TMI Blog2019 (7) TMI 1992X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. Learned counsel referred to several case laws for the proposition that benefit test is not for TPO. As we note that this Tribunal in assessee's own case for A.Y. 2006-07 [ 2018 (11) TMI 1762 - ITAT MUMBAI] hold that the royalty payment on trade mark to SCOL @ 1% of net sales is at arm's length, hence, no further adjustment is required. Accordingly, we delete the disallowance made by the Assessing Officer. We note that the AO as well as learned CIT(A) have also based their decision on their earlier orders. Since ITAT has considered those orders and remitted the issue to the file of the Assessing Officer, we deem it appropriate to follow the precedent and set aside the issue to the file of the Assessing Officer. The Assessing Officer is directed to consider the issue afresh keeping in mind additional submissions being made by learned counsel. Disallowance of payment of royalty on technology paid to Cadbury Adams USA LLC. - HELD THAT:- As decided in own case A.Y. 2006-07 [ 2018 (11) TMI 1762 - ITAT MUMBAI] assessee has also availed technical know-how from CAUSA. Further, the Departmental Authorities don dispute the genuineness or authenticity of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Assessing Officer for verification. - Shamim Yahya, Member (A) and Ramlal Negi, Member (J) For the Appellant : J.D. Mistry and Hiten Chande. For the Respondents : Anand Mohan. ORDER SHAMIM YAHYA, MEMBER (A) 1. This appeal by the assessee is directed against the order of learned CIT(A) dated 19.3.2014 and pertains to A.Y. 2007-08. 2. Grounds of appeal read as under:- Based on the facts and in the circumstances of the case and in law, Mondelez India Foods Limited (hereinafter referred to as 'the Appellant') craves leave to prefer an appeal against the order dated 19 March 2014 passed by the Hon'ble Commissioner of Income-tax (Appeals) -15, Mumbai [hereinafter referred to as the 'CIT(A)]' under section 250 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), on the following grounds: Based on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred: Transfer pricing adjustments 1. In making an adjustment of Rs. 21,37,70,000 to the total income of the Appellant under section 92CA(3) of the Act on account of adjustment in the arm's length price of intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on from the arm's length price permitted to the Appellant under the proviso to section 92C(2) of the Act. Corporate tax additions/disallowances In confirming the adjustments made by the Additional Commissioner of Income-tax - 5(1) ('learned AC') amounting to Rs. 12,26,61,755 to the total taxable income of the Appellant on account of various additions/disallowances under the provisions of the Act. Denial of depreciation on marketing know-how 12. In upholding the disallowance of Rs. 17,06,629 made by the learned AO with respect to depreciation on marketing know-how claimed by the Appellant under section 32 of the Act. Allocation of expenses in respect of Appellant's unit at Baddi 13. In upholding the action of the learned AO of arbitrarily allocating on basis of sales turnover, the expenditure incurred by the Appellant to its unit at Baddi and disregarding the allocation by the Appellant on scientific basis, for determining profits eligible for deduction under section 80-IC of the Act. Thus, reducing the said deduction claimed in the Return of Income from Rs. 41,06,18,903 to Rs. 28,96,63,777. The above grounds are without prejudice to one another. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Industrial Assistance vide Press Note No. 8(2) 2001-FC. 1 dated 3rd January 2002 clearly states that in the case of Technical Transfer, payment of royalty for technical know-how subsumes the payments of royalty for the use of trade mark, and brand name of the foreign collaborator. 4. Submissions of the assessee were considered by the TPO. He concluded as under:- The submissions of the assessee were considered by the TPO and it has been observed that the assessee has incurred advertisement and marketing expenses inter alia, on the following:- Continuously reminding the customers of its products especially when competitors launches new products/Advertisement campaigns such as Kit Kat, Munch, Eclairs etc. Countering competition/acting as entry barriers for new players eg. Lindt, Mars etc. New product launches such as Bourneville, Cadbury silk etc. To increase sales of its existing products especially where there is a downward trend. To create awareness of discounts offered on various products at a particular point of time. To create a recall vale of an Indian sweet on festive occasions such as Diwali, New year, Holi etc; To reach out to rural ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntra, learned Departmental Representative submitted that there are no difference in the facts of the case as compared to earlier year considered by the ITAT. It is submitted that the matter should be accordingly set aside. 