TaxTMI 
TaxTMI 
2013 (4) TMI 699
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....urned 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 understanding/arrangement between the appellant and the associated enterprise, the associ....
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....at 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 specific provision under the transfer pricing regulations of the United States of America. 2.14 That the Assessing Officer erred on facts and in l....
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.... 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 law in dis allowing consumer market research expenses of Rs. 5,67,49,531 under section 37(1) of the Act alleging the same to be capital in nature. 5. That the Assessing Officer erred on facts and in law in making disallowance of Rs. 11,09,89,913, claimed in respect of the provision made for post retirement medical....
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....sfer 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 adjustment amounting to Rs. 102,83,55,523 in relation to advertisement, marketing and sales promotion expenses (hereinafter referred to as " AMP expenses" ) incurred by the assessee. 7. Grounds Nos. 2.1 to 2.22 relate to different aspects of transfer pricing adjustment made in the case of the assessee. Both the authorised representatives appearing before us admitted tha....
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....erial, 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 Act. The Transfer Pricing Officer vide para 6 of his order acknowledged the assessee to have adopted transactional net margin method (TNMM) for transfer pricing analysis with operating profit/total cost ratio as profit level indicator. 12. The Transfer Pricing Officer noted that the assessee in respect of international transactions, i.e., exports of malted food/biscuit to the....
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....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 associated enterprises (in short " AE" ). The Transfer Pricing Officer also analysed the results of comparables relied upon by the assessee The questionnaire issued by the Transfer Pricing Officer is reproduced at page 7 to page 18 of the order of the Transfer Pricing Officer. The submission of the assessee in reply is reproduced under paras 7.11 and 7.12 at pages 18 to 42 of the order of the Transfer Pricing Officer. 15. The f....
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....ch 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 was that rebates/incentives were paid to other Indian parties and the second requirement in the application of transfer pricing regulation, i.e., existence of international transaction and transaction of payment between associated enterprises, one of whom is non-resident, was not fulfilled and thus the provisions of section 92B(1) of the Act could not be invoked. The alternate plea of the assessee was that various expenses incurred we....
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....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 by the said figure and the assessee was held not to be entitled for deduction under section 10A, 10AA, 10B or under Chapter VI-A in respect of the amount of income which has been enhanced. 18. The assessee filed its objections on January 28, 2011 in form No. 35A before the Dispute Resolution Panel. The directions under section 144C(5) of the Act were issued by the Dispute Resolution Panel, New Delhi, vide its order dated September 23, 2....
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....ge 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 insertion of the Explanation to section 92B by the Finance Act, 2012 with retrospective effect from April 1, 2002, but the case under consideration does not fall in any of the sub-clauses of clause (i) of the Explanation to section 92B so as to be called as an international transaction. 73. Coming a step ahead of actual international transaction as per section 92B(1), learned counsel submitted that the Legislature also deems certain transactions as intern....
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.... 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 international transaction. 75. The learned Departmental representative contended that a careful look at sub-section (1) of section 92B would indicate that the term ' international transaction' has been defined in widest possible manner. Normally a provision is either exhaustive or inclusive. Section 92B was claimed as a classic example of a combination of both. It was explained that the provision can be seen into three parts. The first part is exhaustive as ....
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....oreign 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 associated enterprises (between the assessee and foreign associated enterprise) for the allocation or apportionment of . . . any cost or expense incurred or to be incurred (brand promotion expenses) in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises (benefit, service or facility of which shall be available to the foreign associated enterprise). It was stated that there is an agreement between the assessee and its foreign associated ente....
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.... 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 transaction.-(1) For the purposes of this section and sections 92, 92C, 92D and 92E, " international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or pro vision of services, or lending or borrowing money, or any other trans action having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more as....
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....nition 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-clause (d) being the ' provision of services' is again inclusive as ' including' provision of market research, market development, marketing management, . . . It is of critical importance to observe that the expression ' international transaction' itself has been defined in this Explanation only in an inclusive manner. As a result of insertion of the Explanation with retrospective effect, otherwise the exhaustive definition of ' international transaction' given in sub-section (1) has been converted into an inclusive....
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.... 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 inclusions. 90. Now, we will examine as to whether this transaction falls within any of the sub-clauses of clause (i) of the Explanation to section 92B. Learned counsel for the assessee contended that the view point of the learned Departmental representative that the transaction of brand building is in the nature of ' provision of service', is not ten able. He submitted that Indian entity is engaged in the business of manufacturing and selling of electronic goods, etc. and not in rendering services of advertisement and promotion of a brand to its customers. His contention was that in order t....
