TaxTMI 
TaxTMI 
2013 (6) TMI 591
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.... Rs. 15,28,77,527/- (2) The other issue raised pertains to Corporate Tax issue. In this regard it has been urged that the Assessing Officer has erred in disallowing a sum of Rs. 36,69,882/- u/s. 40(a)(ia). (3) Another issue raised is that Assessing Officer has erred in levying interest u/s. 234B and 234C of the Act. The assessee company is engaged in the business of trading of footwear, apparel, accessories, sports equipments etc. and providing exports related consultancy services on behalf of group companies. It is a subsidiary company of M/s Reebok Mauritius Company Ltd. The international transaction entered into by the assessee company are as under:- S.No. Nature of transaction Method used by assessee Amount 1 Import of apparels and footwear for resale. RPM 34,75,63,922/- 2 Royalty CUP 15,28,77,527/- 3 Identification of factories in India for sourcing/exporting the goods. TNMM 73,87,878/- 4 Reimbursement of other expenses. advertisement and No benchmarking 44,67,273/- Total 51,22,96,600/- 3. TPO considered the above transactions. TPO proposed an upward adjustment of Rs. 51,82,80,551....
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....d non routine advertisement and marketing expenditure on brand promotion and development of marketing intangible for the AE. The TPO further charged mark up of 15% and accordingly proposed an adjustment of Rs. 50,82,80,551/- on account of the alleged brand building activity undertaken by the assessee for the AE. The DRP directed the Assessing Officer to reduce the mark up to 12.50% and accordingly reduced the adjustment to Rs. 49,72,06,126/-. 6. Now the assessee is in appeal before us. We have heard the rival contentions and perused the records. 7. We find that a Special Bench of the Tribunal was constituted by the President, in the case of LG Electronics India Pvt. Ltd. Noida vs. ACIT, Circle-3, Noida bearing I.T.A. No. 5140/Del/2011 to decide as to whether the Assessing Officer /TPO was justified in making transfer pricing adjustment in relation to advertisement, marketing and promotion expenses incurred by the assessee. The appellant had also intervened before the Special Bench. 7.1 The Special Bench has recently pronounced its decision vide order dated 15.1.2013. The Special Bench has in principle held that benchmarking of AMP expenses, being an international transacti....
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....to make assessment or reassessment U/S 147 or pass order U/S 154 to enhance the assessment completed before 1-7-2012, has been curtailed to the extent the subject matter is covered by sub-section (2B). It shows that abundant caution has been taken by the legislature in not disturbing the finality of the assessment due to retrospective operation of sub- section (2B) in cases set out in sub- section (2C). The acceptance of the contention of the ld. AR to consider sub- section (2B) as prospective, would not only make sub-section (2B) but sub- section (2C) also as dormant and non- existent. Obviously an interpretation which makes a valid piece of legislation as redundant, does not merit acceptance. The purpose intended to be achieved in validating the jurisdiction of the TPO on the earlier transactions not referred to him by the AO on one hand and also not disturbing the finality of assessments already. completed on the other, has been properly achieved by the respective dates from which sub- sections (2A), (2B) and (2C) have been given effect to. 7.20. The Id. counsel for the appellant also contended that if sub- section (2B) is considered as retrospective in operation, then all ot....
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.... during the course of proceedings before him. The prerequisite of seeking approval of the Commissioner is incorporated in sub-sec. (1) alone and the same cannot be read into sub-secs. (2A) and (2B) by the doctrine of incorporation. Our view is fortified by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Pawan Kumar Laddha [(2010) 324ITR 324 (SC)) . 7.22. Now we take up the contention raised by the Id. counsel for some of the interveners on harmoniously interpreting sub-section (2B) by limiting its scope only to such transactions which the assessee perceives as international transactions but fails to report. We are not convinced with such interpretation. A line of distinction sought to be drawn by. the ld. counsel between two types of international transactions for which the assessee has not furnished audit report, viz., which is an international transaction as. per assessee's version and which is not so, has no statutory sanction. There is no such cue, even remotely, in the language of sub-sec. (2B). The reference to international transaction in sub-sec. (2B), for which the assessee has not furnished report u/s 92E is unqualified. If we interpret sub-sec. (2B) i....
