TMI Blog2021 (11) TMI 1124X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in assessee s own case for immediately preceding A.Y. 2009-10 wherein the Co-ordinate Bench of the Tribunal after making reference to the decision of Sony Ericsson India Pvt. Ltd. [ 2015 (3) TMI 580 - DELHI HIGH COURT] and in the case of Maruti Suzuki India Ltd. [ 2015 (12) TMI 634 - DELHI HIGH COURT] and placing reliance on Essilor India Pvt. Ltd. [ 2016 (3) TMI 959 - ITAT BANGALORE] held that in the absence of agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to the existence of international transaction on mere incurring excess expenses on the marketing and advertisement as compared to the expenditure incurred by the comparables. It was further held that in the absence of any machinery provisions to compute arm's length price provision, the provisions of Chapter X cannot be invoked and bright line test cannot be used either to determine the existing international transaction or its arm's length price -ground of appeal No.1 filed by the Revenue is devoid of merit and stands dismissed. Determination of arm's length price with regard to the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elling discount was given to the HUL towards the sale cost - HELD THAT:- The expenditure in question was incurred towards the selling discount given to the distributor stockists. The relationship between the appellant and the distributor was that of the principal to principal. No services were rendered by the distributor to the appellant company and what was offered to the distributor was discount under the sales promotion schemes and, therefore, it cannot be said that the discount is in the nature of commission within the meaning of Explanation 1 to section 194H of the Act as held in the case of Intervet India Pvt. Ltd.[ 2014 (4) TMI 353 - BOMBAY HIGH COURT] and CIT vs. Piramal Healthcare, [ 2015 (1) TMI 873 - BOMBAY HIGH COURT] - we are of the considered opinion that the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the selling discount. Disallowance u/s 40(a)(ia) being the payment made to Star India Pvt. Ltd. towards advertisement charges - AO disallowed the expenditure on the ground that no TDS was made on said payment - HELD THAT:- We find force in the alternative submission made on behalf of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurring such expenses, without demonstrating the same. 1.3Assuming that such A M expenses automatically contribute to an enhancement of the brand value and creation of marketing intangibles without appreciating that such expenses were incurred by the Appellant on its own behalf and that these expenses were incurred due to the unique product category and competitive market conditions which also resulted in reactive marketing. 1.4Computing the arm s length price of such alleged international transaction in an arbitrary manner without following any of the methods prescribed in Section 92C(1) of the Act and by using an incorrect set of comparables. 1.5Including selling and distribution expenses such as trade discounts given to wholesaler/stockist, sampling activities, shelf space charges market research expenses, product packaging design as a part of A M expenses for benchmarking purposes. 1.6Not holding the fact that if at all A M expenses have benefitted Associated Enterprise in strengthening the brand, the compensation to be received has to be restricted to quantum of royalty generated from the usage of such brand in India. 1.7Not treating the difference between roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred for the benefit of AE and hence, the same cannot be again disallowed. Incorrect disallowance under section 40(a)(ia) of the Act of Rs 1,78,19,577 to taxable income of the Appellant in respect of reimbursement of salary cost of employees deputed to the Appellant by HUL 5. erred in considering that the reimbursement of actual salary cost of the employees of HUL deputed to work under the control and supervision of the Appellant is in the nature of managerial service warranting a disallowance under Section 40(a)(ia) of the Act for non-withholding of tax at source under Section 194J of the Act. Incorrect disallowance of Rs. 4,51,43,992 to taxable income of the Appellant in respect of selling discounts extended to HUL 6. erred in considering that the selling discount extended by the Appellant to HUL which is an industry practice is in the nature of commission payment to HUL for sale of the Appellant's products in the market warranting a disallowance under Section 40(a)(ia) of the Act for non-withholding of tax at source under Section 194H/194J of the Act. 7. erred in not considering the credit notes issued by the Appellant which clearly substantiates that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .10.2009 declaring total income of Rs.50,70,130/-. The appellant company also reported the following international transactions within the meaning of section 92B of the Income Tax Act, 1961 ( the Act for short) :- Sr.No. Nature of Transactions Amount of Transactions Method Adopted 1. Purchase of materials spare parts consumables 41,39,64,114 CPM 2. Purchase of finished goods 23,20,53,599 TNMM 3. Purchase of Machinery 3,18,34,424 - 4. Payment of Royalty 1,79,29,715 CUP 5. Payment of Global License Fees 38,14,243 - 6 Payment towards ITS Customer Service Support 8,82,700 - 7 Reimbursement of Managerial remuneration 3,25,28,799 CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Difference [d=(b-c)] (e) 13.30% (19.99% - 6.69%) Compensation to be received from AE (f) = (a) * (e) = Rs.21,17,81,020 6. Accordingly, the TPO proposed upward adjustment of Rs.21,17,81,020/- u/s 92CA(3) of the Act on account of A M expenses. As regards to transaction of import of Raw material. 