9. Upon careful consideration, we note that this Tribunal in assessee's own case for A.Y. 2006-07 in ITA No. 1512/Mum/2013 vide order dated 28.11.2018 considered the same issue as under:- 7. We have considered rival submissions and perused materials on record. As could be seen from the order of the Transfer Pricing Officer, he has determined the arm's length price of royalty payment on trademark to SCOL at zero. In other words, he has disallowed royalty payment on trademark at 1% while allowing royalty payment on technical know-how at 1.25% of net sales. The reasoning on which the Assessing Officer has denied royalty payment on trademark are basically that as per the terms of earlier agreement approved by the Government, the assessee can pay royalty for technical know-how at the maximum rate of 2%, whereas, the assessee has paid royalty both for technical know-how and trademark aggregating to 2.25%. He has also referred to the Press Note issued by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute relating to payment of royalty for trademark at 1% over and above royalty paid for technical know-how at 1.25% and its allowability came up for consideration before the Tribunal in assessee's own case for assessment year 2002--03 to 2005-06. While deciding the issue in the aforesaid assessment years, the Tribunal held that the payment of royalty on trademark to CSOL at 1% of sales is allowable and at arm's length. In fact decision of the Tribunal has also been accepted by the Revenue. In this context, we may refer to the relevant observations of the Tribunal while deciding identical issue in assessee's own case for assessment year 2005-06, in ITA no. 5470/Mum./2012, dated 18th May 2016, which is as under:-- 2.3. We have heard the rival submissions and perused the material before us. We find that while deciding the appeal for AY 2002-03(supra) the Tribunal has decided the issue as under:- 37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical know-how and trademark usage. 38. From the arguments of the DR, made on b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ground of Appeal No. 1 in favour of the assessee. 8. There being no difference in factual position in the impugned assessment year, respectfully following the consistent view of the Tribunal on identical issue in assessee's own case as referred to above, we hold that the royalty payment on trade mark to SCOL @ 1% of net sales is at arm's length, hence, no further adjustment is required. Accordingly, we delete the disallowance made by the Assessing Officer. Ground raised is allowed. 10. Upon careful consideration, we note that the Assessing Officer as well as learned CIT(A) have also based their decision on their earlier orders. Since ITAT has considered those orders and remitted the issue to the file of the Assessing Officer, we deem it appropriate to follow the precedent and set aside the issue to the file of the Assessing Officer. The Assessing Officer is directed to consider the issue afresh keeping in mind additional submissions being made by learned counsel. 11. Another issue raised in Ground No. 6 7 relates to disallowance of payment of royalty on technology paid to Cadbury Adams USA LLC. 12. It transpires that this issue has been decided by learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... December 2007, amending the terms of the original agreement. As per the aforesaid agreement, certain terms of the original agreement was amended to include licensing/sub--licensing of technology. It is the contention of the learned Sr. Counsel for the assessee that the amendment agreement executed on 24th December 2007, shall operate retrospectively from 1st January 2006, to emphasize this fact, the learned Sr. Counsel for the assessee has sought to produce letter dated 26th April 2016, issued by Mondelez International as additional evidence. From a perusal of the aforesaid letter, it appears that it has been issued to clarify that as per the original agreement executed on 1st June 2006, effective from 1st January 2006, the parties to the agreement intended to transfer and avail technical know-how/knowledge relating to the licensed product along with trademark. Considering the submissions of the learned Sr. Counsel for the assessee that in subsequent assessment years royalty paid by the assessee @ 2.7% of sales was accepted by the Transfer Pricing Officer, the letter dated 26th April 2016, sought to be produced by the assessee as additional evidence, in our view, is of much signif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed, to a degree, on estimated effort for providing services. If Provider estimates that the level of effort required to perform the services will be significantly different or it estimates significant overruns, the same will be cleared with the Recipient on a timely basis. TPO narrated the Payments term as per agreement as under: Beginning from 1st April 2006, cost for services provided shall be charged on the basis of quarterly accounting periods. TPO mentioned the Services term as per the agreement as under: The services provided to Recipient by Provider (as the Regional Head Offices of the Group) under the Agreement will be separate and differentiated from any service provided to the Recipient by the Group parent. 15. TPO observed that in the 3CBB Report, the arm's length price determined by the assessee (at Rs. 9.92 crores) was the same as recorded in the books of accounts on the basis of the above referred agreement (4.80 million Singapore Dolar per anum). The assessee stated to have used Transactional net Margin Method (TNMM) for recording this transaction. 