9911796707
TMI Blog2022 (11) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... e of expenditure on corporate social responsibility u/s 115JB of the Act by treating the same as apportion of profits (vi) Disallowance of royalty expenses by holding that the assessee had no liability to pay such royalty; (vii) Disallowance of provision for warrantee; (viii) Non-grant of deduction u/s 80G of the Act; (ix) Non-allowance of amount paid as education cess, though this ground has not been pressed. Therefore, the same is dismissed as not pressed. 3. The above concise grounds shall take care of grounds of appeal from Sl. No. 40 till 63 of the appeal memo. Grounds raised vide Ground Nos. 1 to 39 are related to the outcome of Ground Nos. 40 to 40.6 in respect of transfer pricing adjustment of transaction of payment of royalty. 4. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. 5. Briefly stated, the facts of the case are that the assessee is a full-fledged distributor of Sony's electronics products in India and is primarily engaged in import and di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der: Consumer Electronics Advisory Operating Revenue 80,738,365,545 21,276,403 Operating Cost 78,498,772,084 18,501,220 Operating Profit 2,239,593,461 2,775,183 OP/PR 2.77% OP/OC 15.00% 9. In order to bench mark international transaction in the nature of import of finished goods and other aggregated transactions, TNMM was considered as the most appropriate method and the ratio of operating profit to operating sales was considered as the PLI. 10. During the course of TP assessment proceedings, it was noticed that the assessee has paid royalty amounting to Rs. 146,989,634/-. In relation to the transaction, a show cause notice was issued to the assessee by which the assessee was asked to explain the following: "The following aspects need to be seen while examining the arm's length nature of royalty payment: (1) The nature and complete description of tire intangible transferred or licensed to the taxpayer in respect of whom royalty is paid is to be examined. (2) As per the Income Tax Act 1961, each class of transactions has to be examined having regard to the arm's length principle. As payment made in the form of royalty is a class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The going industry rate of royalty for similar intangible / intellectual property right (12) Whether royalty is paid by any of the concern or subsidiary of the AE / Group anywhere in the world for the use of such similar intangible. If yes, the rate or rates at which it is paid. Whether royalty is paid by any independent concern or entity in any other country through which AE/Group carries on similar business as that of you. If yes, the rate or rates at which it is paid. (13) Discounted cash flow analysis or any cost-benefit analysis, if any, carried out by the taxpayer." 11. In its reply, the assessee submitted that there are certain product categories for which manufacturing function is outsourced by Sony group companies to independent manufacturers. In keeping with this, Sony Corp has appointed Moser Baer India Limited [MBIL] and Competition Team Technology [India] Private Limited [CTTL] as an Original Equipment Manufacturer [OEM] for manufacturing of certain products. 12. It was further explained that SID [the assessee] obtained the license to manufacture and sell various blank optical disc of CD-R, CDRW, DVD + R, DVD-R, DVD-RW and USB Memory under the Sony brand name a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the authority of the TPO is to conduct a TP analysis to determine ALP and not to determine whether there is a service/transaction or not from which the assessee benefits. 20. The ld. counsel for the assessee vehemently stated that Sony Corp has invested significant amount in manufacturing intangibles for which it should be remunerated and the assessee receives license to use these valuable intangible properties during the course of its operations in India at a fixed royalty rate and in an uncontrolled transaction, Sony Corp would not allow a third party to use its intangible properties created through a large amount of investment without receiving any sort of consideration. It is the say of the ld. counsel for the assessee that Sony Corp owns patents or own right to use certain patents and any third party would need to make payments for use of such patented technology. 21. The ld. counsel for the assessee continued by stating that royalty transaction has already been bench marked using TNMM as most appropriate method and this fact has been completely ignored by the TPO/DRP. 22. Per contra, the ld. DR supported the findings of the lower authorities and read the relevant portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of this Agreement and any other agreement entered into between SONY and SID regarding the subject matter, (ii) SID shall indemnify and hold SONY harmless from any and all losses or damages suffered or incurred by SONY as a result of breach by SONY SUBSIDIARIES of the above mentioned terms and conditions, (iii) SID shall in no way be relieved of any of its obligations under this Agreement and (iv) nothing contained herein shall be construed as a transfer or assignment of this Agreement by SID to SONY SUBSIDIARIES. SID shall sell the COMPONENTS manufactured by and purchased from SONY SUBSIDIARIES only to the SUBCONTACTOR if not used in the manufacture of the LICENSED PRODUCTS by SID. XXXX (1) SID agrees that it will pay to SONY a running royalty equal to two percent (2%) of the Net Sales determined pursuant to Paragraph (2) of this ARTICLE X for each LICENSED PRODUCT. (2) The "Net Sales" of the LICENSED PRODUCTS shall, for purposes of this ARTICLE X, be the aggregate of the selling prices in the usual course of business for such LICENSED PRODUCTS by SID, without any deductions other than: (i) sales taxes (and similar taxes pertaining to sale, if any, including but not limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income taxes so withheld so as to enable SONY to support a claim for credit against income tax payable by SONY in Japan." 