TaxTMI 
TaxTMI 
2016 (6) TMI 493
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....reign liquor (IMFL). The liquor was bottled and sold within India through government agencies and private distributors and also exported out of India. The AO had made a reference u/s 92CA(1) to Transfer Pricing Officer ('TPO') to determine the Arm's length price ('ALP') in relation to following international transactions with Associated Enterprises ('AEs') reported in form 3CEB filed with the return of income: Name and Address of the Associated Enterprise Description of the International Transaction Book Value of the transaction (Rs.) Arm's length price computed by the assessee (Rs.) Seagram Martell Duty Free Ltd. [SMDF] Unit 23118, Nathan Rd. Kowloom, Hong Kong Market Support Services 4,95,18,093/- 4,95,18,093/- Chivas Brothers Ltd. 111/115 Einfrew Rod, U.K. PA3 4DY CI Purchase of Raw-material 5,60,19,146/- 5,60,19,146/- Seagram Netheriands Antilles N.V. 15, Interest free loan granted in earlier Nil Nil Pieterman, Netherlands, Antilles years Seagram Co. Ltd. Canada, 1430, Peel Street, Canada H3A 159. Sale of cotton flannel 4,68,21,889/- 4,68,21,889/- 3. Ld. TPO accepted the A....
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....s found to be the most appropriate TP method to test the overall profitability of assessee's service function. The assessee was taken as the tested party on the ground that it was bearing less risk as compared to the AEs. The PLI for the TNM method analysis was taken as net profit to total expenses (or cost) ratio, termed as NCP in the T.P. report. 7. Ld. TPO noticed that weighted average of PLI for the comparable cases was 6.11% using data for 3 years. The profit earned by assessee from marketing support service activities, segmented out of the consolidated account by the company management, was 13.25%, which was computed as under: Income Sales Rs. 1501610 Operating income [A] Rs. 1501610 Expenses Cost of traded goods Personnel expenses Rs. 1081023 Administration and selling expenses Rs. 244866 Operating expenses (B) Rs. 1325889 Operating profit (c)=(A)-(B) Rs. 175721 Net cost plus margin (%) (C)/(B)/100 13.25 8. In course of proceedings, the assessee filed revised computation in regard to market support services, which was as under: Market Support Services ....
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....d to furnish total sales of liquor achieved by SMPL during F.Y. 2001-02 separately for India and SAARC countries. It was also asked as to why the commission was agreed to be received as a fixed small sum and not as a percentage of sales. as is the usual practice for independent commission agents. Details of expenses incurred on market support services of Rs. 13.25.889/- and reimbursed expenses of Rs. 4.80.71.661/- were also called for. 12. The assessee in its reply pointed out that under the representation agreement between Seagram Martell and assessee, the role of assessee was that of a mere coordinator between Seagram Martell and final customers. In discharging responsibilities under he said Representation Agreement. SMPL is required to undertake activities that require very minimal time and the risks taken and deployment of assets by assessee were almost negligible. It was further pointed out that all the activities were coordinated by one employee spending full time efforts (namely. Mr. Surjit Verma) and another employee spending minimal part of this time (Mr. Aditya Gooptu). The role of assessee was neither to undertake full-fledged marketing/ distribution activities nor to....
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....ehalf of group members, cost that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function." 14. Ld. TPO required the assessee to inform as to how the sales were made by Seagram Martell in India before entering into representation agreement with assessee. 15. The assessee pointed out that Seagram Martell commenced sales to duty free shops and other govt. approved vendors etc. from August, 1999. For the period up to March, 2000 (approximately 3 months), Seagram Martell directly coordinated the sales with the said customer. The assessee furnished following details of expenses incurred for market support services: Surjit Verma Salary etc. 100% 842,180 Aditya Gooptu Salary etc. 15% 238,843 1,081,023 Surjit Verma Travel Expenses Actual Expenses 117,590 Aditya Gooptu Travel Expenses 15% of Actual Exp. 127,276 244,866 16. ....
