TaxTMI 
TaxTMI 
2011 (9) TMI 279
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..... erred in making transfer pricing adjustment of Rs. 31.54 crores on account of advertising, marketing and promotion expenses alleged to have been incurred towards strengthening of the AE; 2. erred in making transfer pricing adjustment of Rs. 1.20 crores on account of purchase of raw material from AEs by Konkan Agro Marine Industries Pvt Ltd.; 3. erred in treating revenue expenditure of Rs. 2,11,674 (net disallowance of Rs. 84,670 after allowing depreciation @60%) incurred by the appellant on the software; 4. erred in holding that club expenses of Rs. 54,807 have not been incurred by the appellant for the purpose of its business and thereby disallowing the same; 5. erred in not granting depreciation of Rs. 2,90,780 on the tax written down value as on 1st April, 2005, of the expenses incurred by the appellant on software and repairs to furniture, which were treated as capital expenditure by the learned AO in the earlier assessment years; and 6. erred in levying interest under section 234B of the Act of Rs. 5,05,10,710 which is not in accordance with law. 3. We will take up the above grievances one by one. 4. So far as the firs....
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....under both of these segments, the manufacturers are to meet all the costs themselves and realize all the sale proceeds on their own, but any difference, over their costs and agreed margin of profit, is to the credit of the assessee. To give a simple illustration, in case the costs incurred by the CBU is x, the CBU is allowed profit margin of 30 per cent on costs, and sale proceeds of the goods so produced is y, the assessee's entitlement for gross receipt from the CBU is y- 1.2x . In the terms of the agreement with Konkan Agro Marine Industries Pvt Ltd., the profit permitted to this CBU consisted of several factors such as basic minimum monthly sum, additional sum based on outputs and incentives based on quality norms. The balance amount out of gross sales, computed in the prescribed manner, after deducting all the eligible costs such as excise duty, sales tax or value added tax, raw materials, distribution costs and other eligible costs - as agreed upon between the assessee and the CBU, and the profit margin permitted to the CBU, was assessee's entitlement. It was in this background that the assessee reported all the international transactions with AEs, including in respec....
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.... The assessee's objections at the assessment stage, as also before the Dispute Resolution Panel, did not fetch any relief to the assesse. The matter did not rest at this ALP adjustment in the purchases. The Transfer Pricing Officer, further noted that the assessee has incurred an expenditure of Rs. 37.22 crores on account of sales promotion and advertising, which works out to 40.64 per cent of entire turnover of Rs. 91.58 crores. The TPO was of the view that the assessee has spent huge amounts on advertisement and sales promotion which pertain to the brands owned by the AEs, and the assessee has not received any compensation from its AEs for the brand promotion. He was of the view that "an independent enterprise, with a similar business model would expect an arm's length reimbursement for doing brand promotion activities along with a mark up for performing these activities" since "increase in sales, of maintenance of sales at a particular level, would not generate so much of profit as to compensate the assessee for these expenses". The Transfer Pricing Officer, accordingly, held as follows: The assessee has incurred substantial advertising expenditure. This would result ....
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....e assessee filed his objection to this action of the Assessing Officer before the Dispute Resolution Panel, but the Dispute Resolution Panel, it does more often than not, rather summarily rejected the objections. The DRP, in a rather brief order, went on to observe that "moreover, the TPO has allowed highest possible percentage of advertisement expenditure, which is in the case of United Spirits, and thus resulting in maximum benefit to the assessee". Aggrieved by these adjustments, of Rs. 1.20 crores in respect of purchases by assessee's contract bottling unit - namely Konkan Agro Marine Products Limited, and of Rs. 31.54 crores in respect of, what the TPO has termed as, "contribution by the assessee towards the strengthening the brands owned by the AE", the assessee is in appeal before us. 7. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 8. As regards the arm's length price adjustment in the purchases of raw material by assessee's CBU, first objection of the assessee is that Konkan Agro Marine Industries Pvt. Ltd., assessee's contract bottling unit, is....
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....r ready reference: "92A. Meaning of associated enterprise.-(1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise, in relation to another enterprise, means an enterprise (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or....
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.... firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed. 10. We find that, in terms of the provisions of section 92A(1)(a), the expression 'associated enterprises' refers to an enterprises "which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". The scope of 'associated enterprises' is expanded further by section 92A(1)(b), taking into account group concerns, and it is provided that 'associated enterprises' covers an enterprise "in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise." In effect, thus, when same persons participate, directly or indirectly or through....
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.... 92A(2)(e), for example, refers to a situation in which "more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons" but this deeming fiction is equally applicable when the same person appoints, say, more than half of the directors of the governing board for three or more enterprises. A literal interpretation to this clause will mean that if this relationship is between two enterprises, these two enterprises are required to be treated as 'associated enterprises' but when the same basis extends to more than two enterprises, these enterprises will not be associated enterprises. That is clearly an incongruous result. In our considered view, as all clauses of deeming fictions set out in section 92A(2) are only illustration of the manner in which this de facto control on decision making exists, it is necessary that, while interpreting these deeming fictions, we interpret the same in such a manner as to make them workable rather than redundant (ut res magis valeat quam pereat), and that the same test of effective control o....
