TaxTMI 
TaxTMI 
2014 (4) TMI 926
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....bsp; 2. Whether on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in treating 50% the expenses incurred on Architect & Interior Design amounting to Rs. 21.94 Lacs and expenses incurred on Supply & Installation of Electrical Items amounting to Rs. 14.44 Lacs as Revenue?" 3. The facts in brief are that the assessee is in the business of manufacture, distribution and marketing of malted food drinks, cocoa powder, chocolates, toffees, drinking chocolates and sugar confectionaries. The assessee, having its head office at Mumbai, is having its factories at Thane, Induri and Malanpur and marketing offices located at Delhi, Chennai, Kolkata and Mumbai. 4. The assessee is a subsidiary of M/s Cadbury Schewepps PLC, U.K. Cadbury group has presence in more then 200 countries and it enjoys the distinction of being world's third largest soft drinks company in sales volume and is among the fourth largest confectionary company in the world. 5. Cadbury India Ltd., the assessee entered into certain international transactions with its Associated Enterprises (AEs), which are as follows: S No. Name of the Associated Enterprise (AEs) Count....
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....h that of companies engaged in food products, beverages and tobacco business. According to the TPO transactions pertaining to payment of Royalty is not separately and independently benchmarked. He further noted that companies identified by the assessee company i.e. DFM Foods Ltd., Bakeman Industries Ltd., Modern Food Industries (India) Ltd., Parrys Confectionary Ltd and Ravalgaon Sugar Farm Ltd., did not pay any technical fee/royalty. According to him, these companies could not be used in the analysis for benchmarking the royalty payments. Since the total sales of the company is at Rs. 645 crores and international transactions pertaining to this segment is only 14.50 crores, being only 2.24% would not effect the profitability, if the ALP is to be determined at TNMM at entity level. According to the TPO, the most appropriate method, therefore, would be CUP because all other comparables, as supplied by the assessee, either developed their own technology, or they had acquired the technology long back and are no more paying for the transfer of technology. This, in the case of the assessee is not the case, because, the assessee company, i.e. Cadbury India Ltd., is required to pay royalt....
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....ive 4 Cadbury France France and such other territories 2.00% Trade mark licence 5 Cadbury Ghana Limited Ghana 2.00% Combined technical services & trademark user agreement 6 PT Cipta Rasa Primatama The Republic of Indonesia 2.50% Trade mark licence - Exclusive & non-transferable 7 Cadbury Kenya Limited Kenya, Uganda and Tanzania and any other territories 2.00% Trade mark licence 8 Cadbury Confectionery Malaysia SDN BHD East & West Malaysia & Brunei & such other territories 2.00% Royalty technical information and trade mark licence agreement - exclusive & non-transferable 9 Cadbury Nigeria plc Nigeria 2.00% Trade mark licence (1) (2) (3) (4) (5) 10 Cadbury Poland Sp zo.o Poland 2.5% Trademark licence-exclusive and non-transferable 11 Dlrol Cadbury LLC Russia plus named export territories 3% for confectionery ** Trade mark licence exclusive and non-transferable 12 Cadbury Dulciora SA Spain and such other countries 3.00% Trademark licence and non-transferable 13 Crystal Candy (PVT) Limited Zimbawe and such other territories 2.....
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....of India, under the Exchange Control Policy of the Government of India. The branding fee payment, as a general rule is allowed by a Press Note No.9 issued by Ministry of Commerce and Industry. This approval indicates that such payments are not prevented or blocked by the Government, considering the present Exchange Control Policy. There is no intervention from the Government for such payments considering the Exchange Control Policy, but such transaction satisfies the principles of Arm's Length or not is not the concern or within the jurisdiction of the Reserve Bank of India. This requires to be decided as per the provisions of Income Tax Act, 1961. The payment should satisfy the provisions of the Act, separately and independently, irrespective of the allowability of payment as per Exchange Control Policy. Similar is the view of Tax Administration of most of the countries. The Guidelines of Tax Administration of France, on the issue, refers to "please note, finally, that, although the authorization given by the Ministry of Industries or by any other technical department, with respect to the rate of a royalty or of the amount which may be transferred abroad, is not binding on the tax....
