TaxTMI 
TaxTMI 
2013 (4) TMI 699
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.... an income of Rs. 3,15,09,15,922 as against the returned income of Rs. 1,95,37,70,840. 2. That the Assessing Officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 1,02,83,55,523 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as ' the advertisement, marketing and sales promotion expenses' ) incurred by the appellant. 2.1 That the Assessing Officer erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a ' transaction' in the absence of any understanding/arrangement between the appellant and the associated enterprise. 2.2 That the Assessing Officer erred on facts and in law in not appreciating that the advertisement, marketing and sales promotion expenses, etc., incurred by the appellant in India cannot be characterised as an international transaction as per section 92B, so as to invoke the provisions of section 92 of the Act. 2.3 That the Assessing Officer erred on facts and in law in not appreciating that in the absence of any understand....
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....39; BLT' ) for computing adjustment on account of expenditure on advertisement and brand promotion expenses without appreciating that in absence of specific provision under the Transfer pricing regulations in India, adjustment on account of the arm' s length price of the advertisement and brand promotion expenses could not be made. 2.12 Without prejudice that the Assessing Officer erred on facts and in law in not appreciating that even applying developer assister rule as contained in US transfer pricing regulations, viz., REG. 1.482-4, the appellant would be characterised as developer of the marketing intangibles and hence it would not be required to seek reimbursement/compensation for such expenditure from the associated enterprise. 2.13 That the Assessing Officer erred on facts and in law in relying upon the decision of the case of DHL Incorporated and Subsidiaries v. Commissioner of Internal Revenue Tax Court, TCM 1998-461, 285F 3d 1285, affd in part, rev' d in part 285F.3d.1285. 89AFTR2d 2002-1978 (CA-9,2002) ; and Glaxo Smith Kline Holding (Americas) Inc. v. Commissioner, T.C. No. 5750-04 and T.C. No. 6959-05, which were rendered in the context of....
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....nel erred on facts and in law in holding that the appellant has rendered service to the associated enterprises by incurring the advertisement, marketing and sales promotion expense and by holding that mark-up has to be earned by the appellant in respect of the advertisement, marketing and sales promotion expenses, alleged to have incurred for and on behalf of the associated enterprise. 2.21 Without prejudice, mark-up, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. 2.22 Without prejudice that the Assessing Officer erred on facts and in law, in not appreciating that the advertisement, marketing and sales promotion expenses incurred by the appellant was appropriately established to be at arm' s length applying transactional net margin method (TNMM) on entity-wide basis. 3. That the Assessing Officer erred on facts and in law in not allow ing deduction for incremental balance amounting to Rs. 36,87,481 lying in excise PLA under section 43B of the Income-tax Act, 1961 (' the Act' ). 4. That the Assessing Officer erred on facts and in ....
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....vided certain administrative support services such as marketing, sales inputs, IT support, training and accounting, etc. to its group companies. The assessee during the year under consideration had furnished return of income declaring total income of Rs. 195.37 crores. During the course of assessment proceedings the case of the assessee was referred to the Transfer Pricing Officer under section 92CA of the Income-tax Act as the assessee had entered into international transactions of over Rs. 5 crores. The Additional Commissioner of Transfer Pricing vide order dated October 29, 2010 had computed the value of international transaction under section 92CA(3) of the Act. The Dispute Resolution Panel thereafter issued directions under section 144C(5) of the Act dated September 23, 2011 pursuant to which the Assessing Officer had passed the order under section 143(3) read with section 144C of the Act dated October 18, 2011. The assessee is in appeal against the said order of the Assessing Officer and raised several grounds of appeal. 5. Ground No.1 raised by the assessee being general is dismissed as such. 6. Ground No. 2 raised by the assessee is against the transfer pricing adjust....
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....ported in audit report furnished in Form No. 3CEB, under section 92CA(1) of the Income-tax Act, to the Transfer Pricing Officer (TPO) as enlisted under para 2.1 of the order of the Transfer Pricing Officer. The Assessing Officer vide letter dated November 12, 2009 had referred the international transactions in respect of export of malted food, biscuits, export of packing material, provision of IT services, reimbursement of expenses (receipts) and reimbursement of expenses (payments) as enlisted under para 2.1 of the order of the Transfer Pricing Officer. Thereafter, another reference was made by the Additional Commissioner of Income-tax, vide letter dated July 16, 2010 in respect of the international transactions under section 92CA(1) of the Act, to the Transfer Pricing Officer, as enlisted under para 2.2 of the order of the Transfer Pricing Officer. The Transfer Pricing Officer was of the view that the assessee-company is incorporated under the Laws of India and is 40 per cent. owned by Horlicks Ltd., U.K., which was part of GSK group. The Transfer Pricing Officer vide para 5 thus held that it is an associated enterprise within the meaning of section 92A(2)(a) of the Income-tax Ac....
