2023 (9) TMI 1712 - AT - Income Tax

Transfer pricing and related disallowances deleted; AMP, service-fee, global services, IT charges and trademark royalty allowed; Section 14A remitted

M/s Mondelez India Foods Private Limited (formerly known as Cadbury India Limited) Versus Assistant Commissioner of Income-tax, ange-5 (1) (2), Mumbai

ITAT (Mumbai) set aside transfer pricing adjustments and related disallowances raised by the TPO, deleting AMP, service-fee, global services and IT-charge ... TPO adjustments - towards advertisement, marketing and promotion on Cadbury brand in India - assessee is not the legal owner of the brand in India - AMP expenses incurred translates into development of AEs brand - HELD THAT:- We find that the co-ordinate bench of the Tribunal in assessee’s own case for A.Y. 2011-12 [2023 (9) TMI 741 - ITAT MUMBAI], while considering an identical issue, has followed the order of another order of the co-ordinate bench [2021 (2) TMI 1358 - ITAT MUMBAI] to decide the issue in assessee’s favour by holding as under: - 'Undisputedly, as could be seen from the material on record, in response to the show cause notice issued by the Transfer Pricing Officer the assessee had specifically submitted that there is no arrangement or agreement with the overseas A.E. for incurring AMP expenditure. It is also apparent the expenditure was wholly and exclusively incurred for marketing assessee’s own products and the payment was made to third parties in India. Therefore, it is outside the purview of international transaction as defined under section 92B of the ACT. As could be seen, the Transfer Pricing Officer ignoring the submissions made by the assessee had assumed that a benefit has accrued to the overseas A.E. on account of AMP expenditure incurred by the assessee. The learned Commissioner (Appeals) has upheld the adjustment / addition proposed by the Transfer Pricing Officer simply relying upon his order passed in assessee’s own case for assessment year 2005–06 - decided the issue in favour of the assessee'. The facts being identical, respectfully following the above order of the coordinate bench of the Tribunal, we hold that the TP adjustment made towards AMP expenses is hereby deleted. The grounds raised by the assessee in this regard are allowed. Disallowance of payment of royalty on technology paid to Cadbury Enterprises Pte Limited - HELD THAT:- This issue has been decided by the Tribunal for A.Ys 2011-12 & 2012-13 - ' 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 knowhow 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 knowhow at the maximum rate of 2%, whereas, the assessee has paid royalty both for technical knowhow and trademark aggregating to 2.25%. He has also referred to the Press Note issued by the Government clarifying that royalty payment cannot exceed 2% and further the royalty payment for technical knowhow subsumes royalty payment for trademark. In this context, the Transfer Pricing Officer has also referred to similar dispute arising in the preceding assessment years. It is evident that the learned Commissioner (Appeals) has upheld the disallowance of royalty payment of trademark simply relying upon the order passed by him in assessee’s own case for assessment year 2005–06. As could be seen from the material available on record, the assessee has entered into agreement' Respectfully following the above order of the co-ordinate bench, Issue stood squarely covered in assessee’s favor. Disallowance of service fees paid to Cadbury Enterprises Pte Ltd. - HELD THAT:- Issue are identical for A.Y. 2011-12 & 2012-13, which, the coordinate bench has already decided in favour of the assessee. We notice that for the year under consideration also the TPO while arriving at the ALP has used the estimated salary and also used earlier years man hours to determine the current year man hours spent. Therefore respectfully following the above order of the co-ordinate bench, delete the TP addition made and allow these grounds raised by the assessee. Disallowance of service fees paid to Mondelez International Holdings LLC. - HELD THAT:- Issue stands covered in favour of the assessee - We notice that the TPO has computed the TP adjustment towards global services rendered by Mondelez International Holdings LLC also in the same way by applying adhoc estimation of salary cost and man hours. Therefore our decision with respect regional service fee paid to Cadbury Enterprises Pte Ltd. Respectfully following the order of the co-ordinate bench in assessee’s own case for A.Ys 21011-12 & 2012-13, we allow in favour of the assessee. Disallowance