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.... enterprise may be useful in understanding the transactions with associated enterprise may be useful in understanding the transaction under review or as a pointer to further investigation. The dealings between associated enterprises, for comparison, can also be used in the cases of last resort where: (i) There is sufficient data available to demonstrate their reliability. (ii) Related party comparable data provides the most reliable available data upon which to determine or estimate an Arm's Length outcome. (iii) In the FMCG Sector, most of the big companies in India, are part of Multi-National Enterprises, and their transactions would certainly be the controlled transactions. There would be very few companies, in the FMCG Sector other than MNCs, wherein, any royalty is paid by them to unrelated parties. The details regarding any such company could not be found on the website of SIA/RBI "www.siadipp.nic.in/publicat/newsltr" meaning thereby in FMCG sector, such royalty payments are not approved". Considering the above and as the information regarding payment of royalty by the Cadbury Group entities t....
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....fore, these companies cannot be used in the analysis for benchmarking the royalty payments. The total sales of Cadbury India Ltd. is nearly Rs.645 crores and all international transactions, are of value of 14.50 crores, which is only 2.24% of the turnover. The use of Transactional Net Margin Method, at entity level, for benchmarking such a small transaction, will not be the most appropriate method, because, such a transaction does not in a big way affect the profitability of the company. In the present case, the data regarding comparable, though controlled transactions are available, and therefore, Comparable Uncontrolled Price method is the most appropriate method". "The total royalty worked out by the company is Rs.63,668,246/-. The company was asked to submit the working of royalty as per Press Note No.1 (2002 Series), issued by Secretariat for Industrial Assistance, Government of India. As per this Press Note, the formula for calculation of royalty for the use of trademark and brand name is: "Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents/dealers' commission, tran....
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.... payment of both kinds of royalties, i.e. royalty on technical knowhow and royalty on trademarks as: S. No. Transaction As per books ALP as per TPO Difference 1. Royalty on tech. knowhow 5,66,24,003 4,52,99,202 1,13,24,801 2 Royalty on trade marks 6,36,68,247 50,33,678 1,33,36,569 Total 12,02,92,250 9,56,30,880 2,46,61,370 18. The AO, in accordance with the above, made addition to the tune of Rs. 2,46,61,370/- to the income of the assessee. 19. The assessee approached the CIT(A), before whom the assessee reiterated its submissions made before the TPO/AO. The CIT(A) on examining the submissions, made proposal for enhancement for disallowing the entire payment of royalty on trademark usage technical knowhow at 1.25%, as the same were not wholly and exclusively incurred for the purpose of the appellant's business. 20. On receipt of the show cause notice for enhancement, the assessee gave a detailed reply with regard to the genuineness and correctness of royalty payments on both counts. The CIT(A), on receipt of the detailed submission from the assessee held, "Based on the submission....
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....trademarks, the Appellant would be unable to exploit the intellectual property in the Indian market. With respect to the exploitation of the intellectual property, it was submitted that the Appellant has merely been granted the right to use the trademarks on the licensed products manufactured in accordance with the prescribed specifications. The Appellant thereafter undertakes marketing and selling of the products using the brand "Cadbury". It was further explained that economic and commercial value of, a 'brand' is typically driven by the income-stream it generates. However, the Appellant has merely contributed approximately 1% of the total sales of CSOL over the years from 2001-2008. This clearly indicates the Appellant has hardly contributed to the total group turnover and hence it cannot be termed as the economic owner of the 'Cadbury' brand. In fact, it is because of the global brand that it represents that the Appellant has been able to capture approximately 75% of the market share. It was also stated that while Cadbury has been in India from 1948, the brand per-se has been in existence since 1824 and it was a well developed brand even before it wa....
