TMI Blog2021 (11) TMI 647X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure. If we go by the alternative arguments placed by the ld. Counsel, Mr. Deepak Chopra that if intensity approach is to be applied to determine the assessee s profitability, then assessee has earned a profit margin 15.70% as against PLI of the comparable determination by the TPO 4.36% and therefore, at the entity level profitability assessee s margin was far excess of the comparables and accordingly no adjustment on such transaction can be made. As regards the substantive AMP adjustment of applying residual profits split methods, it is incumbent upon the TPO firstly to combine profit from the so called international transaction of incurring of AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. The manner in which RSPM has been applied by the TPO cannot be held as same is consistent with Rule 10B of the Income Tax Rules. Accordingly, this ground raised by the assessee is allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving allocated the common expenses if there resulted in any consequential allocation of expenses to the eligible unit then the reduction of the 80IC claim would be limited to 30% of such expenses - We find force in this contention of the assessee given that this was the ninth year of such claim by the assessee in respect of such unit. As per the applicable provision of Section 80IC the deduction is 100% of the eligible profits for the first five years and 30% of the eligible profits for the balance five years. Thus if at all any reduction of the claim had to be made by the AO it has to be limited to 30% of such allocable expenses and no more. Seeking allowability of the education cess paid - HELD THAT:- Ergo, if cess is considered as part of surcharge, i.e., the additional surcharge on tax, then if income tax payable under the Act is not reckoned as allowable expenditure u/s.37. Ostensibly by this logic, the cess also cannot be held to be allowable business expenditure, because the cess is always calculated and paid on percentage of income tax payable and not actually incurred for the business or profession of assessee. In the context of 115JB Hon ble Calcutta High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and non-eligible units. (i). Ground No. 47 Against disallowance of loss owing to floods. (j). Ground No s. 48 and 49 Relating to applicability of interest under sections 234B/234C of the Act and initiation of penalty proceedings under section 271(1)(c) of the Act. 3. That apart, the assessee has also moved an application raising an additional ground regarding the allowability of education cess vide letter dated 23.07.2021. 4. However, the principle issue which arises in this appeal for consideration is the transfer pricing adjustment on account of AMP expenses. There are two other corporate tax issues, which would be addressed and dealt with separately. We propose to address the transfer pricing grounds first. Brief Facts and Background: 5. Briefly stated, the facts relevant to the issue under consideration are that the assessee is a subsidiary of PVM, Netherlands and started it operations in India in 1994. It is engaged in manufacturing and selling of variety of confectionary products from its factories in Tamil Nadu, Haryana and Uttarakhand. The assessee s products include Big Babool, Alpenliebe, Centre Fresh, Centre Fruit, Chloromint, Fruitella, Cofit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred by the Assessee vide directions dated 27.01.2021 and confirmed the additions / disallowances proposed in toto. 10. Consequently, the final assessment order dated 31.3.2021 was passed by the National e-Assessment Centre giving effect to the directions issued by the DRP. The present appeal emanates out of the said final assessment order. 11. The first issue raised in this appeal is the addition on account of transfer pricing adjustment of ₹ 135,52,80,000/- made by the Assessing Officer on account of AMP expenses. The principle issue raised in the appeal is that the incurring of AMP expenses by the assessee was not an international transaction within the meaning of section 92B of the Act. Various other grounds have also been raised in the appeal relating to this issue. However, whether there existed an international transaction is the core issue. 12. Mr. Deepak Chopra, Ld. Counsel for the assessee submitted that the issue of making transfer pricing adjustments in the assessee s case is a legacy issue and the assessee has been facing additions on this count since AY 2008-09. He submitted that the appeals of the assessee for the earlier years have been repeatedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra) Two rounds of litigation. Assessee is in the process of filing an appeal against the Final assessment Order before the Tribunal. 5. 2012-13 24.05.2017 Remanded to the file of the TPO for re-examination of the issue in the light of Sony Ericsson Mobile Communications India Pvt Ltd : (supra) Two rounds of litigation. Assessee is in the process of filing an appeal against the Final assessment Order before the Tribunal. 6. 2013-14 and 2014-15 - Pending with CIT(A) 7. 2015-16 11.08.2020 - Assessment quashed 8. 