under section 14A of the act read with rule 8D - HELD THAT:- We find that the co-ordinate bench, for A.Ys 2011-12 & 2012-13 has decided the issue by following its earlier decision for A.Y. 2009-10 and remitted the issue back to the Assessing Officer with the following observations: - 'It is now a settled position that when the own funds are available, no disallowance is warranted under section 14A read with rule 8D. For the year under consideration, the reserves and surplus of the company as on 31/03/2011 is at Rs. 89,988.09 lakhs and the investments made stands at Rs. 12,881.07 lakhs, therefore, we see merit in the contention of the Ld.AR that no disallowance is warranted under section 14A.' For the year under consideration also we notice that the assessee is having sufficient own funds which is more than the investments made. Further the assessee has made a suo moto disallowance towards salary paid to personnel working in Treasury Department - respectfully following the above order of the Tribunal, we remit the issue to assessing officer with similar directions - ground is allowed for statistical purpose. Allocation of expenditure at Baddi Unit-I and Unit-II - For the year under consideration, the ld AR during the course hearing presented a worksheet with details of how the disallowance is computed by the assessing officer. HELD THAT:- From the perusal of the same we notice that the assessing officer has used the same basis as in AY 2011-12 in order to make the disallowances. Therefore, respectfully following the earlier decision of the co-ordinate bench, we delete the disallowance made by the Assessing Officer. These grounds of the assessee are allowed. Short grant of credit of taxes deducted at source - dividend distribution tax payment - HELD THAT:- Assessee has filed a petition under section 154 before the assessing officer on 02nd January, 2019, which is not yet disposed of - we direct the Assessing Officer to verify the claim of the assessee made in the petition filed under section 154 and allow the claim in accordance with law - allowed for statistical purpose. Non grant of MAT credit - HELD THAT:- We remit the issue back to the Assessing Officer to examine the status of the assessment order for A.Y.2010-11 and accordingly give credit for the carried forward MAT for the year under consideration. This ground is allowed for statistical purpose. TP adjustment on account of information technology charges - HELD THAT:- We notice that the basis on which the TPO has made the TP adjustment is similar adjustment made for service fee. The TPO in order to arrive at the adjustment has used the estimated salary and also used earlier years man hours to determine the current year man hours spent. Therefore our decision with regard to adjustment made with respect to service fees is mutatis mutandis applicable for the on account of information technology charges also. Accordingly respectfully following the decisions of the co-ordinate bench, we delete the TP adjustment. These grounds are allowed in favour of the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether advertisement, marketing and promotion (AMP) expenditure incurred by the taxpayer constitutes an 'international transaction' under section 92B, thereby permitting transfer pricing (TP) adjustments to attribute part of AMP spend to associated enterprises (AEs). 2. Whether payments characterised as royalty for technical know-how and trademark to overseas AEs are at arm's length and deductible, or require disallowance/adjustment under TP scrutiny. 3. Whether service fees and global/regional service charges (including information technology charges) paid to overseas AEs qualify as international transactions and whether the Transfer Pricing Officer (TPO) applied an appropriate method under section 92C to determine arm's length price (ALP). 4. Legality of TPO's use of ad hoc estimates (e.g., estimated salaries and man-hours) and non-prescribed methodologies to compute ALP instead of one of the methods specified in section 92C(1). 5. Applicability of section 14A and Rule 8D: whether disallowance for exempt income investment is warranted when own funds suffice and as to requirements of satisfaction and computation under Rule 8D. 6. Allocation of expenditure between manufacturing units (Baddi Unit I & II) for purposes of claiming incentives (section 80IC) and correctness of the method of allocation adopted by the taxpayer. 7. Entitlement to tax credits: verification of short-granted credit for tax deducted at source (TDS) and carry-forward/allowance of MAT credit and credit for distributed taxes. 