TMI Blog2020 (2) TMI 1487X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, Assets employed and Risks assumed (FAR) analysis and other aspects of determination of ALP does not require any consideration. Therefore the addition made on account of determination of ALP of AMP expenses in AY 2011-12 to 2014-15 is directed to be deleted. We are of the view that the expenditure in question cannot be regarded as capital in nature. Even the TPO has considered these expenses as routine selling expenses. From the nature of these expenses which are set out in Paragraph-5 of this order, it can be seen that they are routine selling expenses and cannot be regarded as capital expenditure. The decision of the Delhi High Court in the case of Spice Distribution Ltd.. [ 2014 (9) TMI 732 - DELHI HIGH COURT] supports the plea of the Assessee in this regard. The order of the DRP which does not give any reason for holding the aforesaid expenditure to be capital expenditure is therefore reversed and the addition made in this regard is directed to be deleted. Disallowance of expenses incurred in earning exempt income u/s 14A - submission of the ld. counsel for the assessee was that the assessee incurred no expenses for earning dividend income - HELD THAT:- We are of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. The DRP however, confirmed the order of the AO without examining the claim of the assessee by merely observing that it would be difficult to draw inference that the borrowed funds were not used to make investments which yielded dividend income. This inference of the DRP is contrary to the law laid down by the Hon ble Karnataka High Court in the case of Micro labs India Pvt.Ltd.(supra). Since facts having been properly examine in respect of the disallowance u/s 14A of the Act, both Rule under 8D2(ii) and (iii) of the Rules we set aside the order of DRP/AO to re-consider the issue in the light of the above discussion. Disallowance marked to market losses - HELD THAT:- We are of the view that the claim had to be allowed. The DRP has rejected the claim of the assessee for the assessment year 2013-14 and in doing so seems to have placed reliance on the decision of the ITAT B Bench in the case of M/s Shankara Infrastructure [ 2015 (2) TMI 401 - ITAT BANGALORE] . On perusal of the aforesaid decision, we find in that case, the forward contracts were entered into by the assessee without any reference to the transactions connected with the business of the assessee and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,176(B)/2014 & C.O No.39(B)/2016 in IT(TP)A No190(B)/2014 - - - Dated:- 6-2-2020 - SHRI N.V.VASUDEVAN, VICE PRESIDENT AND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER For the Appellant : Shri S. Ramasubramanian, CA For the Revenue : Shri Pradeep Kumar, CIT ORDER PER SHRI N.V.VASUDEVAN, VICE PRESIDENT : Appeal in IT(TP)A No.542(B)/2016 is by the revenue and IT(TP)A No.54(B)/2016 is by the assessee. Both these appeals are directed against the final order of assessment dated 29-01-2016 passed by the DCIT, Circle2(1)(2), Bangalore u/s 143(3) r.w.s.144C of the Income Tax Act, 1961 (Act) in relation to assessment year 2011-12. IT(TP) No.358(B)/2017 is an appeal by the assessee against the final order of assessment dated 20-01-2017 passed by the ACIT, Circle-2(1)(2), Bangalore u/s 143(3) r.w.s.144C of the Act in relation to assessment year 2012-13. IT(TP)A No.2905(B)/2017 is an appeal by the assessee against the final assessment order dated 06-10-2017 passed by the ACIT, Circle -2(1)(1), Bangalore, u/s.143(3) read with Sec.144C of the Act relating to assessment year 2013-14. IT(TP)A No.3328(B)/2018 is an appeal by the assessee against the final assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s case under the following facts and circumstances. The assessee is engaged in the business of buying and selling of ophthalmic lenses and it also process lenses. The assessee is a wholly owned subsidiary of M/s Essilor International SA, France and was therefore an Associated Enterprise(AE). There is no dispute that in so far as the business of trading in ophthalmic lenses of the AE product by the assessee in India it was an international transaction. As per the provisions of Sec.92 of the Act, income from such transactions had to be determined having regard to ALP. The Transfer Pricing Officer (TPO)/Assessing Officer (AO) accepted the purchase price from the AE to be at arm s length (ALP). In the course of proceedings before the TPO, the TPO noticed that the assessee had incurred expenditure on account of advertisement and sales promotion to the tune of ₹ 21,47,74,504/- which was about 10.12% of its revenue of ₹ 212,29,27,069/-. He was of the view that incurring of such high quantum of expenditure compared to other traders in ophthalmic lenses was unusual. The TPO found that one company by name M/s Techtran Polylenses Ltd., which was also in the business of tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of selling expenses and has been incurred by the taxpayer for advertisement and market promotion. Co-operative advertisement 11,054,200 Accepted as selling expenses. Entertainment 556,301 No entity who is just a buyer and seller of products would incur such expenditure to organise conventions. The taxpayer has not furnished any supporting details not has give any justification for incurring such expenditure. Therefore, the TPO is of the view that such expenditure cannot be considered to be of the nature of selling