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....on 92CA. In that view of the matter, it becomes evident that no fault can be found with the jurisdiction of the TPO to process the transaction under reference." .......... 14.21. Thus it is palpable that all the three necessary ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE is non-resident; such transaction is in the nature of provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building an international transaction in the facts and circumstances of the present case." 7.2 Since it is a lengthy order, it will not be desirable to reproduce extensively as the order can be referred independently. The glimpses of the observations and conclusions of Special Bench may be found at various other places also, but we have tried to secure the gist of the conclusions as best possible as above. 7.3 Further the Hon'ble Delhi Bench of the Tribunal in the above case of Canon India Pvt. Ltd. vs. DCIT (I.T.A. No. 4602/Del/....
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..... (Supra) the entire AMP expenses should be sent to the file of the TPO to consider the same afresh, in light of the Special Bench decision in LG Electronics Ltd. case (supra). 10. Upon careful consideration, we find that the Special Bench decision has been considered by the other benches of the tribunal as mentioned above and it has been deduced that the selling expenses do not lead to brad promotion and the selling expenses have to be excluded from the AMP expenses for the purpose of bench marking analysis. 11. Accordingly, we remit the issue of AMP expenses to the files of the TPO with the following directions:- i) Expenditure in connection with the sales as mentioned above cannot be brought within the ambit of advertisement, marketing and promotions expense for determining the cost / value of the international transactions. However, the TPO shall examine the veracity of description and quantification of the amount of selling expenses and accordingly, allow the assessee's claim. ii) After deducting the selling price from the AMP expenses as mentioned above, the TPO shall decide the issue of AMP expenses by applying the proper comparables after hearing the assessee an....
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....(2011-TII-58-ITAT-MUM-TP). 12.5 In view of the above TPO held that the approval of the Ministry of Commerce, Department of Industrial Policy and Promotion cannot be treated as a valid CUP as required by Rule 10B(1((a) of the I.T. Rules. He, therefore, rejected the contentions of the assessee. 12.6 TPO further noted that assessee was asked to furnish the information as to the cost benefit analysis with regard to the payment of royalty. TPO noted that no such cost benefit analysis was carried out by the assessee. TPO noted that assessee has referred that royalty is being paid for technology. As per Clause 1 of the Technology License Agreement dated 01.10.2002 between Reebok International Ltd. and Reebok India Company, the assessee has been provided data, documentation, drawings and specifications relating to inventions, designs, formulae, process and similar property, referred to as 'know-how. Clause 2 of the same agreement, grants the assessee non exclusive, non transferrable right to utilize the technology in the manufacture and distribution of Reebok Products in India. 12.7 Referring to the above, the TPO observed that the technology should have helped the assessee in ear....
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....efit analysis at the time of entering into the agreement with its AE showing that the royalty rate is not fixed based on expected benefit. * There is no proof that the other group concerns or third parties are also charged identical royalty. * The taxpayer has also not been able to show that it derived any economic benefit from the alleged know how received from the AE. * The profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from intangible assets such as distribution systems, trained workforce, etc. Allowances need to be made for them. In the absence of any data provided by the taxpayer, it is impossible to know what percentage of profits the licensee would like to share at an arm's length after removing the returns from assets employed and other economic factors which may not arise solely through the engine of the technology. * The tax payer did not give the details of royalty rates in the industry. In view of the detailed discussions in the preceding paragraphs the arm's length price of royalty is determined at Rs. NIL in place of Rs. 15,28,77,527/-. The amount of Rs. 15,28,77,527/- is treated as adjus....
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....5% of sales. It is respectfully submitted that the industry in which the appellant operates i.e. the premium sports apparel and footwear industry is highly competitive and in order to survive and grow profitably it is imperative for the appellant to continuously launch new and improved products in the market. The appellant, however, does not undertake any significant research and development activity on its own and solely depends upon the associated enterprise for provision of technology. A description of the technology provided by the associated enterprises is submitted as under: a. The PUMP technology: The PUMP technology is proprietary inflatable shoe technology that automatically provides the wearer with a custom fit. A pump chamber that is inflated with air from The Pump wraps around the foot and expands inward eliminating any gaps within the shoe. This uniform glove-like wrapping of the foot results in a customized fit and feel. b. DMX technology: The DMX technology provides cushioning using a heel-to-forefoot, active airflow system that delivers Cushioning when and where it is needed. Since the introduction multiple versions of DMX have been developed to meet ....
