TMI Blog2020 (12) TMI 1073X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO has not questioned the method of recognizing the value of stock at the close of the year i.e as per AS-2 of Accounting Standard and the stock or net realizable value, whichever is less, the disallowance on the basis of surmises is not permissible. Hence, we find no scope to interfere into the findings returned by Ld. CIT(A) and accordingly, aforesaid grounds in A.Y. 2009-10 and A.Y. 2010-11 raised by the Revenue are dismissed. Addition on account of AMP expenses by treating the same as capital expenses - HELD THAT:- We are of the considered view that Assessing Officer has merely made disallowance by following order passed in A.Y. 2008-09 in which taxpayer has incurred identical AMP expenditure for the purpose of Dealer signage and boards; Printing of Brochures, tyre technical guides, merchandise; Product launches; Print advertisements in newspapers and magazines; Seminars and Exhibitions; Hoardings, etc. which was deleted by the Ld. CIT(A) and order of Ld. CIT(A) was upheld by the tribunal. We find no scope to interfere into the findings returned by Ld. CIT(A). Moreover, it is beyond comprehension as to how the AO quantified 50% of the AMP expenses as capital in nature a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision rendered by Hon ble Delhi High Court in case of Soni Ericssion Mobile Pvt. Ltd. [ 2015 (3) TMI 580 - DELHI HIGH COURT ] wherein it is held that gross profit margin should be computed after including AMP expenditure and RPM is considered as the most appropriate method for import segment for resale. So far as question of rejecting Brightline test (BLT) by the Ld. CIT(A) in A.Y. 2010-11 is concerned it has been rejected in a number of judgments by the Hon ble High Courts on the ground that brightline test has no statutory mandate for benchmarking AMP expenses. - ITA No. 5774/Del./2014, Stay No. 288/Del/2020 (ITA No. 5774/Del./2014), ITA No.6128/Del./2014, ITA No.3167/Del./2017, ITA No.3125/Del./2017 - - - Dated:- 24-12-2020 - Shri Anil Chaturvedi, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : Shri Nageshwar Rao, Adv. For the Revenue : Shri Ajit Kr. Singh, CIT-DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER Since common question of facts and law is involved in all the aforesaid cross appeals, the same are taken up together for disposal by way of composite order to avoid repetition of discussion. 2. Appellant, M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 2.4 That the Hon ble CIT(A) / Ld. AO erred in facts and law in disallowing the Appellant s claim of brought forward losses amounting to ₹ 6,50,98,677 collectively for the AY 2005-06 and AY 2006-07, thereby ignoring the fact that the matter is pending before the Hon ble Tribunal for disposal. 2.5 That the Ld. AO erred in levying interest under section 234C of the Act. 2.6 That the Ld. AO has erred in facts and circumstances of the case by initiating penalty proceedings under section 271(1)(c) of the Act, which is bad in law. 3. Grounds pertaining to Transfer Pricing Matters 3.1 That the Hon ble CIT(A) / Ld. TPO erred in law and on facts in inappropriately applying Transfer Pricing provisions to benchmark specific domestic expenses incurred to fulfill Appellant s own business interests, and without appreciating that such unilateral action of the Appellant (to incur such expense) cannot be regarded as an international transaction as per the provision of Section 92B of the Act. 3.2 That the Hon ble CIT(A) / Ld. TPO erred in law and on facts while benchmarking the impugned transaction of the Appellant without conclusively deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant has effectively provided a brand building services/creation of marketing intangible to its AEs, without giving any specific finding / reason to support such erroneous claim and have committed another absurdity by applying a mark-up 15% using highly inappropriate data points. ITA No.6128/Del./2014, A.Y. 2009-10- Revenue s appeal 1. Whether on the facts and circumstances of the facts in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 5,31,75,329 1- on account of advertising and publicity expenses stating that these expenses are revenue in nature by completely ignoring the detailed reasons given by AO and without appreciating that the facts that above expenditure was not uncured wholly and exclusively for the purpose for the purpose of business and was also capital in nature? 2. Whether on the facts and circumstances of the facts in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 12,83,663/- on account of impairment of stock ignoring the facts that AO has established that assessee has tried to claim a provision, which is neither ascertained not is in fact, liability of assessee? 3. That the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdictional Tribunal and making a disallowance leading to double taxation which is contrary to the basic principles of taxation, thus bad in law. 2.2 That the Ld. CIT(A) / AO erred in facts and law by considering the license fees paid towards purchase of computer software (to facilitate inventory, sales order and sub-contract management etc.) as an intangible asset i.e. acquisition of right to use the application, thereby allowing depreciation at the rate of 25% as against the Appellant s claim of 60% in the return of income. 