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2013 (8) TMI 1092
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....returned income of Rs. 275,73,15,234/-. Transfer Pricing Issues: 2. That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of Rs. 106,44,25,680 on account of the alleged difference in the arm's length price of international transactions. 2.1 That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 106,44,25,680 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 2.2 That the assessing officer/DRP erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absence of any understanding / arrangement between the appellant and the associated enterprise. 2.3 That the assessing officer/DRP erred on facts and in law in not appreciating that the AMP expenses, etc., incurred by the appellant in India cannot be characterized as an international transaction as per section 92B, so as to invoke the ....
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....o the AE, if any, is only incidental. 2.11 That the assessing officer/DRP erred on facts and in law in not appreciating that in the absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse the AMP expenses incurred by the appellant for sale of its products. 2.12 That the assessing officer erred on facts and in law in not appreciating that the AMP expenses incurred by the appellant, did not result in creation of any marketing intangibles; much less on account of the AE. 2.13 The TPO / DRP erred on facts and in law in holding that the efforts to create marketing intangibles are in the nature of services and entrepreneurial efforts undertaken by the appellant. 2.14 That the assessing officer erred in failing to appreciate that the scheme of Transfer Pricing under Chapter-X of the Act only provides for determination of 'price' from an international transaction including any expenditure arising from an international transaction but it cannot determine the 'quantum' of international transaction or extent of business expenditure. ....
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....ave also benefited the appellant. 2.22 That the assessing officer erred on facts and in law hi relying upon the decision of the case of DHL Incorporated and Subsidiaries vs. Commissioner of Internal Revenue Tax Court, TCM 1998-461, aff d in part, rev'd in part 285F.3d.1285. 89AFTR2d2002-1978(CA-9,2002);and Glaxo Smith Kline Holding (Americas) Inc. vs. Commissioner, T.C.No. 5750-04 and T.C.No. 6959-05, which were rendered in the context of specific provision under the Transfer Pricing Regulations of United States of America. 2.23 Without prejudice that the assessing officer erred on facts and in law hi considering the following expenses for the purpose of calculating alleged AMP expenditure of the appellant TABLE Particulars Amount (Rs in lacs) Selling and distribution expenses 1067.50 Market Research expenses 969.16 Total 2036.66 2.24 Without prejudice that the assessing officer erred on facts and in law hi not considering the following companies as comparable for benchmarking advertisement and publicity expenses: Company Name Total Sales & Dist Expn/Sales % Cadbury India Ltd. 18.03 Gillette India Ltd. 27.12 ....
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....r market research expenses of Rs. 9,69,15,622/- under section 37(1) of the Act alleging the same to be capital in nature. 4. Without prejudice, that the assessing officer erred on facts and in law in not allowing depreciation on the amount of market research expenses disallowed as capital expenditure. 4.1 That the assessing officer erred on facts and hi law in reducing the returned income by an amount of Rs. 170,88,165/-, without appreciating that the assessee had claimed a deduction of the closing balance lying in PLA amounting to Rs. 32,62,786/- and consequently added back the opening balance lying in PLA amounting to Rs. 2,03,50,951/- resulting in a net addition of Rs. 1,70,88,165/- 5. That the assessing officer erred on facts and in law in making disallowance of Rs. 1,72,00,000/-, claimed in respect of liability for post retirement medical benefits to employees on the basis of actuarial valuation, in accordance with the revised Accounting Standard 15, relating to accounting of employee benefits, on the ground that same is an unascertained liability. 5.1 That the assessing officer erred on facts and in law in observing that the aforesaid....
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....t for the purpose of disallowance. 7.4 Without prejudice, that the assessing officer erred on facts and in law hi not allowing depreciation (in the year of capitalization of the CWIP) on interest expenses of Rs. 1,54,76,000/- held to be capital in nature. 8. That the assessing officer erred on facts and in law in making further disallowance of Rs. 1,02,32,000 under section 14A of the Act, being the difference between disallowance computed as per method provided in Rule 8D of the Income Tax Rules, 1962 ('the Rules') and the amount suo motu disallowed by the appellant. 8.1 That the assessing officer erred on facts and in law in invoking Rule 8D of the Rules and computing disallowance of Rs. 1,08,39,000/- under section 14A of the Act, without appreciating that conditions precedent for applying Rule 8D as prescribed hi sub-sections (2)7 (3) of the said section were not satisfied. 8.2 That the assessing officer erred on facts and in law in attributing part of the interest expenditure incurred during the year towards earning of the exempt income, while computing disallowance under section 14A of the Act hi accordance with prov....
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....judicated on merits. 4. The learned A.R. for the assessee vehemently stressed that the said enlargement of ground of appeal No.2.23 may be allowed to the assessee in order to adjudicate the issue. The learned A.R. for the assessee further submitted that the said issue is squarely covered by the order of the Tribunal in the earlier year. Without going into the merits of the said plea of enlargement of ground of appeal No.2.23 we are of the view that the ground of appeal raised by the assessee i.e. original ground of appeal No.2.23 takes care of the issue and there is no merit in the request made by the learned A.R. for the assessee and the same is rejected. 5. The brief facts of the case are that the assessee was engaged in the manufacturing and selling of nutritional products i.e. malted milk food products and drinks under the brands Horlicks, Boost, Maltova and Viva. During the year under consideration the assessee also exported malted milk food to its group companies, which were manufactured by third party vendors in India and thus acted as traders. Further it provided certain administrative support services such as marketing, sales inputs, IT suppor....