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.... was not the objective of the advertisements since "Cadbury" brand is already well known respected in India. It has been submitted that the Overseas AEs provide strict brand guidelines so as to ensure that the overall strategy and vision associated with the brand is adhered to by the Appellant in India. The appellant has also submitted the copy of branding guidelines before me to corroborate the above. It has also been highlighted by the Appellant that while the increased sales may have benefited the. Overseas AEs by way of increased royalty at 1% on the incremental sales, the same is insignificant as compared to the incremental quantum of profits earned by the Appellant on the increased sales and the taxes paid thereon to the Indian Government Treasury. The Appellant has contended that the correct way of looking at royalty payment is to see the turnover achieved by the Appellant as a result of the license. It has been contended that the payment of Rs 635.68 lakhs to achieve a turnover of Rs 63,606.53 lakhs and to realize the net profit of Rs 8,892.88 lakhs is certainly reasonable and at arm's lengt....
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....k and technical know how under the TNMM. Its operating margin on operating revenue came to 13.28% whereas those of its comparables in confectionary industry came to 2.17% only. TNMM is a profit based method. A royalty rate for the related party is determined indirectly by selecting a royalty rate that would give the licensee post royalty operating profits that are similar to what an unrelated party would earn by using the intangibles. The theoretical basis of the TNMM takes the stance that, if intangible property is contributing to an entity nature, the entity will earn profits in excess of what could be observed in the absence of such intangible property. Applied to the facts of this case, the appellants 13.28% margin vis a vis average margin of comparables at 2.17% clearly establishes that the intangible property (Trademark and Technical Know How) has contributed to its excess profits. The TPO has no objection to the selection of comparable companies for benchmarking but has taken the stand that since they (comparables) are not paying trademark royalty and technical know how fees, hence cannot be used for benchmarking this transaction lacks force. In f....
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....ed to Royalty payment for technical knowhow and use of trademarks. It has been submitted that royalty on technical knowhow was being paid by the assessee company to its parent AE since the signing of the agreement dated 19.03.1993 which was valid upto 08.03.2000, which was extended by SIA vide approval upto 08.03.2000, which was extended by SIA vide approval upto 14.09.2000. He further submitted that since agreement dated 20.12.2000 upto present date, the assessee company has been paying royalty on technical knowhow at the rate of 1.25%. This is being in accordance with the agreements signed on various dates. 27. He further submitted that the assessee started to pay royalty on use of trademark after taking approval of the Board of Directors on 26.04.2001 and consequential approval by the RBI. It was submitted that the assessee had been paying royalty from 12.02.2002 to its parent AE. 28. The DR, advancing the objection made by the TPO submitted that the agreements entered into by group companies in other parts of the world had been paying composite royalty, which came to 2%, whereas, the assessee had been paying royalty ranging between 1% to 1.25% and that the agreements ente....
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....authority is in nature of a clinching evidence, leaving no further room for doubt or controversy, in such a case no useful purpose would be served by following evidence/material to AO to obtain report and in such exceptional circumstances, said requirement may be dispensed with". He therefore, submitted that there is no occasion for restoring the TP issue to the file of the AO to look into the issue of AMP, which is not impugned before us. 35. The Senior Counsel, therefore, submitted that the CIT(A) was correct in holding that the payments made under both the types of royalties were at arms length and no adjustment addition needs to be made. 36. The DR in the rejoinder submitted that the in the interests of justice the issue needs to be restored to the file of the TPO. 37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38. From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1.25% and trademark usage at 1.25%, were overlapping and thus,....
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....lowed the 50% of expenses incurred on renovation of office complex and other expenses pertaining to electric installation, treating the same to be revenue. 47. The facts are that the assessee undertook refurbishing of the Cadbury House and claimed an aggregate expense of Rs. 2,39,38,000/-, which is as under: Party Name Description Amount (Rs.) Dalal Consultants Upgradation of Cadbury House 21,73,793 Dalal Consultants Upgradation of Cadbury House 5,73,924 Nitin Parulekar Architects Architects, interior design work 88,860 Hitesh Shah & Associates Plumbing/removing window frams/debris, etc. 30,160 Hitesh Shah & Associates Plumbing/removing window frams/debris, etc. 30,160 Hitesh Shah & Associates Fixing Ms Steel support/bamboo scaffolding 29,040 Roshan Electrical Contractor Supply & Installation of electrical items 14,44,694 Interscape Civil, Exterior and Plumbing works 1,60,63,652 S.R. Network UTP CAT 5 cable/connectors/cords/cabling work 10,45,103 Geeta Network Repairing with upholstery work Board rooms chairs 34,240 Geeta Network Repairing with upholstery work /Dir Chairs/Mee....