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....'Horlicks' trademark and from its audited financials, it is seen that it has incurred expenditure of Rs. 14,275.01 lakhs on advertisement, marketing and promotion. Thus in the year the assessee has created marketing intangibles by incurring expenditure of Rs. 14,275.01 lakhs on advertisement, marketing and promotion of the associated enterprise brand and products, however, the associated enterprise has not compensated the assessee for this cost pertaining to the brand promotion of the associated enterprise in India. In order to examine the arm' s length price it is necessary to compare total expenditure incurred by the assessee on behalf of the associated enterprise in India and amount paid by the assessee to India as contribution for advertisement expenditure by the associated enterprise. Accordingly, I have examined all the advertisement marketing and sale promotion expenditure (in short AMP expenditure) incurred by the assessee in India." 14. The assessee was thus show caused as to why it should not be inferred that it had incurred both routine and non-routine advertisement and marketing expenses on brand promotion and development of marketing intangibles for the ....
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....e neither incurred at the instance or direction of the associated enterprise nor the associated enterprise is expected to benefit from such expenditure incurred by the domestic enterprise in India. The benefit was claimed for the customers in India and not abroad. The assessee also claimed that there was no international transaction as per section 92B of the Act. Further, it will be appreciated that in absence of any transaction which results in transfer of the benefit of advertisement, marketing and sales promotion and which otherwise belong to and is exploited by the domestic enterprise, the question of transfer of the marketing intangibles or payment by the associated enterprise to the domestic enterprise for transfer of such intangibles does not arise. The main plea of the assessee was that it had incurred expenditure for brand promotion in India to cater to local requirements and the said expenditure was not at the instance of associated enterprise. If any benefit did arise to the associated enterprise but without any arrangement or understanding could not be termed as international transaction. The next plank of argument before the Transfer Pricing Officer by the assessee ....
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....was allowed by the Transfer Pricing Officer. The Transfer Pricing Officer thus was of the view that because of the intangible developed by the assessee by way of enhanced sale or production in India, in turn led to the increased profitability of the parent associated enterprise. The Transfer Pricing Officer was of the view that the abovesaid required recomputation at arm' s length price, as the assessee had not been compensated for the said services. Consequently advertisement, marketing and sales promotion expenditure of Rs. 14,275.01 lakhs was treated as international transaction under section 92D(1) read with clause (v) of section 92F of the Act. The Transfer Pricing Officer applied comparables and determined the arm' s length price of reimbursement received by the assessee for brand promotion and marketing intangibles of the associated enterprise in India by adding a mark-up at 13.04 per cent. to the net advertisement, marketing and sales promotion expenditure incurred by the assessee after deducting brand development expenditure of Rs. 38.82 crores and computed arm' s length value of the subsidy at Rs. 10,390.26 lakhs. The income of the assessee was thus enhanced b....
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.... 21. Ground No. 2 raised by the assessee is general in respect of the aforesaid adjustment made on account of advertisement, marketing and sales promotion expenditure. The issue in grounds Nos. 2.1 to 2.7 is whether the transaction is an international transaction. The Special Bench of the Tribunal in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] vide paras 72 to 95 of the decision held as under (page 59) : "72. Having seen that there was a transaction between the assessee and the foreign associated enterprise, now let us examine as to whether such transaction can be called as international transaction. It was submitted by learned counsel for the assessee and some of the interveners that even if it is treated as a transaction, it still does not fall within the definition of ' international transaction' as per section 92B of the Act. It was argued that section 92B refers to a transaction between two or more associated enterprises ' in the nature of' purchase, sale or lease of tangible or intangible property, etc. It was sub mitted that the expression ' in the nature of' has been clarified by way of insert....
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....ans action with a third party or a part of such transaction cannot be called as transaction with the associated enterprise. As the entire advertisement expenses were incurred in India vis-a-vis third parties, the requirement of section 92B was claimed to be lacking. The learned authorised representative argued that there should be a first degree nexus between the incurring of advertisement expenses and the brand promotion for the foreign associated enterprise so as to regard it as an international transaction. Any incidental benefit resulting to the foreign associated enterprise, out of the expenses incurred by the assessee in India, cannot be termed international transaction. As there was no transaction between the assessee and its foreign asso ciated enterprise in so far as incurring of advertising, marketing and promotion expenses is concerned, the learned authorised representative argued that the same ceased to be an international transaction. It was argued that the present so-called transaction of brand building for the foreign associated enterprise by the assessee is neither covered under sub-section (1) nor (2) of section 92B and hence the same cannot be recognised as an int....
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.... as deduction by the Indian enterprise. If it amply turns out that the Indian entity has booked certain amount incurred for its associated enterprise as its own expense, this would have the effect of reducing the profit without reason, thereby depriving Indian exchequer from its rightful share of taxes. It was stated on behalf of the Revenue that the assessee incurred advertising, marketing and promotion expenses with a tacit understanding of creating the marketing intangible for its foreign associated enterprise. The assessee not only claimed deduction for the advertising, marketing and promotion expenses incurred for its own business purpose but also for the expenses towards creating or improving the marketing intangibles of the foreign entity. This excess claim of deduction was stated to have a direct bearing on the profits of the assessee, thereby bringing it within the ambit of an international transaction. 78. The third way of looking at this as an international transaction was its inclusion under the relevant part of section 92B(1), which runs as under : and shall include a mutual agreement or arrangement (there is an oral understanding) between two or more associat....