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....of the Delhi Tribunal in M/s L.G. Electronics India P. Ltd. Vs. ACIT (supra). However, in view of the directions of the Special Bench the matter has to be referred back to the Transfer Pricing Officer for computation purposes. 11. The learned A.R. for the assessee, however, pointed out that in line with the ratio laid down by the Special Bench, the issue needs to be looked at by the Transfer Pricing Officer after considering the comparables in order to compute the transfer pricing adjustment on account of AMP expenses. The plea of the learned A.R. for the assessee was that opportunity should be given by TPO to the assessee to furnish the list of relevant comparables. 12. We have heard the rival contentions and perused the record. The brief facts of the case are that the assessee had furnished return of income declaring total income of Rs. 2,75,73,15,234/-. The Assessing Officer vide letter dated 9.8.2010 and thereafter vide letter dated 27.7.2011 and further letter dated 23.8.2011 made reference to the TPO under section 92CA(1) of the Act. The details of the said communication are enlisted under paras 2.1 to 2.3 at pages 1 and 2 of the order of the TPO. The TPO af....
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....a 7.5 at page 7 of the order, considered the shareholding pattern of two companies and observed that GSK Asia Pvt. Ltd. is subsidiary of S.B. Port Louis Ltd., Mauritius, an Associated Enterprise. Similarly Glaxo Group Ltd., U.K. (an Associated Enterprise) has 35.99% share holding in GSK Pharmaceuticals Ltd. Thus the provisions of section 92A(2)(b) of the I.T. Act are attracted. Further the TPO vide para 7 analyzed the transfer pricing approach adopted by the assessee. The TPO further noted that the assessee was paying royalty which was deemed international transaction between the assessee and its AE. The other aspect noted by the TPO was marketing royalty for use of 'Horlicks' and the assessee had incurred expenditure of Rs. 17447.09 lacs on advertisement, marketing and promotion of the said product. As per the TPO, the assessee had created marketing intangible by incurring expenditure of Rs. 17447.09 lacs on advertisement, marketing and promotion of the AE brands and products, which was not compensated for by the AE and in order to examine the arms' length price, it was necessary to compare total expenditure incurred by the assessee on behalf of the A....
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....bution expenditure of the said concern as compared to the sales were noted by the TPO and the average was worked out at 2.20%. On the other hand, the total marking expenditure incurred by the assessee during the year under consideration was Rs. 17447.09 lacs on gross sales of Rs. 149745.66 lacs. The AMP expenditure of the assessee accounted for 11.65% of the income as compared to average AMP expenditure to income ratio of 2.20% for the comparables i.e. comparables under control price, selected by the TPO. The TPO thus concluded by establishing that the assessee had incurred huge non routine expenditure on development marketing intangible for the AE. The said comparability analysis also prove that AMP expenditure in the case of the assessee was in excess of the bright line test more than routine marketing expenditure of the distributors. The TPO thus held that the expenditure which is beyond the routine marketing expenditure is for the benefit of AE. The TPO thus determined the arms' length price of reimbursement received by the assessee for the brand promotion and marketing intangible of the AE in India and computed the arms' length value of the subsidy at Rs. 1,09,22,10,830/- as a....
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....the AE in India and the difference in the amount of arm's length subsidy and the value of international transaction undertaken being more than 5%, adjustment of Rs. 1,06,44,25,680/- was made to the income of the assessee, after considering the reply of the assessee on the issue. 21. The assessee is in appeal against the order of the Assessing Officer passed under section 143(3) r.w.s. 144C of the Act and has raised various grounds of appeal. Both the authorized representatives fairly admitted that the issue has been deliberated upon by the Special Bench of Delhi Tribunal in M/s L.G. Electronics India Pvt. Ltd. Vs. ACIT (supra) and majority view in the said decision is against the assessee. Multiple grounds of appeal have been raised by way of ground Nos.,2 to 2.30. The learned A.R. for the assessee further pointed out that the ratio laid down by the Special Bench of the Delhi Tribunal in M/s L.G. Electronics India P. Ltd. Vs. ACIT (supra) has been applied by the Chandigarh Bench of the Tribunal in assessee's own case and the issue of determination of arms' length price in relation to AMP expenditure has been restored back to the file of the TPO with directions.....
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....ted enterprise or the terms of relevant transaction are determined in substance between such third person and the associated enterprise. It was stated that the case of the assessee cannot be brought even within the purview of subsec. (2) because there is no allegation by the Revenue that the third parties who were paid by the assessee for defraying advertisement expenses had any understanding with the foreign AE so as to determine the terms of their agreements for advertisement with the assessee. Once a transaction is not covered under sub-sec. (1) of section 92B, the ld. AR stated that the same can be deemed as an international transaction only when it falls under sub-sec. (2) of sec. 92B. If a transaction does not satisfy the pre- requisites for inclusion either in sub-sec. (1) or sub-section (2) section 92B, it cannot be reckoned as an international transaction so as to be eligible for processing under Chapter X of the Act. 14.3. The ld. AR argued that there is always some consideration for doing any thing, without which there can be no valid agreement. It was pointed out that no consideration moved between the assessee and the foreign AE on account of the alleged brand....
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....ded to any one or more of such enterprises.' 14.5. The ld. DR argued that the instant transaction can be viewed as international transaction not on one but on three different counts. The first being, the earlier part of sub-section (1), which is in the nature of the exhaustive part of the definition referring to.in the nature of ....provision of services'. It was stated that the authorities below have primarily viewed this transaction as in the nature of provision of a service of creating, improving or maintaining marketing intangible for the foreign AE, in lieu of which the foreign AE ought to have reimbursed the assessee. 14.6. The ld. DR contended that it can also be considered as an international transaction having a 'bearing on the profits, income, losses or assets' of the assessee. Bearing on the profits of an enterprise was explained as a transaction having been recorded in such a way that the profits of the enterprise get needlessly deflated. In the present context, there can be deflation of profits of an enterprise, when the expenses pertaining to the foreign AE are also claimed as deduction by the Indian enterprise. If it amply turns out that....
