TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 493
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....ed 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 ALP as determined by assessee in regard to purchase of raw-material, interest free loan granted ....
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....sted 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 fee Rs. 13,85,339/- Reimbursement for market support services Rs. 4,80,71,661/- Exchange gain Rs. 61,093/- Total amount for market support services Rs. 4,95,18,093/- 9. He noted that revi....
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....ual 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 operate as a sales agent of Seagram Martell. Hence it was claimed that the fixed fee of US $ 2500 per month for the limited activities undertaken by assessee was justified, which covered personnel costs, communication expenses and a profit make up. ....
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.... 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. Ld. TPO pointed out with reference to above details that though in the letter dated 6.2.2004, the assessee stated that the objective of fixed fee received by assesse was to cover personnel costs, communication expenses and a profit make up, no communication expenses were included in the expenditure on communication. He furt....
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....arges 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. Gooptu coordinated with advertising agency for organization of Chivas Regal Golf & Polo activities in India. Research was conducted on behalf of Seagram Martell. findings for which were communicated by Mr. Gooptu to Seagram Martell. Mr. Verma played a role in selection of the venues. invitees for the Golf & Polo events. Both Mr. Gooptu and Mr. Verma were fully involved in these events. Mr. Verma was involved in coordination with ITDC and the agency hired by S....
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....atio 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 transaction value arises on two counts: Costs incurred by SMPL but not reimbursed Rs. 64,25,995/- (Difference of Rs. 7751884 and Rs. 1325889) Shortfall in profit Rs. 43,39,758/- (Difference between Rs. 4460301 &(Rs. 59450+Rs.610931) Total Rs. 1,07,65,753/-" 26. The AO, accordingly gave effect to the directions of ld. TPO and further made addition on following counts: - Loss on foreign exchange fluctuation - Provision for professional expense - Provision for transit breakages - Difference in Arm's length price u/....
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....ng, 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 Reimbursement expenses 48071661 0 0 4,80,71,661 2 Communication expenses 42,52,144 1,05,06,755 52,534 5,26,388 3 Finance charges 4,44,088 33,94,492 16,972 0 4 Rent 3,00,000 1,84,65,610 92,328 92,328 5 Conveyance and local travel 2,50,000 3,18,18,476 1,59,092 1,59,092 6 Depreciation 1,00,000 1,96,10,713 98,054 98,054 7 Power and fuel 1,25,616 12,93,984 6,470 6,470 8 Miscellaneous 1,00,000 1,88,04,901 94,025 1,00,000 9 Salary expense of Mr. Verma 8,42,180 - - 8,42,180 10 Travel expenses of Mr. Verma 1,17,590 - - 1,17,590 11 50% salary of Mr. Aditya Gooptu 7,96,143 7,96,143 7,96,143 7,96,143 12 50% travel expenses of Mr. Aditya Gooptu 4,24,253 - - 4,2....
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.... 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 payments due and outstanding from customers in the Territory; and 1.2.9 Providing any other assistance as may be mutually agreed between the parties hereto. ........ "6.3. The Company shall directly bear all expenditure to be incurred in respect of the promotion and marketing events organized by SML for and on behalf of the Company. In the event that SML agrees to disburse such expenditure or any part thereof on behalf of the Company due to expediency or convenience, the Company shall provide to SML an advance of the estimated amount of expenditure to be so disbursed by it. SML shall furnish to the Company a detailed statement of account on the conclusion of the event and adjust any balance amounts against the commission payable to SML under this Agreement." 35. Ld. counsel submitted that when cost has already been allocated for carrying out marketing support service by assessee, then how reimbursement can be allocated to cost base.....
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....ediary 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 customer failed to pay any such amount to the advertisement agency, the bad debt risk was borne by the third party vendor and not by the advertising agency i.e. the assessee. It was, thus, clear that the assessee had not assumed any risk on account of non-payment by its customers or AEs. At this stage a useful reference may be made to ITS 2009 Transfer Pricing Guidelines accepted by the GECD where it is laid down that when an AE is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may not be appropriate to determine ALP as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower t....