expenses and has been incurred by the taxpayer for advertisement and market promotion. Loyalty Programme for Opticians 46,222,084 The taxpayer has not furnished any supporting evidences, breakup of the heads of expenses a their exact nature. The taxpayer has also not justified the incurring of such expenditure when it is mainly a trader. At Para 2.0 of the TP document, it is clearly stated that the taxpayer is engaged in buying and selling of lenses. No simple trader would incur such huge expenditure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for Advertisement and Total Expenditure on Account of Advertisement and Market promotion as per the TPO after considering the taxpayer's submission (₹ 84,558,779+99,179,703) 183,738,482 8.1.2 Therefore, looking into the nature of expenses incurred by the taxpayer, the TPO has identified an amount of ₹ 183,738,482/- as AMP expenditure as against ₹ 214,774,054/- debited under this classification of expenses in the audited financials of the taxpayer. The balance expenditure being of the nature of selling expenses. 8.2Therefore, excess expenditure incurred by the taxpayer over the brightline of such expenditure is computed by the TPO as under: AMP Expenses 183,738,482 Total Revenue 2,175,415,877 AMP/ OR 8.45% SPA/Sales of the tax payer (a) 8.45% SPA/Sales of the comparable (b) 8.45 1.93% % 1.93% Excess SPA expenses after application of bright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment u/s 92CA 141,837,115 Mark-up thereon 15,077,285 Total adjustment 156,914,400 7. The assessee filed objections before the DRP against the aforesaid proposal of the TPO which was incorporated by the AO in the draft order of assessment. The DRP deleted the addition made by the O by rendering the conclusion that the incurring of marketing and advertisement expenses was not an international transaction. In doing so, the DRP followed the decision of the Hon ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd Vs CIT 381 ITR 117(Del.) and also in the case of M/s Sony Ericsson Mobile Communications Pvt.Ltd. Vs CIT 374 ITR 118(Del.). The DRP however held that a sum of ₹ 9.91 Crores which was incurred on media advertisemet and brand ambassadors are in the nature of capital expenditure which result in enduring benefit in the form of creating the brand of the Assessee and therefore it cannot be allowed as revenue expenditure. To this extent the DRP directed the AO to disallow expenditure and add the same to the total income of the Assessee. 8. Aggrieved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the order of the DRP holding that out of the AMP expenditure a sum of ₹ 9.91 Crores which was incurred on media advertisement and brand ambassadors are in the nature of capital expenditure which result in enduring benefit in the form of creating the brand of the Assessee and therefore it cannot be allowed as revenue expenditure, the Assessee has preferred appeal and in Assessee s appeal Gr.No.2 to 4 deal with this aspect of the grievance of the revenue. It is the plea of the Assessee in Gr.No.4 that the DRP did not confront the Assessee with its decision to disallow ₹ 9.91Crores out of AMP expenses as capital expenditure and did not allow opportunity of being heard to the Assessee. 10. So far as in assessment year 2012-13, 2013-14 and 2014-15 similar addition was made by the TPO in these assessment years. The DRP however, confirmed the orders of the TPO in all these assessment years. It may also be mentioned that in assessment year 2013-14, the TPO was apprised of the fact that on identical issue the Hon ble ITAT in assessee s own case for assessment year 2009-10 and 2011-12 in IT(TP)A No.29/B/2014 227/B/2015 upheld the order of DRP in those years, whereby it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of determination of ALP of AMP expenses and those reasons were the same as were given for making similar addition in assessment year 2011-12 which is also not been accepted by the Tribunal and therefore, those reasons are not being set out in this order. The DRP in all these year accepted the stand taken by the TPO and sustained the addition made on set off of determination of ALP on account of AMP expenses. 11. Aggrieved by the decision of the revenue authorities in assessment year 2012-13, 2013-14 and 2014-15 the assessee is in appeal before the Tribunal. There is a a delay of about 3 days in filing of this appeal by the assessee for assessment year 2013-14 which has been stated in an affidavit fileld by the Director before the Tribunal to be due to the absence of Shri J. Shivakumar, Director of the assessee, as he was on official travel. We are of the view that the delay is very nominal and has to be condoned accepting the reason given in the affidavit. Accordingly, the delay in filing this appeal is condoned. 