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....ansaction is restricted to the activity done by the Indian AE in relation to foreign AE for adding value to a brand (being an intangible property of the foreign AE), the payment for which made by the Indian assessee is included in the overall AMP expenses claimed as deduction by the assessee. 14.9. Replying to the ld. DR's contention that section 92B has been worded very widely to include each and every transaction between the two AEs within the pale of international transaction, the ld. counsel for some of the interveners relied on the judgment in Addtl. CIT Vs. Income Tax Appellate Tribunal & Anr. [(1975) 100 ITR 483 (AP)] to contend that simultaneous use of the words 'means' and 'includes' in a definition make it exhaustive and not inclusive. It was highlighted that only the transactions set out in section 92B can be considered as international transactions and nothing beyond that. As the instant transaction is not covered by section 92B, it was claimed that the same cannot be considered as an international transaction. 14.10. After considering the rival submissions in this regard, we have no doubt in our mind that only international transactions ca....
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....thereafter lists out certain items, say A and B. In that case it will mean that only A and B form the content of the thing defined. A definition is inclusive when it uses the word 'includes' in its opening part and thereafter lists out certain items, say A and B. In that case it will mean that not only A and B but also other items not listed, say C or D, can also form the content of the thing defined, if these are otherwise of the same nature. If however a definition includes both the words 'means' and 'includes', that is, it says that it means 'A' and includes 'B', then it will again mean that it is an exhaustive definition to include both A and B and not C or D etc. A definition despite being exhaustive can still be inclusive, if one or more of its components are again defined in an inclusive manner. Suppose in the definition of the third category discussed above, having both A and B by use of the words 'means' and 'includes', the contents of either A or B are both are further defined in an inclusive manner, this definition will again become inclusive to the extent of the definition of either A or B or both having been defined in an inclusive manner. ....
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....nterprise of the assessee. Thus, there are two AEs in the present case and one of them, namely, LGK is a non-resident. This condition also stands satisfied. 14.16. The third requisite is that the 'transaction' as per the first requisite must be of the nature as referred to in section 92B. All the three requisites must be cumulatively satisfied so as to make a 'transaction' an 'international transaction'. If there is a transaction between two AEs and one or both of whom are non-residents, it will not become an international transaction so as to fall within the domain of Chapter-X, unless it is of the nature as defined in section 92B. 14.17. It has been vigorously argued by the ld. counsel for the assessee and some of the interveners that clause (i) of Explanation to section 92B gives meaning to the expression 'in the nature of international transaction' and since sub-clauses (a) to (e) of clause (i) do not refer to transaction of brand building, it cannot be considered as an international transaction. We are not persuaded by this submission. It is pertinent to note that the expression 'international transaction' as per clause (i) of the Explanat....
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....performing a task for a person which that person requires it in exchange for some consideration. Cl. (i) of Explanation to section 92B defining 'international transaction' includes through sub-clause (d) : 'provision of services, including provision of market research, market development, marketing management.....'. Clause (ii) of the Explanation defining 'intangible property' includes through sub-clause (a) : 'marketing related intangible assets, such as, trademarks, trade names, brand names, logos'. When we consider both these provisions together, it becomes clear that provision of services defined in an inclusive manner encompassing all the market related services including those specifically covered like market development, research and administration and the further fact that brand name and logos have been specifically considered as marketing intangibles, there remains no doubt about the brand building being a provision of service in the present context. In the light of the above discussion we are of the considered opinion that the transaction of brand building by the assessee for the foreign AE is in the nature of 'provision of service'. Having held such t....
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....f the fact that these are special provisions for avoidance of tax on the transactions structured between two associated enterprises. The simple fact that the foreign AE did not pay any consideration to the Indian AE will not take the transaction out of the purview of the transfer pricing provisions, if it is otherwise an international transaction. 14.21 Thus it is palpable that all the three necessary ingredients as culled out from bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE is non-resident; such transaction is in the nature of provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building as an international transaction in the facts and circumstances of the present case. 22. In view of the majority decision of the Special Bench in M/s L.G. Electronics India P. Ltd. Vs. ACIT (supra), we hold that the transaction in question is an international transaction which is liable to be considered under the provisions of section 92B of th....
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....ted to the TP provisions under the transactional net margin method (hereinafter called the TNMM) and hence there was no warrant for making any further addition on the transaction of brand building expenses incurred by the assessee for the foreign AE. The ld. counsel stated that the overall higher net profit rate implies that, firstly, there was no advertisement by the assessee for the brand of the foreign AE and secondly, if at all it was there, the same stood compensated by the foreign AE in terms of sale of goods to the assessee at lower rates. The sale of goods at lower prices to the assessee by the foreign AE should be considered as a quid pro quo for the foreign brand building. For ascertaining as to whether or not the foreign enterprise sold goods to the assessee at a lower price, the ld. AR urged that the overall net profit rate of the assessee should be considered, which will naturally absorb the effect of incurring such brand building expenses. If the overall profit rate is higher, it will mean that the expenses incurred by the assessee on brand building were compensated by the foreign AE in terms of lower price of goods charged from the Indian AE, necessitating no separat....