7. The Appellant is a manufacturer of diapers and sanitary napkins. For qualitative supply of raw material at a lower price, the AE of the Appellant has entered into agreements with third party vendors for supply of raw material to all the group entities including the Appellant at an agreed price. According to the appellant, the aforesaid arrangement with third parties results in standard quality of supply of raw material and reduced price of the raw material due to collective buying. The AEs of the Appellant also supply raw material to the Appellant only in exceptional circumstances when the third party vendors are not able to supply the same for some reason. During the year, the Appellant has imported raw materials from third party vendors under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the pricing related details including certificates received from third party vendors and AEs by citing following reasons: - That the certificates issued the third party vendors cannot be considered as they are deemed AEs of the Appellant and therefore serve no purpose. - The Appellant has not provided the details i.e. Annual reports, RPT calculation and calculation of the margins of the foreign comparables. - Up to last year the Transaction Net Margin Method ( TNMM ) was used to benchmark the transaction however, the method is changed in this year without there being any reason for the same. 11. Pursuant to the TPO s order, a draft assessment order dated 14.03.2013 was passed by the Assessing Officer wherein the following disallowances were proposed by the Assessing Officer :- (a) Disallowance on account of International Transaction Rs.21,17,81,020/-. (b) Disallowance of payments to Hindustan Unilever Limited on account of Advertising and Marketing expenses Rs.8,37,15,151/-. (c) Disallowances on account of Management Cost Rs.1,78,19,577/-. (d) Disallowance on account of Selling Discount to HUL Rs.4,51,43,992/- (e) Disallowance on account of Fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to all the group entities at the same price (Pg. 489 to 498 of the paper book) and, due to the collective buying by all the group entities the cost of the raw material has reduced. In this regard, the Appellant relies on the certificates issued by the third party vendors wherein they have confirmed that discount of i0%-20% has been given to the Appellant on the raw material supplied during the year. The certificates also confirm that the price that they have charged to the Appellant is lower than the price it would have charged if the Appellant had not purchased the raw material under the global sourcing arrangement (Pg. 411 to 418 of the paper book). Therefore, it is submitted that the raw material has been purchased from third party vendors at arm s length price and the adjustment made by lower authorities is unsustainable and bad in law. 15. The Appellant also submits that the lower authorities have erred in rejecting the certificates and other evidence produced by the Appellant to substantiate the arm s length price of raw material purchased from the third party vendors on the footing that the third party vendors are deemed AEs of the Appellant. It is submitted that the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing adjustment made by the lower authorities of Rs. Rs. 15,42,54,297 is unsustainable and bad in law. 18. Insofar as the raw material purchased from the AEs is concerned, the appellant submits that the lower authorities failed to appreciate that the mark up of 9% charged by Yuhan Kimberly Ltd. and Kimberly Global sales LLC (Pg. 584 to 586 of the paper book) is lower than the margin earned by the foreign companies carrying out the similar activities. As per the fresh benchmarking submitted during the course of the proceeding the arm s length margin comes to 10.62% and 10.18% respectively (Pg. 587to 599 of the paper book). Despite the fresh benchmarking submitted by the Appellant justifying the price charged by the AE for supply of raw material, the lower authorities made the adjustment without considering the evidence submitted by the Appellant. 19. The Appellant also submits that the rejection of gross margin under the cost plus method used by the Appellant in the transfer pricing report is also incorrect. The lower authorities failed to appreciate that the net operating margin of the Appellant during the year was under severe pressure due to the competition faced from the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat payments are in the nature of reimbursement of cost of advertisement and marketing expenses, management cost and selling discount. On due consideration of the said additional evidences as well as the submissions of the appellant company, the Hon ble DRP had confirmed the findings of the Assessing Officer without assigning any independent reasoning. 23. Being aggrieved with the above actions of the Hon ble DRP/TPO/Assessing Officer, the appellant is before us in the present appeal. 24. The GROUND OF APPEAL NO.1 challenges the addition of Rs.21,17,81,020/-on account of Transfer Pricing adjustment in respect of Advertisement and Marketing expenses incurred by the appellant. The TPO as well as the Hon ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A M expenses incurred by the AE. In the process, the TPO as well as the Hon ble DRP presumed that the benefit of this expenditure had endured to its foreign AE. 25. Before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Counsel vehemently opposed the remand to the Assessing Officer/TPO placing reliance on the decision of Hon ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra). 