AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (9) TMI 19
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....ervices outsourcing such services and actually services were received by assesse. Thereby re computing the ALP of the payments of service fees at Rs. NIL resulting into adjustment of Rs. 2,51,97,157/- iii) Erred in holding that payment of Rs. 31,04,176/- was not actual reimbursement of advertisement expenses & making ALP adjustment of the transaction by applying operating margin of Rs. 12.40% on the said amount resulting into adjustment of Rs. 3,84,918/-. iv) The Ld. DRP has also erred on facts and in law in summarily holding that issue has been considered in detail by the TPO & even before DRP all old arguments have been reiterated without discussing the various objections raised & documentary evidences filed before it in respect of business service received by the assessee. It has further erred in directing the TPO to verify the nature of payment of Rs. 31.04 lacs instead of deciding the issue on the basis of evidences produced by the assessee which is not as per law in terms of section 144C(8) 2. Brief facts are -assessee is a public limited listed company and is engaged in the business of manufacturing and distribution of products for personal care and use including blades, ....
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.... shared service centre known as Global Business Service Centre(GBS)to provide customized and expert services to affiliate recipients to enable them to carry out their business in a more efficient and focused manner. P& G Singapore operates as GBS Centre with its branch in Manila, Phillippines. The assessee company has entered into a "Business Services Agreement" with P&G, Singapore (Service Provider) effective from July 1, 2006 to obtain various support services as outlined in the said agreement. iii. As per the terms of the agreement, P&G desired to conduct the respective business in an optimal and competitive way would involve unnecessary duplication of effort and costs and further due to increasing standardization of the product and businesses in P&G's market. It was beneficial to P&G to have collective organization work together to improve their overall efficiency and business ability. Consequent to such business policy assessee entered into this agreement to secure these services from the centralized source to improve its overall efficiency and business ability. iv. The payment for these business support services is made by the assessee to the service provider at cost plus 7....
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....hed individual service-wise calculation of reduction in cost. The cost benefit analysis is not proved simply from annual results. Assessee has not furnished information relating to Benchmarking of transaction by the AE. - The assessee is not a startup company. It has established business expenditure. Hence, sudden dependence on the AE, as claimed by the assessee, even for routine services, is questionable. Apparently, this is for the benefit of the parent company for consolidation and not for the benefit of the assessee. - The higher profit of the assessee during the year does not prove that the payment made to the AE was at arm's length. - Assessee has incurred huge expenditure on manpower and other administrative expenses. Hence, it cannot be said that these services could not have been performed itself. - AE has not provided any tangible or real services to the assessee. In fact AE is in no position to provide any support services to India, as the knowledge of local conditions lies with assessee and not the AE. Based on these observations ld. TPO held that assessee has not been able to show that any service has actually passed to him. No independent party would have made a ....
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.... are based out here because of extremely good infrastructure. * The nature of services rendered by P & G Asia PTE Ltd., Philliphines (Code LE 753) and Singapore (LE 606) to the assessee company (Code 973) and basis of charge is as under: Category of Service Basis of Charge Accounting and Financial Reporting Services No. of Postings (Accounting Entries) Purchases Net Outside Sales (NOS) Employee Services No. of Employees managed Customer Logistic Financial Services Net Outside Sales (NOS) Business Intelligent Services Net Outside Sales (NOS) Work Place Service - Central IT and AFRS Central IT Work Place Maintenance - No. Of Employees, Floor Space Technology Infrastructure - No. Of Employees, System ID No. Based on audited accounts, P & G Singapore identify and finalise the cost and expenses incurred in providing the Business Support Services. This is allocated to each of the service recipients on the basis of charge as agreed in the agreement. Monthly payment is determined on the basis of annual budget of service provider. At the year end service provider would make allocation based on actual cost and expenses for first eleven months of the fiscal ye....
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....O's remarks on cost benefits by contending that by this arrangement other cost has reduced drastically and at the same time sales has increased significantly which amounts to demonstrative cost benefit. Following is submitted in this behalf: (i) Payment to and provision for employees reduced to Rs. 33.71 Crores as against Rs. 42.47 Crores in the last year. The list of employees who were retrenched from the services during the year. (ii) Purchased services cost has reduced to Rs. 2.57 Crores as against Rs. 9.58 Crores in the last year. (iii) Other expenses (which generally comprises of professional expenses, misc administrative expenses) have also reduced significantly from Rs. 10.16 crores in last year to Rs. 6.70 crores during the period under consideration (refer schedule 15 of the audited accounts. (iv) Cost benefit analysis of the services has been carried out by the assessee which shows that after the outsourcing of these activities, the overall staff cost and cost of purchased services (i.e local outsourcing) has reduced drastically even from the very first year in which services have been first received. The table showing reduction in cost is as under: Particulars AY 2....
