TaxTMI 
TaxTMI 
2014 (2) TMI 555
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....r the assessment year under consideration and while suggesting adjustments to be made in respect of the payment of royalty by the assessee on technical know-how as well as brand usage etc stated that similar disallowances were also made by him in his orders for assessment years 2003-04 to 2005-06 and on similar lines suggested the disallowances in the assessment year under consideration i.e. assessment year 2006-07; which are being disputed by the assessee in ground Nos.12 to 17, as mentioned hereinabove. In view of above, the matter was fixed for clarification on 30.10.2013. Ld. AR submitted that appeals for assessment years 2003-04 to 2005-06 are still pending before ld. CIT(A) but the appeal for the assessment year under consideration i.e. assessment year 2006-07 has come up to the Tribunal because this appeal is arising out of order of DRP and whereas in the preceding assessment years there was no constitution of DRP and the appeals were to be filed before ld. CIT(A). In view of above, a query was raised to ld. DR if the appeal for assessment year 2006-07 is decided by the Tribunal, it may be possible that the appeals for earlier assessment years i.e. assessment years 2003-04 t....
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.... not attained finality. Hence, this appeal by the assessee. 4.2 At the time of hearing, the ld.AR submitted that the Tribunal in assessee's own case for assessment years 1997-98, 1998-99 and 1999-2000 in ITA Nos.145/Mum/2001, 2054/Mum/2003 and 2055/Mum/2003, respectively, by a common order dated 18.1.2013 by relying on its own decision in the case of assessee itself for assessment year 1991-92 in ITA No.1146/Mum/1997 has held that the said expenditure is revenue expenditure. He submitted that similar issue on identical facts again came before Tribunal for assessment years 2000-01 and 2001-02 in ITA Nos.2774/Mum/2004 and 9106/Mum/2004 and the Tribunal by its order dated 15.2.2013 decided the issue in favour of the assessee by following its earlier order in assessee's own case. He submitted that the same issue again came up before the Tribunal on identical facts for assessment year 2002-03 in ITA No.4070/Mum/2007 and the Tribunal by order dated 28.8.2013 held that the said expenditure is revenue in nature by following orders in assessee's own case for earlier years. Ld. AR placed copies of said orders before the Tribunal to substantiate his submissions. Ld. DR has not disputed abo....
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....while passing assessment order added an amount of Rs.3,88,15,192/- to the total income of the assessee-company. Hence, assessee is in appeal before the Tribunal. 5.2 During the course of hearing, ld. AR submitted that the assessee follows exclusive method of accounting to determine the value of cost of goods sold. Hence, excise duty paid on closing stock is a part of inventories in the balance sheet. The AR submitted that similar issue was considered by Tribunal in the assessee's own case for assessment years 2000-01 and 2001-02 vide order dated 15.2.2013 (supra) and the Tribunal by considering its own order for AY 1999-2000 in ITA No.2680/Mum/2003 dated 18.1.2013 restored the matter to AO. He submitted that the issue for this assessment year be restored to the AO to decide it afresh as per direction of the Tribunal in respect of assessment year 1999-2000. Ld. DR has not disputed the above submission of ld. AR. 5.3 We have considered the submission of ld. Representatives of the parties and the orders of authorities below. We have also considered Tribunal order dated 18.1.2013 placed at pages 643A to 643BV of the paper book in ITA No.2680/Mum/2003. We observe that vide para 96....
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....is by the Tribunal in the preceding assessment years. In view of above submissions of ld. AR, Ground No.3 of the appeal taken by assessee is rejected. 7. Ground No.4 of appeal of assessee reads as under : "4. The AO erred in law and in facts by disallowing 10% of the payments made to Crawford Bailey & Co. aggregating to Rs.107,373 under section 40A(2)(b) of the Act on the ground that they are excessive and unreasonable. Without prejudice to the above, the Hon'ble DRP has erred in law and in facts in by not passing a reasoned order with respect to the above ground and accordingly, the order should be quashed. 7.1 AO, on perusal of tax audit report, observed that the assessee company paid to Crawford Bailey & Co. aggregating to Rs.10,73,728/- and stated that it falls within the definition of persons referred to under section 40A(2)(b) of the Act. AO by following the assessment order of previous year, disallowed 10% of the said amount which comes to Rs.1,07,373/- u/s 40A(2)(b) of the Act. He has stated that DRP has also confirmed the disallowance in its direction. Hence, this appeal by the assessee. 7.2 At the time of hearing, the ld.AR submitted that similar issue came....