2.3 That the Ld. CIT(A) / AO grossly erred by disallowing the Appellant s claim of brought forward losses amounting to ₹ 26,85,56,128 collectively for AY 2006-07 and AY 2007-08, thereby ignoring the fact that the matter is pending before the Hon ble Tribunal for disposal. 2.4 That the Ld. AO grossly erred in not giving the full credit for tax withheld at source and self- assessment tax deposited by the Appellant while computing the tax demand due from the Appellant. 2.5 That the Ld. AO erred on facts and in law by levying interest under section 234B and section 234C of the Act. 2.6 That the Ld. AO erred on facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding that Resale Price Method (RPM) was most appropriate method without appreciating a fact that gross profit as disclosed in the Annual Report of the companies including assessee and comparables were computed without considering advertisement, marketing and business promotion expenditure (AMP expenditure) and application of RPM would require multiple comparability adjustments leading to unreliable arm's length price? 2. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding RPM as most appropriate method to compute the arm s length price of AMP expenditure without taking into account that AMP expenditure adds value to the product by enhancing its saleabil ty accordingly, RPM was not most appropriate method to determine arm s length price (ALP) of AMP expenditure i.e. marketing intangibles? 3. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding RPM as most appropriate method to determine ALP of AMP expenditure even when the AMP expenditure effects net profit instead of gross profit? 4. Whether on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Explanation below section 9213(2) of the Act? 10. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in deleting disallowance of ₹ 4,78,89,110/- u/s 37(1) of the Act on account of advertising and publicity expenses even when the assessee had not discharged its initial onus u/s 37(1) of the Act that expenditure was not capital in nature? 11.Whether on facts and in circumstances of the case, Ld. C1T(A) is legally justified in deleting disallowance of ₹ 4,78,89,110/- u/s 37(1) of the Act on account of advertising and publicity expenses ignoring the fact that the expenses incurred by the assessee have created marketing intangibles the capital asset as defined under Explanation below section 92B(2) of the Act? 12.Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in deleting disallowance of ₹ 9,90,383/- on account of provision for impairment of stocks ignoring the fact that the expenses claimed in profit loss account were in nature of uncertain liability and hence, was not allowable u/s 37(1) of the Act? 13. That the appellant craves leave to add, amend, alter or forgo a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E s brand in India. The taxpayer has also created marketing intangible in favour of its AE and called upon the taxpayer to explain as to why the huge AMP expenses should not be subjected to benchmarking as international transaction. 6. Declining the contentions raised by the taxpayer, the Ld. TPO reached the conclusion that assessee being a distributor has undertaken the marketing activities on behalf of its AE to create intangible in its favour and has not paid any royalty and after applying the Resale Price Method (RPM) on the trading activities treated the incurring of AMP expenses and the resultant creation of marketing intangibles as a separate international transaction and benchmarked the same separately. Ld. TPO selected three companies in A.Y. 2009-10 as comparables namely ; Dunlop India Ltd.; T V S Srichakra Ltd. ; Krypton Industries Ltd. Having AMP/ Sales ratio of 4.79% as against 11.30% in case of the taxpayer which is into similar activities. 7. Ld. TPO applied bright line test and computed the arm s length of AMP i.e. the bright line at 4.79% of sales. The taxpayer spent AMP expenses to the tune of ₹ 25,08,53,510/- and Ld. TPO computed the amount in ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of impairment of stock on the ground that claim of a provision which is neither ascertained nor is in fact the liability of the taxpayer. BRIEF FACTS ITA No. 3125/DEL/2017 OF A.Y. 2010-11 Revenue s appeal AND ITA No. 3167/DEL/2017 OF A.Y. 2010-11 Taxpayer s appeal 11. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Michelin India Pvt. Ltd. is into import and resale (or trading) of tyres for passenger cars, trucks and buses under the brand name Michelin . During the year under assessment, the taxpayer entered into International Transaction with its Associate Enterprises (AE) as under :- Sl. No Nature of transaction Value of transaction Benchmarking by the Assessee 1. Import of finished goods for resale 1,807,259,401 RPM- The GP/Sales of the assessee has been worked out at 40.11% vis- -vis the comparable companies at 9.19% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the amount in excess of the arm s length amount of AMP at ₹ 222,416,487/-. The Ld. TPO has also applied the mark-up of 12.88% on the cost of CPM (14.88%- assured markup on all costs minus 2% = 12.88%) and computed arm s length price of AMP expenses as under :- Arm s length margin for markup 14.88% Arm s Length AMP Expenses (A) 113,582,711 AMP expenses incurred by the assessee(s) 335,999,199 Expenditure incurred on creation of intangibles (B-A) 222.417.498 Mark up @ (12.88%=14.88%-2%) 28,647,243 16. Assessing Officer disallowed the claim of payment of Management Fee of ₹ 8,17,64,429/- excluding tax and cess made to M/s. Michelin Asia Pacific Pte Ltd. (AE) u/s 37(1) on the ground that aforesaid expenditure has not been incurred wholly and exclusively for the purpose of business. 