24. A perusal of the above relevant clauses of the agreement shows that MBIL and CTTL are manufacturing sub-contractors and license has been given to the assessee by Sony Corp. It is not a case of the Revenue that MBIL and CTTL have also paid royalty to Sony Corp. Therefore, we fail to understand how MBIL and CTTL can be considered as manufacturer by TPO/DRP for the purposes of royalty payment because by no stretch of imagination Sony Corp would allow an unrelated party to manufacture its products on which it has sole copyright/trade mark right/manufacturing/distribution rights. 25. Further, we are of the considered view that the TPO has grossly erred in supporting his finding on the premise that the assessee has failed to prove that such intangibles were actually received by it and further failed to prove that such received intangibles have benefitted it. 26. The TPO further erred in justifying his findings by stating that the assessee has not derived any benefit on account of usage of intangible property for which royalty was paid. 27. The Hon'ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaken * Customer liaison support including facilitating feedback from product users regarding quality and other related matters. 33. For benchmarking the said transaction, the assessee chose TNMM as the most appropriate method with average margin of the comparables in a range of 9.44% to 13.72% and the transaction was held to be at arm's length. 34. The comparables selected by the assessee and the TPO are as under: S. No. Name of the Comparable selected by the assessee Remarks of this office 1 Priya International Ltd. (Segmental) The Service Income is only24.24% which is less than 75%. Hence Rejected as a comparable. 2 ICR A Management Consulting Services Ltd. The company is functionally dissimilar to the nature of operations of this segment of the assessee. Hence Rejected as a comparable. 3 MCI Management (India) Ltd. The company is persistently loss making as it is facing losses in 2 out of last 3 years including the current FY2016. Hence Rejected as a comparable. 4 India Tourism Development Corporation Ltd. (Segmental) Tire company is engaged in progressive development, promotion and expansion of tourism in India. This is in no way comparable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport of slow-moving goods outstanding for more than 30 days as separate international transaction of unsecured loan extended to AE. 42. The TPO benchmarked this alleged international transaction on a stand - alone basis using PLR as CUP. The assessee contended for application of LIBOR rate as appropriate rate to bench mark transaction but the TPO was of the opinion that income for transactions relating to the sale accrued and arose in India, therefore, domestic prime lending rate has been applied. 43. The assessee raised objections before the DRP maintaining its stand that outstanding receivables cannot be characterized as unsecured loans and, therefore, the TPO erred in bench marking the same by applying PLR to compute notional interest. 44. After considering the facts, the DRP directed the Assessing Officer to consider 60 days credit for bench marking of impugned international transaction. The DRP further directed to net off payables and charge interest on net receivables after verifying whether invoices raised against AEs was in foreign currency and accordingly, directed use of LIBOR instead of SBI base rate to determine interest. Accordingly, revised adjustment was worked o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer on application of Accounting Standard - 2 is without any merits and, in fact, uncalled for. Secondly, it is an undisputed fact that the assessee has been consistently following the same method of valuation of closing stock which was cost or net realizable value, whichever is lower. 57. The Hon'ble Supreme Court in the case of Woodward Governor India [P] Ltd 312 ITR 254 had an occasion to consider similar grievance and the Hon'ble Supreme Court held as under: "The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade is valued is part of the method of accounting. It is well-established, that, on general principles of commercial accounting, in the P&L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower - the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Section 145(1) enacts that for the purpose of section 28 and section 56 alone, income, profits and gains must be computed in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een and one-half per cent" occurring at both the places, the words "fifteen per cent" had been substituted. (2) Every assessee,-- (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or (b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including