TaxTMI 
TaxTMI 
2013 (7) TMI 380
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.... for its marketing efforts in India. 3. The Learned AO / TPO has erred in law and on facts by not following the directions received from Learned DRP in relation to treatment of trade discounts and volume rebates in advertisement and promotional expenditure ("A&P") for comparables and the Appellant. 4. The Learned AO / DRP/TPO has erred in law and on facts by not taking cognizance of the business model, functional and risk profile of the appellant as outlined in the Transfer Pricing documentation and as submitted during the course of the proceedings. 5. The Learned AO / DRP/TPO has erred in law and on facts by making an adjustment of Rs. 212,902,581 (A.Y. 2006- 07); INR 332,504,380 (A.Y. 2007-08); and INR 52,19,78,244 (A.Y. 2008-09) to the income of the appellant and in holding that the transactions between the Appellant and its associated enterprise were not at an arm's length price as defined under section 92F(ii) of the Act. 6. The Learned AO / DRP/TPO has erred in law and on facts by making an adjustment in relation to the value of subsidy received by the appellant from its associated enterprise. 7. The Learned AO / DRP/TPO has erred in law and on facts by disrega....
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....nals Enterprises and tax Administrators, July 2010 and other international commentaries and jurisprudence. 16. The Learned AO / DRP/TPO have erred in law and on facts by identifying incorrect set of comparable companies for computing the mark up to be charged on the reimbursement to be received with respect to A&P expenses. 17. The Learned AO / DRP/TPO have erred in law and on facts by arbitrary determining the mark up for the deemed services rendered in an ad hoc and inappropriate manner without undertaking any methodological search for comparable companies. 18. The Learned AO / DRP/TPO have erred in law and on facts by questioning the commercial decisions of the appellant in relation to the expenses incurred for A&P activities. The said expenses are incurred considering the best interest of the business and the same should be considered from the point of view of a prudent businessman. 19. The Learned AO / DRP/TPO have evaluated the reasonableness of such expenses, which should not be judged only on the subjective standards but from the point of view of commercial expediency. 20. The Learned AO / DRP/TPO have erred in law and on facts by not providing the appellant ....
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....justments, assessee raised various issues, including the legal issues like retrospective nature of amendment in sec. 92CA(2B), the expenditure incurred being Indian transactions, were not liable to adjustment being beyond the purview of international transaction. It was further objected that host of routine sales expenditure, which were not in the nature of advertisement, marketing and promotional expenses, arbitrarily included in the aggregation and scope of AMP expenditure. Therefore, apart from various legal issues raised in grounds of appeals, the classification and quantification of AMP expenses were also challenged. 3.3. Assessing officer in the draft order adopted the TPO's line of action, aggrieved assessee approached DRP. The Dispute Resolution Panel ("DRP") upheld the TP adjustments made on account of AMP and the final assessment order was passed in accordance with the DRP directions. 3.4. Aggrieved by the aforesaid, the assessee is in appeals before us. 4. Ld. Counsel for the assessee Shri Mukesh Bhutani contends that the issue about TP adjustment in respect of AMP expenditure/ Marketing intangibles impacted a number of assessees across India. To ensure uniformi....
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....nto the deemed international transactions and other related issues regarding the reference by assessing officer etc. Thus, these issues have been decided by Special Bench in favour of the revenue and against the assessees. The assessee in question has also raised such legal arguments before DRP as an intervener before Special Bench in the case of LG Electronics India Pvt. Ltd., as also before ITAT in these appeals. Though these issues, following the Special Bench decision, may be decided against the assessee, however, the assessee will be preferring appeals before the Hon'ble Delhi High Court, therefore, these grounds are pressed by it and assessee's comments on the relevant legal issues as held by the Special Bench in LG Electronics India's case are tabulated as under:- S. No. Issues LG's decision Appellant's remarks/ facts 1. Jurisdiction of TPO Upholds retrospective application of Sec. 92CA(2B) enhancing TPO's powers. Subsection (2B) of section 92CA covers all types of international transactions in respect of which the assessee has n not furnished report, whether or not these are international transactions as per the assessee's version - para 7.18 at page 22....
