2018 (11) TMI 1762 - AT - Income Tax

Tribunal Partially Allows Assessee's Appeal, Dismisses Revenue's Claims

Mondelez India Foods Pvt. Ltd. Versus Addl. Commissioner of Income Tax  And Dy. Commissioner of Income Tax Range–5 (1), Mumbai Versus Mondelez India Foods Pvt. Ltd.  

Mondelez India Foods Pvt. Ltd. Versus Addl. Commissioner of Income Tax  And Dy. Commissioner of Income Tax Range–5 (1), Mumbai Versus Mondelez India Foods ... Issues Involved:1. Disallowance of Rs. 8,88,97,000 out of the royalty paid to M/s. Cadbury Schweppes Overseas Ltd., U.K. (CSOL).2. Disallowance of Rs. 80,00,000 on account of proportionate expenditure incurred on behalf of the A.E. towards advertisement, marketing, and promotion (AMP).3. Disallowance of Rs. 20,41,065 towards royalty payable to Cadbury Adams, U.S.A.4. Disallowance of Rs. 13,02,22,800 to M/s. Cadbury Schweppes Asia Pacific TTE, Singapore.5. Disallowance of depreciation of Rs. 22,75,506 on capitalization of marketing knowhow.6. Disallowance of expenditure under section 14A of the Act amounting to Rs. 1,77,87,904.7. Revenue’s appeal concerning deletion of part disallowance made under section 14A of the Act.8. Revenue’s additional grounds concerning the AMP expenditure.Detailed Analysis:1. Disallowance of Rs. 8,88,97,000 out of the royalty paid to M/s. Cadbury Schweppes Overseas Ltd., U.K. (CSOL):The assessee, a subsidiary of CSOL, U.K., challenged the disallowance of Rs. 8,88,97,000 out of the royalty paid to CSOL. The Transfer Pricing Officer (TPO) determined that the royalty payment for the use of the trademark should be subsumed within the royalty for technical knowhow, thus adjusting the arm's length price of the royalty payment to 1.25% of net sales. The Commissioner (Appeals) upheld this disallowance. However, the Tribunal, following its consistent view in the assessee's own case for preceding assessment years, held that the royalty payment on the trademark to CSOL at 1% of net sales is at arm's length, hence, no further adjustment is required. The disallowance made by the Assessing Officer was deleted.2. Disallowance of Rs. 80,00,000 on account of proportionate expenditure incurred on behalf of the A.E. towards advertisement, marketing, and promotion (AMP):The TPO noticed that the assessee's AMP expenditure was significantly higher than the industry average. He concluded that a benefit had accrued to the A.E. on account of such expenditure and quantified the benefit at Rs. 1.70 crore, restricting the adjustment to Rs. 80 lakh. The Commissioner (Appeals) upheld the addition. The Tribunal, following its decision in the assessee's own case for assessment year 2005-06, held that the transaction was not an international transaction and deleted the addition made by the Assessing Officer.3. Disallowance of Rs. 20,41,065 towards royalty payable to Cadbury Adams, U.S.A.:The TPO determined that the royalty payment to Cadbury Adams, U.S.A. (CAUSA) at 2.7% of sales was not at arm's length and restricted it to 1%. The Commissioner (Appeals) upheld this view. The Tribunal, after examining the agreements and additional evidence, held that the payment of royalty to CAUSA was at arm's length and deleted the disallowance.4. Disallowance of Rs. 13,02,22,800 to M/s. Cadbury Schweppes Asia Pacific TTE, Singapore:The TPO determined the arm's length price of the payment made to M/s. Cadbury Schweppes Asia Pacific TTE (CSAPL) at nil, as the assessee failed to furnish necessary evidence. The Commissioner (Appeals) upheld the addition. The Tribunal admitted additional evidence and remanded the matter back to the Assessing Officer for de novo adjudication, directing a speaking and well-reasoned order.5. Disallowance of depreciation of Rs. 22,75,506 on capitalization of marketing knowhow:The Assessing Officer disallowed the depreciation claim following the assessment order for 2003-04. The Tribunal, following its consistent view in the assessee's own case for preceding assessment years, allowed the claim of depreciation.6. Disallowance of expenditure under section 14A of the Act amounting to Rs. 1,77,87,904:The Assessing Officer disallowed the expenditure under section 14A by applying a proportionate basis. The Tribunal, following its decision in the assessee's own case for assessment year 2004-05 and 2005-06, restricted the disallowance to 2% of the exempt income earned during the year.7. Revenue’s appeal concerning deletion of part disallowance made under section 14A of the Act:In view of the Tribunal's decision in ground no.6 of the assessee's appeal, this ground became redundant and was dismissed.8. Revenue’s additional grounds concerning the AMP expenditure:In view of the Tribunal's decision in ground no.2 of the assessee's appeal, these grounds became redundant and were dismissed.Conclusion:The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal provided detailed reasoning for each issue, ensuring that the legal principles and facts were thoroughly examined.