statement of profit and loss,-- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including statement of profit and loss; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or (fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, (k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (iie) the amount representing,-- (A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the statement of profit and loss; or (iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be; or (iig) the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a-- (A) company, and its subsidiary and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t CSR expenses have to be added to book profit. Except for the wild imagination of the Assessing Officer by no stretch of imagination, it can be said expenditure on CSR expenses is a transfer to/from reserve. Hon'ble Apex Court in Apollo Tyers (supra) have clearly laid down that the Assessing Officer or assessee, none can tinker with book profit disclosed in audited account. It is not the case that the accounts have not been prepared as per accepted accounting principle. Once the accounts have been prepared in accordance with standards in this regard, this tinkering by the Assessing Officer has no sanction of law. We have no hesitation in setting aside the addition to book profit in this regard." 61. As no distinguishing decision has been brought to our notice, respectfully following the decision of the co-ordinate bench [supra], we direct the Assessing Officer to delete the impugned addition. Accordingly, Grounds Nos. 49 to 52 are allowed. 62. Next issue raised vide Ground Nos. 53 and 54 relates to the disallowance of royalty expenses by holding that the assessee had no liability to pay such royalties. 63. The underlying facts in this issue are from the account of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pret the judgment of the Hon'ble Delhi High Court in his own way by observing that the Hon'ble High Court has by default agreed that if the amount set aside is unreasonably disproportionate, in that case the disallowance can be made. Accordingly, the Assessing Officer made the following chart: F.Y. Provision created as % of sales Provision utilized as % of creation 2009-10 0.66 105.6 2010-11 0.32 93.5 2011-12 1.06 85.09 2012-13 1.13 87.6 2013-14 3.05 67.06 2014-15 2.24 103.8 2015-16 2.40 119.7 71. The Assessing Officer further made table of closing balance ratio of provision account as under: F.Y. Provision created as % of sales Provision utilized as % of creation 2009-10 0.66 105.6 2010-11 0.32 93.5 2011-12 1.06 85.09 2012-13 1.13 87.6 2013-14 3.05 67.06 2014-15 2.24 103.8 2015-16 2.40 119.7 72. Distinguishing the facts of the year under consideration, from the decision of the Hon'ble High Court of Delhi [supra], the Assessing Officer concluded by holding that the provision is not created on any scientific basis or on any past experience and computed the disallowance as under: "The assessee has made provisions @ 0.66% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt of Delhi and the Hon'ble High Court in 160 Taxmann 397 held as under: "The assessee is engaged in the manufacture and sale of TV and audio system. As a matter of policy, it offers warranty of one year on all the products which it has manufactured and sold. In order to provide for claims arising out of such warranties, the assessee set apart different amounts for different assessment years which it claimed towards deduction. The Assessing Officer, however, disallowed the said claim for deduction on the ground that the same was based on what was only a contingent liability and not a liability within the meaning of section 37(1) of the Income-tax Act, 1961. The CIT (Appeals) reversed that view in an appeal preferred by the assessee. The Tribunal has in a further appeal preferred before it by the revenue affirmed that view taken by CIT(A) The present appeal arising out of the said order assails the view taken by the Tribunal. 2. We have heard learned counsel for the parties and perused the order under challenge. The issue whether amounts set apart by the assessee to meet claims arising out of warranties issued by it to its customers can be taken as a permissible deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tfully following the decision of the co-ordinate bench, we direct the Assessing Officer to consider it as an allowable deduction in computing the book profit u/s 115JB of the Act. Accordingly, Grounds Nos. 55 to 60 are allowed. 76. Last issue relates to non grant of deduction u/s 80G of the Act. 77. The underlying facts in issue show are that the assessee has claimed deduction u/s 80G of the Act as under: Name of Donee PAN of Donee Amount of Donation (INR) Eligible amount of Donation (INR) Annexures A. Donations entitled for 100% deduction without qualifying limit National Culture Fund GGGGG0000G 1,90,00,000 1,90,00,000 2(a) Prime Minister's National Relief Fund AACTP4637Q 49,42,100 49,42,100 2(b) Sub-total (A) 2,39,42,100 2,39,42,100 B. Donations entitled for 50% deduction without qualifying limit World Wide Fund for Nature India AAATW0356P 40,00,000 20,00,000 2(c) Society for Educational Welfare and AAGTS4277B 1,14,10,033 57,05,017 2(d) Isha Outreach AAATI7085D 12,14,800 6,07,400 2(e) Sub-total (B) 1,66,24,833 83,12,417 Total deduction under sec. 80G of the Act (A+B) 3,22,54,517 78. In support of the above claim, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
