TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 1012
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.... the assessee-company paid consideration in the form of royalty at the rate of 5% of the sales. Return of income for the assessment year 2010-11 was filed on 5/10/2005 declaring income of Rs. 55,25,65,514/-. After processing the said return of income under the provisions of sec.143(1) of the Act, the case was taken up for scrutiny assessment by issuing notice under section 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer [AO] found that the assessee-company returned the following international transactions in Form 3CEB: Name of the Associated Enterprise Nature of International Transaction Paid/payable Jockey International Inc. Kenosha, USA Royalty@ 5% of entire sales 1,67,829,024 During the previous year relevant to assessment year under consideration, the assessee-company paid royalty of Rs. 6,78,29,024/- to JII towards royalty. The assessee-company sought to justify the consideration paid for international transactions entered with JII to be at arm's length. The assessee-company submitted transfer pricing study and the rate of royalty is 5% which is within the prescribed limit as prescribed by the RBI. 3. The AO referred the matter to ....
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....r, draft assessment order was passed by the AO wherein the following disallowances were proposed: i. Adjustment on account of transfer pricing Rs. 20,20,07,861/- ii. Disallowance under section 14A read with rule 8D(2)(iii) of Rs. 20,51,175/- iii. Disallowance of Rs. 74,08,961/- under the provisions of sec.80JJAA of the Act. 5. Being aggrieved by the draft assessment order, the assessee-company filed objections before the Dispute Resolution Panel [DRP] contesting all the additions. It was contended by the assessee-company before the DRP inter alia that the said transactions do not constitute international transaction as the assessee-company and JII do not constitute Associated Enterprise (AE). It is submitted that the conditions specified u/s 92A(1) of the Act are not existing between the assessee-company and JII. In the absence of relationship of assessee-company between two companies, the transaction does not constitute international transaction within the meaning of sec.92B of the Act. It was further contended that in any event, transaction of payment of royalty is at arm's length as the rate of royalty is less than the rate prescribed by the RBI and also disputed it was inte....
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....ermining the price or the value of the international t r ans act ion usin g a st and ard and accept abl e method and then sel ect ing the most appropriate method prescribed under the Act for the purpose of comparison of such ALPs. We therefore find no infirmity in the methodology followed by the TPO. The submission of the taxpayer that the TPO has used cost plus method is examined and found that it is only a typographical error. Ground No 4: Clubbing of royalty with the advertising and marketing expenditure. The next objection of the taxpayer is the clubbing of royalty with the advertising and marketing expenditure. The TPO's reasoning in the 'IV order is that payment of royalty is intrinsically linked with the marketing expenses as per the contents of the licence Agreement. There is no dispute that the brand JOCKEY and its logo are the advertising tools for the taxpayer. It is also a fact that the taxpayer, Page Industries Ltd is the exclusive licensee of Jockey International Inc USA. It is engaged in the business of manufacturing and distribution of the Jockey brand innerwear/ leisure wear for men and women in lndia/Sri Lanka, and Maldives. 7.3 As per the admission of the....
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....mount equal to 40 percent of the Minimum Advertisement Expenditure directly to Jockey to support such brand and image advertising, marketing and promotional activity. Such payments shall be paid by the licensee to Jockey within 30 days after the end of each license quarter. Said amount shall be credited against Licensee's Minimum Advertising Expenditures. In para 18(e) it is mentioned that all artwork and designs involving the Jockey Mark or any reproduction thereof shall, not withstanding their creation or use by the Licensee be and remain the property of Jockey and Jockey shall be entitled to use the same and to license the use of the same to others. The Agreement started on January 1, 2005 and expires on December 31,2009. S per term S8 of the schedule to the agreement the target of minimum sales have been fixed for each year. For instance, for the period January 1, 2009 to December 31, 2009 the target sales of licensed product have been fixed at fixed at Rs. 821 Millions. If the target sales are not met, Licensee will pay to Jockey within 30 days after completion of second and fourth quarters of each License Year, the difference between Royalties paid and Target Sales for th....