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....9; includes' in a definition make it exhaustive and not inclusive. It was highlighted that only the trans actions set out in section 92B can be considered as international transactions and nothing beyond that. As the instant transaction is not covered by section 92B, it was claimed that the same cannot be considered as an international transaction. 81. After considering the rival submissions in this regard, we have no doubt in our mind that only international transactions can be considered within the purview of the Chapter X of the Act. Unless a transaction is an international transaction within the meaning of section 92B, the same cannot be subjected to the transfer pricing pro visions. The expression ' international transaction' has been defined under section 92B, which has two sub-sections. The first sub-section talks of actual international transaction and the second sub-section refers to a deemed international transaction. 82. The case of the Revenue is that it is an international transaction in terms of sub-section (1) of section 92B. Let us see the prescription of this provision, which is as under : ' 92B. Meaning of international t....
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....39;, then it will again mean that it is an exhaustive definition to include both A and B and not C or D, etc. A definition despite being exhaustive can still be inclusive, if one or more of its components are again defined in an inclusive manner. Suppose in the definition of the third category discussed above, having both A and B by use of the words ' means' and ' includes', the con tents of either A or B or both are further defined in an inclusive manner, this definition will again become inclusive to the extent of the definition of either A or B or both having been defined in an inclusive manner. 85. Turning to the definition of international transaction as per sub-section (1) of section 92B, it is noticed that it uses both the words ' means' and ' includes' . When we examine the Explanation to this section clarifying the meaning of the expression ' international trans action' and ' intangible property', then it becomes clear that both have again been defined in inclusive manner. Even though sub-clauses (a) to (c) and (e) of clause (i) of the Explanation defining ' international transaction' are exhaustive, but sub-....
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....transaction between two associated enterprises and one or both of whom are non-residents, it will not become an international transaction so as to fall within the domain of Chapter X, unless it is of the nature as defined in section 92B. 89. It has been vigorously argued by learned counsel for the asses see and some of the interveners that clause (i) of the Explanation to section 92B gives meaning to the expression in the nature of ' international transaction' and since sub-clauses (a) to (e) of clause (i) do not refer to transaction of brand building, it cannot be considered as an international transaction. We are not persuaded by this submission. It is pertinent to note that the expression ' international trans action' as per clause (i) of the Explanation has been ' clarified' to ' include' five sub-clauses. Thus the meaning assigned to ' international transaction' as per clause (i) of the Explanation is simply inclusive and not exhaustive. There is hardly any need to burden this order with the ratio decidendi emanating from a plethora of judgments that the scope of an inclusive definition always extends beyond the specified inclus....
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.... services, including provision of market research, market development, marketing management' . Clause (ii) of the Explanation defining ' intangible property' includes through sub-clause (a) : ' marketing related intangible assets, such as, trademarks, trade names, brand names, logos' . When we consider both these provisions together, it becomes clear that provision of services defined in an inclusive manner encompassing all the market related services including those specifically covered like market development, research and administration and the further fact that brand name and logos have been specifically considered as marketing intangibles, there remains no doubt about the brand building being a provision of service in the present context. In the light of the above discussion we are of the considered opinion that the transaction of brand building by the assessee for the foreign associated enterprise is in the nature of ' provision of service' . Having held such transaction to be an international transaction in the nature of ' provision of service', we do not consider it expedient to deal with the contention of the learned Departmental represe....
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....f any transaction within the ambit of section 92B. The transfer pricing provisions should be seen in the backdrop of the fact that these are special provisions for avoidance of tax on the transactions structured between two associated enterprises. The simple fact that the foreign associated enterprise did not pay any consideration to the Indian associated enterprise will not take the transaction out of the purview of the transfer pricing provisions, if it is otherwise an international transaction. 95. 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 associated enterprise ; the foreign associated enterprise 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 as an international transaction in the facts and circumstances of the present case." 22. In view of the majority decision of the Special Bench in L. G. Elect....
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....rand building expenses incurred by the assessee for the foreign associated enterprise. Learned counsel stated that the overall higher net profit rate implies that, firstly, there was no advertisement by the assessee for the brand of the foreign associated enterprise and secondly, if at all it was there, the same stood compensated by the foreign associated enterprise in terms of sale of goods to the assessee at lower rates. The sale of goods at lower prices to the assessee by the foreign associated enterprise should be considered as a quid pro quo for the foreign brand building. For ascertaining as to whether or not the foreign enterprise sold goods to the assessee at a lower price, the learned authorised representative urged that the overall net profit rate of the assessee should be considered, which will naturally absorb the effect of incurring such brand building expenses. If the overall profit rate is higher, it will mean that the expenses incurred by the assessee on brand building were compensated by the foreign associated enterprise in terms of the lower price of goods charged from the Indian associated enterprise, necessitating no separate further addition on the alleged pres....
