AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 764
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....4,393/- although he adjudicated on the said ground and allowed relief in respect of delayed contribution to P.F. being part of the same ground of appeal before him." By the revenue : "3. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 27,43,614/- on account of delayed deposit of 'Employees 'contribution towards PF. " 3. The Assessee is a company. It is engaged in the business of manufacturing and marketing of footwear and its accessories. In the course of assessment proceedings, the assessee claimed deduction of sums which were paid to Provident Fund (PF) and Employees State Insurance (ESI) authorities as employees share of contribution belatedly i.e., payments of employees share of contribution was paid by the Assessee beyond the due date of payment as prescribed in the respective legislation governing PF and ESI. The assessee claimed before AO that though the aforesaid contribution were paid belatedly to the concerned authorities they were allowable as deduction because the contribution had been paid on or before the due date for filing the return of income u/s 139(1) of the Income Tax Act, 1961 (Act). 4. T....
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.... disallowance of employees shares of contribution to PF would equally apply to the contribution to ESI even also. Accordingly we direct the AO to delete the disallowance in respect of payment of employees contribution to ESI even also. Ground no.2 raised by the assessee is accordingly allowed. 8. The other grounds are general and do not call for any adjudication. 9. In the result the appeal of the assessee is partly allowed. 10. As far as ground no.3 raised by the revenue is concerned we are of the view that in the light of the judicial pronouncements referred to by CIT(A) in his order there is no merit in the ground raised by the revenue. Accordingly ground no.3 by the revenue is dismissed. ITA NO.365/Kol/2012 (Revenue's appeal): 11. Ground No.1 raised by the revenue reads as follows :- "1. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 66,96,560/- on account of contribution to Bata Workers Sickness Benefit Society." 12. The assessee contributed a sum of Rs. 66,96,560/- to Bata Workers Sickness Benefit Society (BWSBS) and claimed deduction of the same. The AO made a reference to the provisions of S....
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....e aforesaid decision the CIT(A) deleted the addition made by AO. 14. Aggrieved by the order of CIT(A) the Revenue has preferred ground no.1 before the Tribunal. 15. We have heard the rival submissions. We find that identical ground raised by the revenue for A.Y.2005-06 and 2006-07 has been decided by this Tribunal as follows :- "6. In regard to ground no.1 of the revenue's appeal against the action of the ld. CIT(A) in holding that the contribution made by the assessee to Bata Workers Sickness Benefit Society is an allowable expenditure, it was fairly agreed by both the sides that the issue is squarely covered by the decision of the Co-ordinate Bench of this Tribunal in assessee's own case for A.Yrs.1990-91 and 1991-92 in ITA No.329/Cal/1996 and ITA No.99/Cal/1997 dated 24th September, 2002 wherein in para 17 of the order the Coordinate Bench of this Tribunal has held as follows :- "17. In view of the above judicial decisions and considering the facts that there was a valid agreement entered into by the parties and enforceable in law against each other. It becomes legal obligation of the assessee company to make the contribution to the society and as such we are o....
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.... of the standing orders and rules. The said standing orders and rules had been duly certified under the provisions of the Industrial Employment (Standing Orders) Act, 1946. As per section 5 of the said Act, the standing orders have statutory force and any contravention thereof is liable to be punished. It was further observed on a perusal of the memorandum of settlement entered into between the assessee-company and its workmen that medical benefit was specifically provided and the settlements were arrived at to which the Labour Commissioner and Conciliation Officer were also the party. As per section 2(p) of the Industrial Disputes Act, 1947, it is provided that 'settlement' means a settlement arrived at in the course of conciliation proceedings and includes a written agreement between the employer and the workmen arrived at otherwise than in the course of a conciliation proceeding and where such agreement has been signed by the parties thereto and a copy thereof has been sent to an Officer authorised in this behalf by the appropriate Government and the Conciliation Officer. As per section 18 of the Industrial Disputes Act, a settlement arrived at by agreement between the employer ....