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.... respect to the above ground and accordingly, the order should be quashed." 8.1 AO has stated that the assessee had debited to profit and loss account a sum of Rs.42,46,34,000/- under the head "Travelling Expenses". Assessee was asked to give proof of payments made. That assessee filed its reply vide letter dated 18.12.2009, the details of which are given by AO at page 20 of the assessment order. AO, disallowed entire expenditure on the ground that the assessee has not provided complete details of the expenditure to find out the personal element and the genuineness of expenditure. In the objection filed before DRP, the assessee contended that AO never demanded bills and vouchers, which were available with the assessee. That same were produced before DRP. DRP after considering the details, filed by assessee, observed that element of personal use and that some expenses not having any connection with the business activity of the assessee could not be ruled out and accordingly directed the AO to sustain the disallowance under different heads as under :- S. No. Particulars Amount (Rs.) % of disallowance confirmed 1 Business meals 15,828 5% 2 Conference T....
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....in the case of Dinesh Mills Ltd. V/s VIT (2004) 268 ITR 502 (Guj). However, we observe that DRP has also stated that some of the expenditure claimed are not connected with business activity of the assessee. However, DRP has not pointed out the expenses which are not in connection with business activity of the assessee inspite of facts that the details were filed by assessee before DRP, as mentioned in the order of DRP itself. In view of above said adhoc disallowance of Rs.3,27,50,973/- out of travelling expenses claimed by assessee is not justified. Accordingly, we delete the same by allowing Ground No.5 taken by assessee. 9. Ground No.6 of appeal of assessee reads as under : "6. The learned AO erred in law and in facts by disallowing on ad-hoc basis 50% of the expenditure incurred towards professional sponsorship amounting to Rs 115,563,298 on the ground that the same have not been incurred for the purpose of business." 10. AO has stated that on scrutinizing the details of miscellaneous expenses, it is seen that assessee-company incurred expense of Rs.23,11,26,595/- towards professional sponsorship. The assessee was asked to provide details and nature of the expenses. The....
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....ed for business purposes. However, DRP has stated that it cannot be denied that some of the expenses are necessary for the purposes of business and accordingly suggested to make disallowance of 50% of such expenses. Therefore, the AO was directed to allow 50% of the expenses claimed by assessee. Accordingly, AO inconfirmity with the direction of DRP added Rs.11,55,63,298/- to the total income of the assessee. Hence, assessee is in further appeal before us. 11. During the course of hearing, ld. AR referred pages 754 to 787 of the paper book and submitted that division wise detailed break-up of expenditure incurred for professional sponsorship was furnished before the AO. The ld. AR further submitted that there are guidelines for sponsoring the doctors to attend the conferences etc and referred pages 788 to 800 of the paper book which is a copy from the extract of Health Care Business Integrity Guide. Ld. AR submitted that similar issue was considered by the Tribunal in assessee's own case in Addl.CIT V/s Johnson & Johnson Limited in ITA No.9106/Mum/2004 (AY-2001-02) dated 15.2.2013 and the Tribunal vide paras 44-45 allowed the expenditure incurred by assessee and even 10% claim o....
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....o assessment year 2001-02 and dated 28.8.2013 relating to assessment year 2002-03 (supra). We have also considered the cases referred to by assessee in its note. There is no dispute to the fact that the assessee could not file requisite details to justify that expenditure incurred by the assessee aggregating to Rs.23,11,26,595/- was wholly and exclusively for business purposes of the assessee. We observe that the assessee has placed reliance on the earlier orders of the Tribunal that similar expenses were allowed by Tribunal by confirming the deletion of 10% disallowance made by AO and deleted by ld. CIT(A). However, we observe that in the assessment year 2001-02 the total expenses incurred by assessee was Rs.2.23 crores and in assessment year 2002-03 it was Rs.4.36 crores under the head "Professional Sponsorship"; and whereas in the assessment year under consideration the total expenditure incurred is of Rs.23,11,26,595/-. We observe that DRP has also stated that assessee filed only scanty details of the foreign visits of doctors etc. It is also not in dispute that the addresses of doctors and the organizers have not been given in the details filed by assessee even before us. On p....