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....d the rival submissions on this issue in the light of the material placed before us and precedent relied. The crux of the learned authorised representative' s submission in this regard is that when the international transaction of import of raw material was scrutinised by the Transfer Pricing Officer under the transactional net margin method and the overall net profit of the assessee was found to be higher than other comparables, then no other international trans action could have been processed under the transfer pricing provisions. There are two sub-arguments in this main argument of the learned authorised representative. First, that the international trans action of import of raw material has been processed under the transactional net margin method on entity level and the second that when on doing this exercise, the overall net profit was found to be better than other comparables, then no addition was called for by subjecting the advertising, marketing and promotion expenses to the transfer pricing provisions. 21.4. There is a basic fallacy in the first sub-argument, which lies in not properly appreciating the modus operandi of applying the transactional net margin ....
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....margin realised by the enterprise from ' an' international transaction. When the mandate of the section and the relevant rule is unambiguous so as to apply on each transaction, as is apparent from the use of the article ' an', then the computation of the arm' s length price of ' an' international transaction on the entity level is inappropriate. Our conclusion that each international transaction is required to be separately scrutinised under Chapter-X also becomes apparent from the language of section 92(3) as discussed infra. Thus, it is clear that the sanction is for applying the transactional net margin method only on a transactional level and not on entity level. Of course, the transactional net margin method can be correctly applied on entity level if all the international transactions are of sale by the assessee to its foreign associated enterprise and there is no other transaction of sale to any outsider and also there is no other international transaction. But if there are several unrelated international transactions, as is the case before us and the assessee or the Transfer Pricing Officer has applied the transactional net margin method in a wro....
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....hers. Earning an overall higher profit rate in comparison with other comparable cases cannot be considered as a licence to the assessee to record other expenses in international transactions without considering the benefit, service or facility out of such expenses at arm' s length. All the transactions are to be separately viewed. This position can be seen with a simple illustration. Suppose an Indian entity is engaged in manufacturing of some products and all the sales are to its foreign associated enterprise. In such international transaction, it earns actual profit of, say, Rs. 120. Further suppose the arm' s length profit on total sales earned in comparable uncontrolled trans actions is Rs. 100. In such a case, there can be no question of making any addition on account of arm' s length profit from such international transaction of sale to foreign associated enterprise because the actual overall profit is more than the arm' s length profit. It may also be possible that the actual profit of the Indian associated enterprise was Rs. 140 but the advertising, marketing and promotion expenses have been so claimed as deduction so as to include a part representing brand ....
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....penses on manufacturing, financing and selling which constitute part of the total cost of product along with the cost of raw materials. Subjecting the international transaction of purchase of raw material to the transfer pricing provisions would only show that purchase price of raw material is not unnecessarily inflated. It is self evident that net profit is not dependent only on the purchase cost. A host of other factors contribute to the earning of profit. It may be possible that a manufacturer succeeds in making economical purchases but suffers setback in incurring other expenses thereby resulting into a comparatively low profit. Similarly, there can be a converse situation in which the purchases are made costly but the economies in other areas are achieved thereby leading to higher profit. The crux is that purchase cost is only one of several other important factors having a bearing on the overall profit. All other costs, including the advertising, marketing and promotion expenses are independent of such cost of import of raw material, having some correlation with the overall profit. In our considered opinion there is no logic in not applying the transfer pricing provisions on ....
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....owance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into' . On a careful perusal of sub-section (3) in combination with sub-section (1), it tran spires that if the computation of income having regard to the arm' s length price of an international transaction has the effect of reducing the income chargeable to tax computed on the basis of entries made in the books of account, then the provisions of section 92 will be ignored. It can be understood by way of a simple example. If the arm' s length price of an international transaction in the nature of expense is Rs. 100 and the amount of actual expense recorded in the books of account is Rs. 80, then the arm' s length price of such expense at Rs. 100 will be ignored, because acting upon such the arm' s length price will lead to lowering of th....
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....action. Such the arm' s length price can be determined, inter alia, by comparable uncontrolled price (CUP) method or cost plus method or even by the transactional net margin method. All the five methods, as prescribed under section 92(1) and rule 10B, aim at determining the arm' s length price of an international transaction in one way or the other. The first is the comparable uncontrolled price method, by which the price charged or paid for property transferred, etc. in a comparable uncontrolled transaction is identified. Such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transaction. The adjusted price arrived at is taken as the arm' s length price in respect of the property transferred, etc., in the international transaction. In a like manner all the methods including transactional net margin method provide for determining the arm' s length price of an international transaction. The main focus of the learned authorised representative was on restricting the application of the provisions of Chapter X to other international transactions when one transaction has been processed under the tra....
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....ainable because the determination of the arm' s length price in this case is not based on any of the methods prescribed under the transfer pricing regulations. Referring to section 92C, the learned authorised representative sub mitted that five methods have been listed in specific and there is a general clause, i.e. (f), which states-' such other methods as may be prescribed by the Board' . It was stated that such other method as per clause (f) of section 92C(1), has been brought into existence by means of Notification dated May 23, 2012 through Income-tax (Sixth Amendment) Rules 2012 coming into force on first day of April 2012, applicable from the assessment year 2012-13. Relying on the judgment of the hon'ble jurisdictional High Court in the case of Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi), the learned authorised representative contended that rule 10AB, specifying the sixth method, cannot have retrospective operation when it has been made applicable from the assessment year 2012-13. 22.2. Coming back to his point, it was argued that the Transfer Pricing Officer/the Dispute Resolution Panel have determined the arm' s length price in respec....