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....e to non-providing of individual service wise calculations of reduction in cost, TPO has assumed that cost benefit analysis is not proved for annual results. The assessee company through its audited accounts and SAP extracts and detailed analysis of outsourcing expenses has proved beyond doubt the services availed by it from its associated enterprises. There can be no other means to justify the economic and commercial value received by the assessee. Financial accounting, administration are some of the activity to its AE which enhanced its growth and profits. (i) Ld. TPO is grossly unjustified in taking this view as in the TP Study the arithmetic mean of the comparable service provider in India is computed at 12.40%. Further the AO himself has considered the margin of 12.40% as reasonable in respect of adjustment made by him for reimbursement of expenses. Therefore the mark up of 7% charged by the AE is at lower to mark up of 12.40% charged by benchmarked service providers. (ii) As far as the benchmarking of the transaction by AE is concerned, AE (Service Provider) has the policy of charging a mark-up of 7% from all the service recipients on the total operating cost for the variou....
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....efits. That aspect of the exercise is left to the AO. - The TPO's report is subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by AO, rather than determining whether such services exists or benefits have accrued. That exercise of factual verification is retained by the AO u/s 37 in this case. - Indeed, this is not to say that the TPO cannot after a consideration of the facts state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. - This is a slender yet crucial distinction that restricts the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the ALP was 'nil', since a comparable entity would pay 'nil' amount for these services it was noted that remarks concerning, and the final decision relati....
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....siness advantages flowing from such arrangements like: Lower costs due to economies of scale (b) Ability to concentrate on core functions (c) Greater flexibility and ability to define the requisite service more readily (d)Specific supplier benefits. For example, better security, continuity, etc. (e) Higher quality service due to focus of the supplier.(f) Improved internal management disciplines resulting from the exercise.(g) Less dependency upon internal resources (h) Control of budget (i)Faster setup of the function or service. (j) Lower ongoing investment required in internal infrastructure.(k) Greater ability to control delivery dates (eg: via penalty clauses)(l) Lack of internal expertise(m)Increase flexibility to meet changing business conditions.(n) Purchase of industry best practice. (o)Improve risk management.(p)Acquire innovative ideas. (q) Increase commitment and energy in non core areas. (r) Improve credibility and image by associating with superior providers. (s) Generate cash by transferring assets to the provider. (t)Turn fixed costs into variable costs.(u)Gain market access and business opportunities through the supplier's network etc... Keeping in view the above f....
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....AE's as is evident from the documents placed at. (iv) There is no material with the AO to hold that a comparable independent enterprise would not have paid for these services in comparable circumstances. In fact the similar services received by other group concern has been accepted by the TPO in those cases. (v) In view of above the ALP of the business services determined by the AO on the basis of TPO report by applying CUP method at Rs. NIL is unjustified and uncalled for. Hence the addition made by AO be deleted. B. REIMBURSEMENT OF ADVERTISING EXPENSES Rs. 3,84,918/- 3. Assessee received reimbursement of advertisement expenses of Rs. 95,28,427/- Lacs comprising of an amount of Rs. 64,24,251/- from Gillette, Boston in respect of GBU Television production commercial Film and Rs. 31,04,176/- also from Gillette Boston. In respect of the amount of Rs. 64,24,251/-, assessee furnished the invoices and accordingly the same is accepted by AO/TPO as reimbursement of expenses. 3.1. However in respect of the remaining amount of Rs. 31,04,176/- which is also the reimbursement of cost of production film, as explained vide letter dated 08.10.2010 the copy of invoice could not be furnished....
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....uncalled for and be deleted. 4. Ld. DR has filed written submissions and contends that OECD guidelines postulate that to allow AE transactions for rendering of intra group service following information should be made available: (1) Whether the AE has received intra group services ? (2) What are the economic and commercial benefits derived by the recipient of intra group services ? (3) In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. (4) Whether a comparable independent enterprise would have paid for the services in comparable circumstances. Reliance is placed on VVF LTD. (2010)-TIOL-55(MUM) holding that: 6. On a conceptual note, the purpose of making arms length adjustments, in prices at which transactions have been entered into with associated enterprises, is to nullify the impact of interrelationship between the associated enterprises. Unless the method on the basis of which such hypothetical prices are computed is such that costs are to be taken into account, these hypothetical prices h....
