Exploration Technology Ltd . (supra), the AO disallowed the claim of the assessee of ₹ 20,40,000/- incurred for buyback of shares and treated the same as capital expenditure of the assessee and thus added it to the income. In so far as the above amount is concerned, it was paid by the assessee to HSBC Securities and Capital Markets (India) (P.) Ltd. for advisory services. Such payment of advisory services was in connection with buyback of shares and instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal held that the assessee had not acquired the benefit or addition of enduring nature and the expenditure was therefore, allowable as revenue expenditure. In further appeal by the revenue, the Hon ble High Court referring inter alia the decision in Brooke Bond India Ltd . (supra) held : 8. We may also mention at this stage that to the same effect is the judgment of the Supreme Court in Empire Jute Co. v. CIT[1980] 124 ITR 1, wherein the following principle of law was enunciated:- In short, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the buyback of the shares. In these circumstances, the Tribunal rightly held that the assessee had not acquired the benefit or addition of enduring nature because after the buyback, benefit or addition of enduring nature would not arise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature. 12. The contention of learned counsel for the Revenue that with lesser capital dividend in future payable shall be less and, therefore, it shall be treated as a benefit of enduring nature cannot be accepted. We further find that in these circumstances the Tribunal rightly held that such an expenditure was allowed under section 37 of the Act as expense incurred for business purpose in the following manner :- 15. Once we decide that the impugned expenditure is not capital in nature, we have to see its allowability under section 37. In this regard, we find that the expenses were incurred by the assessee company for compliance of SEBI guidelines with regard to buyback of shares. The buyback of shares is stated to be for the purpose of providing an exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/DRP erred in confirming the upward adjustment of ₹ 572,554,441/- to the income of the Appellant, in respect of advertisement, marketing and sales promotion ('AMP') expenses incurred by the Appellant, by: a failing to appreciate that the AMP expense which is incurred by way of payments to third parties is incurred 'wholly and exclusively' for purpose of business of the Appellant in India and that the AMP expenses do not benefit Colgate Palmolive Company, U.S.A ('CP USA'); b alleging that there exists an arrangement between the Appellant and CP USA for AMP expenses thereby erred in contending that CP USA needs to compensate the Appellant towards AMP expenses; c applying the bright line test for determining the compensation towards the AMP expenses; d concluding that the AMP expenses of the Appellant, which is incurred by way of payment to the third parties, as an international transaction; e applying Indian transfer pricing regulations to the transaction between the Appellant and third parties as there was no reference made by the AO to the Transfer Pricing Officer in this regard; and f not granting the (+/-) 5% range benefit availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r agreement between the taxpayer and its AE and accordingly, no addition could be made on mere assumption of certain facts, (ii) the case of the assessee is in accordance with the ratio laid down by the Bombay High Court in Johnson Johnson Ltd . (80 taxmann.com 269) and Delhi High Court in Maruti Suzuki India Ltd. v. CIT (2015) 64 taxmann.com 150 ; CIT v. Whirlpool of India Ltd. 381 ITR 154; Bausch Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT 381 ITR 237, (iii) in AY 2011-12, the DRP has decided the issue in favour of the assessee following the decision in the case of Maruti Suzuki (supra). On the other hand, the Ld. DR relies on the order passed by the AO as per the direction of the DRP. 17. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We find that on similar facts in appellant s own case for AYs 2005-06 2007-08, the Tribunal has followed the decision of the Co-ordinate Bench in Johnson Johnson Ltd. v. CIT (43 taxmann.com 15). In further appeal by the Revenue, the Hon ble Bombay High Court has upheld the view of the Tribunal in Johnson Johnson Ltd (supra) by observing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s accrued to the AE by aforesaid expenditure, it could not be held that the same was incurred to promote the brand of foreign AE. Facts being identical, we follow the above order of the Co-ordinate Bench in appellant s own case for AYs 2005-06 2007-08 and delete the upward adjustment of ₹ 572,554,441/- made by the AO. Thus the 4th ground of appeal is allowed. 