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....zed by the TPO under TNMM and the overall net profit of the assessee was found to be higher than other comparables, then no other international transaction could have been processed under the TP provisions. There are two sub-arguments in this main argument of the ld. AR. First, that the international transaction of import of raw material has been processed under the TNMM on entity level and second that when on doing this exercise, the overall net profit was found to be better than other comparables, then the no addition was called for by subjecting the AMP expenses to the TP provisions. 21.4. There is a basic fallacy in the first sub-argument, which lies in not properly appreciating the modus operandi of applying the TNMM. This method provides for benchmarking of 'an' international transaction by considering the operating profit from the concerned international transaction vis-à-vis certain basis as given in Rule 10B(1)(e), being total cost, sales, capital employed etc. Here it is significant to note the meaning of the term 'transaction' as given in rule 10A(d). It provides that : 'transaction includes a number of closely linked transactions'. Plural of ....
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....he TNMM only on a transactional level and not on entity level. Of course, the TNMM can be correctly applied on entity level if all the international transactions are of sale by the assessee to its foreign AE and there is no other transaction of sale to any outsider and also there is no other international transaction. But if there are several unrelated international transactions, as is the case before us and the assessee or the TPO has applied the TNMM in a wrong manner on entity level for testing any of such transactions, then the remedy lies in correcting such mistake rather than drawing legally unsustainable conclusions by taking such mistake as a correct legal position. 21.6. Now we espouse the second sub-argument that when on applying the TNMM on entity level for the transaction of import of raw material the overall net profit is better than other comparables, then no addition is called for by subjecting the AMP expenses to the TP provisions. We have held in an earlier para that when there are different unrelated international transactions, the application of TNMM on entity level for examining one of such transactions, is itself an incorrect approach. Notwithstanding ....
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....anding the fact that the assessee's overall profit at Rs. 120/- is more than the arm's length profit earned by comparable cases at Rs. 100/-, still there will be a requirement for making adjustment of Rs. 20/- on account of advertisement expenses incurred by the assessee towards the brand building on behalf of the foreign AE. If we accept the assessee's contention that since Rs. 120/-, being the profit declared by the assessee from the international transaction is more than the arm's length profit of Rs. 100/- and hence no further adjustment on account of AMP expenses should be made, then the assessee's income would stand reduced to Rs. 120/- as against the actual income of Rs. 140/-. We fail to appreciate as to how the judgment in the case of Calcutta Discount Co. Ltd. (supra) advances the case of the assessee. There cannot be any quarrel on the proposition that the assessee cannot be compelled to earn maximum profit. As it is the real profit which is to be taxed and the assessee cannot be expected to earn maximum profit, in the same way, the assessee cannot be allowed to reduce its real profit by including certain expenses which are for the benefit of the fore....
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....isions. 21.10. It was also contended on behalf of the assessee that if the overall profit of the Indian entity is more than the comparable cases then it should be presumed that the foreign enterprise supplied goods at relatively low price to make up for the AMP expenses incurred in India towards brand promotion. In our considered opinion there are no roots for such a presumption. In order to take benefit of such a contention the assessee is required to directly prove the fact of cheap purchases de hors the overall higher net profit rate. This fact can be established by demonstrating that the foreign AE charged a specially low price from the assessee in comparison with that charged for the similar goods supplied to other independent entities dealing with it in India or in case there is no other independent entity in India, then the price charged for similar goods from other foreign parties. It can also be proved by showing that goods with identical features are available in the Indian market at a higher price. The fact that the assessee has a better net profit rate in comparison with other comparable entities is not decisive in itself of the assessee having purchased the go....
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....t is relevant to note on a conjoint reading of sub-section (1) and sub-section (3) of section 92 is that if there are two distinct international transactions and the determination of ALP in respect of the first transaction leads to an increase in total income as per subsection (1) but no adjustment is called for in respect of the second transaction as per sub-section (3) because of the ALP on the negative side, then the ALP in respect of the first transaction shall be considered in computing the total income, but the ALP of the second transaction shall be ignored. There is no provision which permits set off of negative adjustment with the positive adjustment to the income on account of different international transactions. The outcome of both the transactions has to be given effect distinctly. It, therefore, divulges that two or more international transactions are required to be separately processed under the TP provisions. The contention that if TNMM has been applied on one international transaction, then it would oust the jurisdiction of the TPO to process other international transactions under Chapter-X, really does not stand in the scheme of the provisions. Further, it this con....
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.... through the TP provisions, but if some other method is so used, then all other international transactions are immune from such processing. The ld. AR could not draw our attention towards any such provision in the Act. At best, the application of any method including TNMM shows that the said transaction is at ALP. In our considered opinion, the requirement of benchmarking all other international transactions of expenses including AMP, also needs to be scrupulously done, apart from testing one international transaction under the TNMM. 22.1. Notwithstanding his argument that the when the TNMM is applied to international transaction of imports, no addition can be made by processing any other international transaction, the ld. AR then contended that the addition by way of adjustment made is not sustainable because the determination of ALP in this case is not based on any of the methods prescribed under the transfer pricing regulations. Referring to sec. 92C, the ld. AR submitted that five methods have been listed in specific and there is a general clause i.e. (f), which states - ―such other methods as maybe prescribed by the Board‖. It was stated that such other me....
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....ers submitted that any contract for purchase/service involves two elements viz. quantity and price. Chapter-X of the Act only touches price aspect and not quantity aspect. By adopting the bright line method, the learned counsel contended that the TPO has impinged on the quantum aspect of the advertisement expenses which cannot fall within the purview of Chapter-X. He submitted that by applying the bright line method, the TPO/AO have taken a view that the assessee should not have incurred so much expenses on AMP. He also contended that Chapter-X of the Act is a complete code in itself inasmuch as it includes not only the substantive but also the machinery provisions. If machinery provision cannot be applied then the subject matter goes out of the tax net. In support of this contention, he relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. B.C.Srinivasa Setty [(1981) 128 ITR 294 (SC)] and another judgment of the Hon'ble Supreme Court in the case of PNB Finance Limited v. CIT [(2008) 307 ITR 75 (SC)]. In the light of these judgments it was submitted that the Hon'ble Supreme Court has clearly held that where machinery provision fails, the charge canno....