28. We heard the rival submissions and perused the material on record. By this ground of appeal no.1, the appellant challenges the TP adjustments made by the TPO/Assessing Officer as confirmed by the Hon ble DRP on account of A M expenses. The TPO inferred the existence of international transactions by deducing the difference between the expenditure incurred by the appellant company on account of A M expenses and expenditure incurred by the comparables chosen by the TPO. The lower authorities had inferred that the benefit had enured its foreign AE on account of excesses expenditure incurred by the assessee on account of A M. The main contention advanced by the appellant is that the existence of international transaction cannot be inferred by the TPO in the absence of any actual transactions and the presumption by the lower authorities that the benefit had enured to its foreign AE is merely based on the conjectures. In the absence of any agreement between the assessee and its foreign AE to incur any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue had failed to discharge its onus proving the existence of international transactions involving A M expenses and no purpose would be served by the remand and the reliance in this regard can be made on the decision of the Hon ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra). 29. We do not find any reason as to why the decision of the Co-ordinate Bench in assessee s own case for preceding year cannot be applied to the present year as the identical facts are involved in the present year also. Accordingly, we do not find any merit in this ground of appeal. Hence, ground of appeal No.1 filed by the Revenue is devoid of merit and stands dismissed. 30. The issue in GROUND OF APPEAL NO.2 pertains to the determination of arm's length price with regard to the transaction of import of raw materials. 31. During the financial year 2011-12 relevant to the assessment under consideration, the respondent assessee has imported raw materials costing Rs.37,18,66,093/- from the third party vendors under global sourcing arrangement across the world. The assessee sought to justify the transaction of import of raw materials is at arm's length price by using ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders of authorities below. 34. We have heard the rival submissions and perused the relevant material on record. It is settled position of law that comparison should be between the tested party and the controlled transaction. A controlled transaction has been defined to mean that a transaction entered into between two associated enterprises and therefore, we are of the considered opinion that the lower authorities were justified in not giving any credence to the certificates issued by deemed AEs. However, in the light of additional evidence filed before us in the form of price list obtained from the third parties, we remit the matter back to the file of AO / TPO with a direction to undertake the exercise of benchmarking the transaction of import of raw material taking cognizance of price list furnished by the assessee from the third party vendors and to restrict any TP adjustment only in respect of AE transactions, in view of the following decision of Jurisdictional High Court in the case of (i) CIT vs. Hindustan Unilever Ltd., 72 taxmann.com 325 (Bombay) and (ii) CIT vs. Ratilal Becharlal Sons, 65 taxmann.com 155 (Bombay). Thus, this ground of appeal stands partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts (P.) Ltd., 202 ITR 1014; and, (iii) CIT vs. Dunlop Rubber Co. Ltd., 142 ITR 493. Therefore, we are of the considered opinion that the provisions of section 194J of the Act have no application to the subject payment. Accordingly, the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the sum of Rs.1,54,77,351/- on account of management cost. 38. Since we held in earlier paragraphs of this order that the provisions of section 194J have no application to the subject payment, it is not necessary for us to deal with contention, regarding benefit of second proviso section 40(a)(ia) of the Act. Thus, the ground of appeal no.2 stands allowed in favour of the assessee. 39. The GROUNDS OF APPEAL NO.3, 4, 6 and 7 challenge the disallowance on account of selling discount of Rs.8,37,15,151/- and Rs.1,78,19,577/- given to HUL. It is submitted that the HUL is the distributor of products of the appellant company and selling discount was given to the HUL towards the sale cost. It is submitted that the HUL was not responsible for the control and conduct of the business of the appellant company and no services towards sales were re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent either in cash or cheque or draft or any other mode. Where the sales of any goods are covered under the M.R.P. system, the M.R.P. is fixed and the seller is entitled to sell the goods to a stockist at a price lesser that the M.R.P. as mutually agreed between the parties. In such a case, what should be the sale price or what should be the margin available to the stockist is entirely at the discretion of the parties. In the present case, the assessee has received the sale price at the rate fixed under the agreement. In such a case, where the assessee has received the amount of sale price, the question of the assessee deducting tax at source under Section 194-J of the Act does not arise, because the assessee is not making any payment to the stockist. Therefore, whatever be the margin made available to the stockist, so long as the assessee is not making any payment to the stockist, the question of invoking Section 194-J against the assessee does not arise. Hence, we see no reason to entertain question (b) raised by the Revenue. 42. In the light of the above decisions, we are of the considered opinion that the impugned expenditure does not fall within the meaning of commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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