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....eir own business / profession. AO has stated that the said equipments installed by assessee at the clinics of doctors, laboratories etc could not be considered being used by assessee for the purpose of its business and accordingly disallowed the claim of depreciation of Rs.63,69,962/-, which was also confirmed by DRP in its direction. 18. At the time of hearing, the ld. AR referred the decision of the Tribunal in assessee's own case for assessment years 2000-01 and 2001-02, order dated 15.2.2013 (supra), and also Tribunal decision for assessment year 2002-03 dated 28.8.2013 (supra), wherein the Tribunal considered similar issue on identical facts and by following the decision in the case of N R Jet Enterprises Ltd in ITA No.4474/Mum/2004, Mumbai Tribunal, dated 28.5.2008, a sister concern of the assessee, wherein the depreciation was allowed on the testing equipments provided to laboratory and hospitals as in the case of assessee. Ld. DR has not disputed the contention of ld. AR that the facts in the assessment year under consideration are identical and similar issue has been decided by the Tribunal in favour of assessee in the earlier assess....
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....That on being asked to furnish reasons for short fall, the assessee stated that it was due to distribution of various types of samples. The AO has stated that the reply of the assessee was evasive and to investigate the matter further, further details/explanations were asked from the assessee. The AO has stated that the assessee vide letter dated 18.12.2009 furnished the details but they were not filed division-wise, nor the details of the persons, institution, agents with address, samples and amount were filed. The AO has stated that genuineness of distribution of samples was not established. Therefore, the assessee was asked to submit details of total sales, free samples and link with purchase or production to establish the difference. The AO has stated that the assessee filed its reply vide letter dated 24.10.2009; which has been stated by AO at pages 33 to 36 of the Assessment Order. It is observed that the assessee interalia stated that free samples were distributed to promote sales and it is an accepted commercial practice. That the expenses on account of it should be allowed as business expenditure. The assessee also placed its reliance on the decision of the Hon'ble Bombay ....
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....n appeal before the Tribunal. 24. Ld. AR submitted that the assessee filed division-wise break-up of free samples distributed and the details of which are also placed at pages 806 to 1014 of the paper book. He submitted that distribution of free samples is one of the promotional avenues to promote the product. That it is a normal trade practice. He submitted that there is a sufficient control in regard to distribution of free samples. Ld. AR referred the decision of Hon'ble Bombay High Court in the case of Brihan Maharashtra Sugar Syndicate Ltd.(supra) and the decision of Hon'ble Apex Court in the case of in the case of Smithkline Beecham Pharmaceuticals (India) Ltd. (supra) and submitted that free samples were given due to commercial exigency. He submitted that the assessee has also paid Fringe Benefit Tax in respect of the said expenditure incurred and therefore the expenditure cannot be disallowed. The ld. AR placed reliance on the following decisions : i) Om International (ITA No.2310/M/2012) dated 25.4.2013 (Mumbai ITAT) ii) Hansraj Mathuradas (ITA No.2397/Mum/2010) dated 16.9.2010 iii) J.K.H.Exports (35 CCH 108) (Mumbai). He submitted that in the subsequent ass....
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....is expected to maintain details to enable the AO to verify as to whether the said samples had been given by assessee wholly and exclusively in connection with its business. On perusal of the details placed at pages 805 to 1014 of the paper book, we observe that the names with address are not given and therefore on the basis of details placed, AO could not verify genuineness of claim of the assessee. Further the contention of the assessee that it has paid Fringe Benefit Tax (FBT) and therefore no disallowance be made, has no merits. Payment of Fringe Benefit Tax (FBT) does not establish that expenditure has been incurred by the assessee for its business purpose. In view of above and considering the details placed before us and the decisions relied upon by ld. AR, we are of the considered view that on the facts and in the circumstances it will be fair and reasonable to restrict disallowance to 2% of the claim of assessee which comes to Rs.31,61,000/-as against Rs. Rs.11,85,03,996/- disallowed by AO. Hence, Ground No.11 of the appeal taken by assessee is allowed in part. 26. We propose to consider ground Nos.12 to 17 of the appeal taken by assessee together which are as under: "....
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....how royalty at the rate of 4% for its product, in spite of the fact that some of the products were introduced by the assessee company long ago and the technology is fully adapted for such products. That only updating to technology, if available with its AE Johnson and Johnson, USA (hereinafter to be referred as J&JUS) would be required. He has stated that the assessee company is having full-fledged Government approved Research and Development Facilities (R&D) which are not only being used for adopting the technology but the improvement of products and also for developing the process, which resulted into making products suitable in the Indian climate/conditions. That R and D facilities of the assessee-company are so advanced that the same are being shared with group entities. He has stated that the assessee company had entered into an agreement with its AE, J&J US to pay royalty for know-how received from its AE J&J US at the rate of 2% on sales vide agreement entered into on November 21, 1994 and it covered only certain specific drugs and pharmaceuticals. The royalty under this agreement was paid by the assessee to its AE, J&J US from June 1, 1994 to May 31, 2001. Thereafter and pu....