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....Officer has impinged on the quantum aspect of the advertisement expenses which cannot fall within the purview of Chapter X. He submitted that by applying the bright line method, the Transfer Pricing Officer/Assessing Officer have taken a view that the assessee should not have incurred so much expenses on advertising, marketing and promotion. He also contended that Chapter X of the Act is a complete code in itself inasmuch as it includes not only the substantive but also the machinery provisions. If machinery provision cannot be applied then the subject matter goes out of the tax net. In support of this contention, he relied on the judgment of the hon'ble Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) and another judgment of the hon'ble Supreme Court in the case of PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC). In the light of these judgments it was submitted that the hon'ble Supreme Court has clearly held that where machinery provision fails, the charge cannot be attracted under the substantive provision. Since the Revenue' s case hinges on the computation of the arm' s length price of advertising, marketing and promotion expe....
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.... 22.6. Replying to the contention raised on behalf of the assessee for cancelling the assessment itself for the reason of application of a non-prescribed method, the learned Departmental representative con tended that the Dispute Resolution Panel applied cost plus method. Even if in any case there is a wrong application of method by the authorities, the right course is to send the matter back to the Assessing Officer/ the Transfer Pricing Officer for correcting the deficiency instead of taking away the jurisdiction itself. 22.7. In rejoinder, the learned authorised representative found fault with the argument of the learned Departmental representative on the application of the cost plus method by contending that this method cannot be applied as the transaction is not in the nature of rendering of service. His contention was that unless an assessee itself is regularly engaged in the provision of service which is provided to the associated enterprise, the cost plus method under section 10B(1)(c) cannot apply. 22.8. We have considered the rival submissions. Before proceeding further it is imperative to note that we have dealt with the contention of the learn....
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....id of force. There is no doubt that the word ' any' has been used under section 92C(1) which would have ordinarily implied that any specific or non specific method or even a combination of one or more prescribed methods is sufficient. However it is relevant to note that the scope of the word ' any' is circumscribed by the succeeding words ' of the following methods being the most appropriate method' . The ambit of the word ' any' in sub-section (1) has been restricted by the ' following' five specific methods given in the later part of the provision. Rule 10B also provides in the same manner that ' . . . the arm' s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method . . .' Here also the word ' any' is succeeded by the word ' following', which implies that it can be any of the five methods prescribed in the following part of the rule. When we read sub-section (1) of section 92C in entirety along with rule 10B(1), there remains no doubt that the arm' s length price is required to be determined by any single method out of t....
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.... any other mechanism with the one prescribed under the rule. It is neither possible to invent a new method nor to substitute a new methodology in place of the one prescribed in the rule. 23.1. We have noticed from the orders of the authorities below that there is no express reference to any method employed for determining the arm' s length price of the international transaction. This factor in itself, cannot be considered as detrimental to the computation of the arm' s length price, if in substance it has actually been computed by any of the prescribed methods. In our considered opinion the Dispute Resolution Panel as well as the Assessing Officer in passing the impugned order were right in applying the spirit of the ' cost plus method' to the facts of the instant case by firstly identifying the cost/ value of service provided to the assessee and thereafter adding mark up. The mere fact that the Dispute Resolution Panel did not specifically mention it in so many words, will not ipso facto mean that it did not apply the cost plus method, when the essence of the working matches with the methodology provided in that method. 23.2. At this stage, it wil....
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....p 4 talks of increasing the cost as determined under step 1 by such adjusted profit mark-up. In this case, the Dispute Resolution Panel increased cost of Rs. 161.21 crores under step 1 with 13 per cent. as determined under steps 2 and 3 to find out the amount as per step 4 at Rs. 182.71 crores. Step 5 declares that the figure computed under step 4 should be taken as an arm' s length price for the provision of services by the enterprise. Thus it is vivid that the Dispute Resolution Panel determined a sum of Rs. 182.71 crores as the arm' s length price under the cost plus method of the international transaction in the nature of provision of service with its cost/value at Rs. 161.21 crores. 23.4. It is relevant to note that under the second and the third steps what is required to be determined is the rate of normal gross profit mark-up as arising to the enterprise from an uncontrolled transaction or to an unrelated enterprise in a similar situation. Here it is significant to note that a comparable uncontrolled transaction to be considered for benchmarking the normal gross profit mark-up has to be similar to the international transaction under consideration. Consequent....
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....ypothetical profit mark-up under steps 2 and 3 for determining the arm' s length price. It has to be a profit mark-up of a comparable uncontrolled transaction. The Dispute Resolution Panel suggested 13 per cent. mark-up without showing such mark-up in a comparable uncontrolled transaction. This course of action cannot be sanctioned. When the rule prescribes a particular method to be followed and the steps so given are unambiguous, it is impermissible to substitute such steps with any other mode. Accordingly we do not approve the action taken by the Assessing Officer in implementing the direction of the Dispute Resolution Panel to mark up 13 per cent. on the cost/value of international transaction. 23.6. We have held earlier in this order that the Transfer Pricing Officer was not justified in restricting himself only to the two com parable cases as against certain other comparable cases cited by the assessee without verifying or discussing the comparability or other wise of such cases cited by the assessee. These observations have been made in the context of determining the cost/value of international transaction which was worked out by the authorities below at Rs. 161.....