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....increase sales and charge higher prices which leads to higher profitability. It would also be noted that during the relevant previous year the total revenue of the appellant increased to Rs. 451.97 crores from Rs. 360.95 crores in the preceding previous year registering a growth of 25.21%. The growth in the revenue of the appellant clearly demonstrates the benefits derived by the appellant from the use of technology. It is respectfully submitted that the survival of the business of the appellant depends upon the technology provided by the associated enterprise and in the absence of the technology the appellant would not be able to undertake manufacturing of goods. The appellant has been able to profitably survive and grow in a competitive industry, where continuous innovation is a prerequisite, solely due to the technology provided by the associated enterprise. The payment of royalty, therefore, it would be appreciated, is a consideration in terms of agreement with the associated enterprises for availing license to use their proprietary technology. In other words, the payment of royalty is necessary cost incurred for obtaining know-how for manufacture of products by the appel....
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.... Court held as under: "21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. XXX So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not con....
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.... is not hit by the provisions of s. 92 of the Act and there is no reason to hold that the expenses should not be allowed under s. 37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee. Therefore the payment of royalty is a business expenditure which has been incurred wholly and exclusively for the purpose of business of the assessee and same is to be allowed in toto as a matter of commercial expediency. Therefore, the case laws relied upon by the learned CIT-Departmental Representative are of no benefit to the Revenue. The reasonableness of expenditure in the present circumstances and facts of case cannot be doubted and accordingly the AO is directed to allow the claim of the assessee and the order of learned CIT(A) is reversed. Thus, ground no. 3 of the assessee is allowed." Further, recently in the case of SC Enviro Agro India Ltd vs DCIT (ITA No 2057 & 2058/Mum/2009) the Hon'ble Mumbai Bench of the Tribunal held that "The TPO has to examine whether the price paid or amount paid was at arms length or not under the provisions of Transfer Pricing and its rules. The rule do....
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....nch of Tribunal in the case of ThyssenKrupp Industries India Ltd vs Addl CIT (ITA No. 6460/Mum/2012), wherein the Hon'ble Tribunal held as under: "It is in pursuance to the deemed approval by RBI under the automatic approval scheme that the assessee made payment of royalty and technical fee to its AE. It is relevant to note that such payment has been approved or deemed to have been approved by the RBI. When a payment is made after obtaining due approval from the RBI, how its ALP can be computed at Rs.Nil, is anybody's guess. The fact of approval of the payment by the RBI has been succinctly recorded by the TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of Rs.4.29 crore made by the A.O. in this regard." Reliance in this regard is also placed on the decision of Delhi Bench of Tribunal in the case of DCIT vs. Sona Okegawa Precision Forgings Limited (ITA No. 5386/Del/2010), wherein the Hon'ble Tribunal wh....
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....spectfully submitted that for the aforesaid reason too, the adjustment made by the TPO is liable to be deleted. (iii) None of the prescribed methods applied by the TPO: The Transfer Pricing regulation in India provides for five methods, out of which one of the methods is to be applied as the most appropriate method to determine the arm's length price of the international transaction. Under the Transfer Pricing regulations contained in sections 92 to 92F of the Act, the mandate of the TPO is to determine the arm's length price of the international transaction. Section 92C(1) of the Income-tax Act provides five methods for determination of arm's length price of an 'international transaction'. The mandate of the TPO, it is respectfully submitted, is limited to application of any of the five prescribed methods as the most appropriate method. The aforesaid has been clarified by the CBDT in Instruction No. 3 of 2003 dated 20-05-2003 as under: "- - - In order to maintain uniformity of procedure and to ensure that work in this important area proceeds smoothly and effectively, the following guidelines are hereby issued: (i) Reference to Transfer Pricing Officer (TPO): The ....
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....omputer Associates Pvt. Ltd. vs. DCIT (ITA Nos. 5420 and 5421/Mum/2006), wherein, while deleting the adjustment made by the TPO by holding payment of royalty to be unjustified, the Hon'ble Tribunal held as under: "8. The manner in which the A.L.P. is to be determined by any of the method prescribed in Sec. 92C in provided in Rule 10B of the I.T. Rules, 2961. After examining the parameters prescribed in Rule 10B, it can be seen that bad debts written off cannot be factor to determine the arm's length price of any international transaction. In our opinion, the TPO has exceeded his limitation by following the method which is not authorized under the Act or rules. We, therefore, hold that the Arm's Length Price determined by the TPO and adopted by the Assessing Officer to the extent of royalty payable to the CA Inc Management, USA is not as per the procedure prescribed and same cannot be sustained. We, therefore, direct the Assessing Officer to adopt the Arm's Length Price of the royalty payable to CA Inc Management, USA as declared by the assessee in both the years." (emphasis supplied) The aforesaid decision has also been affirmed by the Hon'ble High court. Reliance in this ....