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.... the AE for the same activity or it is a duplicate payment. (g) Whether the payment is in the nature of shareholder's activity or largely for the benefit of the AE. (h) Whether the AE is rendering such services to other AEs or independent parties and if so the rate/amount charged from such persons. (i) The cost incurred by the AE for providing such services and the basis of allocation key. (j) If the AE has charged any mark up on such payments the arm's length margin is also examined. 4.1. It is further pleaded that in following cases the ITAT has upheld determination of ALP of intra group services as NIL :- Gemplus India Pvt. Ltd. Vs. ACIT, Bangalore in ITA No. 352/Bang/2009 (2010-TII-55-ITAT-BANG-TP). Deloitte Consulting India Pvt. Ltd. Vs. DCIT in ITA Nos. 3910 & 3911(MUM) of 2009 & 579, 1272 & 1273 (MUM) 2011. Nike India (P) Ltd in ITA Nos. 653 & 654 (BANG.) OF 2011. M/s. Knorr-Bremse India Pvt. Ltd in ITA No. 5097/Del/2011. M/s. Petro Araldite Pvt. Ltd in ITA No. 6217/Mum/2012. For other grounds, the ld. D/R relied on the orders of TPO/AO/DRP. 5. We have heard the rival contentions and perused the material available on the record on this issue. It emerges from the ....
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....t details about rendering of services were not furnished and its benefit on the assessee's business could not be ascertained. The details of services provided are mentioned as cited above, besides assessee has not incurred any expenditure on its own in this behalf. It cannot be accepted that assessee will provide even the scratches of information about rendering of services which is otherwise discernible from the facts. The questioned judgement also takes in stride the fact that the quantum of benefit availed by the assessee in terms of its business yields cannot be questioned as in cases it may so happen that the services though availed does not yield into any ostensible benefit. Whereas in this case assessee has been able to demonstrate that there are ostensible benefits. Thus this proposition also fails under the domain business acumen of the assessee. Considering all the facts as narrated above and the case laws, we may further add that there is no whisper by lower authorities that the ALP work provided by the assessee suffers from any infirmity. It is not proper to go for an ALP ascertainment without finding any fault with the assessee's working. The TP services provide that t....
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....as categorically submitted that there is no suppression of sale of scrap as assumed by the AO in questionnaire dated 15.12.2010. In course of assessment proceedings, the nature of scrap generated, records maintained and month wise details of scrap sold was filed. The assessee company vide letter dated 28.10.2010 submitted the following facts: i. 99% of scrap sale at manufacturing location consist of process scrap which gets generated during the process of manufacturing. It also includes sale of waste generated during repair and maintenance of plant & machinery. ii. The process scrap is in the form of aluminium scrap, stainless steel scrap burnt / slug, plastic scrap, platinum scrap, generated in production process. iii. As and when scrap gets generated, it is sent to the scrap yard with intimation to warehouse. iv. At warehouse data is maintained for opening balance of scrap, scrap generated during production, month wise. As and when scrap is sold through invoice, entry of dispatches is made. v. Month wise detail of scrap sale was furnished. The details of scrap sold in earlier years, which is accepted by the A O was filed. The scrap sold during the year is comparable to the ....
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....ion. Never in past or future the assess's scrape sales have been question. The addition being presumptive and based on conjectures is deleted. This ground is allowed. Ground 3: Not allowing the claim of inventories written off at Rs. 91,83,353/- and the Ld. DRP has erred in not giving direction to delete the addition proposed by the AO in this regard. Both the authorities have also erred in making various observations which is not correct on facts & also not deleting the addition when it has been decided by Hon'ble ITAT in favour of assessee in earlier years. 8. Brief facts are - assessee company being in the fast moving consumer goods, the obsolescence and expiry of stock is quite normal. The company as a regular practice writes off its obsolete and expired stock. During the year under consideration the assessee company has written off inventories of Rs. 91,83,353/-. Assessee vide letter dated 23.12.2010 explained the company procedure for write off and further explained that periodical and regular physical verification of inventory is carried out as per laid down procedure by company officials. After due diligence and necessary approvals, the identified items of inventories are....