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....o as "Payment of Royalty" by the Transfer Pricing Officer (TPO) in his order. Since M/s Bata Ltd., Canada, was an Associated Enterprise (AE) within the meaning of Sec.92A of the Act, the A.O. made a reference u/s.92CA to the Transfer Pricing Officer (TPO), to determine whether the said transaction was made at arm's length price(ALP). As we have already seen the assessee is engaged in the business of manufacturing leather, canvas, synthetic and rubber footwear. Bata Ltd., Canada ("associated enterprise") is engaged, inter alia, in the business of providing comprehensive advisory services in relation to production and distribution of footwear and associated products to clients across the world. The associated enterprise has valuable knowledge expertise and experience and possesses secret and specialized know- how, information and data in the field of production and distribution of footwear and associated products. 19. The assessee has entered into a technical collaboration agreement dated 29-12- 2000 for availing the following services from Bata Ltd., Canada: (i) Engineering services (ii) Purchasing services (iii) Construction and architectural services (iv) Resear....
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....da, from time to time. 22. The TPO, however, following the Transfer Pricing assessment order for assessment year 2003-04, determined the arm's length price of payment of royalty as 'nil' allegedly holding that no services were actually received by the assessee. The entire amount paid to Bata Ltd., Canada was therefore added to the total income of the Assessee by way of adjustment to the ALP. 23. Before CIT(A) the Assessee submitted the details of the services that were rendered by Bata Ltd., Canada for which royalty in question was paid. (a) Technical information relating to design methods and manufacturing techniques including drawings, tracings, etc.: In respect of the same the appellant submitted that the AE provided regular advice to Bata India on maters relating to manufacturing operations. It also assisted in development and design of new types of footwear by advising on matters connected with product development such as materials, design methods, colour, etc. (b) Brand development services: With respect to this, it was submitted that it had got brand development services to enable it to compete against international brands and imported products. (c....
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.... AY 2004-05 also. The learned DR could not controvert the above submission but relied on the order of the TPO. The learned counsel for the assessee drew our attention to the various evidence filed in support of the nature of the services rendered by the AE for which payment of royalty was made by the Assessee. It was further contended that it is the assessee's prerogative to decide whether to incur any expenditure or not for the purpose of business and the revenue authorities cannot sit in judgment over the same. In this regard attention was drawn to several judicial pronouncements some of which are as follows :- a) CIT vs Malabar Plantations 53 ITR 140 b) Madhav Prasad Jhatia vs CIT 118 ITR 200 Reference was also made to the decision of the ITAT, Kolkata Bench in the case of NLC Nalco India Ltd. Vs DCIT in ITA NO.529/Kol/2008 order dated 03.02.2016 wherein this Tribunal held on identical transfer pricing adjustment that the disallowance made cannot be sustained. 26. We have considered the rival submissions. At the outset we observe In the case of Dresser Rand India Pvt.Ltd. Vs. ACIT ITA No.8753/Mum/2010 AY 2006-07 order dated 7.9.2011, the Hon'ble Mumbai Tribunal had a....
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....enefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. ............ 9........... 10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the c....
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.... services? Whether payment made to AE meets ALP criterion will be determined, keeping in mind all the above factors, as well. 29. Keeping in mind the principles emanating from the aforesaid decisions, we shall now proceed to examine the material on record to see the nature of services received by the Assessee and as to whether the same were at Arm's Length. 30. The material on record shows that the assessee entered into a "Technical Collaboration Agreement" ("TCA") with Bata Ltd., Canada, (successor of Bata Lim) with effect from January 1, 2001 to avail the desired advisory and technical services. A copy of the said agreement is placed at page 85 to 99 of the Assessee's paper book. The said agreement has been approved by Government of India, Secretariat for Industrial Assistance vide approval letter No. 120(2000)/564(2000)PAB-EL dated October 23, 2000. Bata Limited, Canada along with its other subsidiaries (herewith referred to as "AE") is engaged inter-alia in the business of providing comprehensive advisory services relating to production and distribution of footwear and associated products to clients across the world. The said company is stated to possess valuable knowl....