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....Bright Line is not a method as prescribed under the Indian Regulations. 5. Methods for determination of ALP of international transaction AMP is a transaction distinct from other transactions, having independent effect on the overall net profit of the Indian AE. Thus required to be separately bench marked as per the TP provisions and the methods prescribed under the Act. The issue of marketing intangibles becomes important in the context of a distributor, who buys products from the principal manufacturer and sells the same in its jurisdictions. A pertinent question arises, namely, has the distributor received adequate or commensurate remuneration for the distribution functions it carries out, including advertising andmarketing. It may be appreciated that the ale of product along with brand are functions of distribution and cannot be isolated from each other. Therefore, once it is established that the distributor is being adequately remunerate ed for its distribution function, in our respectful submission, no further adjustment is called for. It is respectfully submitted that this principle has been explained in detail by both the OECD and the ATO in their guidelines. The....
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....he expenses in connection with the sales should be considered as one basket of expenses, out of which the AMP expenses for the creation or promotion of marketing intangibles on behalf of the-foreign enterprise are to be segregated. It was contended that since by their very nature most of the AMP expenses are common having been incurred for own business and brand- building for the foreign AE, the reduction of expenses in connection with sales would prejudice the computation of the AMP expenses for the brand building, 18.3. Having heard the rival submissions on this issue, we find that the AMP expenses refer only to advertisement, marketing and publicity expenses. A divider needs to be placed between the expenses for the promotion of sales on one hand and expenses in connection with the sales on the other. Both these expenses are required to be kept in different compartments. While expenses for the promotion of sales directly lead to brand building, the expenses directly in connection with sales are only sales specific. 18.4. Sub-Section (3A) of sec. 37, before its omission, provided that where the. expenses incurred by the assessee on anyone or more of the items specified in s....
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.... without discussing as to how other cases cited by the assessee were not comparable. Further it can be seen that the TPO has not considered the effect of any of the relevant factors as discussed above. A bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors as discussed above, cannot produce correct result. It can be illustrated by a simple example. If there is no subsidy in a comparable case but the assessee has received some amount of subsidy from its foreign AE on imports or in any other manner, which fact otherwise needs to be specifically established by the assessee, then the initial amount so . computed would require reduction to the extent of such subsidy or vice versa As the TPO has neither properly considered the request of the assessee for inclusion of some other comparable cases nor examined the effect of the above discussed relevant factors on the question of determination of the cost/value of international transaction, . in our considered. opinion the ends of justice will meet adequately if the order of the TPO and that of the AO giving effect to such order is set aside arid the matter is restored ....
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....e related expenses and furnished separate details thereof along with AMP related expenses. Thus, on record there existed a complete break up of sale related expenses which cannot be considered as AMP expenses. 4.11. All the relevant details about the correct nature of such expenses have been filed before TPO, ASSESSING OFFICER and DRP. No doubts what so ever, have been raised by any of the lower authorities on the real nature of expenses. 4.12. The entries in the books of accounts are not determinative of deductibility of an item of expenditure for the purposes of computation of taxable income under the provisions of the Act. Reliance, in this regard, is placed on Kedarnath Jute Mfg. .Co. Ltd. vs CIT 82 ITR 363 (SC). It is reiterated that such expenses incurred by appellant go to reduce the cost of goods sold, as they have a live nexus to the only sales made during the years and has no nexus with brand building. The Special Bench after considering these issues has rightly held that such expenditure should be excluded from the AMP before benchmarking. No dispute about such details has been raised by AO/ TPO or DRP. 4.13. AMP expenses quantified by the TPO in these assessments ....
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....d (refer pgs) AY 2006-07 - pg 619 of paper-book 2 AY 2007-08 - pg 562 of paper-book 2 AY 2008-09 - pg 539 of paper-book 2 * Product along with brand are functions of distribution, there is no explicit arrangement or clause in Appellant's case for exclusive use of brand and once the distributor is being adequately remunerated, in our respectful submission no further adjustment is called for. . * Canon India does not pay any royalty for the use of brand name. * Canon India launched new products during the relevant year(s) and the details were submitted before lower authorities. * No use of technical know-how by Canon India * Canon India receives subsidy from its AE ( agreement and details placed on PB) * Canon India is relatively a new entrant in the Indian market in comparison to other established players.. Established players enjoy secured positions in the markets and are not required to make significant investments on AMP activities. * There are several factors which affect the quantum of expenditure on AMP activities such as industry, product, market, competition, brand etc. Accordingly, an appropriate set of comparables need to be identified and an opportunity ....