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....27.4 The TPO has stated that if the expenses on technical services fee, trade mark fee, R&D facilities and sales promotion expenses are considered together, the assessee company viz J&J India is spending about 15% of the turnover towards these expenses. The TPO relying on his orders for assessment years, 2003,04, 2004-05 and 2005-06 has stated that if these expenses are considered together, the assessee is not required to make any payment for the use of trade mark/ brand name. 27.5 Further, TPO has stated that the assessee-company did not submit the informations regarding Technical services fees and trade mark fee charged by J&J US to other manufacturing/trading entities of the group in the Asia Pacific and European Countries. That in the absence of these details, it is not possible to factually verify whether the royalties paid by assessee-company are in line with what is paid by other entities. He has stated it is not known whether other entities even if those are paying royalties are incurring any expenses on the R&D facilities. He has stated that the assessee started paying royalty at the rate permitted under automatic route of the Government of India. The royalty is prescri....
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....ssessee company has paid trademark license fee and technical service fee for all the business divisions which have international transactions. In the TNMM, if the controlled transactions are not benchmarked separately, it will be difficult to say that the transactions are at Arm's Length or not. The TPO has summarized the discussions on the issue of payment of royalty in para 6.1.1 and thereafter he has stated that on the basis of order for assessment year 2005-06, the payment of technical know how fee at the rate of 1% for all the manufactured product for the consumer segment, pharmaceutical segment and medical devices and brand royalty at the rate of 1% would be the Arm's Length royalty payable by assessee company. He has stated that this view is supported from the fact that from 1.6.1994 to 30.6.2002, the assessee had been paying technical know-how royalty at the rate of 2% only and no brand royalty was being paid though the assessee was using the brand name all through since 1957. He has stated that royalty for the use of technical know-how subsumes royalty for use of brand name also. In this regard, he has stated that this has been clarified by the Government of India, Departm....
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....rious new products dealt by assessee-company and also some additional technical /marketing assistance was included. Ld. AR submitted that the additional technical /marketing assistance included under the agreement dated 14.3.2002 relates to marketing plan and strategy, the distribution net work, technological solution and programmes for information management etc. He submitted that copies of agreements dated 21.11.1994 and 14.3.2002 are placed in the paper book No.1 at pages 128 to 149 and at pages 150 to 175 respectively. Ld. AR submitted that it was proposed to revise technical know - how royalty from 2% to 4% and RBI accorded its approval vide letter dated 26.6.2002, copy placed at pages 179 of the paper book. He submitted that thereafter the assessee entered into a supplemental Technical know-how agreement on 29.8.2002 enhancing the royalty payable to its AE, J&J US from 2% to 4% on sales, and copy of the said agreement is placed at pages 176 to 178 of the paper book. Ld.AR submitted that TPO while making transfer pricing adjustment by disallowing technical know-how royalty relied on its own Transfer Pricing Order of assessment years 2003-04 to 2005-06 and the assessee has file....
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....red in view of the order of Tribunal in assessee's own case. 29.3 Ld AR further submitted that the TPO also suggested the disallowance of service tax paid by assessee. He submitted that service tax paid is not an international transaction and the same is out side the purview of International Transaction and therefore, the TPO was not justified to disallow service tax paid by assessee on the royalty paid to J&J US. Ld. AR referred the decision of ITAT, Mumbai Bench in the case of DCIT V/s Starlite [2010] 40 SOT 421 (MUM.) and submitted that the Tribunal has held that adjustment if any arising due to computation of ALP are to be restricted only to International Transaction and not to be applied to entire turnover of the assessee. He submitted that the payment of service tax on the royalty paid by assessee to J&J US is not international transaction and therefore, the same is outside the scope of TPO to make adjustment by suggesting disallowance. He further submitted that royalty is also to be paid net of taxes, the payment of service tax even otherwise is the responsibility of the assessee and no adjustment under ALP is justified. 29.4 Ld. AR further submitted that in respect of....
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....as conducted on the website to identify approval granted by the SIA/RBI in respect of royalty payments made between third parties in consideration for provision of technical know-how/marketing know-how for consumer healthcare products, pharmaceutical products and medical devices. Based on the analysis, the average royalty rate for the comparable technical know-how/marketing know-how approvals worked out to 4.84% on sales. Based on such analysis and the fact that royalty of 4% paid by assessee to J&J US was lower than the arm's length rate of 4.84%. Hence royalty paid by the assessee to J&J US meets the arm's length text. 32. We have considered the submissions of ld Representatives of the parties and the orders of authorities below as well as the material placed on record. We have also carefully considered earlier order of Tribunal in assessee's own case for assessment year 2002-03(supra) and also the cases placed on paper book. 33. We observe that the assessee is a subsidiary of Johnson & Johnson Inc. US who is holding 75% shares and the balance 25% are held by DePuy Medical Private Limited, India. The assessee has computed ALP in respect of International Transactions by usin....
