TaxTMI 
TaxTMI 
2014 (10) TMI 355
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....ment on account of AMP expenditure. (ii) Disallowance on account of intra-group Support services. (iii) Corporate tax issues. 3. 2008- 09 6382/Del/2012 Appellant Transfer pricing - Adjustment on account of AMP expenditure (ii) (ii) Disallowance on account of intra-group Support services 4. 2009- 10 6580/Del/2013 Appellant Transfer pricing - Adjustment on account of AMP expenditure. (ii) Adjustment in relation notional interest on outstanding receivables. 2. A perusal of above reveals that one common issue in all the years pertains to adjustment on account of Advertising, Marketing and Promotion ("AMP") Expenditure incurred by the Appellant for AY 2006-07, 2007-08, 2008-09 & 2009-10. Brief Facts in this behalf are: 2.1. The Appellant is a wholly owned subsidiary of Bausch & Lomb South Asia Inc., USA, primarily engaged in the business of (i) manufacturing and distribution/trading of vision care products such as soft contact lenses, toric lenses, infra-ocular lenses, eye care solution and protein removing enzyme tablets ("vision care segment"). (ii) distribution/trading of surgical equipment such a....
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....Officer ("TPO"): 2.7. Ld. TPO held assessee's AMP expenditure to be excessive and benchmarked the same by comparing it with that of the his chosen comparables. Post determination of ALP qua AMP, a transfer pricing adjustment was carried out on this account in these years holding that the Appellant should have been compensated by AE for the alleged brand promotion services alleged to be rendered by the assessee. Besides ld. TPO further added a mark-up on rendition of such services. 2.8. The TPO thus calculated the adjustments as under: Particulars AY 2006-07 (INR) AY 2007-08 (INR) AY 2008-09 (INR) AY 2009-10 (INR) AMP of appellant including trade discount/ commission 20,90,47,349 25,67,02,198 17,60,95,512 12,95,73,460 Less Arm's Length AMP expenditure (as computed by TPO) 3,08,74,221 (ALP=2.77%) 3,16,33,605 (ALP=3.61%) 5,84,81,920 (ALP=5.62%) 4,36,18,644 (ALP=3.71%) Expenditure 17,81,73,129 22,50,68,593 11,76,13,592 8,59,54,816 incurred for developing intangibles Add: Mark-up 1,78,17,312 (@10%) 3,36,02,740 (....
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....ine approach, etc. 3.3. That Special Bench has decided them in following manner: Category 1 - Selling Expenses such as Trade/ Channel Discounts, Commission are not part of AMP. In assessee's case however, they have been held to be AMP expenses, which is against the Special Bench judgment, relevant grounds are raised in respective grounds of appeal as under: AY 2006-07 - Ground no. 11 & 12 AY 2007-08 - Ground no. 9 AY 2008-09 - Ground no. 8 & 8.1 AY 2009-10 - Ground no. 6 a) It is submitted that the Appellant provided certain channel discounts to its dealers depending on the sales volumes achieved. These discounts are essentially in the nature of trade discounts provided to incentivize dealers to increase the sales volume of the Appellant. The Appellant also incurred commission expenses which were in the nature of normal dealer commission paid to distributors/ channel partners depending upon approved commission percentage. In addition to the above, the Appellant also incurred expenses directly related to sales such as (i) point of sale related expenses like booking stalls, erecting stalls, dispensers, etc; (ii) conference related expenses like costs incurred ....
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....Del/2012) and Chandigarh Bench in the case of M/s Glaxo Smithkline Consumer Healthcare Ltd. (ITA No. 1148/Chd/2011). f) Thus ld. TPO has summarily held that it has incurred excessive expenditure in the form of AMP which leads to brand building for its foreign AE in India. Thus, the lower authorities have purposely avoided going into the actual expenditure and the fact that they were sales related as against alleged brand building. g) It is submitted that following earlier pattern of accounts heading even if the appellant included trade/channel discount, commission, other selling expenses, etc under the nomenclature AMP and has claimed the same as revenue expenditure as against reducing the same directly from sales. The expenditure cannot be classified as AMP expenditure, merely on the basis of entries in the books of account. 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). As such expenses go to reduce the cost of goods sold and have a live nexus to ....