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....to be considered by the TPO before arriving at the cost of the service/ value of the transaction. It has been clearly held in para 19 at page 106 of the judgment, that in cases where such subsidy is received, the amount of subsidy ought to be reduced from the initial amount of AMP proposed for adjustments. The relevant observations are asunder:- "19. ....... A bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors as discussed above, cannot produce correct result. It can be illustrated by a simple example. If there is no subsidy in a comparable case but the assessee has received some amount of subsidy from its foreign AE on imports or in any other manner, which fact otherwise needs to be specifically established by the assessee, then the initial amount so computed would require reduction to the extent of such subsidy or vice versa.....". 4.22. From the above facts, submissions and conclusions of Special Bench, it is apparent that AO has a duty to exclude such amount of subsidy received for meeting AMP expenses at the threshold itself i.e. before commencing the exercise of benchmarking the AMP expenditure. ....
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.... building. In light of various observations, the Special Bench of the Tribunal held that subsidy is to be reduced for two reasons before benchmarking such transaction (a) the same goes to reduce the total AMP expenditure that needs to be benchmarked, such that the Indian AE to the extent reimbursed has not incurred such expenditure and (b) for an objective or like comparison of AMP spend between the appellant and the comparables chosen the subsidy (reimbursement) received should be reduced. In other words, it would then only be an apple to apple comparison to benchmark such expenditure and not otherwise. The manner in which such benefit is to be given to the assessees has been explained by the Special Bench in para 19, wherein it is clearly stated that where the Indian AE receives subsidy, while its comparables do not receive any subsidy, the amount of subsidy received must be reduced from the initial amount of AMP, before any exercise of comparison with the comparables can be commenced. iii) Even as per the facts of the instant case the subsidy and trade discount/ dealer commission etc operate in separate fields. (a) Clause 9.4 of the Distribution agreement (referred supra) ....
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.... of these authorities. 6.1. In light of the above, it is pleaded that:- (a) Undoubtedly subsidy has not been received by the appellant in respect of sales expenses as alleged by the Ld. DR. (b) Based on the facts submitted to the TPO and not disputed by him, subsidy was utilized towards advertisement and sales promotion activities and not to provide discounts to dealers. (c) Exclusion of subsidy and exclusion of sales related expenses operate in two different fields. The two are not inter-related as alleged by the Ld. DR and exclusion subsidy and trade discount etc in principle and especially on facts of instant case from the AMP expenditure would not result in double deduction. 6.2. It is submitted that the Ld. DR did not object to the various findings of Special Bench, the fact remains that figures and nature of expenses and subsidy supplied by the assessee have not been disputed by TPO/DRP. In view of these facts, circumstances and availability of record, the Bench may be pleased to issue suitable directions for exclusion of such amounts from AMP related TP adjustments. The parameters laid by the Special Bench of the Tribunal for exclusion of AMP subsidy and other....
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....m 1.6.2002, sub-section (2C) has been given effect from 1-7- 2012. The reason is obvious when we see the contents of both the provisions. Under sub-section (2C), the power of the AO 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), (....
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....ich he is making reference to the TPO. There is no requirement of previous approval of the Commissioner in respect of the international transactions which come to the notice of the TPO 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-sees. (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 langua....
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....s we are concerned. with the present appeal involving the A.Y. 2007-08, which is a period anterior to A.Y~ 2012-13. The extant case is fully and directly. covered under sub- section (2B) of section 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." 7.3. Since it is a very lengthy order, it will not be desirable to reproduce extensively as the order can be referred to independently. The glimpses of the observations and conclusion of Special Bench may be found at various other places also, but we ....
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....ly similar type of situation, where such type of selling expense were excluded from the AMP expenses at the ITAT level itself. The relevant extract is as under:- "27. The plea of the assessee before us was that expenses aggregating Rs. 5500.86 lacs are expense incurred in connection with sale and do not lead to brand promotion as held by the Special Bench. After excluding the aforesaid selling expenses aggregating to Rs. 5500.86 lacs, the remaining expense of Rs. 8679.75 lacs (consisting of 6.87% of the total sales) only is required to be considered for the purpose of benchmarking analysis as undertaken by the TPO. The learned DR for the Revenue placed reliance on the orders of the authorities below. 28. We have heard the rival contentions and perused the records. The claim of the assessee is that the total AMP expenditure considered by the TPO while determining the ALP included certain expense which are in relation to the sales made by the assessee and are not related to the brand promotion. the claim of the assessee is with regard to the expenses totaling Rs. 5500.86 lacs as tabulated below:- S. No. Name of expenses Amount (Rs. Lacs) 1. Discount-sales 60.5....