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..... Even if in any case there is a wrong application of method by the authorities, the right course is to send the matter back to the AO/TPO for correcting the deficiency instead of taking away the jurisdiction itself. 22.7. In rejoinder, the learned AR found fault with the argument of the ld. DR on the application of the cost plus method by contending that this method cannot be applied as the transaction is not in the nature of rendering of service. His contention was that unless an assessee itself is regularly engaged in the provision of service which is provided to the AE, the cost plus method u/s 10B(1)(c) cannot apply. 22.8. We have considered the rival submissions. Before proceeding further it is imperative to note that we have dealt with the contention of the ld. AR about the application of bright line test by the authorities below by holding that such method has been employed to determine the cost/value of international transaction and not its ALP. Another contention has been raised by the ld. AR that unless an assessee itself is regularly engaged in the business of providing services, there can be no provision of service to the other AE. This contention has....
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....ngth price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method........ Here also the word 'any' is succeeded by the word 'following', which implies that it can be any of the five methods prescribed in the following part of the rule. When we read subsection (1) of section 92C in entirety along with Rule 10B(1), there remains no doubt that the arm's length price is required to be determined by any single method out of the five prescribed methods. It is further pertinent to note the prescription of Rule 10C which deals with the determination of most appropriate method to be applied for determining ALP. Sub- rule (1) provides that the most appropriate method for the purpose of section 92C(1) shall be the method which is best suitable to the facts and circumstances of each case. Subrule (2) which assumes significance in the present context provides that : ―In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account........... Use of the definite article ―the in sub-rule (2) along with the most appropriate method, makes it abu....
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....ically mention it in so many words, will not ipso facto mean that it did not apply the cost plus method, when the essence of the working matches with the methodology provided in that method. 23.2. At this stage it will be apt to note the directive of 'cost plus method' as per rule 10B(1) (c), which is as under :- "(c) cost plus method, by which,-- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined ; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ; (iii) the normal gross profit mark-up referred to in sub- clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, wh....
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....ernational transaction under consideration. Consequently, the profit mark-up under steps 2 and 3 should in the present case be the rate which an independent third party earns for creating marketing intangible for and on behalf of the foreign enterprise. In the present case, the DRP suggested 13% mark-up. The DRP went wrong in applying steps 2 and 3 by arbitrarily determining the rate of mark-up at 13% without showing as to how much an independent comparable entity has earned from an international transaction similar to one which is under consideration. 23.5. At this juncture we consider it expedient to refer clause (ii) of section 92F which defines ―arm's length price to mean ―a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Rule 10A of the Income-tax Rules, 1962 gives meaning to ―uncontrolled transaction under clause (a) as ―a transaction between enterprises other than associated enterprises, whether resident or non- resident‖. It is this expression ―uncontrolled transaction‖ which has been used in Rule10B(1) inter alia in ....
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....e the cost/value of international transaction at '161.21 crore and restored the matter to the file of AO/TPO for determining such value afresh after allowing a reasonable opportunity of being heard to the assessee. This determination would provide the figure of first step as per the cost plus method, being the cost/value of the international transaction. As the DRP also did not correctly proceed to compute the correct rate of mark-up as per law, in our considered opinion the ends of justice would adequately meet if the process of determining normal profit markup as per steps 2 and 3 of Rule 10B(1)(c) as against 13% applied by the DRP/AO, is also restored to the file of the AO/TPO so that he may determine the cost/value of international transaction in the first instance and then the ALP of this international transaction. 24.1. We do not find any substance in the contention of the learned AR that since the authorities below did not apply any of the recognized methods, their orders be declared as void ab initio without requiring any restoration for fresh determination. The obvious reason is that, even if it is presumed that the contention of the ld. AR is correct, which is ot....
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....PO in order to adjudicate the issue afresh. Consequently, ground Nos.2.8 to 2.13 are allowed for statistical purposes. 25. The issue raised vide ground Nos.2.17 to 2.22 is identical to the issue raised before the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. Vs. ACIT (supra) and also before Chandigarh Bench of the Tribunal in assessee's own case where the issue has been set aside to the file of the Assessing Officer/TPO. In view thereof, following the majority view of the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. Vs. ACIT (supra) and the Chandigarh Bench of the Tribunal in assessee's own case relating to assessment year 2007-08, we set side the present issue also back to the file of the Assessing Officer/TPO for adoption of prescribed method for determining the arms' length price in relation to AMP expenditure. The Assessing Officer/TPO would provide reasonable opportunity of hearing to the assessee, who in turn is at liberty to furnish fresh list of comparables before the TPO in order to adjudicate the issue afresh. Thus the ground Nos.2.17 to 2.22 raised by the assessee are allowed for stat....
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....s. 29. The learned D.R. for the Revenue had no objection to inclusion of sales promotion expenses as part of ground No.2.23. 30. The learned A.R. for the assessee further pointed out that the Tribunal in assessee's own case vide paras 26 to 29 in the appeal relating to assessment year 2007-08 had directed the Assessing Officer to exclude expenditure incurred on marketing research, sales promotion and selling and distribution as not being linked to the brand promotion of products of AE. The learned A.R. for the assessee fairly pointed out that though out of total sales promotion expenses of Rs. 4460.21 lacs the TPO had already excluded expenses relating to local brands to the tune of Rs. 1167.35 lacs and had considered the balance sales promotion of international brands. The DRP had directed exclusion of expenses incurred on Scientific Research and discount on sales and the balance expenses considered by the Assessing Officer was Rs. 17149.14 lacs. 31. We find that similar issue arose before the Tribunal in assessment year 2007-08 and the Tribunal vide paras 26 to 29 observed as under: 26. The next set of grounds of appeal are ground Nos.2....