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....assessment year 2002-03 vide order dated 28.8.2013 (supra) and the Tribunal held (vide para 49) that the agreement between the assessee-company and J&J US for payment of royalty is to be considered in the light of approval of RBI. The Tribunal has also observed that there is no substance in the findings of the TPO that there is no need for paying royalty for technical/marketing know-how and accordingly confirmed the order of ld. CIT(A) by dismissing the ground of appeal taken by department before Tribunal on similar facts except that technical know-how royalty paid in the assessment year 2002-03 was at the rate of 2% whereas in the assessment year under consideration it is at the rate of 4% on sales. However, it was contended that payment of royalty at the enhanced rate of 4% is paid as per agreement entered into between the assessee-company and J&J US dated 29.8.2002, copy placed at pages 176 to 178 of the paper book. That it was submitted that payment of royalty at the rate of 4% is as per RBI formula and the average royalty rate for comparable technical know-how /marketing know-how approval worked out to 4.84% on sales and therefore royalty of 4% paid by assessee to J&J US is le....
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.... of 4.84% as per information available on "website" of SIA which provides rate which is approved by SIA/RBI. We are of the considered view that the TPO cannot suggest the disallowance merely because as per his assumption it is excessive though the payment is at Arm's length. In view of above, we are of the considered view that the disallowance suggested by TPO and confirmed by DRP/AO of the royalty paid by assessee, when he has not found that the payment is not at arm's length/excessive under any of the method as prescribed u/s 92C(1) of the Act, can not be made under the Transfer Pricing Provisions. Therefore, we direct to delete the same and consequential Ground Nos.14 and 15 of the appeal taken by assessee are allowed. 34. In respect of Ground taken by assessee for making disallowance on account of tax, service tax paid by assessee on the payment of royalty, we observe that the said issue has already been considered by Tribunal in assessee's own case for the assessment year 2002-03 (supra) and the Tribunal has held after considering the agreements entered into between the assessee and J&J US and also the decision in the case of Dresser Rand India P. Ltd. (supra) that the taxe....
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.... Rs.163.27 crores during the relevant financial year. The TPO has stated that said expenses on publicity and sales promotion has resulted into higher sales on which correspondingly higher royalty has been paid to the parent company J&J US. Therefore, the benefit of higher publicity and sales promotion expenses are accrued to the parent company J&J US but the cost thereof is not apportioned to the parent company. The TPO sought explanation from the assessee as to why the cost of arrangement as emanating from the records, is resulting into the benefit to the parent AE, but not apportioned as per section 92(2) of the Act. The TPO stated that the assessee and the parent company J&J US should have shared sales promotion expenses in the ratio of royalty to sales or would have renegotiated a lower royalty rate. The assessee filed its reply stating interalia that assessee is engaged in the business of distributing the products in the Indian Market on its own account. It was also contended that the advertisement and marketing expenses are incurred in India only for promoting sales by assessee of its products in India and it is not in any way benefited to J&J US. That J&J US is not directly ....
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....f the TPO. Accordingly the AO disallowed a sum of Rs.200.82 lakhs while making assessment. Hence, assessee is in appeal before the Tribunal. 38. During the course of hearing, ld. AR submitted that it was an adhoc disallowance made by TPO and relied on the decision of Mumbai Bench of Tribunal in the case of Kodak India Pvt. Ltd. V/s Addl. Commissioner of Income Tax in ITA No.7349/Mum/2012 (AY 2008-09) dated 30.04.2013 and submitted that the Tribunal deleted similar kind of adjustment suggested by TPO on the ground that TPO cannot make a disallowance which is not within the precinct of specific method prescribed under section 92C(1) of the Act. He submitted that no adhoc disallowance can be made under the Transfer Pricing provisions. 39. On the other hand, ld. DR supported the order of AO/TPO and submitted that to consider marketing expenses the cost plus method could be applied. Since TPO has not followed any specific method as 2006-07 is the first year, the matter could be restored to TPO to decide it afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India (P.) Ltd. V/s ACIT (2013)140 ITD 41(Del) (SB). He submitted that....