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....ad of 60% under block of 'Computers' 2. 2007-08 5593/DEL- 2011 Assessee 143(3)/ 144C * Disallowance of provision for warranty * Addition of unutilized subsidy 3. 2008-09 6068/DEL- 2012 Assessee 143(3)/ 144C * Disallowance of provision for warranty * Addition of unutilized subsidy * Reduction of amount of tax credit in respect of deduction of tax in Japan 8.1. Ld. Counsel for assessee Shri S.K. Agarwal argued the round about corporate (non T.P.) issues as under Issue 1 - Provision for warranty:- 8.2. Brief facts are: The AO disallowed the provision for warranty by holding the same to be an unascertained liability and held that the method adopted by the appellant for calculation of provision for warranty is not based on any scientific basis. AO relied on Hon'ble Madras High Court decision in the case of Rotork Controls India Ltd. (2007) 293 ITR 311, despite the fact that it has been reversed by the Supreme Court. 8.3. According to assessee, the relevant submissions for allowing provision for warranty and relevant details were furnished before the AO during the respective assessment proceedings and also before the DRP in all the th....
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....or warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstance....
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....warranty created during the year (A) 2,65,19,664 1,85,19,487 4,46,77,197 Less: Actual consumption of warranty during the year (B) 2,65,18,173 1,14,97,684 2,78,01,790 Closing Provision as on 31 March 1,09,98,383 1,80,20,186 3,48,95,593 Consumption as % of Provision for warranty expense (B/A) 99.99% 62.08% 62.23% 8.8. Thus, the warranty provision created by the appellant during the year is on a scientific basis on accepted historical past practice and the total warranty provision created in earlier years is reviewed at the end of the year at the time of closure of accounts and statutory audit. 8.9. In this regard, the appellant places reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC) in which the Apex Court has ruled that the provision for meeting warranty claims on sales computed on accrual basis as per scientific method taking into account the past trends is an allowable expenditure. 8.10. It is submitted that the issue is squarely covered by the aforesaid judgment of the Supreme Court in the case of Rotork Controls India (P) Ltd. (supra). The parity of fac....
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....nt to 'current liabilities'; it is mentioned in Note no. 6 of Notes to Accounts. (iii) Out of Rs. 7,62,58,434/-, a further amount Rs. 39,161,177/- was utilized/ paid towards advertisement/ sales promotion activities from January to March 2007 in AY 2007-08. The aforesaid amount paid in this respect was directly debited in the current liabilities account only. Accordingly, the closing balance being unutilized/ unpaid portion of subsidy was Rs. 37,097,257/- only as at 31 March 2007. (iv) During the AY 2008-09, the subsidy received by the appellant amounting to Rs. 50,16,13,022/- was transferred by the appellant to the 'Current liabilities' account and expenditure incurred against the opening balance and subsidy received was directly debited in this account mentioned in Note no. 6 of Notes to Accounts. (v) Accordingly, an amount of Rs. 43,32,98,619/- utilized/ paid towards advertisement/ sales promotion activities was directly debited in the current liabilities account. Accordingly, the unutilized/ unpaid portion out of total subsidy amounted to Rs. 10,54,11,660/- as at 31st March 2008. However, the AO had inadvertently considered the closing subsidy as on 31 March 2008 as Rs....
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....nd no separate deduction claimed by the assessee in previous year 2007-08) 37,097,257 AY 2008-09 1. Opening balance unutilized/ unpaid amount of advertisement/ sales promotion expenditure as onApril'07 (as per S. No 5) 3,70,97,257 2. Total amount of subsidy received for advertisement/ sales promotional activities transferred to Current liabilities account (Details of subsidy received and expenditure incurred in this regard at PB 95 to 100) 50,16,13,022 3. Less: Amount utilized/ paid towards the aforesaid activities and directly debited to the current liabilities account during AY 2008-09 43,32,98,619 4. Closing balance unutilized/ unpaid amount of advertisement/ sales promotion expenditure as on March'08 (Paid during succeeding previous year 2008-09 (i.e. AY 2009-10) from the current liabilities account and no separate deduction claimed by the assessee in previous year 2008-09) 10,54,11,660 9.5. The AO inadvertently considered the closing subsidy as on 31 March 2008 as Rs. 10,51,00,000 instead of Rs. 10,54,11,660 in the assessment order under section 143(3) r.w. section 144C for AY 2008-09 dated 29 October 2012. 9.....