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.... nullity when these are taken without any jurisdiction or beyond the limitation period. The test to determine as to whether the order passed is invalid or irregular is to see whether there is a lack of jurisdiction or a procedural default. Coming back to our context, we find that the lapse came in applying the procedure of determining the arm' s length price correctly. Such a lapse coupled with the fact that there was otherwise valid jurisdiction and the action was well within the time limit, cannot in our considered opinion lead to the declaration of the order as a nullity. There occurred an irregularity due to such lapse which can very well be cured by correcting it from the stage at which such lapse occurred. In view of the foregoing discussion, we are of the considered opinion that there is no merit in the contention of the learned authorised representative that the entire proceedings be declared as null and void simply because of some procedural lapse in determining the arm' s length price of the international transaction." 25. In view of the abovesaid ratio laid down by the majority view in the Special Bench of the Tribunal and in view of the issue being set aside ....
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....m ' advertisement, publicity and sales promotion' as employed in the erstwhile sub-section (3B) of section 37, all the judgments rendered in the context of sub-sections (3A) and (3B) of section 37 will squarely apply to the interpretation of the scope of advertising, marketing and promotion expenses. We, therefore, hold that the expenses in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of ' advertisement, marketing and promotion expenses' for determining the cost/ value of the international transaction." 27. The plea of the assessee before us was that expenses aggregating Rs. 5,500.86 lakhs are expenses 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. 5,500.86 lakhs, the remaining expenses of Rs. 8,679.75 lakhs (constituting 6.87 per cent. of the total sales) only is required to be considered for the purpose of benchmarking analysis as undertaken by the Transfer Pricing Officer. The learned Departmental representative for the Revenue placed reliance on the orders of the authorities below. 28. We ....
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....d representative about the necessity of choosing properly comparable cases in the first instance before starting the exercise of making comparison of the advertising, marketing and promotion expenses incurred by them for finding out the amount spent by the assessee for its own business purpose. However, the way in which such comparable cases should be chosen, as advocated by the learned authorised representative, is not acceptable. He submitted that only such com parable cases should be chosen as are using the foreign brand. We find that choosing cases using the foreign brand ex facie cannot be accepted. It is but natural that the advertising, marketing and pro motion expenses of such cases will also include contribution towards brand building of their respective foreign associated enterprises. In such a situation the comparison would become meaningless as their total advertising, marketing and promotion expenses will stand on the same footing as that of the assessee before the exclusion of expenses in relation to brand building for the foreign associated enterprise. The correct way to make a meaningful comparison is to choose comparable domestic cases not using any foreign brand. ....
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....e the issue of determination of the arm' s length price of advertisement, marketing and sales promotion expenses to the file of the Transfer Pricing Officer, the abovesaid issues are also set aside to the file of the Transfer Pricing Officer, who shall decide the issue in line with the directions of the Special Bench of the Tribunal in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] and also our directions in paras hereinabove. Grounds Nos. 2.20 to 2.22 are thus allowed for statistical purposes. 34. The issue in ground No. 3 raised by the assessee is against the disallowance under section 43B of the Act. The brief facts relating to the issue are that the assessee during the year under consideration had claimed deduction at Rs. 36,87,481 on account of difference in excise duty deposited/balance with the Excise Department at the end of current financial year and previous financial year. The explanation of the assessee before the Assessing Officer was as under : " During the relevant previous year, the assessee reduced an amount of Rs. 36,87,481 from its income being the difference between the excise deposit with Excise Depa....
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....2012, vide judgment dated September 19, 2012 had laid down that the credit of the excise duty paid was to be allowed. The learned authorised representative for the assessee further referred to the ratio laid down by the hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. [2012] 250 CTR 140 (Delhi) and pointed out that the only issue raised was in connection with the excess payment made on account of excise duty, which was lying in the PLA account. 37. The learned Departmental representative for the Revenue though admitted that the issue was decided in favour of the assessee by the earlier order of the Tribunal in the case of the assessee itself but placed reliance on the order of the Assessing Officer in this regard. 38. We have heard the rival contentions and perused the record. The issue arising vide ground of appeal No. 3 is against disallowance made under section 43B of the Act on account of excess payment made on account of excise duty. The assessee during the year under consideration had claimed expenditure of Rs. 36,87,481 being the difference between the excise deposit with the excise department i.e. the balance in the central excise lying in PLA Account a....
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....of deduction in the year in question when the goods were manufactured and the amount was deposited in the ' account-current' . The expense would certainly relate to the year in which the goods were manufactured and the amount was deposited, which could not possibly be treated as an advance. The amount was deductible." 40. Further the Delhi High Court in CIT v. Modipon Ltd. (No. 2) [2011] 334 ITR 106 (Delhi) had allowed similar claim of excise duty paid in advance under the provisions of section 43B of the Act and held as under (headnote) : " (ii) That with regard to the deduction of Rs. 14,71,387 on account of excise duty paid in advance as business expenditure, the procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods were removed from the factory premises. The duty, thus, already stood deposited in the accounts of the assessee maintained with the treasury and the amount, thus, stood paid to the State. The submission of the Department that it was only on removal of the goods that the amount credited to the personal ledger account could be claimed as deductible under section 43B of the In....