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....2.91 2004-05 2.88 424.43 0.67 2005-06 3.70 453.56 0.81 2006-07 8.28 383.43 2.15 2007-08 0.92 493.57 0.19 The write off's have been fully allowed as deduction upto AY. 2001-02. In assessment year 2003-04 also the amount of inventory written off was allowed by CIT(A) vide their order dated 24.01.2007 but claim for obsolescence, stock shortage & sample was not allowed. Against the order of CIT (A) both assessee and the department preferred appeal before ITAT. Hon'ble ITAT in ITA No. 188/JP/07 dt. 09.08.2010 dismissed the appeal of the department by allowing the claim of inventory written off. Again Hon'ble ITAT in ITA No. 1234/JP/2010 dated 11.2.2011 for A Y 2005-06 in para 11 of the order allowed the claim of inventory written off. 8.5. The assessee company is engaged in the business of manufacture and trading of FMCG items and any unserviceable, damaged and obsolete inventory items have to be taken off from the regular stock items. The market value of such stock becomes NIL on its getting damaged or unusable, therefore as per the Accounting policy of the company which in accordance with Accounting Standard - 2 issued by the Institute of Chartered Accountant....
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....n off the inventory of Rs. 91,83,353/- by identifying the damaged / obsolete items. This is also the regular practice of the assessee. In any case since stock are valued at cost or market price whichever is lower and these inventory has no value, the same is to be allowed to the assessee in view of the accounting principles and the ratio laid down by Hon'ble Supreme Court. CIT Vs. Hotline Teletube and Components Ltd. 175 Taxman 216 (Del.): Provision for diminution in value of stock is allowable as business loss. 8.10. In view of above, it is contended that asessee's claim of inventory written off is fully allowable. 8.11. Ld. DR relied on the orders of authorities below. 9. We have heard the rival contentions and perused material on the record. ITAT in assesssee's own case has allowed the similar claim of inventory write off in AYs 2003-4 to 06-07. Besides considering the facts and the judicial precedent cited above we see no justification in disallowing the claim of inventory write off. Consequently claim in this behalf is allowed, assessee succeeds on this ground. Ground 4: Treating the revenue expenditure of Rs. 8,74,73,893/- on account of restructuring as one time expendit....
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....842 Damaged Goods - Retail 6,93,20,528 60,18,094 Misc. Expenses 1,90,49,146 2,65,74,796 Others Nil 3,95,474 Total 11,12,24,780 9,50,10,216 Less: Loss on sale of Asset 5,81,110 75,36,323 11,06,43,670 8,74,73,893 10.3. The AO proposed the disallowance of these expenditure by holding that these are one time expenditure for enduring benefit, hence, are capital in nature and cannot be regarded as revenue expenditure. 10.4. The DRP sustained the addition by giving following findings: "It is seen that out of total amount of Rs. 57,45,57,652/-, (amount for the year is only Rs. 45,16,19,901/-) a portion has been disallowed suo-moto by the assessee. Regarding the balance, although, the auditor has qualified the expenditure incurred being one-time expenditure in connection with restructuring, the assessee, nevertheless, has claimed the expenditure on revenue account. It is seen from the details of the expenditure filed that it includes substantial amounts in the nature of damaged goods, purchase services, sales etc. These expenditure have been, no doubt, incurred in connection with restructuring. The decision to move its corporate office from Gurgaon to Mu....
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....ely because expenditure results in some enduring benefit is not alone decisive of it's being capital in nature. If the same increases the revenue generating apparatus then it will fall in the category of revenue expenditure despite giving enduring benefit. Besides in Alembic it has been held that merely because once for all payment is made it doesn't ipso facto amount to capital expenditure. 12.1. Assessee incurred these expenses for shifting of Corporate office from Gurgaon to Mumbai wholly and exclusively for its business. Besides Hon'ble High Court gave the permission for charging of these expenses against amalgamation reserves. In assessment year 2006-07, similar expenditure of Rs. 11,12,24,780/- were allowed by the AO in assessment framed u/s 143(3) after considering the details of such expenditure reflected in the notes to the accounts. In view of the foregoing we are of the considered view that assessee's claim falls in the category of revenue expenses and deserve to be allowed. This ground succeeds. Ground 5: Disallowance of Rs. 37,14,84,213/- u/s 40(a)(ia) assuming that following expenditure was liable for TDS: i. Rs. 13,17,51,694/-(Amount wrongly taken as Rs. 13,42,66,....