17. Assessing Officer also disallowed taxpayer s claim of brought forward losses to the tune of ₹ 26,85,56,128/- collectively for AY 2005-06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the deficiency and shortcomings brought out by the department in the documents/ evidences in form of service agreement and mail exchanges furnished by the assessee have not been appreciated by the tribunal. However, on putting specific queries the Ld. DR has failed to bring on record distinguishable facts of the cases at hands vis- -vis case of the taxpayer of A.Y. 2008-09. 23. We have perused the order passed by the tribunal in assessee s own case in A.Y. 2008-09 and facts are identical. Coordinate Bench of Tribunal vide order dated 22nd June, 2020 passed in ITA no. 2415/Del/2014, A.Y. 2008-09 deleted the disallowance of management fee made by the Ld. CIT(A)/AO by returning following findings :- 8. Briefly in the facts of the case the assessee for the year under consideration had filed original return of income on 30.09.2008 declaring total income at NIL. The assessee then filed revised return of income on 14.10.2008 declaring total income of ₹ 13,12,461/-. The assessee company was incorporated on 12.11.2003 as a result of joint venture between the Michelin Group, France and Appolo Tyres Ltd. in India. The said joint venture was formed to carry out the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that submissions of the assessee were not correct as the assessee had incurred huge personnel cost and establishment cost. He also observed that from the details filed, it appears that the assessee had full team of management consisting of Mr. Jean Paul Caylar as Director and Mr. Herve Dub, as Director. The assessee had incurred huge expenses on their salaries and other perquisites. The Assessing Officer further observed that against total turnover of ₹ 132.81 crores, the assessee had incurred operating expenses of ₹ 49.97 crores where the assessee was only a trading company and had not established any manufacturing plant in India so far. The claim of the assessee in the form of management fee was not genuine claim as per the Assessing Officer. It was held to be a clear diversion of income and the claim of the assessee was held to be non genuine business claim and the same was disallowed and added to the total income of the assessee. Another point which was raised by the ITA Nos.2415 2946/Del/2014 Assessment Year 2008-09 6 Assessing Officer relying on different decisions and it was observed that the payments made to the related parties should be reasonable in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. He also pointed out that though the Tribunal had decided the issue against the assessee but the same was on the premises that only one bill for the month of March 2008 was filed. He also brought to our notice that Miscellaneous Application was filed and pending against the order of the Tribunal relating to Assessment Year 2007-08. However, he stated that he was ready to argue the appeal for the instant assessment year. 13. The Ld.DR for the Revenue pointed out that undoubtedly TPO had examined the arm s length price of international transaction but the Assessing Officer can also conduct inquiry and carry out the exercise as he was within his rights to do so. Replying to the plea of the assessee that the reduction in losses are also attributable to the support services availed by the assessee, the Ld. DR for the Revenue pointed out that these were corroborating statement. Referring to the order of CIT(A), the Ld.DR pointed out that it has been noted that the existence of services was not doubted but the question was whether services were availed or not and such availment of services was questioned by the authorities below. 14. The Ld.AR in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the management of products flows, determine resources necessary to ensure the efficient supply of products in a timely manner. Quality control services: Expertise on quality assurance in all the fields of activity from the development of products to the service to final client. Legal services: Legal services in all matters including but not limited to corporate, tax, intellectual property. commerce, finance, partnership, all legal aspects of business. Information and Telecommunication services: Assistance in technical definition, implementation and maintenance of computers and telecommunication systems. Support operations management in identifying process evaluation requirements and in implement organizational changes. 