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....jit Verma was recorded. The AO has in detail discussed the allocation of expenses for marketing support service in paras 10 to 11.6 and has finally concluded that following expenses had to be allocated towards marketing support services: Salary Verma 8,42,180/- Salary Gooptu 7,96,143/- Travel expenses Verma 1,17,590/- Travel expenses Gooptu 4,24,253/- Communication 42,52,114/- Finance Charges 4,44,088/- Rent 3,00,000/- Conveyance 2,50,000/- Depreciation 1,00,000/- Power and fuel 1,25,516/- Miscellaneous 1,00,000/- Total 77,51,884/- 22. As regards the non-inclusion of reimbursed expenses in the cost base for NCP calculation, ld. TPO has observed that when assessee, which incurs expenses in the first place and records them in its books, there can be no justification in excluding them from 'total cost' for calculating NCP ratio. Ld. TPO has referred to the statement of Mr. Surjit Verma and has observed as under: "As evident from the statement of Mr. Surjit Verma, SMPL is fully involved in organizing and coordinating various activities and events financed through . reimbursed expenses. Mr. Goo....
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.... 4,80,71,661/- Total expenses (B) Rs. 5,58,23,545/- Operating profit (C)=(A)-(B) (-) Rs. 63,05,452/- Net cost plus margin (&) (C)/(B)x100 24. He, therefore, pointed out that the NCP ratio for the tested party i.e. SMPL for FY 2001-02 was (-11.30%) as against the mean of NCP ratio for comparable parties, using the current year data for F.Y. 2001-02 was 7.99%. 25. He directed addition of Rs. 1,07,65,753/-, observing as under: "By applying the mean NCP ratio for the comparable cases i.e. 7.99% to the total cost for market support services function of the tested party SMPL. Profit = Rs. 55823545 x5 0.0799 = Rs. 44,60,301 Amount receivable using NCP of 7.99% = Rs. 55823545+Rs. 44,60,301 = Rs. 6,02,83,846 95% of the above = Rs. 57269654 95% of the amount receivable using NCP of 7.99% is more than the amount actually received i.e. Rs. 4,95,18,093/-. The Arm's length price of the Market Support Services receipts is therefore Rs. 6,02,83,846. The difference works out to Rs. 1,07,65,753 It needs to be noted that the difference between ALP and the ....
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.... the provision for transit breakages was purely contingent in nature. 4. That the Ld. CIT(A) erred in sustaining the disallowance of Rs. 114,449 on account of depreciation. 5. That the Ld. CIT(A) erred in law in sustaining the addition of Rs. 5,159,990 being provision of transit breakages in order to compute book profit under section 115JA of the Act. 6. That the Ld. CIT(A) erred on facts and in law in sustaining the treatment of Rs. 9,885,207 as 'income from other sources' as against 'business income' of the appellant. 7. That the Ld. CIT(A) erred in sustaining the levy of interest under section 234B and D of the Act". 30. At the time of hearing, ld. counsel for the assessee did not press ground nos. 2 & 4. Accordingly, ground nos. 2 & 4 stand dismissed, being not pressed. 31. Apropos ground no. 1 ld. counsel pointed out that ld. CIT(A) has determined the cost incurred by assessee towards marketing support service, as under: S. No. Nature of expenses Value taken by TPO Head of expenses as appearing in the P&L Apportionment on the basis of head count computed by the appellant Finding in this order 1 R....
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.... in Product advertising, addressing customer grievances regarding features and standards of the Products providing clarifications to customers and prospective customers in the Territory, organization and conduct of various promotion/ marketing events and liaison with third parties such as advertising agencies, event managers and other sponsors if any, on behalf of the Company without in any way having the authority to finally bind the Company to the terms and conditions negotiated by it with such third parties; 1.2.4 Negotiating terms and conditions and credit limits with customers, subject to the terms and conditions of Article 2.3; 1.2.5 Obtaining orders from customers 3..11d forwarding such orders to Company with draft proforma invoices containing proposed terms and conditions, including prices; 1.2.6 Upon receipt of formal proforma invoices from the Company, obtaining confirmation from customers; 1.2.7 Based on the confirmation received from the customers, advising Company on delivery of goods while retaining the original invoice with itself; 1.2.8 Providing assistance and support to the Company in the collection and follow up of pay....