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....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 representative that it is also an international transaction having a ' bearing on the profits, income, losses or assets' of the assessee on one hand and/or towards allocation or apportionment of any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, on the other. 93. Now, we take up the contention of the learned authorised representative that there was no transaction between the assessee and its foreign associated enterprise in so far as incurring of advertising, marketing and promotion expenses is concern....
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....ed 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. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB], we hold that the transaction in question is an international transaction which is liable to be considered under the provisions of section 92B of the Act and the Assessing Officer was justified in treating the transaction of brand building as an international transaction in the facts and circumstances of the case. Grounds Nos. 2.1 to 2.7 are thus dismissed. 23. The additional grounds of appeal raised by the assessee in relation to the computation of the arm' s length price of the international transaction not referred to the Transfer Pricing Officer by ....
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....e 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 presumption of the assessee having incurred any advertising, marketing and promotion expenses towards brand building. The learned authorised representative relied on the case of the hon'ble Supreme Court in CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC), to canvass the view that the assessee cannot be expected to earn maximum profit. It was submitted that the action of the Revenue in firstly taxing higher rate of net profit on sales and thereafter further increasing the income by making addition on account of advertising, marketing and promotion expenses, runs contrary to the cardinal principle laid down in that case. He explained that in that case the Re....
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....ort 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 method. This method provides for benchmarking of ' an' international transaction by considering the operating profit from the concerned international transaction vis-a-vis certain basis as given in rule 10B(1)(e), being total cost, sales, capital employed, etc. Here it is significant to note the meaning of the term ' transaction' as given in rule 10A(d). It provides that : transaction includes a number of closely linked ' transactions' . Plural of transactions becomes singular when the transactions are closely linked to each other or are identical. These closely linked transactions can be processed as one transaction under any of the prescribed methods. If an ....
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....vel. 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 wrong manner on entity level for testing any of such transactions, then the remedy lies in correcting such mistake rather than drawing legally unsustainable conclusions by taking such mistake as a correct legal position. 21.6. Now, we espouse the second sub-argument that when on applying the transactional net margin method on entity level for the transaction of import of raw material the overall net profit is better than other comparables, then no addition is called for by subjecting the advertising, marketing and promotion expenses to the transfer pricing provisions. We have held in an earlier paragraph that when there are different unrelated international transactions, the application of t....
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....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 building for the foreign associated enterprise to the tune of Rs. 20. In such a case, notwithstanding the fact that the assessee' s overall profit at Rs. 120 is more than the arm' s length profit earned by comparable cases at Rs. 100, still there will be a requirement for mak ing adjustment of Rs. 20 on account of advertisement expenses incurred by the assessee towards the brand building on behalf of the foreign associated enterprise. If we accept the assessee' s contention that since Rs. 120, being the profit declared by the assessee from the international transaction is more than the arm' s length profit of Rs. 100 and hence no further adjustment on account of advertising, marketing and promot....
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....t 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 advertising, marketing and pro motion expenses, if the international transaction of import of raw material from the foreign associated enterprise has been subjected to the transfer pricing provisions. As the transactions of import of raw material and advertising, marketing and promotion expenses are distinct from each other, having independent effect on the overall net profit of the Indian associated enterprise, both are required to be separately processed as per the transfer pricing provisions. 21.10. It was also contended on behalf of the assessee that if the overall profit of the Indian entity is more than the comparable cases then it should be presumed that the foreign enterprise supplied goods at relatively low....
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.... 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 the total income by Rs. 20, which is not permissible as per sub-section (3). If however the arm' s length price of such expense turns out to be lower at Rs. 60, then sub- section (1) of section 92 will apply and the total income of the asses see will be computed by considering the arm' s length price of expense at Rs. 60, making a northward sojourn to the total income by Rs. 20. 21.12. We have noticed above that sub-section (1) of section 92 read with rule 10B requires computation of income from ' an' international transaction having regard to its arm' s length price. It means that each international transaction is required to be subjected to the transfer pricing provisions distinctly. What is relevant to note o....
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....pect 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 transactional net margin method. It has been argued so on the ground that under the transactional net mar gin method, the net profit of the entity is considered which includes the effect of all other transactions also. The natural consequence of the learned authorised representative' s argument on this issue is that if the arm' s length price of an international transaction is determined by the transactional net margin method then no other international transaction can be subjected to the transfer pricing provisions. From here it follows that if any other method, such as comparable uncontrolled price or resale price method, etc., is applied for determining the arm' s length price of an international transaction, then the processing of t....