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....Detailed design and drawings were provided by the associated enterprise to enable the assessee to implement the know-how and manufacture shoes using such technology. Such technical know-how and design drawings etc have been used by the assessee for its benefit. It was submitted that as long as the technology which is owned and provided by the associated enterprise is used by the assessee for manufacture of footwear products, whether such technology was developed exclusively for the assessee is irrelevant. It would be appreciated that without the payment of royalty, the assessee would not have been in a position to use such technical know-how. 32.4. It was further submitted that even under arm's length circumstances a licensor may license a technology to various licensees and charge royalty for granting such license. Accordingly, the contention of the TPO that it is not known if such technology was developed specifically for the assessee is flawed and baseless. 33. (ii) Brand development services: 33.1. It was submitted that in order to compete against international brands and imported products, Bata India has, under the guidance of the associated enterprise, undertaken....
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....global presence was abreast with prevailing trends and practices. The services provided by the associated enterprise plays a vital role in the survival of the assessee in a highly competitive market. The aforesaid services were specifically requisitioned by the Assesee and were rendered pursuant to the agreement entered into with the associated enterprise. It was submitted that the contention of the TPO that none of the brand related work were specifically directed towards the assessee, is incorrect and not borne out from the record. 34. (iii) Management support: 34.1. It was the plea of the Assessee that in order to meet the requirements of a highly competitive market characterized by the presence of various global players, it was imperative for the assessee to adopt global best practices. The associated enterprise, as a result of its global presence was abreast with prevailing trends and practices. The services provided by the associated enterprise played a vital role in the survival of the assessee in a highly competitive market. The aforesaid services were specifically requisitioned by the assessee and were rendered pursuant to the agreement entered into with the associat....
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....ata stores. At pages 467 to 483 are guidelines provided by Bata Ltd., Canada relating to the display and position of footwear, boards, hoardings, window display etc. It cannot be disputed that the material contained in the brand books have in fact been practiced in reality. The Tribunal takes judicial notice of the existence of directions contained in the brand book and holds that they were in fact put in practice in the various Bata stores in India. We therefore hold that services in the form of technical information relating to design methods and manufacturing techniques were in fact provided by the AE to the Assessee. So also Brand Development services were provided by the AE to the Assessee. 38. (iii) Management support : 38.1. It was the contention of the Assessee that since financial year 2000-01, the AE has been assisting Bata India in identifying key personnel who have global experience and are experts in their own fields, to manage the operations of Bata India. These managers/directors have been assigned tasks of spearheading initiatives in product development, quality control and distribution management, all of which are critical determinants of success in the footw....
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....t and not borne out from the record. 38.4. We have considered the rival contentions. It is seen from the record that since financial year 2000-01 the AE has been assisting the Assessee in identifying key personnel who have global experience and are experts in their own fields, to manage the operations of the Assessee. Instances have been given in the submission dated 5-12- 2005 by the Assessee before the Assessing officer/TPO in the proceedings for AY 2003-04. Mr.Chandhu Morzaria, Senior Vice-President and Executive Director of Commercial Servoces at Bata World Headquarters, Canda was appointed as Director of the Assessee on 30.8.2001 and is stated to have assisted the Assessee in the aggressive expansion of the retail division of the Assessee. He had continued till March, 2004 and resigned thereafter. One Mr.S.J.Daives was the Managing Director of the Assessee from September, 2002 to January, 2005. Prior to joining the Assessee he was Manging Director and Deputy Chariman of Bata Shoe Company, Bangaladesh. Other instances of several key managerial personnel who were deputed to work for the Assessee have been given in the submissions referred to above. None of these averments wer....