16. Before TPO the assessee submitted various details. The TPO observed that show-cause notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner (Appeals). Considering the fact that the affidavit produced before us may have a crucial bearing on deciding the issue one way or the other, though, we admit the additional evidence produced by the assessee, however, since the aforesaid additional evidences has not been examined either by the Transfer Pricing Officer or the learned Commissioner (Appeals), in our view, it would be fair and reasonable to allow an opportunity to the Assessing Officer to consider the additional evidence and decide the issue. Moreover, there is also allegation and counter allegation with regard to production of evidences. While the departmental authorities have alleged that relevant documentary evidences were not produced, the assessee claims that all evidences were produced. Without entering into the controversy as to whether assessee has produced the evidences or not, we are of the opinion that evidences brought on record, as contained in the paper books filed before us, deserve to be examined on their own merit before deciding the issue one way or the other. More so, when as per assessee's claim in the subsequent assessment years the Transfer Pricing Officer himself has allowed a part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed depreciation on same in A.Y. 2002-03 by treating these as 'intangible'. The allocation was based on the valuation report of an independent valuer. The Assessing Officer observed that for the reasons stated in assessment order for A.Y. 2003-04, the claim of depreciation was not accepted by the department. He further observed that there is no change in the facts from the earlier assessment years and therefore, the depreciation claimed by the assessee on marketing know-how amounting to Rs. 17,06,629/- was disallowed. 23. Upon assessee's appeal learned CIT(A) referred to his own order of earlier year, wherein the issue has been decided against the assessee. Against this order, assessee is in appeal before us. 24. It transpires that this Tribunal in assessee's own case for A.Y. 2006-07 has decided this issue and allowed the claim of the assessee as under:- 33. We have considered rival submissions and perused materials on record. It is evident, the Assessing Officer disallowed assessee's claim on capitalized value of marketing know-how simply relying upon the assessment order passed for the assessment year 2003--04. However it is a fact on record, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat time, only Bournvita was manufactured. The expenses on other employee at H.O., are allocated on the basis of number of employees at each factory. Other indirect expenses relating to the Directors are distributed amongst the, various units on the basis of the type of manufacturing done at the various-factories and services rendered by each director in particular field. Sales and distribution expenses relating to Bournvita are distributed on the basis of ratio of sides effected at various factories Brand License Fees is 1% of total sales which is payable to the foreign parries. 28. Considering the above, the AO noted that the assessee in its letter stated that different methods are employed in allocating common expenses to various units of the company. That the broader question of uniformity in allocating expenses to various divisions has not been satisfactorily answered. That a multinational company like Cadbury India Ltd., needs to have a system of at least satisfactorily apportioning their expenses. That any allocation of expenses however should not depend upon the fact that the income generated from a particular division is chargeable to tax or not. That the appor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv) Cess on royalty u/s. 43B 905,295 5,00,11,892 43,22,77,100 Less Depreciation as per I.T. Act 14,26,13,323 Profit of Baddi Unit eligible for deduction u/s. 80IC 28,96,63,777 29. Upon assessee's appeal learned CIT(A) confirmed the action of the Assessing Officer. Against this order assessee is in appeal before us. 30. Learned Counsel of the assessee submitted that the Assessing Officer has allocated following items to Baddi unit on the basis of sales ratio as under:- (i) Interest (ii) Operation and Establishment expenses (iii) Voluntary retirement expenses (iv) Decrease in stock 31. As regards decrease in stock, learned Counsel of the assessee submitted that this is actually change in inventory at Baddi unit and it is submitted that there is no question of any allocation of sales ratio. As regards voluntary retirement scheme expenses, learned counsel contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward areas and operation and establishment cost are comparatively lower as compared to Warna. ii) The factories located at other units are old. Hence, the operation and establishment expenses increase on year on year basis. iii) Further, Baddi unit enjoys a scale benefit since the production of Bournvita at Baddi unit is much higher than production of Bournvita in Warna. Therefore the unit fixed cost at Baddi is mower resulting in higher profit percentage. iii) Thus the ratio of establishment expenses has decreased due to increase in sales at Baddi factory leading to higher margin at Baddi unit. 32. Upon hearing both the counsel and perusing the record, we agree with the submissions of the learned counsel of the assessee, as regards allocation of interest, voluntary retirement scheme and decrease in stock. As agreed by learned counsel above the fact that no VRS expenditure pertains to the employees of Baddi unit may be checked by the Assessing Officer. 33. As regards operation/establishment expenses, we find considerable cogency in the allocation key used by the assessee for direct expenses, direct marketing cost and selling and distribution expenditure, royalty and ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