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.... 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 respect of advertising, marketing and promotion expenses by applying the bright-line test, which is not one of the five recognised methods under the Indian legislation. As determination of the arm' s length price has not been done as per any of the methods under section 92C, the learned authorised representative contended that the same should be set aside. He relied on an order passed by the Mumbai Bench of the Tribunal in C. A. Computer Associates P. Ltd. v. Deputy CIT [2011] 8 ITR (Trib) 142 (Mumbai) dated January 28, 2010, in which the assessee paid royalty to its parent-company. The Transfer Pricing Officer rejected the arm' s length price of royalty payment as shown by the assessee on the ground that some of the sales did not materialise for various re....
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.... 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 expenses on the basis of a bright-line method which is not prescribed under section 92C, the learned authorised representative contended that the entire exercise must fail. 22.4. Per contra, the learned Departmental representative emphasised on the word ' any' as used in section 92C(1). His contention was that the word ' any' in sub-section (1) cannot be read as restricting itself to any one of the five methods but it may also be a combination of two or more of such methods. He relied on certain Tribunal orders to buttress his point that the arm' s length price can be determined by any method even though it is not specifically one of such five methods. He invited our attention towards an order passed by the Bangalore Bench of the Tribunal in which ....
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....ature 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 learned authorised representative about the application of bright-line test by the authorities below by holding that such method has been employed to determine the cost/value of international trans action and not its the arm' s length price. Another contention has been raised by the learned authorised representative that unless an assessee itself is regularly engaged in the business of providing services, there can be no provision of service to the other associated enterprise. This contention has also been dealt with and rejected by holding that the present international transaction is in the nature of ' provision of service' . Now we will proceed to see if it has to be any of the prescribed methods or it can even be a combination thereof and further if an inappropriate method is applied by th....
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.... .' 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 the five prescribed methods. It is further pertinent to note the prescription of rule 10C which deals with the determination of most appropriate method to be applied for determining the arm' s length price. Sub-rule (1) provides that the most appropriate method for the purpose of section 92C(1) shall be the method which is best suitable to the facts and circumstances of each case. Sub-rule (2) which assumes significance in the present context provides that : ' In select ing the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account' . Use of the definite article ' the' in sub-rule (2) along with the most appropriate method, makes it abundantly clear that it can be any of the methods given in sub-rule (1), that, in turn, draws strength from ....
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....alue 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 will be apt to note the directive of cost plus method as per rule 10B(1)(c), which is as under : ' (c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined ; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and ....
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....ed 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. Consequently, the profit mark-up under steps 2 and 3 should in the present case be the rate which an independent third party earns for creating marketing intangible for and on behalf of the foreign enterprise. In the present case, the Dispute Resolution Panel suggested 13 per cent. mark-up. The Dispute Resolution Panel went wrong in applying steps 2 and 3 by arbitrarily determining the rate of mark-up at 13 per cent. without showing as to how much an independent comparable entity has earned from an international transaction similar to one which is under consideration. 23.5. At this juncture, we consider it expedient to refer clause (ii) of section 92F which defines ' arm' s length price' to mean ' a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions' . Rule 10A of the Income-tax Rules, 1962, g....
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....e 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. 161.21 crores. Certain relevant factors have also been discussed by us in that part of the order which should be taken into consideration before determining the cost/value of the transaction. Resultantly, we have set aside the cost/value of international transaction at Rs. 161.21 crores and restored the matter to the file of the Assessing Officer/ Transfer Pricing Officer for determining such value afresh after allowing a reasonable opportunity of being heard to the assessee. This determination would provide the figure of first step as per the cost plus method, being the cost/value of the international transaction. As the Dispute Resolution Panel also did not correctly proceed to compute the correct rate of mark-up as per law, in our considered opinion the ends of justice would adequately meet if the process of deter mining normal profit mark-up as per steps 2 and 3 of rule 10B(1)(c) as against 13 per cent. applie....
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....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 to the Transfer Pricing Officer and the issue before us being identical, we respectfully following the ratio laid down by the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] also set aside the present issue for adoption of the prescribed method for determining arm' s length price in relation to the advertisement, marketing and sales promotion expenditure to the file of the Transfer Pricing Officer. The Transfer Pricing Officer while deciding the issue as directed by the Special Bench would give reasonable opportunity of hearing to the assessee. The assessee is at liberty to furnish complete list of comparables before the Transfer Pricing Officer in order to adjudicate the issue afresh. Consequently, ground Nos. 2.8 to 2.13 are allowed for statistical purposes. 26. The next set of grounds of appeal are grounds Nos. 2.14 to....