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....ts incurred by the assessee in cost contribution arrangement. Similarly, the Hon'ble Mumbai Bench of the Tribunal in the case of Nimbus Communications Ltd vs ACIT (ITA No 2361/Mum/2007), held adjustment made by the TPO for not charging interest on outstanding bills raised for services rendered to an associated enterprise, without applying any of the prescribed methods as not sustainable. The Hon'ble Tribunal in that case held as under: "8. The TPO in this case has not followed the mandate of the Act. No method has been specified. Under these circumstances, the adjustment made on the basis of the Transfer Pricing Officer under section 92CA(3) of the Act cannot be sustained."(emphasis supplied) Reliance in this regard is also placed on the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Hero Motocorp Ltd vs Addl CIT (ITA No 5130/Del/2010), wherein the Hon'ble Tribunal, while deleting a similar transfer pricing adjustment, held as under: "Even otherwise, there is no basis or justification for the TPO for arriving at the conclusion that the arm's length price for model fee should have been only to the extent of 25% of the payment made towards model fee. T....
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....at it was a case of suo moto reference to the TPO and it is the case of the revenue authorities, to import the provisions of Chapter X. In this circumstance, since the TPO did not adhere to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed, as the TPO infringed the relevant provision of the Income Tax Act and Rules." In view of the aforesaid, it is respectfully submitted that the TPO on the one hand has rejected the CUP applied by the assessee which is based upon comparable uncontrolled agreements and on the other hand determined the ALP of the transaction at Nil allegedly applying the CUP method. It is submitted that for application of CUP, availability of comparable uncontrolled transaction is a prerequisite. The TPO, however, determined the arm's length price on the basis of assumptions and surmises. In view of the aforesaid, it is respectfully submitted that the adjustment made by the TPO is liable to be deleted. Reliance in this regard is placed on the decisions of the Hon'ble Delhi Bench of the Tribunal in the case of AWB India Pvt Ltd vs Addl CIT (ITA No 4454/Del/2012). The Hon'ble Tribunal held as under: "27. Further, the ....
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....he earlier years. Further, in the earlier years, TNMM has been accepted to be the most appropriate method for the purpose of benchmarking the international transaction of payment of royalty. In assessment year 2004-05, the Transfer Pricing Officer, applying TNMM, determined the arm's length price of international transaction of payment of royalty at Rs 3,12,29,088 as against the actual payment of Rs 4,42,11,041. However, the addition made by the TPO was deleted by the CIT(A). Reliance in this regard is placed on the decision of the Hon'ble Mumabi Bench of the Tribunal in the case of SC Enviro Agro India Ltd vs DCIT (ITA No 704/Mum/2012) wherein the Hon'ble Tribunal held as under: "Facts this year in which royalty has been paid based on the same agreement as in earlier are identical. Therefore, respectfully following the decision of the Tribunal in assessee's own case in assessment years 2003-04 and 2004-05 (supra), we set aside the order of CIT(A) and delete the addition made" 14.2 Ld. Departmental Representative on the other hand submitted that the international transactions of payment of royalty should satisfy the benefit test. He argued that in this case the payment of ....
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....kla Appliances: (2011-TII-37-ITAT-Del-TP) Wherein the Hon'ble Tribunal held that the TPO cannot challenge the judgment of the assessee as to the source from which the technology is to be obtained and at what cost etc. The Hon'ble Delhi High Court while upholding the decision of the Hon'ble Tribunal held "so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning" Further, in the case of Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010) the Hon'ble Mumbai bench of the Tribunal held that benefits derived by the assessee is not a relevant criteria for determination of arm's length of an expenditure incurred by the assessee. Further, recently in the case of SC Enviro Agro India Ltd vs DCIT (ITA No 2057 & 2058/Mum/2009) the Hon'ble Mumbai Bench of the Tribunal held that "The TPO has to examine whether the price paid or amount paid was at arms length or not under the provisions of Transfer Pricing and its rules. The rule does not authorize the TPO to disallow any expenditure on the ground that it was not necessary or prudent for ....