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....ee was engaged in undertaking advertising services for its customers/AEs in the capacity of an agent. As part of its business operation, the assessee facilitated placement of advertisement for its AE in the print/electronic etc. media and for that purpose, the assessee was required to make payment to third parties for rendering of advertisement space on behalf of its customers or AEs. It was, thus, clear that the assessee's business was not sale of advertising slots to its customers or associate concern. For performing the functions for and on behalf of AEs, the assessee was remunerated by its AEs on the basis of a fixed commission/charges based on expenses or cost incurred by the assessee for release of a particular advertisement. It was also to be noted that advertising space ( be it media, print or outdoor), had been let out by third party vendors in the name of ultimate customers and beneficiary of advertisement. The assessee simply acted as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendor was recovered from the respective customers or AEs. In the event ....
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....ts AEs for performing certain functions on behalf of AEs only. These functions included organization of various functions such as Golf Championship, Polo Championship sponsored by AEs. The Marketing support services implies that assessee is providing support services for building up the market for its AEs. It cannot be disputed that had this activity had been performed by an independent entity, would have been compensated not only towards the cost incurred by it but also a mark up on the same would have been realized. The comparables selected by assessee and accepted by ld. TPO, which were performing Marketing support services, there is nothing on record to suggest that all such comparables were also being reimbursed for certain specific functions carried out by them. Under such circumstances, in order to bring the tested party and comparables at level playing field, it is necessary that reimbursed cost should be considered in the cost base as well as part of income so as to neutralize any variation in the cost incurred by assessee towards carrying out marketing support services. Admittedly, at first place assessee has incurred all these expenses and then got reimbursed by its AEs.....
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....ment. (ii) Sales promotion activities of similar nature were also organized for the domestic segment of the appellant and claim of such expenses have been allowed as business expenses. There is no reason as to why a separate treatment is to be given to the reimbursed amounts in the segmented accounts as both these expenses aim at achieving similar results. In any case, the reimbursed expenses did impact the sales of the AE positively. (iii) The appellant has been using the same agencies for the sales promotion purposes both for the domestic segment as well as for the AE segment. Credits are extended to SMPL on its own credibility or standing and not on the basis of the credibility of the AE. This makes these expenses an integral part of the market support function. (iv) Perusal of some of the advertising bills reveals that the appellant while making payments collected TDS. All obligations relating to collection of TDS, obtaining TAN, filing TDS returns and all other consequential legal Obligations are met by the appellant in its own right as an independent entity. Resources of the entire enterprise are used to meet such legal Obligations and support the m....
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....es would be allowable as a business expenditure. In light of the law explained in the above decisions, the Court is satisfied that the view taken by the ITAT in the present case is not erroneous in law. 26. To summarise the legal position as far as the Assessees are concerned: (a) There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages so as to justify creating of provision for such breakages. (b) The provision would, in the circumstances, be a provision for a contingent liability and, therefore, in terms of the AS 29 ought not be recognised. (c )The actual transit breakages as and when they occur are allowable as revenue expenditure in the accounting year in which such breakages occur. 27. Consequently, the question framed is answered in favour of the Revenue and against the Assessees. 28. It is clarified that while giving an appeal effect to this order, the AO shall allow the actual transit breakages for A Y 2001-02 as revenue expenditure consistent with the settled legal position. The Assessees would also be permitted to get the benefit of the reversal of the provision for transit b....
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.... 50. Thus, it is evident that the issue was considered for AY 1998-99 and not 1999-2000 as submitted by assessee. Further, the interest income earned only on loans given to employees were considered. Therefore, we direct the assessee to furnish the details of interest earned on loans given to employees before AO and the AO will treat the said interest under the head "business income" and the balance interest is to be confirmed as income from other sources, as assessee has not furnished any details. In terms of aforementioned observations this ground is partly allowed for statistical purposes. 51. Ground no. 7: Charging of interest u/s 234B & D is consequential. The AO shall recalculate the interest under the aforesaid sections, if any, while giving effect to appellate orders. Departmental appeal (ITA no. 4779/Del/2007):- 52. The department has raised following grounds of appeal: 1. "On the facts and in the circumstances of the case the Ld. CIT (A) erred in law and on facts in allowing relief of Rs. 49,56,078/- out of total disallowance of Rs. 1,07,65,753/- made by the AO on account of difference in Arm's Length Price determined by the TPO and that taken by the as....