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.... various circulars of the Board, it was presumed that assessee was liable to deduct tax at source u/s 194C on the entire payment of Rs. 27,07,86,281/-. Assessee has deducted tax at source on the amount of Rs. 3,10,53,762/-. Hence Rs. 23,97,32,519/- was disallowed u/s 40(a)(ia). 13.2. Before DRP relevant material and explanation was submitted, however instead of deciding the issue, it merely gave following directions: "It is seen that the disallowances have arisen on account of incorrect appreciation of TDS Sections and then, trying to reconvert them into income figures. The assessee has clearly indicated how TDS is not attracted on many of the expenditure or attracts lower rates of TDS. Therefore, the A O is directed by DRP to verify the applicability of the correct TDS provisions and the rates thereof and then, calculate disallowance u/s 40(a)(ia), if any. Therefore, the assessee's objection in this regard is partly accepted." 13.3. Ld. AO in the final assessment order accepted that disallowance u/s 40(a)(ia) for Rs. 25,14,394/- in respect of payment made to M/s Madison Communication Pvt. Ltd. is not required. However in respect of the remaining amount, by reiterating draft ass....
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....,53,762. On the balance amount tax is not deductible for the reason that the payment is made against supply of display units, price reduction, damage concession gifts given to dealers under policy of sales incentives etc. Most of the incentive is given to Government owned Canteen Stores Department amounting to Rs. 2,86,98,672/- on which tax is otherwise not required to be deducted. Thus from the above it can be noted that the disallowance made by AO u/s 40(a)(ia) out of the trade incentive expenses is uncalled for. 14.2. In A. Y 2008-09, ld. AO raised similar issues in respect of trade Inventive of Rs. 37,44,41,176/- and Distributor Coverage Expenses of Rs. 1,62,03,546/-. The assessee offered same explanation about the nature of these expenses, contending that TDS is not required to be deducted on these payments. The AO himself accepted the contention of the assessee and has not made any disallowance u/s 40(a)(ia). Since revenue itself has accepted that TDS is not required to be deducted on such trade incentive in AY 2008-09, the disallowance made u/s 40(a) (ia) for the year under consideration is un justified. Reliance is placed on: i. S. R. F. Finance Ltd. vs. CBDT (1995) 211 I....
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....08-09, the disallowance made u/s 40(a) (ia) for the year is unjustified. 15.1. Adverting to advertisement issue the remaining amount of Rs. 13,17,51,694/- represents purchases of articles like display units, wall units, floor stands, posters, banners etc., on which VAT was paid. The transactions being of purchase simpliciter and VAT being charged thereon, there is no justification in holding it as advertisement contract. Consequently the question of TDS liability thereon does not arise. Hence the impugned disallowance made u/s 40(a)(ia) is deleted. Assessee's ground is allowed. Ground 6 - Making disallowance of advertisement payment made to Group M Media Pvt. Ltd. for Rs. 23,44,747/- by holding that the liability of deduction of tax at source arises u/s 195 and therefore it attracts provisions of sec.40(a)(i) & the Ld. DRP has erred in not giving direction to delete the disallowance proposed by the AO in this regard. 16. Brief facts are assessee made payment of Rs. 23,44,747/- to Group M Media Pvt. Ltd. for advertisement in various TV channels, TDS thereon was deducted u/s 194C, vide letter dated 23.12.2010, copy of invoice was filed. AO however proposed that TDS was deductible ....
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....iod between 1.1.2006 to 30.6.2006. This agreement has no effect on the assessee. The assessee has independent arrangement with Group M Media India (P) Ltd. even prior to 1.1.2006. In course of assessment proceedings for AY 2006-07, the assessee vide letter dated 21.12.2009 has also requested the A O to obtain the information directly from Group M Media India Pvt. Ltd. but this was not done to ascertain the nature of payment. 16.5. Group M-Media Ltd. is a Company incorporated under the Companies Act, 1956. Incorporation certificate is placed on record. It is an Indian company as defined u/s 10(26). It is a company resident in India u/s 6(3). Hence, in respect of payment made to Group M Media India (P) Ltd., assessee has rightly deducted TDS u/s 194C. Section 195 applies when payment is made to a Non resident or to a foreign company. In present case payment is made to Group M Media India (P) Ltd. which is an Indian Company. It is neither a non resident, nor a foreign company and therefore section 195 is not applicable. 16.6. The observation of the A O that payment to Group M Media (India) Pvt. Ltd. is on behalf of Mindshare, Singapore in view of the AOR Service Contract between Min....