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....ales) 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 have heard the rival contentions and perused the records. The claim of the assessee is that the total advertisement, marketing and sales promotion expenditure considered by the Transfer Pricing Officer while determining the arm' s length price included certain expenses which are in relation to the sales made by the assessee and are not related to the brand promotion. The claim of the assessee is with regard to the expenses totalling Rs. 5,500.86 lakhs as tabulated below : Sl. No. Name of expenses Amount (Rs. Lacs) 1. Discount sales 60.52 2. Market research 664.24 3. Sales promotion 3,939.90 4. Selling and distribution 826.17 5. Service charges paid to selling agent 10.03 Total 5,500.86 29. We find that the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] held that the expenses in connection with the sales do ....
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.... 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. Of course when effect will be given to the relevant factors as discussed above, it will correctly reflect the cost/value of international transaction." 31. The plea of the assessee in this regard was that the expenditure was incurred on foreign brand name, i.e., Horlicks and also on domestic brands such as Boost, Viva, Maltova, etc., and the expense as a percentage on sales of foreign brand was 10.37 per cent. and on domestic brand was 14.02 per cent. Consequently the advertisement, marketing and sales promotion expenditure incurred on foreign brand being lower than what is incurred on domestic product, no transfer pricing adjustment is to be made. As the issue of determining the transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee being set aside to the file of Transfer Pricing Officer for redetermining the arm' s length price of international transaction after considering the comparables companies, we direct the Tra....
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....s 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 Department (balance of Central excise duty lying in PLA) as on March 31, 2007 and as on March 31, 2006, which represents payment made to the excise authorities that can be used by the assessee to offset payment of duty on the final products. The total balance in the account-current as on March 31, 2007 was Rs. 2,03,50,951 and as on March 31, 2006 was Rs. 1,66,63,470 as per schedule 9 of the audited accounts already provided at page 11, vide our letter dated August 18, 2009. The difference of Rs. 36,87,481 was claimed deduction under section 43B of the Act following the consistent stand of the assessee in the earlier years." 35. The assessee relied upon the decision of the Special Bench of the Tribunal in ITA No. 343/Chd/2005 relating to the assessment year 2001-02 in its own case, reported in Deputy CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2008] 299 ITR (AT) 1 (Chandigarh) [SB] for the claim of the said deduction under section 43B of the Act. The Assessing Officer disallowed the claim of the assesse....
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....laimed 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 as on March 31, 2007 and as on March 31, 2006. The said sum of Rs. 36,87,481 represents the excess payment made to the excise authorities, which as per the assessee could be used to offset the payment of excise duty on the final products. The difference in the total balance of two accounts, i.e., on March 31, 2007 and March 31, 2006 of Rs. 36,87,481 was claimed by the assessee as a deduction under the provisions of section 43B of the Act. The present issue raised vide ground No. 3 stands covered in favour of the assessee by the order of the Special Bench of the Chandigarh Tribunal in the assessee' s own case relating to the assessment year 2001-02, reported in Deputy CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2008] 299 ITR (AT) 1 (Chandigarh) [SB]. The said deduction had been consistently allowed in the case of the assessee i.e. in the preceding years 1998-99 to 2000-01 and thereafter in the assessment years 2002-03 to 2006-07. The Tribunal in ITA No. 1238/Chd/2010 relating to the assessment year 2006-0....
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....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 Income-tax Act, 1961, could not be accepted." 41. Further, the hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. [2013] 255 CTR (Delhi) 140 also deliberated upon the payment made towards excise duty in personal ledger account and consequent allowance under section 43B of the Act and held as under : " A plain reading of section 43B clarifies that : (a) deduction claimed by the assessee must be ' otherwise' allowable under the other pro visions of the Act ; (b) the deduction must relate to any sum payable by way of tax, duty, cess or fee ; (c) the assessee must have incurred liability in respect of such tax, duty, etc. On fulfilling these conditions, the assessee' s claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term ' liability to pay such sum was incurred by the assessee' together with the words ' a sum for which the assessee incurred liability' in Explanation 2 underline that payment must relate to the incurred liab....