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.... assumption that the details may still contain some element towards brand building is purely a guess work bereft of any cogent reasoning and not form a basis for further interference. It is pleaded that the AO/ TPO may be directed to grant relief with regard to the expenditure relating to trade discount, commission and any other selling expenses incurred by the Appellant, and the same shall be excluded from AMP at the threshold itself before even initiating the benchmarking exercise. 3.4. Category 2 - Key factors enumerated by Special Bench to be considered by TPO during benchmarking exercise 3.5. The Special Bench of the Tribunal (Para 17.4) has categorically suggested factors for determination of cost/ value of international transaction. The factors enumerated by Hon'ble Special Bench along with Appellant's facts have been reproduced below: Criteria's/ Factors Suggested by Special Bench (para 17.4) Appellant's facts FAR of the tax payer The TPO has grossly erred on fats of the business model of the appellant in assuming (i) the entire AMP expenditure was incurred for the distribution activity of (ii) the appellant is a limited risk distribut....
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....o force with prospective effect. Retrospectivity cannot be assumed by implications. 2. Transaction Incurrence of high AMP and use of foreign brand entails understanding and constitutes transaction - (para 9.11, 9.12 (last 4 lines) & 12.1 to 13) It will be appreciated that the questions referred to Special Bench were actually fact specific i.e. they were required to be answered by the Special Bench in light o facts and circumstances of the principal applicant i.e. LG India. Thus, to a great extent, the observations of the Special Bench were restricted in the context of the facts of the principal applicant and did not consider the facts in the case of interveners. Therefore, a judgment cannot in our respectful submissions, be applied uniformly to the instant case de hors appreciation of the relevant facts involved herein. Further, it is submitted that the TPO himself had accepted that the AMP expenses are payments to unrelated entities and has not, anywhere, incurred in relation to the business of the entity. The same should be included as operating expe....
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....r charged thereon. c) In the case of the Appellant, the TPO / DRP followed an inconsistent approach to determine the mark-up on following counts: - For AY 2006-07 and 2007-08, the TPO applied mark-up of 10 percent and 14.93 percent respectively wherein TPO has not undertaken any meaningful search for selection of appropriate comparables. Further, the TPO did not ever provide an opportunity to the Appellant to respond to the comparables as finally disclosed in the transfer pricing order. The comparables used by the TPO / DRP to compute the arm's length mark-up are not comparable to the alleged marketing services rendered by the Appellant. The specific objections of the Appellant pertaining to the use of the comparables are placed at Pgs 61-62 of PB for AY 2006-07 & Pgs. 87-89 of PB for AY 2007-08. - For AY 2008-09 and 2009-10, the TPO applied mark-up of Prime Lending Rate ("PLR") plus an associated service charge and arrived at a mark-up of 15 percent (PLR of 12.5 percent plus 2.5 percent mark-up) and 15.27 percent (PLR of 12.77 percent plus 2.5 percent mark-up) respectively. It is respectfully submitted that the application of PLR to compute the mark-up is erroneous. The s....
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....has actually passed to the Appellant and, further, no independent party shall pay for availing the services similar to those received by the Appellant from its AEs. In other words, the TPO, while rejecting the TNMM as benchmarking methodology stated that TNMM should be applied at transactional level and not entity level. Accordingly, the TPO applied CUP method for determining the ALP as 'Nil' and not acknowledging the fact that the services were actually received by the Appellant and the same have benefitted the Appellant. 4.5. It is submitted that services availed from the AEs are utilized by the Appellant in its operations and serve as a business maintaining tool for the Appellant. Such services assist with strategic planning, management and monitoring of the Appellant's operations and provide material benefits to the Appellant in terms of revenue growth, cost savings, operational efficiency and sustainability. By incurring these expenses, the Appellant has access to network, expertise, skills, knowledge, information, etc., that is available within the B&L Group. Further, the Appellant has not procured / purchased similar services from unrelated parties during these years and ....
