TMI Blog2021 (3) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the expenditure is only in the nature of reimbursement of cost to HUL. It had not resulted in any income to the HUL. Therefore, in the absence of income in the hands of the payee, the question of deduction of tax at source does not arise having regard to the ratio of the judgement in the case of CIT vs. Siemens Aktiongesellschaft [ 2008 (11) TMI 74 - BOMBAY HIGH COURT] as held the reimbursement of expenses cannot be regarded as a revenue receipt and as the assessee received nothing in excess of the actual expenditure incurred. Therefore, the question of deduction of tax at source does not arise. Thus neither the impugned expenditure falls within the ambit of managerial services as defined in section 9(1)(vii) of the Act nor liable to deduct tax at source u/s 194J of the Act. Therefore, the Assessing Officer was not justified in invoking the provisions of section 40(a)(ia) of the Act to disallow the A M expenses. TDS u/s 194J - Addition on account of management cost - AO disallowed the expenditure for non-deduction of tax at source treating the same as expenditure under the provision of managerial services - HELD THAT:- Mere reimbursement of salary of employees d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PER INTURI RAMA RAO, AM: This is an appeal filed by the assessee directed against the final assessment order u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 ( the Act for short) of the Asstt. Commissioner of Income Tax, Circle-11(1), Pune ( the Assessing Officer for short) dated 29.10.2012 for the assessment year 2008-09. 2. The appellant raised the following grounds of appeal :- The appellant objects to the order dated 29 October 2012 passed under section 143(3) r.w.s. 144(C) of the Income-tax Act, 1961 ( the Act ) by the Assistant Commissioner of Income Tax, Circle 11(1), Pune [ ACIT or AO ] following the directions issued by the Dispute Resolution Panel ( DRP ) in respect of the aforesaid assessment year on the following among other grounds: 1. Disallowance of Advertising and Marketing ( A M ) expenses a. The learned ACIT erred in disallowing A M expenses of ₹ 2,47,13,051/- reimbursed to Hindustan Unilever Limited ( HUL ). The learned DRP erred in confirming the same. b. The learned ACIT / DRP erred in holding that HUL was managing directly or indirectly the advertisement network for the appellant thereby rendering managerial servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any directions in respect of the same. e. The learned ACIT / DRP erred in not appreciating that the selling discount given to HUL was based on the sales achieved by HUL being the appellant s largest customer and not for any services rendered by HUL. f. The learned ACIT / DRP erred in not considering the submissions of the appellant / documentary evidence filed by the appellant in the correct perspective. 4. Disallowance incorrectly made under section 40(a)(ia) of the Act a. Without prejudice to the above grounds of appeal, the learned ACIT erred in disallowing the A M expenses / management cost reimbursed to HUL and selling discount given to HUL under section 40(a)(ia) of the Act. The learned DRP erred in confirming the same. b. The learned ACIT/DRP erred in not appreciating that: i. the above reimbursement made /discount given to HUL were duly taken into account by HUL in computing its total income in the return of income furnished under section 139 of the Act and tax due on the income declared in the return of income filed had also been paid by HUL; ii. in terms of the amendment to section 40(a)(ia) of the Act made by the Finance Act, 2012, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing an arbitrary and an unspecified method not prescribed in Rule 10B of the Income-tax Rules, 1962 to compute the arm s length price of any such alleged international transaction. 6. Incorrect adjustment on account of refund not received a. The learned ACIT erred in making an adjustment of ₹ 82,12,434/-, on account of refund shown as issued to the appellant pursuant to the intimation dated 18 March 2010 issued under section 143(1) of the Act, while computing the demand payable by the appellant. b. The learned ACIT erred in not appreciating that the appellant had not received either the aforesaid intimation or refund and hence the question of making an adjustment on account of the same while computing the demand payable by the appellant did not arise. 7. Incorrect levy of interest under section 234D of the Act a. The learned ACIT erred in levying interest of ₹ 12,72,920/- under section 234D of the Act. b. The learned ACIT erred in not appreciating that as no refund had been received by the appellant for the aforesaid assessment year, no interest could be charged under section 234D of the Act. 8. Initiation of penalty proceedings under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method for the purpose of benchmarking the international transactions of finished goods with its foreign AE i.e. Kimberly Clark Asia Pacific Pte Limited. As regards to the payment of royalty and license fee, the appellant company applied Comparable Uncontrolled Price (CUP) method as the most appropriate method for the purpose of benchmarking the international transactions with its foreign AE i.e. Kimberly Clark Corporation USA. It was further claimed that the appellant company s operating profit margin was comparable with other companies which are engaged in the similar line of business. 5. Considering the above, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for the purpose of benchmarking the above international transactions reported by the appellant company in Form No.3CEB. The TPO vide order dated 28.10.2011 passed u/s 92CA(3) of the Act suggested the TP adjustments on account of Advertising Marketing (A M) expenses of ₹ 32,63,66,267/-. While doing so, the TPO observed that the expenditure incurred on account of advertisement spend of ₹ 38,62,38,410/- which works out to 26.44% of the sales. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the proposed approach would tantamount to disallowance of excess A M expenditure which is a domestic expense towards third parties and hence, is outside the purview of section 92 of the Act. In view of the same, submitted that the said transaction is out of the jurisdiction of TPO. that it is a manufacturer and not a distributor and being a 50:50 Joint venture of AE and Hindustan Unilever Ltd., the JV partner would not have agreed to bear A M expenses which would result in development of brand owned by other JV partner. That the comparables selected by TPO is not appropriate and the comparable would have functional similarity. That the bright line concept of routine vs. non-routine expenses in the case of creation of marketing intangible is not applicable in the case. That if the AE has derived benefit from benefit from the A M expenditure incurred by the assessee, then the evidence of the tangible benefits derived by the AE should have been given. The onus is on the revenue to provide evidence supporting the tangible benefits derived by the AE while arriving at the aforesaid conclusion. In this regard reliance is placed on the order of Hon ble ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d distribution network of HUL. The HUL settled the dues of redistribution stockists and claimed the reimbursement from the appellant company. It is contended that the expenditure was incurred wholly and exclusively for the purpose of promoting the sales of its products and since it is only in the nature of reimbursement of cost, no tax was required to be deducted on the said payments. 11. Similarly, as regards to the disallowance of management cost of ₹ 1,54,77,351/-, it was submitted that the expenditure represents the reimbursement of management cost to the HUL towards the deputation of the Senior Managers to the appellant company. The salary and other benefits of these employees deputed to the appellant company were paid by the HUL and the same were reimbursed by the appellant company. Since it is only in the nature of the reimbursement of expenditure, the payment does not attract the provisions of section 194J of the Act. 12. As regards to the disallowance of selling discount of ₹ 3,25,68,847/-, it is submitted that HUL is a distributor of the products of the appellant company and the discount was given to the HUL. It is further submitted that no remuneration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, the ld. CIT-DR submitted that the details of the expenditure were not filed before the Assessing Officer and, therefore, the Assessing Officer could not come to a conclusion as to the allowability or otherwise of such expenditure. He further submitted that the services rendered by the HUL are in the nature of managerial services and, therefore, liable to tax deduction at source under the provisions of section 194J of the Act. He placed reliance on the orders of the lower authorities i.e. Assessing Officer/TPO and the Hon ble DRP. 16. We heard the rival submissions and perused the material on record. The details of the A M expenses of ₹ 2,47,13,051/- were furnished by the appellant company. It is submitted that these expenses are incurred on visibility schemes through various channels and this expenditure was paid to HUL and the same were reflected as payments made to specified person u/s 40(a)(2b) of the Act. This expenditure was incurred on running of various trade promotion schemes which is designed and controlled by the appellant company. However, these schemes were administered through the selling and distribution network of the HUL. The claims made for selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Jurisdictional High Court (supra) which reads as under :- 33. That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gain-fully refer to the judgment of a Division Bench of the Delhi High Court in CIT v. Industrial Engineering Projects P. Ltd. [1993] 202 ITR 1014. The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493 (Cal). The learned Division Bench was answering the following question : Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company) from M/s. Dun-lop Rubber Co. (India) Ltd. (Indian company) as per agreement dated July 29, 1957, constituted income assessable to tax ? On considering the issue the learned Bench noted that the Tribunal was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the HUL to the appellant company. It is nature of reimbursement of the expenditure to the HUL and the HUL in turn had not made any profit and gain and thus it was submitted that the expenditure had not incurred towards provisions of receipt of any managerial services from HUL. Without prejudice to this argument, it is contended that since the expenditure is only a reimbursement in the hands of the HUL, no TDS is required to be made. Finally, he submitted that since the payee has already paid tax on said sum, the benefit of second proviso to section 40(a)(ia) of the Act should be granted. He relied upon the case laws cited (supra) in respect of the ground of appeal no.1. 