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....ees attended such trainings /seminars. 39.3. On the above conclusion of the TPO, it was submitted that the services rendered by the associated enterprise in this regard relates to assistance in selection, recruitment and assessment of people for current and future roles within the assessee company and other HR related services. These services are aimed at enabling the assessee company in selection of right people and development of leadership and operational skills of the employees of the assessee. Further, the associated enterprise also provided guidance in establishing model store to set the standard and institute a "Best in Class" model for all stores to follow. The associated enterprise inter-alia provides support in terms of developing sample evaluation sheets for store managers, district managers, sales person etc. and also supports the assessee in developing an effective in-house training programme. Accordingly, the conferences and training programmes referred in the order by the TPO are different from the services rendered by the associated enterprise under the TCA. 40. We have considered the rival contentions. Perusal of the page 698 to 787 of the Assessee's paper bo....
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....AE for calculation of ratio (on cash flow planning, assets management, etc.) and business indicators (like stock turns, forward weeks inventory etc.) which are essential for controlling the shoe business (placed on record). It would assist the company in analyzing its financial performance and provide guidance in formulating future business plans and strategies. In 2003, a study was conducted by AE in order to review Bata India's performance and achievement on capex invested in 2002 as against commitments made to justify investment. Details of the study were placed on record. Support from AE enabled Bata India to obtain a better credit rating in 2004 from CRISIL, enabling the company to obtain WCDL loan of Rs. 500 million at a rate of 5.8% from State Bank of India instead of 11.75%. The same was possible after meetings held by officials of AE with representative of CRISIL in this regards and after commitment from AE, CRISI did not downgrade Bata India, thereby enabling the company to obtain the loan at a cheaper rate. Further, the AE had assisted Bata India in 2004 for obtaining a short term loan of Rs. 300 million from the State Bank of India. The same was done by a guarantee ....
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.... software development licenses. 43.3. Retail Integrated Merchandising System ("RIMS")' RIMS provides meaningful sales and stock information of the store and the products. It assists the assessee in achieving greater business and customer service with lower stock and costs by replacing the goods sold in the shortest possible time. Accordingly, it keeps assists the assessee in achieving greater business and customer service with lower stock and costs by replacing the goods sold in the shortest possible time. Accordingly, it keeps a control on the funds blocked in inventory and assists the management in improving profitability [ page 249 - 322, 810-811, 812-818 & 819- 822 of the paper book] 43.4. On the above submission of the Assessee, the TPO was of the view that from the details submitted, it is seen that some of the activities performed by Bata Limited, Canada were continuing from past and no royalty payment was made for the same. One such example is that of accounting manual which were continuing since 1994 as is evident from the manual itself. The further reasoning of the TPO was that the activities related to provision of accounting and other IT package and other f....
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....ich is performed by a member of an MNE group (usually thft parent company or a regional holding company) solely because Of its ownership interest in one or more other group members, i.e. in its capacity as shareholder." Further attention was drawn to para 7.10 of the OECD Transfer Pricing Guidelines further provides the following examples of shareholder activity: '7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; b) Costs relating to reporting requirements of the parent company including the consolidation of reports; c) Costs of raising funds for the acquisition of its participations." It was thus submitted that shareholder activity is an activity which is performed by an entity solely because of its ownership interest in other company i.e. in the capacity of shareholder. It was thus submitted that specific services rendered by the associated ent....
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....of the ownership - shareholder. We have while dealing with similar conclusion held that the conclusion of the TPO/AO in this regard cannot be sustained. The reasons given for such conclusions will equally apply here also. 47. In the light of the discussion in paragraphs 30 to 46, We hold that the Assessee has established the nature of services including quantum of services received by the related party, that services were provided in order to meet specific need of the Assessee for such services, the economic and commercial benefits derived by the Assesseee of intra group services. 48. The next question is as to whether the consideration paid to the AE is at Arm's length. On this aspect we have already seen in para-20 of this order that the Assessee in its Transfer Pricing Documentation, for the purpose of benchmarking, applied Comparable Uncontrolled Price ("CUP") method as the most appropriate method. For application of CUP, the assessee identified following four comparable companies from the Secretariat for Industrial Assistance (SIA) database engaged in providing similar services paying an average rate of royalty of 3.95% and 3.5% on domestic sales and export sales respect....