8. Whether issues in the assessment years under appeal are identical to earlier years and therefore covered by prior coordinate-bench decisions (principle of consistency/precedent within taxpayer's own cases). ISSUE-WISE DETAILED ANALYSIS Issue 1 - AMP expenditure as an international transaction (TP adjustment) Legal framework: Chapter X (sections 92B-92C) requires existence of an 'international transaction' between associated enterprises before applying TP adjustments; ALP must be computed by one of the methods in section 92C(1). Precedent treatment: The Tribunal's coordinate-bench decisions for earlier assessment years (relied upon by the Court) interpreted that AMP spend is not an international transaction absent an agreement/arrangement obliging the taxpayer to incur AMP for AE's benefit; mere incidental benefit to AE is insufficient. Interpretation and reasoning: The Court examined whether AMP spend was (a) directed to promote the taxpayer's local products with local messaging, (b) paid to third parties in India, and (c) unsupported by any agreement obliging the taxpayer to incur AMP for the AE. It applied the two-stage test: (i) establish an international transaction/existence of a transaction (agreement/arrangement/understanding) and (ii) compute ALP by prescribed methods. The Court held the TPO had not proven a transaction and had impermissibly used BLT/quantitative comparisons to infer a transaction. Ratio vs. Obiter: Ratio - AMP expenditures, in absence of an agreement/arrangement or evidence of obligation to promote AE's global brand, do not constitute an international transaction under section 92B; TP provisions cannot be invoked on perceived or notional indirect benefit. Obiter - observations on commercial wisdom and local marketing factors explaining why AMP may benefit both local entity and AE without creating a TP transaction. Conclusion: TP adjustments for AMP expenditure deleted; grounds in taxpayer's favour. Issue 2 - Royalty payments for technical know-how and trademark Legal framework: Royalty payments are subject to TP rules if they constitute international transactions; ALP must be shown and, where applicable, approvals/authorisations (e.g., regulatory approvals) and agreements govern characterization. Precedent treatment: Coordinate-bench rulings for earlier years accepted royalty payments (technical and trademark) as at arm's length where agreements, governmental/regulatory approvals and consistent historical treatment existed. Interpretation and reasoning: The Court found that separate agreements existed for technical know-how and trademark, regulatory approvals/approvals by competent authorities were on record, and factual materials (including subsequent conduct and consistency across years) supported that payments were genuine and ALP compliant. Where agreements and amendment letters evidenced transfer of technical know-how, TP adjustment was not sustainable. Ratio vs. Obiter: Ratio - Given authentic agreements and regulatory approvals, royalty payments for technical know-how and trademark were held to be at arm's length; adjustments deleted. Obiter - comparative analysis discussing how overlapping payments should be analysed if facts differ. Conclusion: Disallowance/TP adjustments in respect of royalty payments to overseas AEs deleted; grounds allowed. Issue 3 - Service fees / global services / IT charges paid to AEs and method of ALP computation Legal framework: Section 92C(1) prescribes specific methods for determining ALP; Rule 10B and related jurisprudence restrict TPO to the statutory methods; ad hoc or extraneous estimation is impermissible. Precedent treatment: Coordinate-bench precedents and higher-court reasoning emphasise that TPO cannot adopt a 'seventh' or alien method; determination must follow one of the prescribed methods and procedural safeguards. Interpretation and reasoning: The Court observed TPO used estimated salary costs and historical man-hours to compute ALP (an ad hoc approach), rather than applying any of the section 92C methods properly. Reliance on prior coordinate-bench decisions led to deletion of such TP adjustments; remand only where mandatory methodology requires re-consideration but not where the TPO failed to follow section 92C. Ratio vs. Obiter: Ratio - ALP computation must follow one of the statutory methods; use of ad hoc estimates/man-hours by TPO is not sustainable. Obiter - procedural remarks on remand and avoidance of unnecessary litigation where legal position is settled. Conclusion: TP adjustments for service fees and IT charges computed by ad hoc methods deleted; grounds