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....e records. The claim of the assessee is that the total AMP expenditure considered by the TPO while determining the ALP included certain expenses which are in relation to the sales made by the assessee and are not related to the brand promotion. The claim of the assessee is with regard to the expenses totaling Rs. 5500.86 lacs as tabulated below: S.No. Name of Expenses Amount (Rs.Lacs) 1. Discount - sales 60.52 2. Market Research 664.24 3. Sales Promotion 3939.90 4. Selling and distribution 826.17 5. Service charges paid to selling agent 10.03 Total 5500.86 29. We find that the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. Vs. ACIT (supra) held that the expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totaling Rs. 5500.86 lacs as the sa....
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....ficer/DRP that it had rendered service to the AEs by incurring the AMP expense and by holding that markup had to be earned by the assessee in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 35. We find that similar issue arose before the Tribunal in assessee's own case relating to assessment year 2007-08 and the Tribunal vide paras 30 and 31 had considered the issue and held as under: 30. The assessee vide ground Nos.2.17 and 2.18 had raised the issue of taking into consideration the comparable companies for benchmarking the advertisement and publicity expenses. Admittedly the same issue has been deliberated upon by the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. Vs. ACIT (supra) vide para 17.6 of the majority view and observed as under: 17.6. In principle, we accept the contention of the ld. AR about the necessity of choosing properly comparable cases in the first instance before starting the exercise of making comparison of the AMP expenses incurred by them for finding out the amount spent by the assessee for its own business purpose. However the way in which such comparab....
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....ard and redetermine the value of arms' length price in relation to AMP expenses incurred by the assessee for brand promotion of foreign brand in turn following the observations of the majority view of the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. Vs. ACIT (supra). The assessee is at liberty to file list of fresh comparables in this regard before the Assessing Officer/TPO in line with the majority view of Special Bench of the Tribunal in M/s L.G.Electronics India P. Ltd. Vs. ACIT (supra). The ground Nos.2.24 to 2.30 are thus allowed for statistical purposes. 37. The issue in ground No.3 has been adjudicated by us alongwith ground No.2.23 in paras hereinabove and the said ground of appeal No.3 is thus allowed. In view of our allowing ground No.3 the ground No.3.1 raised by the assessee being without prejudice to the same thus becomes infructuous and the same is dismissed. 38. The issue raised vide ground No.4 is against the disallowance made under section 43B of the Act in relation to the deduction claimed towards the closing balance amounting to Rs. 32,62,786/- lying in Profit & Loss Account. The second aspect of the issue is vide gro....
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....the Tribunal in assessee's own case relating to assessment year 200102, reported in 107 ITD 343 (Chd)(SB). The learned A.R. for the assessee pointed out that the Tribunal in assessment years 1998-99 to 2000-01 and 2002-03 to 2006-07 had followed the order of the Special Bench of Tribunal and allowed the relief to the assessee. Further reliance was placed in CIT Vs. Raj & Sandeeps Ltd. [293 ITR 12 (P&H)], CIT Vs. Modipon Ltd. [334 ITR 106 (Del)] and CIT Vs. Maruti Suzuki India Ltd. [250 CTR 140 (Del)]. The learned A.R. for the assessee further pointed out that the Hon'ble Supreme Court in CIT Vs. Shri Ram Honda Power Equipment Corporation in Civil Appeal No.5721 of 2012 vide judgment dated 19.9.2012 had laid down that the credit of the excise duty paid was to be allowed. The learned A.R. for the assessee further referred to the ratio laid down by the Hon'ble Delhi High Court in CIT Vs. Maruti Suzuki India Ltd. (supra) and pointed out that the only issue raised was in connection with the excess payment made on account of excise duty, which was lying in the PLA Account . 42. The Tribunal vide paras 38 to 42 held as under: 38. We have heard the rival con....
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....essee was under an obligation to deposit that amount in the "account-current" and the amount so deposited in the "account-current" being non refundable, there was no reason for the Revenue to deny the benefit of deduction in the year in question when the goods were manufactured and the amount was deposited in the "accountcurrent". The expense would certainly relate to the year in which the goods were manufactured and the amount was deposited, which the goods were manufactured and the amount was deposited, which could not possible be treated as an advance. The amount was deductible. 40. Further the Delhi High Court in CIT Vs. Modipon Ltd. (supra) had allowed similar claim of excise duty paid in advance under the provisions of section 43B of the Act and held as under: (ii) That with regard to the deduction of Rs. 14,71,387/- on account of excise duty paid in advance as business expenditure, the procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods were removed from the factory premises. The duty, thus, already stood deposited in the accounts of the assessee maintained with the treasury and th....
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....the account, to cover the removals. Therefore, at any given point of time, there had to be an excess in the account, if the assessee were to remove the goods. Each clearance mentions the- quantum of goods and the duty amount, which is apparently reconciled at the end of the period, and shortfalls if any are appropriated from the account. The excess credit is likewise adjusted for the next day's clearances. The point to be underlined, is that there is no choice, and the amounts relate to the assessee's duty liability, falling within the description under s. 43B. The Tribunal was therefore justified in holding that the amounts deposited by the assessee in the Excise Personal Ledger Account could not be disallowed under s. 43B.-CIT vs. Shri Ram Honda Power Equipment Corporation (Civil Appeal No. 5721 of.2012, dt. 19th Sept., 2012) followed; CIT vs. C.L Gupta & Sons (2003) 180 CTR (All) 530 : (2003) 259 ITR 513 (All) concurred with. 42. The Hon'ble Delhi High Court in CIT Vs. Maruti Suzuki India Ltd. (supra) in turn relied upon the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Shri Ram Honda Power Equipment Corporation (supra), wherein it has been lai....