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....sary or prudent for the assessee to have incurred the same and, therefore, the TPO exceeded the jurisdiction in examining the arms length price on a transaction. 4.8. Incorrect application of CUP: CUP cannot be considered as the most appropriate method since, CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. However, no such data is available for comparability purposes. The TPO while proposing such an adjustment did not identify any unrelated comparable transactions for application of CUP and arbitrarily considered the ALP as Nil, thereby, proposing an adjustment amounting to the total value of reimbursements. It is respectfully submitted that the TPO erred in adopting such an arbitrary approach for making an adjustment per se which is not the intent of Chapter-X. Reliance is placed on the recent judgment of the Hon'ble Delhi of Bench of the Tribunal in the case of Hero MotoCorp Limited (2013)156 TTJ 139 (Del) wherein, the applicant had paid model development fee and the TPO applied CUP for determinin....
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....AY 2009-10, no transfer pricing adjustments have been made by the TPO/AO in this behalf i.e. on account on receipt of support services. 4.13. In view of the above contentions Shri Butani pleads that ld. TPO has erred in: (a) not appreciating the benefits received by the Appellant from the services rendered by AEs. (b) determining the ALP of the transaction as Nil. Accordingly, the said adjustment is not sustainable. 5. Re-characterizing "delayed" payments as unsecured loans to AE and imputing a notional interest on such alleged loan. Ground no. 12 & 13 for AY 2009-10 5.1. It is contended that ld. TPO held as under in this behalf: a) certain receivables, namely, amounts outstanding from the Appellant's AEs being B&L Sing and B&L HK, have not been received within the stipulated time and, therefore, treated the receivables as unsecured loans advanced to AEs. b) as a consequence of insertion of Explanation (i)(c) to Section 92B retrospectively "receivables" have been included in the definition of international transactions. c) interest rate was arrived at 15.77% by using PLR as the average lending rate of SBI plus 300 basis points, to account for the various ris....
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.... be too much to expect the assessee to charge the interest from the AEs. There is no rationale to inflict upon the assessee, merely on presumption, that he ought to have charged the interest from it's AEs. We therefore hold that there was no justification to presume that there was a shift of profit to avoid tax in India." 5.5. With regards to the application of the CUP method by the TPO, it was submitted that as per the Act and the Rules, under the CUP method the procedure is to compare the price charged from AE with uncontrolled transaction i.e. non-AE. If the price charged from non-AE is comparable with AE, then no addition can be made. In the present case, the Appellant has not charged any interest from non-AE debtors in respect of delayed realization. The TPO erred in applying the CUP method as similar transactions were not entered into by the Appellant with third parties and the Appellant is not avoiding any tax by intentionally not charging any interest from AEs but charging it from non-AEs. As the case of non-charging of interest in the controlled transaction is comparable with that of non-charging from uncontrolled transactions, no transfer pricing adjustment can be made....
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....s and not at the rate applicable to loans. Instead, the Tribunal adopted a reasonable rate that would be available to the assessee on short-term deposits and fixed the ALP interest rate at 5%. 5.10. The following judicial pronouncements support the arguments of the Appellant: - Evonik Degussa India Private Limited vs ACIT [2013] 55 SOT 566 (Mum) "28. ...Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment....Moreover, the TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs, is uncalled for on the facts of the present case and is, accordingly, deleted." - M/s Nimbus Communications Ltd. vs ACIT [2013] 145 ITD 582 (Mum- Trib.) " ...Even assuming that the continuing debit balances of associated enterprise....