2016-17 - - Year under consideration - First Round - Appeal pending disposal before the ITAT. 13. Given the repeated remands by the Tribunal in the earlier years and the revenue towing the same line for making the AMP adjustment, with minor variations, we deem fit that, in the interest of justice and to bring a fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration, the genesis of the entire case of the revenue lay in the application of BLT and determination of excessive AMP expenses so as to make the TP adjustment. Further for the assessment year under consideration, the TPO while making the transfer pricing adjustment has made protective adjustment using BLT and simultaneously made a substantive adjustment by applying a concoctive version of the profit split method ( PSM ). It is further noticed that, even while applying the so called PSM, the genesis was still the BLT. From perusal of the impugned order, it is seen that on a reference made by the Assessing Officer for the determination of arm s length price (ALP) of the international transactions, the Transfer Pricing Officer has stated that the assessee had incurred AMP expenses amounting to ₹ 220,11,36,339/- and had also paid royalty of ₹ 25,39,25,025/- to its AE at varying rates depending on the products. Considering the Trademark License Agreement between the assessee and its AE, the TPO noticed that para 3 of the agreement provides for extensive support in marketing activity by the AE through its specialized brand teams. The TPO then referred to Para 10 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t BLT should be applied and any AMP expenditure incurred by the tax payer in excess of the expenditure incurred by the comparables should be considered as the expenditure incurred by the tax payer for the benefit of the parent AE and the corresponding adjustment should be made. The TPO further goes on to record that the Hon ble Delhi High Court in the case of Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has rejected the applicability of BLT, but since the Department has filed an SLP before the Hon ble Supreme Court, the primary contention of the Revenue continues to be BLT. Thus, by applying BLT, the TPO determined the amount of routine AMP expense and proposed transfer pricing adjustment on protective basis for a sum of ₹ 201.16 crores. In computing the above amount of transfer pricing adjustment, the TPO applied a mark-up of 15.81%, being weighted average of comparable companies rendering marketing support services. 17. The Ld. Counsel further submitted that having computed an adjustment applying the BLT, the TPO did not stop there and proceeded to work out the transfer pricing adjustment towards AMP expenses on a substantive bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that on this short ground alone the transfer pricing adjustment deserves to be deleted. He also submitted that, as can be evidenced from this computation alone would show that, the entire case of the Revenue hinges on the applicability of the BLT method and the determination of nonroutine expenses. This approach, he submitted is inconsistent with the applicable judicial precedents and the whole approach of the Revenue is erroneous. 20. Thereafter, the learned counsel for the assessee submitted that the assessee company had incurred expenditure on AMP to cater to the needs of the customers in the local market. Such AMP expenditure was neither incurred at the instance/ behest of overseas AE, nor was there any mutual agreement or understanding or arrangement as to allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by the assessee company for the purpose of its business. In absence of any understanding, arrangement, etc., it was submitted, no transaction or international transaction could be said to be involved with respect to such AMP expenditure incurred by the domestic enterprise, which may be covered within the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case. He placed reliance on the following passage from the decision of the Hon ble High Court of Delhi in Maruti Suzuki India Pvt. Ltd. (supra): 60 Even if the resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is any other transaction having a bearing on its profits, income or losses for a transaction there has to be two parties. Therefore for the purposes of the means part of clause (b) and the includes part of clause (c,) the revenue has to show that there exists an agreement or arrangement or understanding between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand SMC 61 Even if the word transaction to include arrangement , understanding or action in concert , whether formal or in writing , it still incumbent on the revenue to show the existence of an understanding or an arrangement or action in concert between MSIL and SMC as regards AMP spend for brand promotion. In other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wspapers, magazine etc. Perfetti India doesn t incur any expenditure to promote the Perfetti Brand or a product not sold in India. Perfetti India develops advertisements in local Indian languages; as required. The nature of advertisement varies depending upon factors such as the target audience, nature of product, etc. Due to the huge competition in the market, Perfetti India aims to make the advertisements appealing to Indian customers across different age groups and socio-economic backgrounds through humour and emotion with some story or an Indian film shoot associated with it. The Company undertakes campaigns to promote new and existing products in the Indian market via visual and audio media and print media to gain competitive advantage. TV advertisements/commercials and video clips in local cable networks and advertisements in local radio networks are produced in local languages to make a difference in the minds of the customer. The Company also gives print ads in newspapers and magazines on regular basis. The marketing team at Perfetti India decides the mix to be used for promotional activities. Perfetti India offers discounts and rebates to third party distributors to promo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess engineering (c) food law products assessments and (d) legal support in IP and other legal issues relating to trademark, design etc. He referred to Clause 4 of the preamble where it is provided that the licensee (Perfetti India) expresses interest in using the said trademarks, technology and knowhow for the manufacturing and sale of confectionary products in India. 