allowed. Issue 4 - Rule 8D / section 14A disallowance for exempt income investments Legal framework: Section 14A read with Rule 8D prescribes computation of disallowance when exempt income arises; applicability depends on source of funds (own funds vs borrowed) and required satisfaction by AO. Precedent treatment: Tribunal decisions hold that when own funds are sufficient to make investments, interest disallowance under Rule 8D is not warranted; direct/indirect expense disallowances may require verification and remand if factual matrix warrants. Interpretation and reasoning: The Court noted the taxpayer had ample own funds exceeding investments and had made suo motu disallowance for minor treasury salaries. It followed coordinate-bench directions: no interest disallowance, and remittance of direct/indirect expense verification to AO with directions to allow representations and consider suo motu disallowance. Ratio vs. Obiter: Ratio - No interest disallowance under section 14A/Rule 8D where own funds suffice; direct/indirect expense computations to be re-examined by AO with opportunity to taxpayer. Obiter - comments on form of recording satisfaction not being rigidly prescribed. Conclusion: No interest disallowance; matter remitted to AO for verification of direct/indirect expense component in accordance with directions. Issue 5 - Allocation of expenditure between manufacturing units and claim under section 80IC Legal framework: Allowances under incentive provisions require proper allocation of costs; AO may verify allocation methodology. Precedent treatment: Coordinate bench accepted allocation methodology for material cost, employee cost and depreciation, remitted/verified operating expenses where necessary; earlier OGE indicated acceptance of method. Interpretation and reasoning: For the years under appeal the AO applied same basis as earlier years; Court followed coordinate-bench findings and deleted disallowance, allowing section 80IC deductions as claimed. Ratio vs. Obiter: Ratio - Where allocation method is consistent and accepted in earlier orders and OGE, corresponding disallowances are invalid. Obiter - necessity of verification limited to changes in allocation method. Conclusion: Disallowances deleted; section 80IC deductions allowed. Issue 6 - TDS credit, dividend distribution tax credit and MAT credit Legal framework: Credits for TDS, distributed taxes and MAT carry-forwards are statutory entitlements subject to verification and status of prior assessments. Precedent treatment: Tribunal remitted claims to AO for factual verification where petitions under section 154 or prior assessment orders affected entitlement. Interpretation and reasoning: The Court directed AO to verify the taxpayer's petitions and claims filed under section 154 and to grant credits in accordance with law; MAT credit issues remitted for examination of the status of the earlier assessment (e.g., assessment quashed as time-barred may affect carried forward figures). Ratio vs. Obiter: Ratio - Entitlement to tax credits must be examined and allowed if supported by records and legal position; remand appropriate where earlier orders affect carry-forwards. Obiter - administrative directions to AO to ensure opportunity of hearing. Conclusion: Claims remitted to AO for verification and grant of credits as per law; grounds allowed for statistical purposes. Issue 7 - Application of prior coordinate-bench decisions to current assessment years Legal framework: Principle of consistency and binding effect of tribunal's own coordinate-bench decisions on materially identical facts; separate assessment years do not preclude application of settled findings where facts are identical. Precedent treatment: The Court repeatedly followed identical holdings in the taxpayer's own earlier assessment-year decisions, applying those outcomes to the years under appeal. Interpretation and reasoning: The Court found facts and legal issues materially identical to earlier years; DRP itself had relied on earlier orders; accordingly the coordinate-bench precedent was followed to avoid re-litigation and unnecessary remand. Ratio vs. Obiter: Ratio - Where identical facts/issues have been decided in prior years by a coordinate bench, the same reasoning applies and adjustments remanded or deleted accordingly. Obiter - caution on restoration only where unresolved higher-court authority changes law. Conclusion: Issues in the appeals were decided consistent with coordinate-bench precedents; appeals partly allowed in taxpayer's favour and relevant adjustments deleted or remitted to AO with directions.