TaxTMI 
TaxTMI 
2018 (5) TMI 1790
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....r in taxing the remission/ cessation of sales tax liability of Rs. 7,63,289/- under section 41(1) of the Income Tax Act,1961 or any other provisions of the Income Tax Act,1961. 1(ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the differential amount of Rs. 7,63,289/- representing the actual loan amount and the present value of the future liability paid by the assessee is on capital account and not taxable u/s 41(1) or any other provision of the Income Tax Ac,1961. 2(i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that no marketing intangibles were created by the assessee on behalf of its associated enterprise in USA and the assessee's advertising & marketing expenses are being incurred purely in respect of its own operations in India. 2(ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the adjustment of Rs. 1,31,36,000/- made by the Transfer Pricing Officer and Assessing Officer in respect of cost allocation to the associated enterprise Colgate USA out of the advertising and marketing expenses debited by the assessee in d....
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....position, Ground No. 1 raised in revenue's appeal stands dismissed. 3.1 Rest of the grounds raised in revenue's appeal as well as in crossobjections of the assessee are related with certain Transfer Pricing [TP] adjustment against Advertising, Marketing & Sales Promotion Expenses [AMP] incurred by the assessee during impugned AY. Facts qua disallowance on account of Transfer Pricing Adjustment u/s 92CA are that during assessment proceedings, the international transactions reported by the assessee in Form No. 3CEB were referred by Ld. AO for determination of Arm Length Price [ALP] to Ld. Transfer Pricing Officer [TPO] on 05/01/2007 who proposed an adjustment of Rs. 131.36 Lakhs on account of cost allocation of AMP expenses debited by the assessee. Incorporating the same, the assessee has been saddled with addition thereof by Ld. AO in assessment order dated 05/12/2008. 3.2 Ld. TPO noted that the assessee [CPIL] was 51% subsidiary of Colgate Palmolive Inc., USA and was engaged in manufacturing and marketing of diversified pharmaceutical products. It reflected turnover & Profit before tax at Rs. 1075.76 crores & Rs. 177.36 crores respectively. The assessee reflected various sale / p....
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....n AE is a full fledged entrepreneur and so this attempt to allocate certain A&M costs to overseas AE is not correct. Had the Indian Entity been only a distributor, then this issue could have carried weight. In the present context, it has not relevance. The appellant plays the role of an entrepreneur and retains the profits emanating from its business enterprise. It not only manufactures but markets and distributes all its products for which it incurs A&M expenditure. b) There are no direct benefits flowing from the appellant's A&M expenses to its AEs since the expenses are incurred solely for the promotion of the appellant's products in the Indian market. Incidental benefits flowing to the AE, if any, cannot change the character of the expenses incurred by the appellant. c) Moreover, the appellant has not made any brand royalty payments to its AEs during the relevant assessment year. Hence, based on the above reasoning, there does not appear to be any marketing intangibles being created by the appellant on behalf of the AE in USA and the appellant's A&M expenses are being incurred purely in respect of its own operations in India. Accordingly, no adjustment is proposed to b....
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....fore, there was no question of any cost allocations or benchmarking thereof. Reliance has been placed on following judicial pronouncement to controvert the stand of revenue and to support his own submissions:- No. Name Citation / Ref. No. Dated Authority (i) Johnson & Johnson Ltd. Vs. CIT ITA No. 83/Mum/2011 05/02/2014 ITAT, Mumbai as upheld by Hon'ble Bombay High Court reported at 80 Taxmann.com 269 03/04/2017 (ii) Maruti Suzuki India Ltd. 381 ITR 117 11/12/2015 Hon'ble Delhi High Court 5.1 We have carefully heard the rival contentions and perused relevant material on record. At the outset, some pertinent facts to be noted are that there exists no arrangement or agreement between the assessee and its AE which obliged the assessee to undertake any sort of brand building on behalf of its AE. Secondly, nothing has been brought on record to suggest that incurring of AMP expenditure has, in any manner, resulted into brand building exercise or creating marketing intangibles for the AE or AE stood benefitted by stated expenditure in any manner. The only argument advanced by the revenue is that the brand value of the Assessee Group, as a whole, has reflected healthy....
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.... arrangement as emanating from the records, is resulting into the benefit to the parent AE, but not apportioned as per section 92(2) of the Act. The TPO stated that the assessee and the parent company J&J US should have shared sales promotion expenses in the ratio of royalty to sales or would have renegotiated a lower royalty rate. The assessee filed its reply stating inter-alia that assessee is engaged in the business of distributing the products in the Indian Market on its own account. It was also contended that the advertisement and marketing expenses are incurred in India only for promoting sales by assessee of its products in India and it is not in any way benefited to J&J US. That J&J US is not directly involved in the business of manufacturing or trading of said goods in India either of its own or through any of its subsidiary. Hence, the entire advertisement and marketing expenses incurred are purely for assessee's own benefit and there is no element of any service being rendered to J&J US. It was also stated that assessee-company is an independent risk bearing entity and any cost incurred towards advertisement and marketing would be for the sole benefit of assesseecomp....