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....ere to remove the goods. Each clearance mentions the quantum of goods and the duty amount, which is apparently reconciled at the end of the period, and shortfalls if any are appropriated from the account. The excess credit is likewise adjusted for the next day' s clearances. The point to be underlined, is that there is no choice, and the amounts relate to the assessee' s duty liability, falling within the description under section 43B. The Tribunal was therefore justified in holding that the amounts deposited by the assessee in the excise personal ledger account could not be disallowed under section 43B.-CIT v. Shri Ram Honda Power Equipment Ltd. [2013] 352 ITR 481 (SC) (Civil Appeal No. 5721 of 2012, dated September 19, 2012) followed ; CIT v. C. L. Gupta and Sons [2003] 259 ITR 513 (All) ; [2003] 180 CTR (All) 530 concurred with. 42. The hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. [2013] 255 CTR (Delhi) 140 in turn relied upon the ratio laid down by the hon'ble Supreme Court in CIT v. Shri Ram Honda Power Equipment Ltd. [2013] 352 ITR 481 (SC), wherein it has been laid down that the PLA credit was excise duty paid. The said observation was made ....
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....provision for the same was made in the books of account amounting to Rs. 11.09 crores. No deduction on account of such provision was claimed in the earlier years and the expenditure was booked during the year because of the change in the method of accounting. The assessee claimed the said expenditure in the previous year as the liability was quantified and had accrued during the year, notwithstanding the fact that the same had to be discharged at a later date. Further reliance was placed on the ratio laid down in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC). Copy of the actuarial certificate was also filed before the Assessing Officer, which is reproduced under para 7.2 at pages 26 and 27 of the assessment order. The revised Accounting Standard-15 was also referred to by the Assessing Officer and part of it is reproduced at pages 29 to 31 of the assessment order. The Assessing Officer show caused the assessee as to why the said liability should not be disallowed as the same was purely an unascertained liability. The assessee in reply clarified that during the financial years 2005- 06 and 2006-07 medical insurance premium of Rs. 2.59 crores and Rs. 2.67 cro....
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....mployee. The assessee in lieu contributed to the insurance policy for meeting the said liability and the premium paid from year to year was being claimed as an expenditure. However, the revised Accounting Standard-15 was introduced with effect from April 1, 2006 under which the company had to account for the provision on account of retireable benefits to the employees based on actuarial valuation. The said liability, as per the learned authorised representative for the assessee, accrued to the employees on the basis of their appointment, i.e., the additional benefit after the retirement from service also. The learned authorised representative for the assessee was of the view that same was akin to warranty obligation. Reliance was placed on the ratio laid down in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) where certain similar expenditure was held allowable. Further it was pointed out that the hon' ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) had allowed the benefit of leave encashment to the employees. The learned authorised representative for the assessee drew our attention to pages 26 and 27 of the assessment order under which the a....
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....t a particular method of accounting and follow the same regularly and only under section 145(3) the method of accounting can be rejected by the Assessing Officer. However, the present case was not a case of rejection of books of account. Admittedly, the assessee during the year had changed the method of accounting of post actuarial liability on account of post retirement benefits to the employees. It was stressed by the learned authorised representative for the assessee that the Assessing Officer had discretion to reject the method of accounting where the change was not bona fide and was not followed regularly. Reliance was placed on the undermentioned judgments : 1. CIT v. Whirlpool of India Ltd. [2011] 242 CTR (Delhi) 245; 2. CIT v. Indo Rama Synthetics Ltd. [2009] 180 Taxman 35 (Delhi) ; 3. CIT v. Virtual Soft Systems Ltd. [2012] 341 ITR 593 (Delhi) ; 4. CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) ; 5. CIT v. West Coast Paper Mills Ltd. [1992] 193 ITR 349 (Bom) ; and 6. CIT v. Standard Radiators P. Ltd. [2006] 286 ITR 207 (Guj). 48. The learned authorised representative for the assessee also referred to ....
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....ention of the learned Departmental representative for the Revenue that ICAI had revised guidelines for the benefit of the shareholders and such Accounting Standard cannot overwrite the express provision of the Act. The next plank of argument of the learned Departmental representative for the Revenue was that the revised Accounting Standard-15 had not been approved by the Central Government. 50. In rejoinder the learned authorised representative for the assessee pointed out that the said expenditure was not debited to the profit and loss account but a provision for the same was made. However, entries in the books of account does not decide the deductible or otherwise of the said expenditure. Reliance was placed on Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC). The learned authorised representative for the assessee further pointed out that under the provisions of section 145 of the Act read with section 211(3) of the Companies Act, where the company was following mercantile system of accounting, the said provision had to be made as per the revised Accounting Standard-15. In respect of the objection raised by the learned Departmental representative for the Revenue that the ....