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.... incurred in the ordinary course of business. Besides it also filed details of nature of expenses for which the advances were given to prove that the expenses were of revenue nature and were wholly and exclusively incurred in the ordinary course of business. 6.3. Ld AO filed the remand, reporting that, the Appellant had only submitted copies of vouchers, bills of advances given to various parties and no other details summarizing the nature of expenses were filed and did not provide any clarity as to whether the advances were given in ordinary course of business. Without giving cogent reasons it was reported that they were advanced for the long term benefit of the Appellant and that the list provided did not clarify that the expenditures were incurred in ordinary course of business. The expenditure having been incurred for protecting interest of customers was not the test for determination of revenue of capital expenditure. AO thus gave self contradictory and shifted from reasons to reason to arbitrarily hold it be not allowable. 6.4. Ld. DRP without considering the merits and offering cogent reasons summarily confirmed the AO's remand report holding that assessee has not been....
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....he loss in such a case may be said to fall on the assessee not as a person carrying on business but as- owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made under section 10(1) or not" - Supreme Court in the case of CIT vs Mysore Sugar Co Ltd [1962] 46 ITR 649 (SC), wherein it was observed as under: "To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understoo....
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....ble to be outrightly rejected by the department. When the assessee had written off the dues recoverable from the Corporation and the same were accepted by the Department and it had also so written off, the advances made to M/s. Kanpur Boot House in its books of account, what else could be the proof with the assessee for its being unable to recover the same................... The CIT(A) rightly recorded that the debt had become bad and not recoverable and it would be a futile exercise to take any action against the legal heirs of the deceased. In view of the discussion as made by the Division Bench of J&K High Court and the Hon'ble Supreme Court, as quoted above, that the advances made by the assessee in the case were certainly of a type which would be within the contemplation of the words "laid out or expended wholly and exclusively for the purposes of the business". As no portion of the said advances could be stated to be loss of capital expenditure, but it being a plain case of business loss, it would certainly be allowable to be deducted under the provisions of section 37 of the Act" - Minda HUF vs JCIT [2006] (285 ITR 88) (Delhi) - Jhalani and Company vs ACIT [2001] (77 I....
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....e not part and parcel of normal selling expenses is not tenable as it represent innovative techniques employed to create and enhance marketing intangibles including brand build up. Further, the TPO has excluded the direct selling expenses as outlined in schedule 14 of the final accounts for the AY 2006-07. C. Intra Group Services: 12. No evidence for rendering any services was furnished by assessee before lower authorities. Besides, TPO asked for a list of information which is not complied by assessee. The question that the set of alleged services is rendered by the AE or a group of AEs remains uncontroverted. It is to be seen that as to whom the assessee sells and through whom the distribution is done. Apropos stewardship services for controlling the entity by the parental group, the allowability of such expenses on the Indian entity to say the least, is to be considered. Further, TPO is within rights to determine ALP for the intra group services rendered per force to the assessee. The case laws cited by Ld AR are distinguishable on the facts as also on the underlying principles. Two such citations are reproduced below and the distinction is clear on both the facts as also t....
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....the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs. The TPO has not gone into the business allowability of Intra Group Services Expenses, only ALP of such item has been determined. (ii) Dresser Rand India P Ltd ( 47 S....
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....w as to how this method is not appropriate to the facts of this case, nor shown as to which other prescribed method of ascertaining arm's length price of services received under CCA will be more appropriate to these facts. 13. Ld CIT(DR) further relies on the following cases: (i) Knorr Bremse India P Limited (ITA no. 5097/Del/2011) Asstt. Yr: 2007-08 Following international transactions of the appellant: i. Payment of management fee; ii. Payment of professional fee; and iii. Payment of SAP implementation fee. 5.10. In the case of Deloitte Consulting India Pvt. Ltd. Vs. DCIT in ITA no. 579, 1272 & 1273/Mum/2011 & others dated 30-3-2012 the Mumbai Bench of the Tribunal has expressed its opinion in following terms" "39. On the issue as to whether the TPO is empowered to determine the ALP at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India Pvt. Ltd. (supra), held that the assessee has to establish before the TPO that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the TPO is justified in making an ad....