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.... The income accrues only when the recipient gets the right over same. Reliance was placed on the following decisions: * CIT vs. A. Gajapathy Naidu 53 ITR 114 (SC) * CIT vs. Hindustan Housing & Land Development Trust Ltd. 161 ITR 524 (SC) 9.10. Alternatively, it is submitted that in case it is held that the unutilized/ unspent subsidy received for advertisement/ sales promotion activities amounting to Rs. 3,70,97,257/- and Rs. 10,51,00,000/-, is income of respective AYs 2007-08 and 2008-09, then the appellant prays that a direction may be given to allow a deduction of an equal amount on utilization of the subsidy on incurring advertisement/ sales promotion expenditure in the succeeding previous years as it has already been offered to tax in the previous year 2007-08 and 2008-09 respectively by the appellant. 10. Issue 3 - Disallowance of club expenses amounting to Rs. 18,000 incurred by the appellant: The relevant ground of appeal taken before the Hon'ble ITAT is:- AY 2006-07 - Ground No. 18 10.1 During the AY 2006-07, the appellant had incurred club expenditure amounting to Rs. 18,000/- paid to DLF Golf Resorts Limited. This expenditure was incurred by the appella....
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....nal India (P) Ltd Vs Addl CIT : 118 TTJ 652 (Del) - ITO v. Samiran Majumdar : 280 ITR (AT) 74 (Kol) - Container Corporation of India Ltd v. ACIT: 30 SOT 284 (Del) - ACIT v. Continental Carriers Private Limited : 2009-TIOL-303-ITAT DEL - ACIT v. Cincom System India Private Limited: 2009-TIOL-371-ITAT DEL 12. Issue 5 - Reduction of claim of Double Taxation benefit i.e. Tax credit in respect of deduction of tax in Japan - Rs. 1,679,638/- in AY 2008-09. 12.1. Brief facts are: The appellant mainly distributes/ trades in the high- tech office automation, entertainment, photographic products etc. In addition, it is engaged in export of software from STPI unit and also by way of subcontracted projects (referred as Non - STPI unit). On such software exports, the customer i.e. Canon Inc Japan has been deducting tax at source @ 10% on gross basis in accordance with the provisions of Article 23 of India-Japan Double Taxation Avoidance Agreement ('DTAA'). 12.2. The assessee claimed credit for tax suffered/ deducted in Japan on export of software from non - STPI unit as per Article 23 of the DTAA. The AO had reduced the amount of tax credit from Rs. 24,44,934/- to Rs. 7,65,2....
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.... Eligible foreign tax credit on Rs. 22,51,534 @ 33.99% Rs. 7,65,296 Foreign tax credit claimed by the assessee Rs. 24,44,934 Foreign tax credit not allowed to the assessee (Rs. 24,44,934 - Rs. 7,65,296) Rs. 16,79,638 12.8. It is submitted that the activity of software development through Non-STPI unit cannot be compared with the activity relating to sales of other electronic products like digicam, printer, scanner etc. for the main reason that software development is solely with Canon Inc Japan where no competition is there in the Indian market. On the contrary, the assessee company faces huge cut throat competition from its competitors like Sony, Kodak, etc. for which it has to undertake substantial selling and distribution expenses. Since no/ minimal selling and distribution expenses are incurred on software development through sub-contracted work, profit margin is higher. 12.9. The profit margins from STP division and trading and service operations (including Non-STPI unit) as per the columnar profit and loss account for the year ended 31 March 2008 is placed on paper book . It is also submitted that the profitability of STP unit of the assessee for the year under co....
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.... trite law that every receipt does not tantamount to income, as per charging sections 4 & 5 of the I.T. Act. While examining whether the receipt is chargeable as income or not, relevant facts and circumstances are to be seen. From the record it clearly emerges that the subsidy provided by CSPL is in lump sum with specific direction that this amount is to be spent only for specified purposes and the unspent amount is to be held in trust for and on behalf of CSPL. This is duly confirmed by CSPL and this fact is further corroborated by the fact that unutilized amount is not credited to the P&L A/c but taken to balance-sheet as a current liability. Once it is acknowledged as current liability assessee does not become owner of this amount and the receipt of unspent amount does not become income of the assessee. Besides, this method of accounting has been followed by the assessee consistently. In these circumstances, we are of the view that unspent subsidy being not income of the assessee but a liability to be spent for specified purposes and recoverable for non-utilization for specific purposes cannot be treated as income of the assessee. Therefore, this ground of the assessee is also a....