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....ent 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 where the assessee was following net method of valuation of closing stock. In view of the above said ratio laid down by the hon'ble Delhi High Court in CIT v. Maruti Suzuki India Ltd. [2013] 255 CTR (Delhi) 140, CIT v. Modipon Ltd. (No. 2) [2011] 334 ITR 106 (Delhi), the hon'ble Punjab and Haryana High Court in Raj and San Deeps Ltd. [2007] 293 ITR 12 (P&H) and also the Special Bench of the Tribunal in the assessee' s own case, we direct the Assessing Officer to allow the claim of expenditure of Rs. 36,87,481 claimed under the provisions of section 43B of the Act. Ground No. 3 raised by the assessee is thus allowed. 43. Ground No. 4 raised by the assessee has been adjudicated by us along with grounds Nos. 2.14 to 2.16 in the paras above. This ground of appeal is thus allowed. 44. The assessee, vide grounds Nos. 5 and 6 has raised the issue against the disallowance of Rs. 11,09,89,913 claimed in respect of the provisions made for post retirement medical benefits to the employees. 45. The brief facts relating to the issue are that duri....
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....reply clarified that during the financial years 2005- 06 and 2006-07 medical insurance premium of Rs. 2.59 crores and Rs. 2.67 crores respectively was debited to the profit and loss account which included the premium paid for the retired employees also. The assessee was claiming the actual medical insurance premium paid by it for covering the health of his current as well as retired employees, which was allowed as such and consequently the liability worked out by actuary could not be said to be unascertained liability as it was in compliance with the revised Accounting Standard- 46. The Assessing Officer vide para 7.5 at page 32 of the assessment order held as under : " 7.5 A perusal of revised AS-15 reveals that a transitional liability has to be calculated on the basis of various assumptions and differ ence between the transitional liability and liability that would have been recognised under the assessee' s previous accounting policy should be adjusted against the opening balance of reserves and surplus. This liability is not at all allowable as per the provisions of the Income-tax Act. Compliance with the accounting standards may be good in the accounting parlance, but i....
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....horised representative for the assessee drew our attention to pages 26 and 27 of the assessment order under which the actuarial valuation has been referred to by the Assessing Officer. The learned authorised representative for the assessee further pointed out that the Assessing Officer had disallowed the claim because as per the Assessing Officer it was an unascertained liability and further how it was allowable under the Income-tax Act. The plea of the learned authorised representative for the assessee was that difficulty in ascertaining does not convert accrued liability into unascertained liability. He further stated that actuarial valuation done by the actuary took into account both the probability of the person falling sick and number of years, the individual has. He further contended that the said expenses was to be incurred by the assessee and the liability to meet the expenditure for accrued liability as it was meeting conditions of service. Reliance was placed on Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) for the proposition that if the person goes on leave then correspondently no earned leave is to be credited to the account of the said person. Our attention was d....
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....8. The learned authorised representative for the assessee also referred to Note No. 6 of auditor' s report placed at page 180. Further reference was made to the revised Accounting Standard-15 placed at pages 836 to 902 and actuarial valuation report placed at page 914 of the paper book. The learned authorised representative for the assessee also placed reliance on the details of post retirement medical benefit, placed at page 840 to 849 of the paper book and also insurance premium paid, placed at page 854 of the paper book. The learned authorised representative for the assessee also placed reliance on the written synopsis filed in tabulated form before us and pointed out that assessee' s case was that in view of the revised Accounting Standard-15, provision for the abovesaid expenditure was made and the change being bona fide in line with the mandatory requirements of Accounting Standard and being regularly followed in the succeeding year, the provision made thereof was duly allowable as an expenditure. The learned authorised representative placed reliance on Bokaro Power Supply Co. P. Ltd. v. Deputy CIT in ITA No. 149/Del/2012 order dated January 24, 2013, where identical ....
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....ed by the learned Departmental representative for the Revenue that the assessee was paying insurance premium from year to year which would take care of the medical benefits of the employees both the present and retiring, it was pointed out by the learned authorised representative for the assessee that the medical insurance was annual premium paid by the assessee and the same would lapse from year to year. Further it was pointed out by the learned authorised representative for the assessee that the premium paid by the assessee was deducted while computing the actuarial liability of the assessee. The basis of the actuarial valuation was the estimation of premium payable over the period of years. The learned authorised representative for the assessee pointed out that the actuary had applied guidelines. However, the standard of accounting could not overwrite the Act but the same must be respected. The learned authorised representative for the assessee concluded by stating that where Act makes contrary provision then the provision of Act would overwrite any other provision. 51. We have heard the rival contentions and perused the record. The assessee was providing benefit of medical ass....