12. We have heard the submissions of the learned counsel for the assessee as well as the ld.DR. The first aspect which was brought tour notice by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed. 13. The ld. counsel for the assessee pointed out that none of the reasons given by the TPO in the order for assessment year 2013-14, for not following decision of the ITAT can be sustained. In this regard, the ld. counsel brought to our notice the facts which were highlighted by the assessee before the DRP. 1. With regard to the stand of the TPO that as per the Distribution Agreement with M/s. Chemiglas Corp Ltd, Korea the Assessee was under obligation to promote the brand of the foreign AE, it was pointed out that the assessee never used the trade mark/brand name of Chemiglas in any of its media advertisement. Secondly the TPO s case is that the AMP expenses p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual property which are specifically granted by supplier (Clause 8.6) It was submitted that the above clauses in the agreement do not in any way suggest that assessee is promoting the sole interest of the Supplier through an obligation to ii advertising and promote the brand name of the Supplier. In any case, the assessee has used the trademarks/brand name belonging to Chemiglas in media advertisement. Therefore, the issue of promoting the brand name of Chemiglas is non-existent. 4. On the aspect of reference to BEPS report by the TPO, it was submitted that BEPS report cannot be preferred over the judicial decisions which binding on the TPO. Even otherwise, the BEPS report deals with a case where there is a divergence between the written agreement and the conduct of the associate enterprises. It states that when there are material differences between the contractual terms and the conduct of the associate enterprises in their relations with one another, the functions they actually perform, the assets they actually use, and the risk they actually assume, the ultimate determination should be based on the factual substance and the actual transactions. It was submitted that when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uzuki s case, Sony Ericsson s case and assessee s own case before the Tribunal. These arguments have been dealt with in an elaborate manner by the court and the Tribunal and the contentions of the revenue have been rejected. The assessee relies on the same. 14. The learned counsel highlighted the fact that the DRP however, upheld the order of AO without dealing with various contentions to be verified by the assessee. He submitted that the order of the Tribunal for assessment year 2009-10 and 2010-11 should be followed and it should be held that there was no international transaction and consequently, there is no requirement for determination of ALP. 15. The ld.DR reiterates the stand of the revenue as contained in the order of the TPO for the assessment year 2013-14. 16. We have given our careful consideration to the rival submissions. The Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd. (MSIL) v. Addl. CIT, TPO [2010] 328 ITR 210 (Delhi), in the case of a licensed manufacturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly by MSIL. The co-branded trade mark Maruti-Suzuki was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the co-branded trade mark MarutiSuzuki on the vehicles. In the assessment of MSIL for assessment year 200506, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of ₹ 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion expenses incurred by MSIL for SMC. On the above facts, the Hon ble Delhi High Court held as follows: . when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has placed reliance on decision of the Hon ble Delhi High Court in the case of CIT Vs. Spice Distribution Ltd., 374 ITR 30 (Delhi) wherein the Hon ble Delhi Court held that advertisement expenditure incurred by a person selling mobile hand-sets and other electronic items and accessories cannot be said to be capital expenditure. The learned DR relied on the order of the DRP. 21. After considering the rival submissions, we are of the view that the expenditure in question cannot be regarded as capita in nature. Even the TPO has considered these expenses as routine selling expenses. From the nature of these expenses which are set out in Paragraph-5 of this order, it can be seen that they are routine selling expenses and cannot be regarded as capital expenditure. The decision of the Delhi High Court in the case of Spice Distribution Ltd. (supra) supports the plea of the Assessee in this regard. The order of the DRP which does not give any reason for holding the aforesaid expenditure to be capital expenditure is therefore reversed and the addition made in this regard is directed to be deleted. 22. The next common issue that arises for consideration in all these appeals is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 24. As far as assessment year 2012-13 is concerned, the disallowance u/s 14A of the Act, the facts are that the assessee earned dividend income of ₹ 87,08,080/- which was claimed as exempt. The AO disallowed a sum of ₹ 2,39,19,152/- per the following details. In view of the above, the disallowance u/ 14A r.w.r.8D is worked out as below; A Total amount of direct interest/other expenses pertaining to tax exempt investments Nil B Total amount of indirect interest pertaining to tax exempt investments 77,10,866 AY: 12-13 AY 11-12 Average C Average amount of tax exempt 448,49,31,085 305,70,40,480 377,09,85,783 Investments D Average amount of total assets 679,54,92,909 468,80,33,198 574,17,63,054 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal with any of those submissions but preferred to uphold the order of the AO. As far as the disallowance u/s 8D(2)(iii) of the Rules is concerned, the facts are identical as the facts in assessment year 201112. The learned counsel for the Assessee has also filed a statement before us showing availability of own funds and the investments which actually yielded the dividend income. The same is placed on record. We are of the view that it will be just and proper to set aside the order of the DRP/AO in this regard and remand the issue for fresh consideration by the AO. As far as disallowance of expenses u/s 8D(2)(ii) of the Rules is concerned, the AO is directed to see the availability of own funds and also to see whether the borrowed funds on which interest was paid for the purpose of making investments that can yield dividend income. The AO is also directed to keep in mind the decision of the Hon ble Karnataka High Court in the case of M/s Micro Labs India Pvt.Ltd 383 ITR 490.