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....ar under appeal. The gist of the revised Accounting Standard-15 is reproduced at pages 29 to 31 of the assessment order. However, the copy of the Accounting Standard-15 is enclosed at pages 836 to 902 of the paper book. The objective of the revised Accounting Standard-15 is to prescribe the accounting and disclosure for employee benefits. The Standard requires an enterprise to recognise : (a) Allowability when an employee has provided service in exchange for employee benefits to be paid in the future ; and (b) An expenses when the enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. 52. The scope of the said Accounting Standard-15 was mandatorily to be applied by an employer in accounting for all employee benefits, except employee share-based payment. Clause-4 defines employee benefits include : (a) Short-term employee benefits, such as wages, salaries and social security contributions (e.g., contribution to an insurance company by an employer to pay for medical care of its employees), paid annual leave, profit-sharing and bonuses (if payable within twelve months of the end of the peri....
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.... an expenses immediately. Under clause 138 it is provided that where an enterprise recognises termination benefits, the enterprise may also have to account for a curtailment of retirement benefits or other employee benefits. 56. The assessee admittedly followed the revised Accounting Standard-15. In view thereof the assessee obtained an actuarial valuation certificate which reads as under : Actuarial valuation certificate-Medical Ref : Actval/m/gsk_0307 GlaxoSmithKline Consumer Healthcare Limited. Re : Actuarial valuation-Post retirement medical assistance as on March 31, 2007. The actuarial value of liability of the company towards post retirement medical assistance to the retired/retiring officers as per the company' s scheme up to the date of valuation mentioned above has been calculated and the results of valuation are as given below : 1. Basis : (a) Discount rate 8.00 per cent. p.a. (b) Mortality L.I.C. (1994-96) Ult. (c) Rate of withdrawal As applicable to the group. (d) Projected unit credit method adopted. 2. Details of staff : The individual details in respect of 36....
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....ice, the same was clearly allowable as deduction. (c) Under the mercantile system of accounting, deduction of expenditure is allowable in the year in which liability is quantified and accrued, notwithstanding that the same has to be discharged at a later date. (d) Further, the aforesaid liability incurred towards medical benefits was only an incremental liability after considering/reducing the amount of medical insurance premium paid to insurance companies. The said liability incurred, thus, did not include the amount of premium paid for which deduction was already claimed. (e) The deduction was claimed because of change in the method of accounting and where there is a bona fide change in the method of accounting, the claims on the basis of the changed method, even if pertaining to earlier years, would be allowable deduction in the year of change, more so since the liability in regard thereto has not been claimed deduction in such earlier years. (f) Since the liability on account of medical assistance pertaining to services rendered in the earlier years has been accounted or claimed in the relevant year for the first time, in view of the bona fid....
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....ake any difference if the future date on which the liability shall have to be discharged is not certain. In Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the appellant-company estimated its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was that every year the company worked out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employee' s service either due to retirement, death or termination of service-the exact time of occurrence of the latter two events being not determinable with exactitude before hand. A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under : (i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued,....
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....tion referred by the Tribunal to the High Court is answered in the affirmative, i.e., in favour of the assessee and against the Revenue." 61. In the facts of the present case before us the assessee had recognised and accounted for the post retirement benefit due to its employees, in terms of the scheme of employment and also in terms of the revised/ change in Accounting Standard-15 issued by ICAI which was to be followed during the year, is an allowable deduction in the hands of the assessee. The said claim being based on the valuation of the actuary is both scientific and one of the recognised method of accounting and quantifying the said post retiremental medical benefits. In such cases though actual and exact quantification may not be possible, however, the liability so recognised by the assessee could not be said to be unascertained and contingent. The assessee having followed the mercantile system of accounting was compulsorily required to account for the said post retirement medical benefits as the same was quantified and had accrued during the year. The claim of the assessee was thus allowable irrespective of the fact that the assessee had made a provision in the books of....
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....ly, accrued liabilities due would also be entitled for deduction while working out the profit and gain of the business of the year. Computation of taxable profit for a particular year can be worked out only by deducting the actual payments made to the employees and present value of any payment in respect of the services in that particular year to be made in the subsequent year. In view of this, we find the order of the Commissioner of Income-tax (Appeals) in ITA No. 149/Del/ 2012 in order. We set aside the order of the Commissioner of Income- tax (Appeals) in ITA No. 4921/Del/2010. For doing so, we also get support from the following decisions of the hon'ble Supreme Court and the hon'ble Delhi High Court. 5.1 The hon'ble Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) has held as under : Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if property ascerta....
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....IT v. Insilco Ltd. [2010] 320 ITR 322 (Delhi) ; 197 Taxman 55 has held as under : ' Similarly it was held by the hon'ble Delhi High Court in the case of CIT v. Insilco Ltd. [2010] 320 ITR 322 (Delhi) that where the pro visions were estimated on the basis of actuarial calculations, the deduction claimed by the assessee has to be allowed. The relevant extracts of the decision is reproduced below for ready reference : 6. In the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC), the Supreme Court was examining the provision-made by the assessee towards gratuity under the Income-tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), crystallised its analysis at page 599 and made the following observations : ' It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as follows : . . . 5. The provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falli....