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....ed expense, which according to us are quite reasonable. 56. We, therefore, sustain the order of the CIT(A) and reject the ground of appeal, as filed by the department. 57. Ground no. 2 is therefore, rejected. 58. In the result, appeal filed by the department is dismissed. ITA No. 7408/Mum/2010: (Assessee appeal): 59. The following grounds have been raised: "GROUND NO. 1- Expenditure incurred on rural development Rs. 1,07,891/-. On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the Additional Commissioner of Income Tax, Range 5(1), Mumbai ("the AO") of disallowing Rs. 1,07,891/-, being expenditure incurred on rural development in villages near the Appellant's factory, on the alleged ground that the said expenditure has no nexus with the business carried out by the Appellant without considering the fact that such expenditure incurred out of commercial expediency, it enhances the corporate image of the Appellant Company and also promote its business. GROUND NO. 2: 8OHHC - Miscellaneous Income and Trade Disco....
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....inly a matter of good corporate governance through corporate citizen, which is encouraged by the government. This is what has been held in the case of Madras Refineries Ltd. (supra). It may not be out of place to mention, that in the case of Indian Rayon & Industries Ltd. (supra) (now known as Aditya Birla Nuvo Ltd.), (where one of us was a party to the decision), in ITA No. 5421/Mum/2005 have allowed a similar expense. 63. In these circumstances, in the interest of justice and the current need for being a better corporate citizen, the issue is restored to the file of the AO, who shall reexamine the nature of expense in the light of Madras Refineries Ltd. case (supra) and Aditya Birla Nuvo Ltd. (supra) and allow the expense, if the assessee has incurred expenditure for upliftment of local village community, as a good corporate citizen. 64. Issues raised in Grounds No. 2 to 4 are dealt with and are covered by the various orders of the coordinate Benches of the ITAT, in the case of the assessee. Since the grounds are covered on identical issues, we for the sake of brevity are not deviating from the inferences drawn by the coordinate Benches. 65. Ground no. 2 pertains to Misc....
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....arning of interest income. The issue is thus restored to AO for working out 90% of net interest income after allowing opportunity of hearing to the assessee". 67. The DR placed reliance on the orders of the revenue authorities. 68. We have gone through the orders of the revenue authorities and have also perused the order in ITA No. 975/Mum/2005 (supra). We find the issue is covered and we do not find any reason to deviate from the order in the assessee's own case. We hold accordingly. 69. Ground no. 2 is therefore allowed. 70. Ground no. 3 pertains to reduction of gross interest from the computation of deduction u/s 80HHC. 71. At the time of hearing, the AR pointed out that the issue is covered by the order in ITA No. 975/Mum/2005 in paras no. 7 and 7.1, which reads as under 7. The sixth dispute is regarding reduction of 90% of interest from profit of business as per Explanation (baa) while computing deduction under section 80 HHC. Assessee had received interest on FDRs, ICDs and others aggregating to Rs.5,21,04,545/-. The AO excluded 90% of the same from the profit of the business while computing deduction under section 80 HHC which in ap....
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....enses (PME) incurred by the company on freight, octroi, additional sales tax etc. The third party manufacturers converters were initially paying excise duty on the products manufactured for Cadbury on the basis of cost of raw material, packing material and conversion charges which included third party manufacturers/converters' margin of profit. However, the excise authorities disputed the said basis of valuation and claimed that excise duty on products manufactured by third party manufacturers/converters is payable on the basis of Cadbury's whole sale trade price less PME. Accordingly, the excise department issued a show cause cum demand notice and directed the manufacturers/converters to pay excise duty on the basis of normal price worked out from the prices charged by the assessee company to their wholesale dealers. The said third party manufacturers/converters disputed the basis adopted by the Excise authorities for levy of excise duty and the said dispute became the subject matter of appeal before the Excise Duty Appellate Authorities. Although the primary liability to pay the excise duty was that of the third party manufacturers/converters, the said excise duty liability was t....