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....he case of Ascendas, the Hon Tribunal has upheld the use of a method (the discounted cash flow method) not prescribed in the Act but widely followed internationally to ascertain the value of an asset. The methodology used to arrive at the market value of the asset is different from the methodology used for benchmarking the international transaction prescribed in section 92C(1) of the Act. 7.6 Having arrived at the Arm's length margin or the allowable AMP expenditure vis-a-vis the comparables, the TPO has used the CUP method as the most appropriate method for the purpose of comparison. As stated earlier, the mention of cost plus method is only a typographical error. We therefore, uphold the use of the CUP method as the most appropriate method adopted by the TPO. 5.2 The DRP also confirmed the disallowance under the provisions of sec.80JJA by holding the disallowance is as per the manner laid down by the Rules. The disallowance of Rs. 20,50,175/- under rule 8D(3) was also confirmed vide paras.9.2 & 9.3 : "9.2 This panel is not able to accept the interpretation offered by the assessee in view of his submission that 'there is in fact no expenditure incurred for the purpose o....
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....king reference to the TPO without disposing the jurisdictional issue as to whether there exists an associated enterprises ("AE") relationship between the Appellant and Jockey International Inc.("Jockey Inc.") 3. The lower authorities have erred in: a) not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law. b) passing the order without demonstrating that the Appellant had motive of tax evasion. Grounds relating to treatment as Associated enterprise 4. The lower authorities have erred in: a) considering Jockey Inc.as AE, without demonstrating that the conditions laid down in 92(A)(2) of the Act are satisfied. b) not appreciating that Jockey Inc. was reported as associated enterprise in the Form 3CEB only out of abundant caution. Ground relating to treating Advertisement, Marketing and Promotions ("AMP") expenditure as an international transaction 5. Assuming without admitting that AE relationship exists, t....
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....business, economic and commercial realities in the case of the Appellant; b) unilaterally adopting comparables selected by the Appellant under TNMM as comparable under CUP Method without demonstrating how they remain comparable under the CUP Method also; c) not appreciating that during the year under consideration the Appellant incurred additional AMP expenses for new events, campaign and launches of new product, which had a substantial impact on the revenue of succeeding years and thereby it was incumbent to adopt multi-year average; and d) considering only advertisement expenses in the case of comparables whereas considering marketing and sales promotionsexpenses in the case of Appellant for computing the AMP ratio. 10. The lower authorities have erred: a) not appreciating the fact that the royalty paid was approved and permitted by the Government authorities and was thus at ALP; b) not appreciating that various judicial precedence have concurred on the view that payment of royalty at the rate of 5% is considered at ALP; and c) not appreciating the fact that the royalty is incurred towards manufacturing know- how, merchandising and marketing, Know-how and Jock....
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....ces of the case, interest under section 115P is not leviable. The appellant denies its liability to pay interest under section 115P. Even otherwise, the interest levied is excessive. d) Levying a sum of Rs. 4,49,95,680/- as interest under section 234B. On the facts and circumstances of the case, interest under section 234B is not leviable. The appellant denies its liability to pay interest under section 234B. Even otherwise, the interest levied is excessive. e) Levying a sum of Rs. 7,62,976/- as interest under section 234C. The interest levied is excessive; and f) Not considering self assessment tax paid amounting to Rs. 23,425,000 for computation of interest under section 234B. The Appellant submits that each of the above grounds/ subgrounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law." 9. Ground Nos. 1 to 12 relates to transfer pricing adjustment u/s 92CA of the Act. In these grounds of appeal, the assessee....
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....al of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,- (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by....
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..... Sub-sec.(1) contains(means) definition of AE is .para meters of management control or capital of that enterprise. Sub-sec.(2) contains a deeming provision and also enumerates circumstances when the enterprise can be deemed to be AE. The opening words of sub-sec.(2) are amended by Finance Act, 2002 w.e.f. 1/4/2002 . The amendment was explained as follows by the Memorandum of Finance Bill 2002: "It is proposed to amend sub-sec.(2) of the said section to clarify that the mere fact of participation of one enterprise in the management or control or capital of the other enterprise or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprise unless the criteria specified in sub-sec(2) are fulfilled." The resultant of the amendment is thus explained that unless the requirements of sub-sec.(2) are fulfilled, the sub- section (1) cannot be applied at all. This implies that in order to constitute relationship of an AE, the parameters laid down in both subsections (1) and (2) should be fulfilled. If we were to hold that there is a relationship of AE, once the requirements of sub-sec.(2) are fulfilled,....