27. He thereafter referred to clause 1 of the Agreement which provides that PVM Blx/Holding granted to the licensee, the license to manufacture and sell various kinds of confectionaries. PVM Blx/Holding also granted to the licensee, the license to use their technological, technical, marketing and commercial knowhow in the manufacturing, sales, advertisements and promotion of the products. The Agreement also provides that PVM Blx and PVM Holding also offered to the licensee their technicians, marketeers, sales men, in house legal counsel and any other experienced employees to assist the licensee in the manufacturing, sales, advertisement and promotion of the products and in solving any technological or commercial problem that may arise during the manufacturing and sales of the products. 28. He again referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lleged that the assessee was incurring the cost of developing new brands in India and was simultaneously enriching its AE by paying royalties. 31. He further submitted that the allegation of the TPO that vernacular version of the brand slogans developed in India such as Dimaag ki Batti jala de and Ekdum Bajedar were used by other jurisdictions, such as Sri Lanka and Bangladesh, which evidences that the assessee s AMP activities were controlled by the foreign AE, were devoid of any merit. First of all, usage of common brand slogans does not, in any manner, demonstrate that there existed an arrangement between the assessee and its AE qua AMP spent. Secondly, advertisement expenses and activities for locations such as Bangladesh and Sri Lanka is managed and borne by Perfetti entities native to those jurisdictions and not by the assessee. Therefore, the question of compensating the assessee does not arise as the cost of developing and airing the advertisement(s) in Sri Lanka and 24 Bangladesh was borne by Perfetti Bangladesh and Perfetti Sri Lanka respectively and not by the assessee. The advertisement content across all jurisdictions has to confirm to the brand guardrails set b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at no compensation was provided by the foreign AE s qua the AMP expenses and this conclusion of the TPO was patently perverse. 35. Mr. Chopra then referred to the various judgments of the Delhi High Court which have been followed by the coordinate Bench in the case of Pepsi Foods (supra). He submitted that the crux of the judgments is that merely on the basis of determining excessive AMP expenditure, it could not be inferred that there existed an arrangement or there was a direction by the foreign AE to incur advertising expenses in India. He referred to the following judgements of the Delhi High Court in support of the above contentions- Maruti Suzuki India Pvt. Ltd. v. CIT (381 ITR 117); CIT v. Whirlpool India Ltd. (381 ITR 154); Bausch Lomb Eyecare India Pvt. Ltc. V. ACIT (381 ITR 227); Honda Siel Power Products Ltd. v. Dy. CIT (237 Taxmann 304). 36. That apart, he also submitted that there arose patent errors in the order of the Dispute Resolution Panel (DRP). He drew our attention to the directions issued by the DRP dated 27.1.2021 in this regard. He also drew our attention to para s 3.1.3.5 and 3.1.3.6 (on page 7 of such directions) where the DRP, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE for incurring of the AMP expenses. He also submitted that although the profitability could vary from year to year owing to external factors like increase in prices of sugar etc. but overall the assessee has maintained a healthy profitability over the comparables. 38. As regard the substantive AMP adjustment by applying the Residual Profit Split method, he submitted that this issue was also considered by the coordinate Bench in the case of Pepsi Foods(supra) in Para 65 of its order. It was held by the coordinate Bench that in a proper application of RSPM method it was incumbent on the TPO to determine the combined profit from the so called international transaction of incurring of AMP expenses and then the TPO was required to split the combined profit in proportion to the relative contribution made by both entities. The order of the TPO reveals that he has not followed this methodology and as per his own admission, the assessee was earning super normal profits in India. Thus, he submitted that the approach of the TPO in applying the profit spit method is completely inconsistent with Rule 10B of the Rules. 39. The Ld. CIT DR, Ms. Meera Shrivastava, in opposition and to count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Yum Restaurants and Sony Ericson (for AY 2010-11) (supra) delivered in the year 2016 are posterior in time to the earlier judgments in the case of Maruti Suzuki and Whirlpool, etc., and, hence, the matter should be restored for a fresh determination. She also relied on a host of orders passed by the Tribunal restoring the matter to the file of TPO for a fresh determination of the question of the existence or otherwise of the international transaction of AMP expenses, post the above referred three sets of judgments by the Hon ble Delhi High Court - in favour of the Revenue (Sony Ericsson, the earlier judgment); in favour of the assessee (Whirlpool and Maruti etc.); and restoring the matter for a fresh determination (Rayban Sun Optics India Ltd., Toshiba India Pvt. Ltd., Bose Corporation (India), Yum Restaurant and Sony Ericsson, the later judgment) 41. Thereafter, the Ld. DR also took us through the Trademark and License Agreement dated April 1, 2010 and referred to various clauses cited in the order of the TPO to substantiate her argument that there existed an arrangement between the assessee and its AEs. She also referred to clause 10 of the said Agreement and the conclusion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se disposed of by the Sony Ericsson Mobile Communications India (P.) Ltd. (supra) judgment, at one stage of the proceedings on 30th October 2014 the appeal was delinked to be heard separately. 