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....ct of the deductibility of the said expenditure proposed disallowance of the claim of Rs. 1.72 crores, which in turn was confirmed by the DRP and consequent order was passed by the Assessing Officer. We find that similar issue arose before the Tribunal in assessee's own case relating to assessment year 2007-08 and the Tribunal vide paras 51 to 63 held as under: 51. We have heard the rival contentions and perused the record. The assessee was providing benefit of medical assistance/reimbursement of medical expenses to the employees post retirement. The said benefit was being allowed by the assessee in terms of the employment agreed upon between the company and the employees at the time of their appointment. In order to meet the said liability of providing medical benefits/assistance to its employees post retirement, the assessee was contributing towards the insurance policy taken for the said purpose. The assessee prior to the year under consideration had claimed and was allowed deduction in respect of the premium paid for keeping afloat the medical insurance policy taken for the benefit of employees from year to year. Such medi-claim insurance policies were taken by the ass....
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....nefits are employee benefits (other than termination benefits) which are payable after the completion of employment. Clause 24 of Revised AS-15 provides post-employment benefits include: (a) Retirement benefits, e.g., gratuity and pension; and (b) Other benefits, e.g., post-employment life insurance and post-employment medical care. Arrangements whereby an enterprises provides postemployment benefits are post-employment benefit plans. An enterprises applies this Standard to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits. 54. Under clause 73 of Revised AS-15 it has been laid down that actuarial assumptions are to be worked out and should be more than unbiased and mutually compatible. Further the method of working actuarial benefits is to be laid down under Accounting Standard-15. Further in respect of termination benefits, as per clause 133 it is provided that the termination benefits are to be treated separately from other employee benefits as the event which gave rise to the obligation is the termination rather than employee service. Under clause ....
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....st retirement Medical assistance benefit under the above assumptions works out to:- Rs. 11,73,99,623.00p. 5. The purpose of this valuation is to make incremental provision in the Books of Account. The valuation has been carried out keeping in view the provisions of AS-15 ( R ) as an on going concern basis. (A.D.GUPTA) 57. The auditors vide notes to the accounts vide note No.6 had reported as under: "6. (a) The Company has during the year adopted Accounting Standard 15 (Revised 2005) 'Employees Benefits'. Accordingly, the transitional adjustment aggregating to Rs. 11,37.19 Lakhs (net of deferred tax asset rsNil) has been charged against the Opening General Reserves. The details of the transitional adjustment is as follows - -Post Employment Medical Assistance Scheme Rs. 11,09.90 Lakhs Leave Encashment/Compensated Rs. 27.29 Lakhs Absences for workers (Earned/Sick Leave)(Also Refer Scheme 2) 58. The assessee accordingly made a provision of Rs. 1636.20 lacs on account of employees benefits which included the provisions for post retirement medical benefits to employees at Rs. 11.09 crores. The above said amount was booke....
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.... basis of actuarial valuation, was made on the basis of certain assumption and, thus, the same cannot be said to be ascertained liability. (b) The assessee has claimed double deduction in respect of same liability, viz., once at the time of payment of premium of insurance companies and secondly, at the time of creating the impugned provision for medical benefits. 59. The first aspect of the issue raised before us is whether the recognition of the liability in view of the revised Accounting Standard-15 which is a notified accounting standard by the ICAI is to be recognized while computing the income of the assessee in line with the method of accounting regularly followed by the assessee. The second aspect of the issue is whether such expenditure is to be allowed as a deduction though the liability has been recognized in the year under consideration but the same has to be incurred in the succeeding year. 60. Their lordship of Hon'ble Supreme Court in Bharat Earth Movers Vs. CIT (supra) held that the provision made for meeting liability of leave encashment scheme is to be allowed as deduction, observing as under: The law is settled : if....
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.... or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. So is the view taken in Calcutta Co. Ltd. vs CIT ( 1959 ) 37 ITR 1 ( SC ) wherein this court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the abovesaid settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant-compan....
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.... during the year under consideration and the claim being bonafide is to be allowed in the year in which the same accrues though the said liability is to be discharged at a later date. 62. Identical issue arose in Bokaro Power Supply Co. (P) Ltd. Vs DCIT (supra) of allowability of claim of deduction of post retirement medical benefits on the basis of actuarial valuation and the same was held to be not an unascertained liability and was held as allowable, observing as under: 5. We have heard both the sides on the issue. We have also perused the order of authorities below. The assessee company of was liable to pay for medical expenses of its retired employees in accordance with the terms of employment. Prior to this year, the assessee was claiming these expenses in the year of expenditure. Due to the change in the Accounting Standard in respect of the accounting of post retirement benefits, the assessee got done the actuarial valuation of these liabilities and started claiming the same on that basis. It is claimed in view of the Accounting Standard, AS-15. This claim was based on the valuation of liability on actuarial and scientific basis. In such cases, the ....
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.... the capital reserve, unless the Tribunal finds that the revaluation is mala fide, the interest on the amount of the reserve should be allowed as a deduction from the gross profits. From the provisions of section 6(c) and section 7 of the Bonus Act, it is evident that the Tribunal must first estimate the amount of direct taxes on the balance of gross profits as worked out under sections 4 and 6, but without deduction bonus, then work out the quantum of taxes thereon at rates applicable during the year to the income, profits and gains of the employer and, after deducting the amount of taxes so worked out, arrive at the available surplus. This will be consistent with the rule laid down by courts and tribunals before the Act was enacted, that the bonus amount should be calculated after provision for tax was made and not before, from which Parliament does not appear to have made a departure." Hon'ble Supreme Court in the case of Bharat Earth Movers Limited vs. CIT - 245 ITR 428 = (2002-TIOL-123-SCrm has held as under :- "Held, reversing the decision of the High Court, that the provisions made by the assessee-company for meeting the liability incurred by i....