17. The claim of the assessee before us is that the said managerial services were availed by the assessee from its AE in order to enable it to undertake its operation in more efficient way. The case of the Revenue on the other hand is that the assessee had received advise in the matter of variety of fields, which include general business and administrative service, economic planning and accounting services, industrial assessment se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to maintain similar terms and conditions, not only for running business but for providing services to customers, has to avail such management advices and services from its AE. In the present scenario where the assessee is dealing in items, which were available in international market also, then same practice has to be adopted worldwide and hence the necessity of availment of management services. Merely because the assessee was increasing expenditure on its personnel and other expenses, cannot be the yardstick for deciding whether assessee had any need to avail the services. It is outside the domain of Assessing Officer to traverse in such direction. The Assessing Officer categorically states that assessee had availed services in various fields, but it is outside his domain to decide whether there was any necessity to avail such services or not. The assessee having availed the support services for its day to day running of business, is entitled to claim the expenditure. Hence, we hold so. In this regard, we must also look to the other side of the picture that the losses arising to the assessee in the earlier year/s have consistently reduced and had resulted in profitability durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the matter is pending before the Tribunal for disposal. So, this issue is remitted back to the AO to verify the facts and grant the set off claimed by the assessee if admissible. Ground No. 2 of ITA No. 6128/Del/2014, A.Y. 2009-10 Revenue s Appeal AND Ground No. 12 of ITA No. 3125/Del/2017, A.Y. 2010-11, 26. Ld. DR for the revenue challenged the impugned deletion of addition of ₹ 12,83,663/- and ₹ 9,90,383/- for A.Y. 2009-10 and 2010-11 respectively by the Ld. CIT(A) by relying on the order passed by the Tribunal. However, Ld. AR for the taxpayer brought to the notice of the bench that this issue has also been decided by the Tribunal in taxpayer s own case in A.Y. 2009-10. This fact has not been controverted by the Ld. DR. 27. We have perused the order of the Co-ordinate Bench of Tribunal passed in assessee s own case bearing ITA No. 2946/Del./2014 for A.Y. 2008-09 in favour of the taxpayer by upholding the order passed by Ld. CIT(A) by returning following findings : 21. The first issue raised by the Revenue vide Ground of appeal No.1 is against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of recognizing the value of stock at the close of the year i.e as per AS-2 of Accounting Standard and the stock or net realizable value, whichever is less, the disallowance on the basis of surmises is not permissible. Hence, we find no scope to interfere into the findings returned by Ld. CIT(A) and accordingly, aforesaid grounds in A.Y. 2009-10 and A.Y. 2010-11 raised by the Revenue are dismissed. Ground. No. 1 of ITA No. 6128/Del/2014, A.Y. 2009-10 Revenue s Appeal AND Ground No. 10 11 of ITA No. 3125/Del/2017 A.Y. 2010-11 29. Revenue has challenged the deletion of addition of ₹ 5,31,75,329/- and ₹ 4,78,89,110/- for A.Y. 2009-10 and 2010- 11 respectively by Ld. CIT(A) made by the AO on account of advertising and publicity expenses by treating the same as revenue in nature. Ld. AR for the assessee contended that this issue has also been decided in favour of the taxpayer by the tribunal in taxpayer s own case for A.Y. 2008-09 in ITA No. 2415/Del/2014 and this fact has not been controverted by the Ld. DR. 30. We have perused the order passed by the Co-ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OT 9 (Delhi), which was upheld by the Hon ble Delhi High Court wherein the advertisement expenses were treated as revenue expenses. The CIT(A) applied the said ratio also and allowed the claim of the assessee. 28. The Ld. DR for the Revenue pointed out that in Assessment Year 2007- 08, the disallowance was made in the hands of the assessee on account of TP adjustment whereas in the present case, the aforesaid disallowance was made u/s 37(1) of the Act hence, the decision of Tribunal for the preceding year is not binding. 29. The Ld.AR for the assessee pointed out that the issue raised was whether any adhoc disallowance can be made in the hands of the assessee out of advertisement and publicity expenses which had been struck down by the Hon ble Delhi High Court in the case of Nestle India Ltd. vs DCIT (supra). 30. We have heard the rival contentions and perused the record. The assessee was engaged in the trading of world renowned tyres of cars and the expenditure made by the assessee benefitted its business in India. The issue which arises vide Ground No.2 raised by the Revenue is against the allowance of particular expenditure or its part disallowance as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Chandulal Keshavlal 38 ITR 601, had observed as under:- in deciding whether a payment of money is a deductible expenditure, one has to take into consideration questions of commercial experience and principle of ordinary commercial trading. Another test is whether the transaction is properly entered into as a part of the Assessee legitimate commercial undertaking in order to facilitate the carrying on of its business and it is immaterial that the third party also benefits thereby ..; 33. Further, the Delhi Tribunal of ITAT in Nestle India Ltd. vs DCIT 111 TTJ 498 (Del. Trib.) had held as under:- 22 .. The expenditure incurred by the Assessee company on