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....ied in the transactions between the persons other than Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that "the quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses". Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of an expenditure has not been excluded from determination." 5.15. The principle stated in MC Ericsion Vs. ACIT (ITA no. 5871/Del/11 dated 8-6-2012) is on the issue of commercial expediency. Though it does not need any deliberation, the applicability of principle of arm's length test of international transactions has not been done away with. The expenditure incurred in an international tra....
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.... By saying so they have only described the circumstance under which the international transaction has been entered by the appellant, so as to test the benefit that can be said to have reached the assessee. It, therefore, cannot be said to have questioned the commercial expediency of such transactions entered by the appellant. The I.T. rules contain exhaustive detail regarding nature of information and documents which are required to be maintained by the assessee. Rule 10D(1) of the I.T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analysing the comparability of the international functions entered into by the assessee. It, therefore, is obligatory on part of the appellant to maintain such record and produce the same before the TPO to show that it has benchmarked the international transaction at ALP. This obligation, however, has not been discharged by the assessee. 9.3. The appellant in the present case is also not shown to be willing to pay any amount for such services, if it were, so provided by an independent enterprise or if the same would have been performed in house. The DRP is found to have considered these s....
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....these expenses and details thereof was provided before TPO and DRP. Thus assessee has provided enough details in this behalf and applying the L.G. Special Bench directions the total AMP expenses incurred by the assessee is tabulated at page 10, in sub para (j), above. These figures of AMP expenses as tabulated should be adopted and no further verification of the expenses should be directed to be carried by TPO in as much as it will amount to subjecting assessee again to rigorous exercise, without there being any fault attributable to it. In sum and substance, ld. Counsel contends that for working of adjustment attributable to brand building in terms of the Special Bench judgment is reflected by the figures mentioned in the above table. Thereafter suitable comparables may be taken and based on objective data the mark up may be applied and the adjustment should be worked out. Thus this exercise does not further verification of expenses. 16.3. Per contra, ld. CIT (DR) contends that the concept of "bright line test" is a recognized concept to determine the cost relevant to the international transactions. The Special Bench ruling in the case of L.G. Electronics though has not especia....
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....Since the approach earlier adopted by the lower authorities did not require verification of expenses and categorization of heads, in the changed scenario it will be desirable that relevant expenses are verified by the AO. In view thereof, we are inclined to set aside the grounds raised by the assessee in this behalf back to the file of TPO to decide the same afresh after giving the assessee adequate opportunity of being heard. Assessee's ground on this issue for all the assessment years in question stands allowed for statistical purposes. 17. Disallowance of Intra Group Support Services ( A.Y. 2007-08 & 2008- 09): 17.1. Before TPO, assessee furnished a list of services claimed to be rendered by the group concerns for which the amount in question was paid as intra group services. The TPO has given a categorical finding that assessee has not provided any evidence to substantiate the claim of receiving any service. Assessee's objection is to the effect that the benefit test is not a method prescribed under the realm of T.P. proceedings. DRP in para 6.7.1 & 6.7.2 of its order for A.Y. 2007-08 has upheld the order of TPO on following lines: (i) Services claimed to have been ren....
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....see's act in not charging interest both from AE and non AE and delay in realization in both the cases is same, , notional interest cannot be considered with ALP on delayed realization. This has been further followed by the ITAT in the case of Lintas India P. Ltd. (supra) & Mastek Ltd. (supra). 18.3. In view of above facts, respectfully following these judicial precedents we are of the view that the adjustment in relation to notional interest on outstanding receivables cannot be made in the case of the assessee. This ground of the assessee is allowed. 19. Corporate addition (A.Y. 2007-08): 19.1. The sole issue relates to disallowance of advances written off, which was disallowed by AO holding that they were given in the ordinary course of business and were revenue in nature, besides conditions of Sec. 36(2) read with sec. 36(1)(vii) were not satisfied. Before DRP assessee filed additional evidence also on which a remand report was called from AO. In the remand proceedings assessee submitted before the AO, that advances given to various parties were in nature of expenses incurred towards marketing and sales promotion activities, sponsorship of events, conferences, travel hot....