43. Secondly, the cases which were disposed of by the Sony Ericsson Mobile Communications India (P.) Ltd. (supra) judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessee s were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er any adjustment is justified on the facts of the case. The assessee company under the license granted and owned by AE is engaged in the manufacturing of variety of confectionary products and selling them as an independent entity in India. Though, we have discussed the various observations and finding of the ld. TPO, however the underline genesis is application of BLT and determination of excessive AMP expenses and consequently making transfer pricing adjustment. Though the TPO has made protective assessment using BLT, but at the same time has proceeded to make substantive adjustment in his own version of profit split method (PSM). While applying his version of PSM, he still was circumscribed by the BLT method while making the adjustment. The core reason of the ld. TPO was that, since the economic ownership of the brand and marketing tangible lies with AE, therefore, routine expenses has been incurred only for the benefit of the parent AE. Not only that, the AMP expenses are leading to enhancement of the brand value and the market penetration of these brands which needs to be compensated to the assessee for the same by the AE. The manner in which he has made the adjustment, we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 92F and sub-section (1) of section 92B of the Act, it could be inferred that Transfer Pricing regulations would be applicable to any transaction , being an arrangement, understanding or action in concert, inter alia, in the nature of purchase, sale or lease of tangible or intangible property or any other transaction having bearing on profits, income, losses or assets of such enterprises. 49. Thus, in order to be characterized as an international transaction , it would have to be demonstrated that the transaction arose pursuant to an arrangement, understanding or action in concert. A transaction , per se involves a bilateral arrangement or contract between the parties. Unilateral action by one of the parties, without any binding obligation, in absence of a mutual understanding or contract, could not be termed as a transaction . A unilateral action, therefore, could not be characterized as an international transaction invoking the provisions of Section 92 of the Act. 50. As culled out from the records and also explained by the ld. Counsel that the entire expenditure of AMP was only to cater to the needs of the customer in the local market of India. It was neith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anage the marketing functions and advertisement across the country based on the local requirements and sales. Here, in this case, it is to be kept in mind that the entire AMP expenditure has been incurred by the assessee company to promote the sale of its product in India as a full-fledged risk bearing manufacturing and solely responsible for its functions or activities and related returns. 52. The royalty has been paid on the ground of long term exclusive right to use the trademark in respect of manufacturing and sale of various kinds of confectionary products in India. It is purely technical collaboration and use of the trademark owned by the licenses. However, in so far marketing expenses are concerned, the same is for increasing the sales and profits in India reaped only by the Indian entity, i.e., assessee-company. There is no obligation or a binding covenant to agree any minimum AMP expenses as a part of its license obligation. The entire strategic decisions for sales and marketing in India is purely on the assessee-company which is developed by the assessee in India only after the study of market and survey etc. any profit or loss on a launch of any product or increase or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ualized and developed in India with trademark with respect of this brand with the foreign AE it has been clarified by the ld. Counsel that it was only for conceptualising and making a different view of the products for looking to the local taste and not a separate product which has been created in India. The manufacture and sale of these products was largely limited to India and no benefit as such has been accrued to the AE on account of promotions of these brands. Moreover, once royalty is being paid by the assessee on its sales, therefore, it cannot be alleged that the assessee was incurring the cost of developing new brands in India and simultaneously in reaching its AE by paying royalty. The ratio of the Co-ordinate Bench in the Pepsi Food vs. ACIT (supra), wherein on the similar aspect of the matter where the advertising campaign and the material were subject to approval by the parent AE, this Tribunal held that reviewing of advertisement material by the AE to confirm to the broad advertising gad rail does not constitute an arrangement or direction by the AE for incurring the AMP expenses on its behalf. 56. Another reasoning given by the ld. TPO to justify that AMP expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusive right to it if necessary by process of law. He may dispose of it if he will-of course, under the conditions attaching to property of that nature ... What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything els ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infra-structure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being the most important element, which can mar or enhance the value. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and' sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort- merit largely representing reputation and quali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise. In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, can demonstrate a technical feasibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC); [1981] 2 SCC 460, a relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits. . (Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi). Accepting the parameters of the bright line test and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate tax grounds - Disallowance made under section 80- IC 59. Ground Nos. 40 to 46 deal with disallowance of deduction under section 80-IC of the Act. Briefly stated, the facts of this ground are that the assessee has three manufacturing units in India, viz., Manesar - Haryana, Chennai Tamil Nadu and Rudrapur Uttarakhand, viz the eligible unit. In the year under consideration, the unit at Rudrapur claimed deduction under section 80-IC of the Act, amounting to ₹ 43,62,65,693/-. The deduction under section 80-IC was claimed for the first time in AY 2008-09 and this was the ninth year of deduction and consequentially, only 30% of the profits earned by eligible unit were claimed as a deduction. We are given to understand that for the purposes of computing the deduction, specific expenses incurred on a particular brand were shown separately against that brand and were charged to the unit where the brand was manufactured. In case, the brand was manufactured by both the eligible as well non-eligible unit, the expense was allocated on the basis of individual brand sales ratio, i.e., ratio of unit wise sales value of brand or product upon total sales value of brand . Common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year . 64. Thus, as per Companies Act, 2013, the term turnover means the sum realized by sale of products which is inclusive of excise duty and thus, excluding the same for the purpose of calculating turnover for allocation will lead to an irrational allocation ratio. 65. In addition thereto, the Ld. Counsel submitted that Excise duty arises as a consequence of manufacture of excisable goods and is as much a cost for a company as any other expenditure. To support his argument, he referred to Guidance Note on Accounting Treatment for Excise Duty issued by Institute of Chartered Accountant of India (ICAI), which read as under: 10. Admittedly, excise duty is an indirect tax but it cannot, for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use/disposal of goods thereafter, e.g., sale, destruction and captive consumption. It does not cease to be a levy merely because the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible unit at Rudrapur. For the rest of the brands, such as Centre Fruit and Centre Fresh, expense was allocated basis brand wise sales effected from the eligible unit. For e.g., 81.57% of the total sales of Centre Fresh brand was effected from the eligible unit and therefore, 81.57% of the advertisement expenditure incurred in relation to Centre Fresh brand was allocated / charged to the eligible unit. Likewise 90.57% of the total units sold of Centre Fruit brand was produced by the eligible unit and therefore, 90.57% of the advertisement expenditure incurred in relation to Centre Fruit brand was allocated / charged to the eligible unit. The remaining expenses that could not be allocated basis on the brand wise sales ratio were allocated on the basis of turnover ratio. As can be seen from Chart B, expenses under the GL Code Corporate and Brand Code have been allocated on the basis of turnover ratio. The allocation of the expenses between the eligible and non-eligible units was accordingly, worked out as under:- S.No. Advertising Expenses Total Expenses Eligible Unit Non-Eligible Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s turnovers of the eligible and non-eligible units. ii. Alternatively even if the unallocated expenses had to. Be attributed, could the Assessing officer have reduced the sales turnovers by the element of excise duty qua the ineligible units. iii. Whether owing to the allocation of expenses to the eligible unit, the consequential disallowance would be restricted to 30% given that this was the ninth year of deduction claimed by the 80IC unit at Rudrapur and was eligible only to 30% deduction in that year 73. As regards the first issue, the assessee has submitted three charts before us wherein Chart A depicts the details of advertisement expenses incurred on common brands manufactured at each units for the subject year, Chart B depicts the total advertisement expenses incurred on various brands product wise, Chart C shows details of allocation of common expense between the eligible and non-eligible units. One major discrepancy that has been pointed out by the Ld. Counsel of the assessee is qua the allocation of advertising and marketing expenses to the tune of ₹ 110,56,61,711/-. He pointed out that a large portion of the advertising expenses were specifically ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of the assessee that even for the purposes of section 145A of the Act which deals with the method of accounting for income tax purposes specifically provides that the sale of goods should be inclusive of the amount of tax, duty, cess or fees actually paid or incurred by the assessee. The Ld. Counsel also placed reliance on the definition of the term turnover under the Central Sales Tax Act and the Companies Act. 76. We also find that the assessee has filed a copy of the order of the CIT(A) for AY 2009-10 which is placed on Pages 