advertisement/sales promotion of some Nestle Products in India may give rise to certain benefit to Nestle SA, but this cannot be a ground to disallow the claim of the Assessee, once it is established that the expenditure in question has been incurred by the Assessee for the purpose of business of the Assessee in as much as the expenditure by the Assessee on advertisement/sales promotion has direct nexus with the earning of income by the Assessee. The appeal of the Revenue against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) have erred in allowing the depreciation on the license fee paid towards computer software @ 25% as against 60% . So, AO is directed to grant depreciation @ 60% on the license fee paid to Oracle by clubbing the said payment with computer and software. So, Ground No. 2.2 of ITA No. 3167/Del/2017, A.Y. 2010-11 raised by the taxpayer is allowed. Ground No. 2.4 of ITA No. 3167/Del/2017, A.Y. 2010-11 Taxpayer s Appeal 34. Ld. AR for the taxpayer contended that AO has not given the full credit for tax deducted at source (TDS) and self-assessment tax deposited while computing the tax demand. We are of the considered view that when taxpayer has brought on record the evidence for deducting the TDS and self tax deposited while computing the tax demand the AO is directed to verify the facts and to provide full credit of TDS and self-assessment tax deposited by the taxpayer in its computation of income. Consequently, Ground No. 2.4 ITA No. 3167/Del/2017, A.Y. 2010-11, Taxpayer s Appeal is determined in favour of the assessee. TRANSFER PRICING ISSUES Ground No. 3.1 to 3.8 of ITA No. 5774/Del/2014, Taxpayer s Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entertaining the additional ground raised by the taxpayer is concerned again, we are of the considered view that for complete appreciation of facts on record and deciding the issue in controversy additional ground raised, which has arisen only after the order passed by the tribunal in A.Y. 2010-11 in taxpayer s own case in the similar set of facts and circumstances, is allowed. So, both the applications moved by taxpayer are allowed without prejudice to the merits of this case. 39. So far as Ground No. 3.1 to 3.8 and additional Ground No. 3.9 raised by taxpayer in A.Y. 2009-10 are concerned the taxpayer has brought on record additional evidence giving working of adjustment on the basis of RPM analysis by following order passed by CIT(A) in A.Y. 2010-11 by relying upon decision of Soni Ericsson Mobile Pvt. Ltd. 374ITR 118, rendered by Hon ble Delhi High Court which need to be examined by the TPO. Since, revenue is required to follow the rule of consistency in the identical facts and circumstances of the case these grounds are remitted back to the TPO to decide afresh in view of additional evidence brought on record by the assessee by following order passed by Ld. CIT(A) in tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate method which are as under :- I have considered the findings of the AO, written submission and oral arguments of the Ld. AR carefully. From the facts of the case it is evident the appellant is entering huge AMP expenditure which will definitely lead to strengthening brand building namely Michelin India owned by the AE. I am not going into the question as to whether AMP expenditure can be considered as international transaction as per the decision of Hon ble Delhi High Court in various decision such as Whirlpool India (ITA No. 228/2015). I am relying on the decision on the jurisdictional High Court in the case of Sony Eracssion Mobile Pvt. Ltd. cited at 374/14- 12-11 where Hon ble High Court has held that gross profit margin should be computed after including AMP expenditure when RPM is considered as most appropriate method. In Present case also RPM is considered as the most appropriate method for import segment for resale. Accordingly the decision of Hon Delhi High Court in the present case will apply. The relevant portion of High Court is reproduced as under:- However, it would be wrong to assert and accept that gross profit margins would not inevit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it is held that gross profit margin should be computed after including AMP expenditure and RPM is considered as the most appropriate method for import segment for resale. So far as question of rejecting Brightline test (BLT) by the Ld. CIT(A) in A.Y. 2010-11 is concerned it has been rejected in a number of judgments by the Hon ble High Courts on the ground that brightline test has no statutory mandate for benchmarking AMP expenses. 45. So, we are of the considered view that there is no scope to interfere in the finding returned by Ld. CIT(A) by following the decision rendered by Jurisdictional High Court in case of Soni Ericsson Moble Pvt. Ltd. (supra). However, we are of the considered view that as discussed in the preceding para outward freight in India except the freight for import of material distributed be not considered for adjustment as it is not operating from transaction perspective. So Ground No. 1 to 9 raised by the revenue in ITA No. 3125/Del/2017 of A.Y. 2010-11 are dismissed. 46. In view of what has been discussed above appeal filed by the assessee for A.Y. 2009-10 and 2010-11 are partly allowed for statistical purposes and appeal filed by the revenue for ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