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....bstantial question of law arises for our consideration." 5.2 Considering the facts of the assessee's case and also the decision of Hon'ble Supreme Court and Hon'ble jurisdictional High Court, we sustain the order of CIT (A) in ITA No.149/Del/2012 on this issue. We allow ITA No. 4921'/Del/2010 and dismiss revenue's appeal on this ground. 63. In view thereof, we direct the Assessing Officer to allow the deduction of Rs. 11.09 crores on account of post retirement medical benefits. The ground Nos.5 and 6 raised by the assessee are thus allowed. 46. The issue arising before us is identical to the issue arose before the Tribunal in assessee's own case and following the same parity of reasoning, we direct the Assessing Officer to allow the claim of the assessee in respect of the post retirement medical benefits to the employees claimed at Rs. 1.72 crores. The ground of appeal Nos.5 to 5.2 raised by the assessee are thus allowed. 47. The ground Nos. 6 to 6.2 raised by the assessee are against disallowance of expenditure aggregating Rs. 5556.64 lacs incurred by the assessee on account of royalty. 48. The brief facts relating to the issue are that ....
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....the parties. 9.8 Hence, it is seen that the Hon'ble Supreme Court has remitted the issues for fresh consideration by the High Court. In view of the discussion above, it is clear that the issue has not been settled and is not finalized in the case of M/s Swaraj Engines (supra). Accordingly, no action as a result of this judgement can be taken in this case. 9.9 Accordingly, in order to have a consistent stand, the expenditure aggregating to Rs. 55,56,64,000/- incurred by the assessee on account of royalty is held to be capital in *attire and disallowed subject to the final outcome in the case of M/s Swaraj Engines (supra). Penalty proceeding u/s 271(l)(c) of the Income Tax Act are initiated separately for furnishing inaccurate particulars of income to the tune of Rs. 55,56,64,000/-. 50. The learned A.R. for the assessee pointed out that the said expenditure on account of royalty had been allowed to the assessee from year to year and only during the year under consideration, said expenditure had been held to be capital in nature though the assessee was incurring expenditure for use of the trade mark and not for acquisition of trade mark. It was further pointed....
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....t Sales Value" of the Contract Products sold under the Trade Marks. "Net Sales Value" for the purpose of this Clause shall mean sales net of returns/allowances and net of excise duty." 54. The issue arising in the present appeal is whether such royalty paid by the assessee is in the nature of capital or revenue expenditure. The Assessing Officer and DRP had considered the allowability of the expenditure in view of the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Swaraj Engines Ltd. (supra) wherein the issue was the applicability of section 35AB of the Act in the context of royalty paid as percentage of the net sale price being revenue and capital in nature. The Hon'ble Supreme Court held that after insertion of section 35AB of the Act, providing for allowance of expenditure on know-how as revenue or capital, would be a substantial question of law and the issue was set aside to the Hon'ble High Court for fresh consideration. The appeal before the Hon'ble Supreme Court related to the assessment year as on 30.12.1991. However, the provisions of section 35AB of the Act were applicable till assessment year 1997-98 and are not applicable to ....
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.... against disallowance of interest in terms of proviso to section 36(1)(iii) of the Act amounting to Rs. 1,54,76,000/-. 59. The brief facts relating to the issue are that during the year under consideration the assessee had shown investment in fixed deposits as closing work-in-progress(CWIP in short). The opening balance of CWIP as on 1.4.2007 was Rs. 767.17 lacs and the closing balance of CWIP as on 31.3.2008 was Rs. 18.12.21 lacs. The Assessing Officer noted that the assessee had paid interest on deposits at Rs. 290.06 lacs, interest to bank at Rs. 83.71 lacs and interest to others at Rs. 100.30 lacs. The total interest paid by the assessee was Rs. 474.07 lacs. The assessee was show caused to explain as to why the provisions of proviso to section 36(1)(iii) of the Act be not applied. The Assessing Officer in the absence of complete details being furnished by the assessee with regard to utilization of cash credit limit, long term loan and short term loan, in the assessment order passed pursuant to the directions issued by the DRP applied the provisions of proviso to section 36(1)(iii) of the Act and disallowed sum of Rs. 1,54,76,000/-. 60. The plea of learned A.R. for the ass....
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....cluded on the instructions of the DRP by the Assessing Officer. However, as the net interest expenditure paid by the assessee was over and above the interest relatable to CWIP balance as on 31.3.2008, the disallowance of Rs. 154.76 lacs was made by the Assessing Officer. 64. The assessee company during the year under consideration had shown sales of Rs. 1389 crores, net of excise duty. Further the assessee had deposits with bank at Rs. 5750.00 lacs as against Rs. 1650.00 lacs alongwith reserves and surplus at Rs. 66248.2 lacs. The assessee had shown income of interest earned by it during the year at Rs. 608.44 lacs. The perusal of the interest expenditure incurred by the assessee reflects that the major portion as on interest on deposits from dealers/wholesalers at Rs. 290.06 lacs, which is being paid by the assessee due to the business compulsion. No fresh deposit has been received during the year. Further interest was paid to the bank on cheque discounting at Rs. 83.71 lacs and such interest cannot be said to have been incurred on such borrowed funds which in turn could be presumed to have been parked as investment in CWIP. The balance interest is paid to other at Rs. 3.....