525 of the paper book. A perusal of the said order shows that the CIT(A) discarded the approach of the assessee in terms of taking the turnover basis for allocating the common expenses, which for the ineligible units included the element of excise duty. He determined such allocation on the basis of the tonnage production between these units and thus, arrived at a different percentage for allocation of such expenses. The CIT(A) also relied on the decision of the Hon ble Supreme Court in the case of CIT vs. Lakshmi Machine Works Ltd. ((2007) 160 Taxman 404) to support his contention that excise duty had nothing to do with the cost of produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not reflect all the costs relating to the manufacturing. In our view, the basis of allocation done by the assessee by taking the actual turnover of the eligible and noneligible units was a reasonable basis since the non-eligible units were subjected to excise duty and there was no reason to reduce the element of excise duty while taking the turnover of the noneligible units for allocation of common expenses. 79. The last issue which has been raised by the assessee is that having allocated the common expenses if there resulted in any consequential allocation of expenses to the eligible unit then the reduction of the 80IC claim would be limited to 30% of such expenses. We find force in this contention of the assessee given that this was the ninth year of such claim by the assessee in respect of such unit. As per the applicable provision of Section 80IC the deduction is 100% of the eligible profits for the first five years and 30% of the eligible profits for the balance five years. Thus if at all any reduction of the claim had to be made by the AO it has to be limited to 30% of such allocable expenses and no more. 80. In result thereof, Grounds Nos. 40 to 46 are allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess has not been mentioned, therefore it is not disallowable and in support reliance has been placed on certain decisions which we shall discuss herein after. 86. First of all we have to examine whether cess is part of tax and rate or surcharge. At present, on income tax and surcharge 2% education cess and 1% secondary and higher education cess is charged on the amount of income tax. It was introduced for the first time by the Finance Bill (2) of 2004 as under:- CHAPTER VI Education Cess. 81. (1) Without prejudice to the provisions of sub-section (11) of section 2, there shall be levied and collected, in accordance with the provisions of this Chapter as surcharge for purposes of the Union, a cess to be called the Education Cess, to fulfil the commitment of the Government to provide and finance universalised quality basic education. (2) The Central Government may, after due appropriation made by Parliament by law in this behalf, utilise, such sums of money of the Education Cess levied under sub-section (11) of section 2 and this Chapter for the purposes specified in sub-section (1), as it may consider necessary. Definition. 82. The words and expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be called the Education Cess to finance the Government s commitment to universalise quality basic education, is proposed to be levied at the rate of two per cent on the amount of tax deducted inclusive of surcharge. 88. Budget speech of the Hon ble Finance Minister while presenting budget for the year 2004-05 before the Parliament. Relevant portion of said budget speech is reproduced below: Education 22. In my scheme of things, no issue enjoys a higher priority than providing basic education to all children. The NCMP mandates Government to levy an education cess. I propose to levy a cess of 2 per cent. The new cess will yield about ₹ 4000- 5000 crores in a full year. The whole of the amount collected as cess will be earmarked for education, which will naturally include providing a nutritious cooked midday meal. If primary education and the nutritious cooked meals scheme can work hand-in-hand, I believe there will be a new dawn for the poor children of India. 89. Thus, from the above finance bill and memorandum explaining the provision of finance bill, it is clear that education cess is an additional surcharge on the tax levied. The controversy which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the Board where the Income-tax officer has disallowed the cess paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the 1922 Act and section 40(a) (ii) of the 1961 Act. 2. The view of the Income-tax Officer is not correct. Clause 40(a) (ii) of the Income-tax Bill, 1961, as introduced in the Parliament, stood as under : (ii) any at a proportion of, or otherwise on the basis of any such profits or gains. When the matter came up before the Select Committee, it was decided to omit the word cess from the clause. The effect of the omission of the word cess is that only taxes paid are to be disallowed in the assessments for the years 1962-63 onwards. 3. The Board desire that the changed position may please be brought to the notice of all the Income-tax Officers so that further litigation on this account may be avoided. sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed. 93. Whether cess is an allowable expenditure or not in light of this CBDT Circular had never come up for interpretation, because prior to year 2004 there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge so as to fulfil the commitment of the Government to provide and finance universalized quality basic education. 2(12) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by a surcharge / underlined words substituted by the applicable surcharge - from Finance Act, 2009], for the purposes of the Union, calculated in the manner provided therein, shall also be increased by an additional surcharge, for the purposes of the Union, to be called the Secondary and Higher Education Cess on income-tax , calculated at the rate of one per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance secondary and higher education. 