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....le within twelve months of the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees ; (b) Post-employment benefits such as gratuity, pension, other retire ment benefits, post-employment life insurance and post-employment medical care ; (c) Other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve months after the end of the period, profit-sharing, bonuses and deferred compensation. 53. Clause 7.3 of revised Accounting Standard-15 defines that post-employment benefits are employee benefits (other than termination benefits) which are payable after the completion of employment. Clause 24 of revised Accounting Standard-15 provides post-employment benefits include : (a) Retirement benefits, e.g., gratuity and pension ; and (b) Other benefits, e.g., post-employment life insurance and post employment medical care. Arrangements whereby an enterprises provides post-employment benefits are post-employment benefit plans. An enterprises applies this....
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.... the purpose. 3. Benefits : The medical assistance is granted for due to accident or sickness and is limited as under : Directors : Rs. 1,50,000 per year Managers : Rs. 1,50,000 per year Executives : Rs.1,00,000 per year The company has assured the benefits with National Insurance Company and pays premium annually. Such premium and any increase of the same has been duly considered. 4. Valuation results : This is to certify that as per the actuarial valuation the total value of the post retirement medical assistance benefit under the above assump tions works out to : Rs. 11,73,99,623.00 per year. 5. The purpose of this valuation is to make incremental provision in the books of account. The valuation has been carried out keeping in view the provisions of AS-15 (R) as an on-going concern basis. (A.D.-Gupta) 57. The auditors vide notes to the accounts vide note No.6 had reported as under : 6.(a) The company has during the year adopted Accounting Standard 15 (Revised 2005) " employees benefits" . Accordingly, the transitional adjustment aggregating to Rs. 1,137.19 lakhs (net of deferred tax asset Rs. nil) has been charged against the opening general reserve....
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....iability is allow able deduction in the relevant year itself. The deduction on account of liability towards medical reimbursement expenses aggregating to Rs. 11.09 crores being actuarial valuation in respect of subsisting liability has been correctly claimed by the appellant. (g) The Assessing Officer had disallowed the claim of the assessee observing that ; (a) The amount of liability, which was incurred on the basis of actu arial valuation, was made on the basis of certain assumption and, thus, the same cannot be said to be ascertained liability. (b) The assessee has claimed double deduction in respect of same liability, viz., once at the time of payment of premium of insurance com panies and secondly, at the time of creating the impugned provision for medical benefits. 59. The first aspect of the issue raised before us is whether the recognition of the liability in view of the revised Accounting Standard-15 which is a notified accounting standard by the ICAI is to be recognised while computing the income of the assessee in line with the method of accounting regularly followed by the assessee. The second aspect of the issue is whether such expenditure is to be allowed as....
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....n the case of amounts actually expended or paid ; (ii) Just as receipts, though not actual receipts but accrued due are brought in for Income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business ; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability ; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. So is the view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), wherein this court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability ....
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.... ble apex court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC). It was further held by the hon' ble apex court that what is necessary to be considered is the true nature of transaction and whether in fact it has resulted in profit or loss to the assessee. Further, the said deduction was claimed during the year under consideration and the claim being bona fide is to be allowed in the year in which the same accrues though the said liability is to be discharged at a later date. 62. Identical issue arose in Bokaro Power Supply Co. P Ltd. v. Deputy CIT of allowability of claim of deduction of post retirement medical benefits on the basis of actuarial valuation and the same was held to be not an unascertained liability and was held as allowable, observing as under : " 5. We have heard both the sides on the issue. We have also perused the order of the authorities below. The assessee-company of was liable to pay for medical expenses of its retired employees in accordance with the terms of employment. Prior to this year, the assessee was claiming these expenses in the year of expenditure. Due to the change in the Accounting Standard in respect of the accounting of post reti....
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....antial accuracy. It cannot, therefore, be termed a " reserve" . Therefore, the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year. Where the fixed assets are revalued and the difference between its cost and the value fixed on such revaluation is credited to the capital reserve, unless the Tribunal finds that the revaluation is mala fide, the interest on the amount of the reserve should be allowed as a deduction from the gross profits. From the provisions of section 6(c) and section 7 of the Bonus Act, it is evident that the Tribunal must first estimate the amount of direct taxes on the balance of gross profits as worked out under sections 4 and 6, but without deduction bonus, then work out the quantum of taxes thereon at rates applicable during the year to the income, profits and gains of the employer and, after deducting the amount of taxes so worked out, arrive at the available surplus. This will be consistent with the rule laid down by courts and Tribunals before the Act was enacted, that the bonus amount should be calculat....