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....ssociated enterprises (whiskey segment), and the other segment in which no purchases have been made from associated enterprises (OTW i.e. other than whiskey segment), but while the assessee has made a profit of 1.16 per cent in the segment in which transactions have taken place with AEs, the assessee has incurred a loss of 4.93 per cent in the segment in which no transactions have taken place with the AEs. Learned counsel that both these distinct segments of operations being in the same line of business, the best comparator of whiskey segment is other than whiskey segment in assessee's own case, the results shown by the assessee in whiskey segment, showing better profitability than OTW segment, should be accepted. Learned counsel terms this comparability as application of 'internal TNMM'. It is submitted that, for the simple reason that the assessee's profitability in the same line of business in the segment in which he has had transactions with AEs is better than the profitability in the segment in which he had no transactions with the AEs, the impugned TNMM adjustment should be quashed. 13. On this issue also, learned Departmental Representative mainly relied u....
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....d the comparability itself, we see no need to deal with this issue of comparing financial results of OTW segment with whiskey segment any further. 16. Learned counsel's next submission that in any case exceptionally high and low profit making comparables are required to be excluded from the list of comparables adopted for TNMM benchmarking. In support of this proposition, he relies upon Special Bench decision of this Tribunal in the case of DCIT v. Quark Systems Pvt. Ltd. (38 SOT 307). He points out that two extreme items, i.e. item Nos. 13 and 19 in the list of comparables- showing loss of 9.98 per cent and profit of 37.48 per cent respectively, are thus required to be excluded. We find that in the case of Quark Systems (supra), while upholding the exclusion of a loss making entity from the comparables, the Special Bench, inter alia, observed that, "While we agree that merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purposes of computation of ALP. Imercius is a case in which not only functional area is different, Imercius has a negative net worth but also because turnover of the Imercius has no comparison with the asses....
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....m pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly. 18. The views so expressed by the Coordinate Bench have been upheld by Hon'ble Punj. & Har. High Court by, vide judgment dated 16th May 2011, by rejecting revenue's appeal and observing that in the remanded proceedings, the Assessing Officer himself has accepted the stand of the assessee. 19. As evident from the above discussions, comparables showing exceptionally high profits and losses have been held to be excludable....
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....on expenses alleged to have been incurred towards strengthening of the AE. 23. As far as this adjustment is concerned, it is an undisputed position that the Assessing Officer had not made any reference to the Transfer Pricing Officer for ascertaining ALP in respect of advertising, marketing and promotion expenses alleged to have been incurred for brand strengthening of the brands owned by the AE. The question whether TPO can make adjustments in such a situation is squarely covered by a decision of the Coordinate Bench in the case of 3i Infotech Ltd. v. DCIT (136 TTJ 641) wherein Coordinate Bench has, inter alia, observed as follows: 38. ........... Under the provisions of section 92E, an assessee who has entered into an international transaction during a previous year has to obtain a report from an accountant and furnish such report in the prescribed form, i.e., Form No. 3CEB. Section 92C(3) provides as follows : "(3) Where during the course of any proceeding for the assessment of income, the AO is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been ....
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....ional transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the AO and to the assessee." In the present case, the AO referred to the TPO for determination of ALP the transactions set out in Form No. 3CEB by his letter dated 29th Sept., 2003. The details of these transactions have already been set out above in the earlier paras. The transaction by which the assessee deputed three of its employees to ICICI Infotech, USA, was not considered as an international transaction to be set out in Form No. 3CEB by the assessee. The AO therefore never referred the computation of ALP to the TPO the transaction of deputation of three of its employees by the assessee to ICICI Infotech, USA. The jurisdiction of the TPO is therefore restricted to the transactions referred to him by the AO under section 92CA(1). The TPO therefore could not under section 92CA(3) determine the ALP in relation to an international transaction not referred to him by the AO under section 92CA(1). In this regard Instruction No. 3 of 2003, dated 20th May, 2003 issued by the CBDT regarding computation of income from international transaction having regard to ALP, is very clear. In th....
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....p entities, by CBU of the assessee. Ground No. 1 is thus allowed and ground No. 2 is partly allowed in the terms indicated above. 26. The next issue that we are required to adjudicate is whether or not the Assessing Officer was justified in treating revenue expenditure of Rs. 2,11,674 (net disallowance of Rs. 84,670 after allowing depreciation @ 60 per cent) incurred by the appellant on account of software, as capital expenditure. 27. The expenditure on software, which has been held to be capital expenditure by the Assessing Officer, is in respect of routine business applications and attendance recordings etc. We have examined each of these cases, and all these software are application software, which become obsolete rather quickly, and the payment is towards licence fees for use of software. Keeping in view the nature of the software, as also the principle laid down by Special Bench in the case of Amway Enterprises v. DCIT (111 ITD 112), we uphold the grievance and direct the Assessing Officer to treat entire expenditure on these routine business application software as revenue expenditure and thus delete the impugned disallowance. 28. Ground No. 3 is thus allowed. 29.....