94. Ergo, if cess is considered as part of surcharge, i.e., the additional surcharge on tax, then if income tax payable under the Act is not reckoned as allowable expenditure u/s.37. Ostensibly by this logic, the cess also cannot be held to be allowable business expenditure, because the cess is always calculated and paid on percentage of income tax payable and not actually incurred for the business or profession of assessee. In the context of 115JB Hon ble Calcutta High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;] 17. Therefore, the question which arises for determination is whether the expression any rate or tax levied as it appears in section 40(a)(z7) of the IT Act includes cess . The Appellant - Assessee contends that the expression does not include ce^ and therefore, the amounts paid towards cess are liable to be deducted in computing the income chargeable under the head profits and gains of business or profession . However, the Respondent - Revenue contends that cess is also included in the scope and import of the expression any rate or tax levied and consequently, the amounts paid towards the cess are not liable for deduction in computing the income chargeable under the head profits and gains of business or profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or profession shall not be deducted in computing the income chargeable under the head profits and gains of business or profession . There is no reference to any cess . Obviously therefore, there is no scope to accept Ms. Linhares's contention that cess being in the nature of a Ta x is equally not deductable in computing the income chargeable under the head profits and gains of business or profession . Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, education cess or any other cess , then, the legislature could have easily included 79 reference to cess in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the cess , when it comes to computing income chargeable under the head profits and gains of business or profession . 24. The legislative history bears out that the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18-5-1967.] 27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression cess ought not to be read or included in the expression any rate or tax levied as appearing in section 40(a)(z7) of the IT Act. 28. In the Income-tax Act, 1922, section 10(4) had banned allowance of any sum paid on account of 'any cess, rate or tax levied on the profits or gains of any business or profession'. In the corresponding Section 40(a)(z7) of the IT Act, 1961 the expression cess is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Incometax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression cess and consequently, this expression finds no place in the final text of the provision in Section 40(a)(z7) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(z7) does not include, cess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. 31. Mr. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltdfsupra) was followed and it was held that the amounts paid by the Assessee towards the 'education cess' were liable for deduction in computing the income chargeable under the head of profits and gains of business or profession . They are as follows :- (i) Dy.CIT v. Peerless General Finance and Investment and Co. Ltd. [IT Appeal No. 1469 and 1470/Kol/2019 decided on 5-12-2019 by the ITAT, Calcutta; (ii) Dy.CIT v. Graphite India Ltd. [IT Appeal No.472 and 474 Co. No. 64 and 66/Kol/2018 dated on 22-11 - 2019)by the ITAT, Calcutta; (iii) Dy.CIT v. Bajaj Allianz General Insurance [IT Appeal No. 1111 and 1112/PUN/2017 dated on 25-7-2019) by the ITAT, Pune. 32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT. 33. The ITAT, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in Unicorn Industries {supra) can be of no assistance to the Respondent - Revenue in the present matters. 37. Ms. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant - Assessee, in its original return, had never claimed deduction towards the amounts paid by it as ce.s.y . She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze {India) Ltd. v. CIT [2006] 284 1TR 323/157 taxman 1 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant - Assessee. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference. 38. Although, it is true that the Appellant - Assessee did not claim any deduction in respect of amounts paid by it towards cess in their original return of income nor did the Appellant - Assessee file any revised return of income, according to us, this was no bar to the Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim for deduction was not raised in the original return or by filing revised return, the Appellant - Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner (Appeals) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare's contention based upon the decision in Goetze India Ltd. {supra). 42. For all the aforesaid reasons, we hold that the substantial question of law No. {iii) in Tax Appeal No. 17 of 2013 and the sole substantial question of law in Tax Appeal No. 18 of 2013 is also required to be answered in favour of the Appellant - Assessee and against the Regpondent-Revenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification. 96. The aforesaid judgment clinches the issue in favour of the assessee not only in allowing the claim made for the first time but also the allowability of cess as busine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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