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....e decision of Hon'ble Jurisdictional High Court of Delhi in the case of CIT Vs. Woodward Governor India Pvt. Ltd. 294 ITR 354, allowed the assessee's claim. 56. Ld. counsel for the assessee pointed out that now the decision of Hon'ble Delhi High Court in the case of Woodward Governor India Pvt. Ltd. (supra), has been affirmed by the Hon'ble Supreme Court in 312 ITR 254 (SC). 57. Ld. DR has not brought on record any particular aspect of the entire issue to take any contrary view. We, therefore, respectfully following the decision of Hon'ble Jurisdictional High Court in the case of Woodward Governor India Pvt. Ltd. (supra), dismiss this ground of appeal, holding that the loss incurred by the assessee was a fate accompali and not a notional one. 58. Ground nos 3 & 4: The AO noticed that in the P&L A/c the assessee had claimed sales and marketing expenses amounting to Rs. 51,61,92,453/- as against Rs. 39,02,30,608/- in the immediately preceding year. He noted that the expenditure of Rs. 51,61,92,453/- included expenses of Rs. 31,18,18,080/- as brand expenses. The assessee explained that these expenses comprised of expenditure on event management, business promotion, merchandising....
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....held that brand expenses did facilitate the profitable operations of the assessee's business. 61. At the time of hearing ld. counsel for the assessee submitted that the ITAT in the case assessee's sister concern has held that the expenses on advertisement and sales promotion are allowable as revenue expenditure u/s 37(1). 62. We have considered the rival submissions and have perused the record of the case. We find that the ITAT Delhi Bench 'G' vide its order dated 10.07.2015 in the case of M/s Seagram Distilleries Pvt. Ltd. Vs. JCIT (ITA no. 4278/Del/2010) & others, under identical set of facts, in paras 10 to 10.5, has observed as under: "10. Ground no. 4 relates to restricting the allowance of brand expenses to the tune of Rs. 10,16,10,577/- to only 1/5th of such expenses for AY 2006-07, Rs. 11,48,67,170/- for A Y 2007- 08 and Rs. 7,34,56,093 for AY 2008-09. In the profit and account, the appellant debited an amount of Rs. 30,18,52,870/- under the head advertising, sales promotions and rebates. Out of the same the appellant had shown expenses of Rs. 10,16,10,577/- as brand expenses. The appellant explained that these expenses were incurred for advertising, sales pr....
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....y the Hon'ble Jurisdictional High Court in the case of CIT Vs. Monto Motors, 206 TAXMAN 43 (Del.) vide para 4, which is reproduced below: "Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisements are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses wh....
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....dition of Rs. 782,854 being provision of transit breakages in order to compute book profit under section 115JA of the Act. 5. That the Ld. C1T(A) erred in sustaining the levy of interest under section 234B and D of the Act. 66. Ld. counsel for the assessee did not press ground no. 2. Hence, ground no. 2 stands dismissed being not pressed. 67. Ground no. 1: Identical ground has been taken by the assessee as ground no. 1 in AY 2002-03. On identical set of facts in AY 2002-03 we have upheld the action of ld. CIT(A) in sustaining the adjustment by ld. TPO u/s 92CA. For the same reasons herein also we uphold the order of ld. CIT(A) on the issue in question. Ground is dismissed. 68. Ground no. 3: Identical ground has been taken by the assessee as ground no. 3 in AY 2002-03. On identical set of facts in AY 2002-0 following the decision of Hon'ble Delhi High Court in assessee's own case in ITA nos. 898/2009 & others dated 6.10.2015, 3 we have restored the matter to the file of AO to pass order in terms of the observations made by Hon'ble Delhi High Court (supra). Ground no. 3 is allowed for statistical purposes. 69. Ground no. 4: Identical ground has been taken by the ....