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....ome 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. All risks incidental to these expenses were at assessee's account and not AE. Ld. CIT(A) has very rightly excluded any allocation towards finance charges because assessee had received advance from its AEs. The statement given by Mr. Surjit Verma, referred to earlier, in the observation of ld. TPO, clearly showed that both employees coordinated with various agencies which were to conduct or organize these events. He has observed that research was also conducted on behalf of Seagram Martell, findings for which were communicated by Mr. Aditya Gooptu to Seagram Martell. In order to avoid repetition, we are not referring to the detailed activities performed by assessee noticed by ld. TPO, which we have reproduced earlier, while considering the TPO's findings. It would suffice to observe that assessee played a vital role in all the activities done to promote sales of Seagram Martell Duty Free Ltd. in India and the meager amount of US$ 2500 p.m. was not at all justifie....
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....equential 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 market service function. Under these circumstances, the appellant is entitled to get a mark-up on the actual cost incurred inclusive of reimbursed expenses. (v) Under TNMM, the appropriate cost base is to be taken into account while determining the arm's length nature, of compensation received for discharging a particular function. Exclusion of a relevant cost item would distort the bench marking analysis vis-a-vis the results of the comparables. No such exceptions have been brought out by the appellant for the comparables. 40. In view of above discussion this ground is dismissed. 41. Ground no. 3: Brief facts apropos ground no. 3 are that from the details of other misc. expenses, the AO noticed that there was provision of Rs. 24,59,972/- appearing in the accounts of the assessee company on account of transit shortages. The AO was of the opinion that this represented unascertained liability. The assessee explained that it was a running account and the actual expenses incurred and the prov....
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....he settled legal position. The Assessees would also be permitted to get the benefit of the reversal of the provision for transit breakages made in the AYs in question accordance with law. 45. Having heard both the parties, respectfully following the decision of Hon'ble Delhi High Court (supra), in assessee's own case, we restore the matter to the file of AO to pass the order in terms of the observations made by Hon'ble Delhi High Court noted above. In view of above, ground no. 3 is allowed for statistical purposes. 46. Ground no. 5: As we have restored the issue involved in ground no. 3 to the file of AO for decision afresh, ground no. 5 becomes academic, wherein the assessee has assailed the directions of ld. CIT(A) in sustaining the addition of Rs. 51,59,990/-, being provision of transit breakages in order to compute book profit u/s 115JA of the Act. 47. Ground no. 6: Brief facts apropos ground no. 6 are that the AO considered the interest income returned by assessee under the head 'business income as income from other source. Before ld. CIT(A) it was submitted by the assessee that the issue is covered in its favour by the order of the Tribunal for AY 1999-2000. However, no f....
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....e AO on account of difference in Arm's Length Price determined by the TPO and that taken by the assessee." 2." On the facts and in the circumstances of the case the Ld. CIT (A) erred in law and on facts in deleting the addition of Rs. 63,60,000/- made by the AO on account of foreign exchange fluctuation loss." 3." On the facts and in the circumstances of the case the Ld. CIT (A) erred in law and on facts in deleting the disallowance of Rs. 3,11,81,808/- representing 10% of the brand expenses by holding that the parent company was also benefited from such brand building exercise." 4. "On the facts and in the circumstances of the case the Ld. CIT (A) erred- in law and on facts in deleting the disallowance of Rs. 3,11,81,808/- being 10% of the brand expenses made by the AO by holding the same as of capital nature." 53. As far as ground no. 1 is concerned, we have confirmed the action of ld. CIT(A) on both the counts viz. allocation of expenses to Marketing support Service segment and also for including the reimbursement of expenses as cost base and also for the income of this segment for computing the NCP of this segment. Therefore, this ground stands dismissed. 54. Br....