21. On the other hand, the ld. CIT-DR submitted that the payment was made towards receipt of the managerial services and, therefore, this is liable to the TDS u/s 194J of the Act and justified the action of the Assessing Officer invoking the provisions of section 40(a)(ia) of the Act. 22. We heard the rival submissions and perused the material on record. There is no material on record to show that the HUL had provided any services like technical or managerial in nature to the appellant company. Mere rei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the material on record. The expenditure in question was incurred towards the selling discount given to the distributor stockists. The relationship between the appellant and the distributor was that of the principal to principal. No services were rendered by the distributor to the appellant company and what was offered to the distributor was discount under the sales promotion schemes and, therefore, it cannot be said that the discount is in the nature of commission within the meaning of Explanation 1 to section 194H of the Act as held by the Hon ble Jurisdictional High Court in the case of Intervet India Pvt. Ltd., 364 ITR 238 and CIT vs. Piramal Healthcare, 230 Taxman 505. For ready reference, the relevant para 8 of the decision of the Hon ble Jurisdictional High Court in the case of Piramal Healthcare (supra) is extracted hereunder :- 8. The submission on behalf of the Revenue that this a mere device to evade the obligation to deduct tax at source is a mere conjecture as it is not supported by any evidence and/or facts on record. Once it is accepted/admitted position that there is sale of drugs by the respondent to M/s.Zivon and no amount is paid by the respondent to M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted by the Finance Act, 2012 should be given. Since these two contentions were already dealt with by us in favour of the appellant while deciding the ground of appeal nos.1 to 3, therefore, it becomes infructuous. 29. The ground of appeal no.5 challenges the addition on account of Transfer Pricing adjustment of ₹ 32,63,66,267/- in respect of A M expenses incurred by the appellant . The TPO as well as the Hon ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A M expenses incurred by the AE. In the process, the TPO as well as the Hon ble DRP presumed that the benefit of this expenditure had enured to its foreign AE. 30. Before us, ld. Sr. Counsel submitted that the TPO/DRP ought not to have recharacterized the A M expenses by itself as international transaction. He further argued that the inference of benefit to its foreign AE is purely based on the surmises and conjectures and there is no explicit of arrangement or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant challenges the TP adjustments made by the TPO/Assessing Officer as confirmed by the Hon ble DRP on account of A M expenses. The TPO inferred the existence of international transactions by deducing the difference between the expenditure incurred by the appellant company on account of A M expenses and expenditure incurred by the comparables chosen by the TPO. The lower authorities had inferred that the benefit had enured its foreign AE on account of excesses expenditure incurred by the assessee on account of A M. The main contention advanced by the appellant is that the existence of international transaction cannot be inferred by the TPO in the absence of any actual transactions and the presumption by the lower authorities that the benefit had enured to its foreign AE is merely based on the conjectures. In the absence of any agreement between the assessee and its foreign AE to incur any A M expenses to the benefit of its foreign AE, the presumption of existence of international transaction is incorrect. The identical issue was dealt with by the Co-ordinate Bench of the Tribunal, Bangalore Bench in the case of Essilor India Pvt. Ltd. vs. DCIT (supra) which is authored b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon ble High Court had placed reliance on the decisions of the Hon ble Apex Court in the cases of CIT vs. B.C.Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. Vs. CIT (307 ITR 75). The Hon ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd (supra) and Whirlpool of India (P) Ltd.,(supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch Lomb Eyecare (India) (P) Ltd.(supra) vide para 51 to 65 as under: 51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her words, for both the means part and the includes part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression acted in concert and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were acting in concert within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no persons acting in concert unle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction as he actually finds the same. 62. In the present case, the mere fact that B L, USA through B L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee- company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction with reference to material on record. (4) The bright line test method cannot be used either to determine the existence of international transaction or arm s length price of international transaction. (5) Merely because, on account of expenditure incurred by an assessee, third party also benefits thereby, expenditure cannot be disallowed. Keeping in view the above legal principles, we proceed to decide the issue on hand. 35. The Revenue had failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE and apparently there is no material referred to by the lower authorities to show that the assessee had incurred the expenditure in advertising and marketing expenses in order to promote the brand value of the foreign AE. The reference made in clause 15 of the agreement is misplaced as rightly submitted by the ld. Sr. Counsel, the incurring of expenditure on advertising is only with regard to the protection of patent and trade mark of the AE and not to promote brand value of foreign AE. In the absence of existence of international transaction, the question of determination of arm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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