18. The 5th ground of appeal 5. On the facts and in the circumstance of the case and in law, the AO/DRP erred in confirming the upward adjustment of ₹ 8,659,200/- to the income of the Appellant, in respect of provision of research and development/ testing services, by: a. failing to appreciate that none of the conditions set out in section 92C(3) were satisfied and that the Appellant had prepared the Transfer Pricing documentation bona fide and in good faith in compliance with the Act and the Rules; b. using single year data (i.e. Financial Year 2007-08) as against the multiple year data used by the Appellant for the comparability analysis; c. rejecting 5 comparable companies without appropriate reasons from the comparability analysis carried out by the Appellant; d. not granting the economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Limited Rejected by Ld. TPO 9.24% 6. Medinova Diagnostics Services Ltd. 4.47% 7. N G Industries Limited 21.56% 8. Neeman Medical International (Asia) Limited 12.74% 9. Pfizer Limited Services 13.63% Count 4 9 Average 29.20% 19.83% The DRP confirmed the action of the TPO. The AO, following the direction of the DRP made an adjustment of ₹ 86,59,200/-. 20. Before us, the Ld. counsel submits that the appellant has taken into account 9 comparables in the TP study. The TPO excluded 5 comparables and computed single year margin of 4 comparables which comes to 29.20%. It is explained out of 5 comparables rejected by the TPO, 3 comparables are not pressed for inclusion and the appellant submits for inclusion of (i) Dolphin Medical Services Ltd., (ii) Medinova Diagnostic Services Ltd. an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reservoir analysis Also we observe that the profit and loss account of the company reflects that the whole operating income is from seismic survey and related service. The Company s business consists of one reportable and geographical segment of seismic data acquisition and its related service within India. In the case of the appellant before us, they provide testing related services to Colgate Palmolive USA. Therefore, we have no hesitation in excluding Alphageo (India) Ltd. from the set of comparables arrived at by the TPO/AO. Accordingly, we direct the AO to exclude Alphageo (India) Ltd. from the final set of comparables. 22.1 A perusal of the annual report (2007-08) of Dolphin Medical Services Ltd. clearly indicates that it is a service industry (page 5). It is engaged in the business inter alia of establishing, providing and maintaining diagnostic laboratories and equipments for testing and setting up laboratories for medical investigations and research (page 7). The generic names of 3 principal products/services of Dolphin are Diagnostic, Ophthalmic and Software Services (page 25). The appellant has relied on the decision in Watson Pharma Pvt. Ltd. (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts work performed, methodology adopted and findings. This report is then sent to the entity requesting for the assignment. 8.2.12 During the year, CP India had carried out various activities like under arm clinical studies, Advanced Technology Oral Care Studies, UAP Stability Studies, etc. 8.2.13 It is pertinent the note that all the above activities are carried out by CP India within the broad parameters laid down by the respective associated enterprises. One may also examine functions performed, assets employed, risks assumed mentioned at page 40-43 of the TP study of the appellant. 22.2. Functional analysis enables comparison of controlled transactions with uncontrolled transactions. The hon ble Supreme Court in the case of Morgan Stanley Company Inc (2007) 292 ITR 416(SC) has placed significant emphasis on FAR (functions performed, assets owned and risks assumed by the associated enterprises involved) analysis for benchmarking exercise, also known as comparability analysis, for determination of arm s length price of a transaction between associated enterprises. Under Rule 10D(1)(e), a taxpayer who has entered into an international transaction is required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that rule 34(5) of the Income Tax Appellate Tribunal Rules 1963, which deals with pronouncement of orders. Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, a nationwide lockdown was imposed for 21 days to prevent the spread of Covid-19 epidemic, and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severely restricted on account of lockdown by the Maharashtra Government, and on account of strict enforcement of health advisories with a view of checking spread of Covid-19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial work all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon'ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown perio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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