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....rised of expenditure on event management, business promotion, merchandising, princting of brouchers/ mailers, market research etc. to determine the consumer reaction to company's products, bar collaterals (like stirrers, glasses, ice buckets, coasters etc.), advertisement (both electronic and print media) and designing of packaging material for company's products. The assessee submitted that the expenditure on brands did not provide enduring benefit to the company and was allowable as revenue expenditure. It was explained that the company brand was a primary source of its competitive advantage and also a valuable strategic asset. Further, brands create an identification for company's products in a brand conscious market and as such these were an integral part of asessee's business and ensure customer loyalty/ satisfaction which naturally results sin increased in its turnover and higher taxable profits. 59. The AO after considering the assessee's submissions concluded that the expenditure incurred by the assessee company on increasing the brand popularity of the parent company was an inadmissible expenditure in the hands of the assessee company. He observed that the expenditure inc....
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.... that these expenses were incurred for advertising, sales promotion, cost and distribution etc. The Assessing Officer held that the brand expenses were incurred for enhancing the image of the brand and as such it was resulting in an enduring benefit. Therefore, he disallowed the same holding to be capital expenditure. On appeal before the CIT(A), the CIT(A) held that although the expenditure was in the nature of event management, business promotion expenses etc. the same would result in an enduring benefit to the appellant. He accordingly spread the expenses over a period of 5 years and allowed only 1/5 of the total expenditure for the year under consideration. 10.1 Before us, the learned counsel argued that the expenditure was in the nature of advertising and sales promotion of the products being sold by the appellant and the expenditure has not resulted in creation of new asset. The test of enduring benefit cannot be alone applied to determine whether the expenditure is revenue or capital. He placed reliance on the following decisions: 1. Empire Jute Company, 124 ITR 1 (SC), 2. CIT Vs. Berger Paints (India) Ltd., 254 ITR 503, (Cal.), 3. CIT Vs. Vs. Adidas India Market....
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....w of the nature of the business. It was an ongoing expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits. " 10.4. Following the above ratio laid down by the Hon'ble Jurisdictional High Court, we allow this ground of appeal filed by the assessee. 10.5 Hence the appeal filed by the assessee company is allowed. 63. As no distinguishing feature has been brought on record by the department, respectfully following the order of the ITAT in the case of M/s Seagram Distilleries Pvt. Ltd. (supra), holding that the brand expenses were in revenue field and contributed towards profit earning process of the assessee, dismiss both these grounds raised by revenue. 64. In the result, revenue's appeal is dismissed. Assessee's appeal for AY 2003-04 (4784/Del/2007): 65. In AY 2003-04 the assessee has taken following grounds of appeal: 1. That the Ld. Commissioner of Income (Appeals) [Ld. CIT(A)] erred on facts and in law in sustaining the adjustment of Rs. 4,748,353 made by the Transfer Pricing Officer (TPO) under section 92CA of the Income Tax Act, 1961 (Act). 1.1 Th....
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....identical herein also adopt the same course. Ground is dismissed. 70. Ground no. 5: 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. 71. In the result, appeal is partly allowed for statistical purposes only. Revenue's appeal for AY 2003-04 (ITA no. 4780/Del/2007): 72. In AY 2003-04 the Revenue has taken 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. 26,35,948/- out of total disallowance of Rs. 73,84,301/- made by the AO on account of difference in Arm's Length Price determined by the TPO and that taken by the assessee." 2. " On the facts and in the circumstances of the case the Ld. CIT (A) erred in law and on facts in deleting the addition of Rs. 7,00,292/- made by the AO on account of foreign exchange fluctuation loss." 3. " On the facts and in the circumstances of the case the Ld. CIT (A) erred in law and on facts in deleting the disallowance of Rs. 3,77,54,860/- representing 10% of the brand expenses by holding that the parent company was als....