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....TPO is to determine the arm's length price (or the reasonableness of the payment) by applying any of the prescribed methods. Determination of the reasonableness of the expense is not left open to the subjective judgment of the TPO and the said decision also relied upon by the Ld DR in-fact supports the case of the appellant Further, the Hon'ble Pune bench of the Tribunal in the case of Patni Computer Systems Limited vs. DCIT (ITA No. 426/PN/2006), held that "in the present case, there is no material to show that any tangible and concrete benefit has accrued to the associated enterprises as a result of the expenditure incurred by the assessee in obtaining consultancy from Mckinsey & Company. Therefore, under these facts and circumstances, in our opinion, the order passed by the TPO on this aspect is based on no evidence and the same is liable to set aside qua the impugned adjustment". The decision of the Hon'ble Tribunal supports the case of the appellant and does not advance the case of the ld. DR. The Hon'ble Tribunal held that that no compensation is warranted if it is shown that no concrete and tangible benefit has accrued to the assessee. However, in the instant case, the ap....
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....ute. Rule 10B(2)(d) providing for taking into account the laws in Government order in force for determining arm's length price as per rule 10B(1) of the Income-tax Rules did not come up for consideration before the Delhi High Court in the case of Nestle India and all other decisions, relied upon by the DR. ITAT in the case of Perot Systems (Supra), at paragraph 13 of the order observed that "RBI approval does not put a seal of approval on true character of the transaction from the perspective of Transfer Pricing. The Tribunal in that case did not held that Government approval is not to be taken into consideration for undertaking benchmarking analysis in terms of rule 10B(1) read with rule 10B(2)(d) of the Rules." The appellant also seeks to place reliance on the following decision, wherein similar international transactions of payment of royalty, pursuant to approval of the Government, has been held to be at arm's length and adjustment made by the TPO holding arm's length price to be NIL, was deleted: - DCIT vs. Sona Okegawa Precision Forgings Limited (ITA No. 5386/Del/2010) - Hero Motocorp Limited vs Addl CIT (ITA No 5130/Del/2010) - ThyssenKrupp Industries India....
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....operty, referred to as know how. Clause 2 of the same agreement, grants the assessee non exclusive, non transferrable right to utilize the technology in the manufacture and distribution of Reebok Products in India. We find that assessee gets goods manufactured on the basis of technology technical know and designs provided by the AEs. In consideration of provision of technology and know how, the assessee pays royalty @ 5%. The industry in which the assessee operates i.e. the premium sports apparel and footwear industry is highly competitive and in order to survive and grow profitably it is imperative for the assessee to continuously launch new and improved products in the market. 14.9 Assessee does not undertake any significant research and development activity on its own and totally depends upon the associated enterprise for provision of technology. The new products are designed and developed largely in the US based Research and Development and product creation centre of the AE. The assessee regularly access this Tech Packages for use in local development and manufacturing processes for the footwear and apparel styles manufactured locally in India which is largely the adaptation....
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....erments have not been disputed by the Revenue. Accordingly, the inference drawn by the TPO that no benefits were derived by the assessee for use of technology and technical know how is not tenable. 14.12 We further agree with the contention of the assessee that assessee is free to conduct business in the manner that assessee deems fit and the commercial and business expediency of incurring any expenditure is to be seen from the assessee's point of view. We find that it is a settled law that the Revenue cannot sit into the shoe of the assessee and decide what is prudent for the business. In this regard, we place reliance upon the decision of the Hon'ble Apex Court in the case of CIT, Bombay Vs. Walchand and Co. Private Ltd. in 65 ITR 381, wherein it was held that "in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively for business, the expenditure has to be adjudged from the point of view of the businessman and not of revenue". 14.13 We further note that it is on the basis of the same agreement the royalty was paid in earlier years. In earlier years the payment of royalty has not been held to be non-bonafide expenditure ....
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....for determining the arms length price. In this context, the conclusion of the TPO that the arms length price of the royalty payment should be NIL without specifying any cogent basis is not sustainable. The TPO's determination is on the basis of assumption and surmises. Hence, the adjustment made by the TPO is liable to be deleted. 15. In the background of the aforesaid discussion, we hold that the upward adjustment of Rs. 15,28,77,527/- on account of payment of royalty cannot be sustained. Accordingly, we hold that payment of royalty in this case was fully justified. 16. III. Apropos issue of disallowance of a sum of Rs. 36,69,882/- 36,69,882/- u/s. 40(a)(ia). On this issue Assessing Officer noted that assessee company has debited various expenses on which TDS needs to be deducted as per provisions of Chapter XVII-B of the I.T. Act, 1961. Assessing Officer asked the assessee to make the reconciliation statement of expenses and TDS. Referring to the said reconciliation, Assessing Officer observed that there was a short deduction of Rs. 36,69,882/- In view of this non-deduction at source on the payment, Assessing Officer proposed to disallow the same u/s. 40(a)(ia) of the Ac....