(Kar.). In so far as the disallowance u/s 8D(2)(ii) of the Rules is concerned, the AO shall examine the disallowance afresh in the light of the directions given in this regard while deciding the identical groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FY 2012-13 Opening Balance 21,01,01,015 - ..... Add:Fresh Loan taken during the year year 42,80,99,785 - - Total 63,82 ,00, 800 _ - Less: Repaid during the year 21,01,01,015 - Closing Balance 42,80,99,785 - 42,80,99,785 Investments Particulars Amount As on 01.04.2011 2,78,21,64,568 Investments made during the year 1,29,97,82,000 As on 31.03.2012 4,08,19,46,568 As on 01.04.2012 4,08,19,46,568 Investments made during the year 15,28,05,109 As on 31.03.2013 4,23,47,51,677 (Amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B Total amount of indirect interest pertaining to tax exempt investments 4,50,20,135 AY 2014-15 AY 2015-16 Average C Average amount of tax exempt investments 423,47,51,677 428,40,63,487 425,94,07,582 D Average amount of total assts 692,28,57,496 741,76,05,228 717,02,31,362 E Proportionate indirect interest to be disallowed B x C D 2,67,43,782 F 0.5% of average amount of tax exempt investments 2,12,97,038 G Total disallowance attracted u/s14A A + E + F 4,80,40,820 Less 14A disallowance already disallowed by the assessee itself in its computation of income. 11,95,245 Disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward contract is allowable. The Assessee also placed reliance on the decision Supreme Court in CIT Vs Woodward Governor India Pvt.Ltd.(312) 254. It was held therein that the loss suffered by an assessee on account of the fluctuation in the rate of foreign exchange as on the date of balance sheet is an item of expenditure u/s 37(1) of the Act. The Assessee pointed out as to how certain tests were laid down to decided the allowability of such losses and as to how the Assessee s case is also similar to the facts of the case decided by the Hon ble Supreme Court. The said table is given below: Tests laid down by Hon ble Supreme Court Assessee Response 1 Whether the system of accounting followed is mercantile system Yes 2 Whether the same system is followed by assessee from the very beginning and if there was change in the system, whether it was bonafide? Yes The assesee is consistently following this system of accounting for numbers years. The question of change does not arise as it is following this system consistentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otional loss. It was submitted that the courts have consistently held that the loss due to foreign exchange fluctuation in respect of outstanding contracts is not a notional loss. In the case of Oriental Motors the issue was whether the disputed claim can be allowed as a deduction. This case has no relevance to the facts of the present case as the issue is not one of the claim for disputed items. As regards the reliance on Instruction no. 3/2010 issued by CBDT is concerned, it was submitted that these instructions have not been followed by the various High Courts and Supreme Court. It was submitted that the opinion expressed by CBDT in Circular No. 3/2010 is not binding on the Assessee and is contrary to the case laws. The courts and the Tribunals have consistently held that the marked to market losses are not contingent in nature and not motioned. Moreover, this circular is with reference to the valuation of financial instruments and not with reference to forward contracts or hedge against exchange fluctuations. Therefore, it was prayed that a sum of ₹ 35,40,261 be allowed as a revenue loss. 35. In assessment year 2013-14, the fact are identical but the only difference is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as foreign exchange loss by holding it to be capital in nature. Before the DRP the assessee pleaded that all the foreign exchange loss was on account of transaction which were revenue in nature but the plea was not accepted by the DRP for want of proper details. The ld.counsl for the assessee made a prayer for remand of the issue to the AO to enable the assessee to file the required details so that the AO can decide the nature of the loss as to capital or revenue. The plea is accepted and the issue is set aside to the AO for fresh consideration after due opportunity to the assessee. 39. The last issue that arises for consideration in assessment year 2014-15 is disallowance u/s 43B of the Act on the ground that the sum disallowed u/s 43B of the Act were not paid on or before the due date for filing the return of income. The assessee pleaded before the DRP that a portion of the sum that was disallowed u/s 43B of the Act had been paid before the due date for filing the return of income, as is evident from by the details available in Form-3CD. The ld.counsel for the assessee prayed that the issue should be set aside to the AO so that the assessee can explain the correct date ..... X X X X Extracts X X X X X X X X Extracts X X X X
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