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.... TPO cannot make a disallowance which is not within the precinct of specific method prescribed under section 92C(1) of the Act. He submitted that no adhoc disallowance can be made under the Transfer Pricing provisions. 39. On the other hand, ld. DR supported the order of AO/TPO and submitted that to consider marketing expenses the cost plus method could be applied. Since TPO has not followed any specific method as 2006-07 is the first year, the matter could be restored to TPO to decide it afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India (P.) Ltd. v. Asstt. CIT [2013]140 ITD 41/29 taxmann.com 300. He submitted that the AE, parent company of the assessee should reimburse the expenses as assessee company has created brand in India which is owned by parent company by incurring the expenditure. 40. We have considered the order of the TPO/AO and the submissions of ld. Representatives of the parties. We observe that the TPO has suggested disallowance on the ground that the AE of the assessee viz J&J US is reaping the benefit of higher royalty amount as a result of higher sales realized by assessee by incurring higher expe....
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....tion and publicity expenses being payable by the Respondent- Assessee' parent M/s. Johnson & Johnson, USA. This on the ground that the Transfer Pricing Officer (TPO) has, while holding that the parent company should share this expenditure on publicity and sales promotion as it benefits therefrom, as higher sales result in higher royalty, has not determined the Arms Length Price (ALP) by following any of the methods prescribed under Section 92C(1) of the Act read with Rule 10B of the Income Tax Rules, 1962. (ii) The TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act. In this case, there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of Rs. 200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johnson & Johnson, USA. (iii) The impugned order holds that transfer pricing adjustment done by disallowing the payment, on the basis of an assumption that it is excessiv....
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....omputation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transacti....
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....ludes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenu....
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....e in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being." 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure....
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.... is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application....
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....tion patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fa....
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....e grounds raised by the revenue reads as under:- 1. In the facts and circumstances of case, the Ld. CIT(A) erred in not appreciating the fact that the duty benefit or any export incentive cannot be directly attributed to the core R&D activity since income arises from ancillary activities. 2. In the facts and circumstances of case, the Ld. CIT(A) erred in not appreciating that the issue involved in the case is similar to that of Good Year India Ltd. VS, DCIT[ITA No.4360/Del/2010], wherein, the Hon'ble Delhi ITAT has held that export incentives do not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. 3. In the facts and circumstances of the case, the Ld. CIT(A) erred in his findings that there are no direct benefits flowing from the appellant's Advertisement and Marketing expenses to its Associated Enterprises, since the expenses are incurred solely for the promotion of appellant's products in the Indian market. 4. In the facts and circumstances of the case, the Ld. CIT(A) erred in concluding that the AMP expenses do not benefit AE when the assessee itself admits that the brands under which it sells the goods is....
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.... the learned CIT(A), erred in not directing the learned AO to exclude a sum of Rs. 34.20 lacs [(Rs.33 lacs+1.2 lacs) as mentioned on Page 3 of the learned CIT(A)'s order] while computing the disallowance as per Rule 8D(2)(ii) of the Rules. The assessee company prays that a sum of Rs. 34.2 lacs merits to be excluded while computing disallowance under Rule 8D(2)(ii) of the Rules. 7.1 Facts qua Ground numbers 1 & 2 of revenue's appeal are that the assessee received an amount of Rs. 5.20 Crores from its parent company for providing certain Research & Development Services [R & D services]. The said services were being charged at mark-up of 5%. The assessee was entitled for duty benefit of 10% of export value of R & D services from Government of Indian under 'Served for India Scheme'. After considering the said duty benefit, the net margin (operating Profit / Total Cost) of the assessee worked out to 15.87% as against mean margin of 15.60% of ten comparables as selected by the assessee. However, Ld. TPO opined that the benefit of said duty benefit could not be considered for the purpose of comparison. The another point of difference was inclusion of two comparables namely Rites & Water....
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....disallowance u/s 14A. During assessment proceedings, it was noted that the assessee earned tax free interest income aggregating to Rs. 6.68 Crores which called for disallowance u/s 14A read with rule 8D. The assessee contested the same by putting forth various submissions as extracted by Ld. AO in the quantum assessment order, where it inter-alia contended that in the absence of specific expenditure to earn the exempt income, disallowance was not called for. The attention was drawn to the fact that the investment was made out of surplus funds generated by the assessee. However, not convinced, Ld. AO computed aggregate disallowance of Rs. 83.54 Lacs u/r 8D(2) which comprised of interest disallowance u/r 8D(2)(ii) for Rs. 34.39 Lacs and expense disallowance u/r 8D(2)(iii) for Rs. 49.14 Lacs. 9.2 Upon further appeal, Ld. CIT(A) has allowed part relief against interest disallowance as stated in Para-4 of the impugned order but confirmed expenses disallowance u/r 8D(2)(iii). Aggrieved, the assessee is in further appeal before us. 9.3 The Ld. Sr. Counsel fairly submitted that the expenses disallowance u/s 14A may be restricted to Rs. 5,37,840/- as per alternative computations submitted....