TaxTMI 
TaxTMI 
2018 (12) TMI 277
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....consolidated order. For sake of read reference, the main issues raised in all the years by the assessee are reproduced hereunder: - A. I.T.As. No. 1203/CHANDI/2011 & 2511/DEL/2013: (AY 2007-08), In this appeal the assessee company (PFL) has raised the following issues in its grounds of appeal: (i) Grounds No. 1 to 3 are general in nature. (ii) In Grounds No. 4 to 4.10, the assessee has challenged the AMP adjustment computed by the TPO using BLT. The facts pertaining to this issue are identical to facts in ITA 1334/CHANDI/2010 for AY 2006-07 (discussed above). (iii) In Grounds No. 5 to 5.5, the assessee has challenged the addition made by the AO on account of Price Support given to Bottlers amount to INR 6,00,52,116/-. This issue, the assessee has submitted, is squarely covered in favour of the assessee by the decision of the coordinate bench dated 05.10.2016 passed in ITA 1334/CHANDI/2010 as affirmed by the Hon'ble High Court of Delhi vide order dated 13.11.2017 passed in ITA No. 474/2017. (iv) In Ground No. 6, the assessee has challenged the addition on account of un-utilized MODVAT credit. The assessee has not pressed this ground and therefore the same is not....
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....nch dated 05.10.2016 passed in ITA 1334/CHANDI/2010 as affirmed by the Hon'ble High Court of Delhi vide order dated 13.11.2017 passed in ITA No. 474/2017. D. I.T.A. No. 4516/DEL/2016 pertaining to AY 2010-11, the assessee company has raised the following issues in its grounds of appeal: (i) Grounds No. 1 to 2 are general in nature. (ii) In Grounds No. 3 to 26, the assessee has challenged the AMP adjustment computed by the TPO vide order dated 30.06.2015 and incorporated in the final assessment order dated 28.07.2016 passed by the AO. (iii) In Ground No. 27, the assessee has challenged the wrongful levy of interest under section 234A of the Act computed by the AO. (iv) In Grounds No. 28 and 29, the assessee has challenged the levy of interest under section 234B and 234D of the Act computed by the AO and are consequential in nature. (v) Ground No. 30 pertains to initiation of penalty proceedings under section 271(1)(c) of the Act and is consequential in nature. E. I.T.A. No. 4517/DEL/2016 pertaining to AY 2010-11, the assessee company (PepsiCo India Holdings Pvt. Ltd.) has raised the following issues in its grounds of appeal: (i) Grounds No. 1 to 2 are general....
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....er dated 29.01.2016 and incorporated in the final assessment order dated 22.11.2016 passed by the AO. (iv) In Grounds No. 33 to 36, the assessee has challenged the disallowance of INR 24,36,362/- computed by the AO as per the provisions of section 14A of the Act. (v) In Grounds No. 37 to 39, the assessee has challenged the addition of INR 2,95,10,993/- on account of Industrial Promotion Assistance (IPA) Subsidy received by the assessee under the West Bengal Incentive Scheme, 2004. (vi) In Ground No. 40, the assessee has challenged the levy of interest under section 234B of the Act and as such is consequential in nature. (vii) Ground No. 41 pertains to initiation of penalty proceedings under section 271(1)(c) of the Act and is consequential in nature. (viii) Ground No. 42 is an additional ground raised by the assessee and is directed against the withdrawal of the benefit of brought forward losses and unabsorbed depreciation vide rectification order dated 08.12.2017 passed by the AO, earlier granted to the assessee vide final assessment order dated 22.11.2016. H. I.T.A. No. 6582/DEL/2017 pertaining to AY 2013-14, the assessee company has raised the following issues ....
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....o Inc. USA, Punjab Agro Industries Corporation and Voltas Limited. Thereafter, in 1993, PepsiCo Inc. bought over the shareholding of Voltas in PFL. In that manner, PepsiCo Inc. held 99.98% of PFL. With effect from April 01, 2010, PFL was merged with PepsiCo India Holdings Pvt. Ltd., the assessee company, which in turn was also set up in India as subsidiary of PepsiCo Inc. The assessee has been inter alia involved in the manufacturing of soft drink/juice based concentrates and other agro products and has been supplying concentrates for aerated and non- aerated soft drinks to its deemed associated enterprises (AEs) in Bangladesh, Nepal, Bhutan and Sri Lanka, in addition to its local sales in India to its franchisee bottlers. By way of Trademark and Licence Agreement dated 09.11.1989, the assessee had procured a license from PepsiCo Inc. U.S.A. for the technology to manufacture the concentrates and to use and exploit the brands owned by PepsiCo Inc. U.S.A. As per the terms of the said agreement, the license to use the trademark was non-transferable and royalty free. Furthermore, it has been agreed in the said agreement that the assessee was granted an exclusive right to use the tra....
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....ement and market activities, its implementation and controlling across the country were performed by the assessee for market penetration in India. 4. In all the years impugned before us, the TPO has made AMP adjustments, by treating the AMP expenses as international transaction and then after applying various methods, like, BLT in the A.Y.s 2006-07 to 2009-10; PSM in the A.Y.s 2010-11 to 2012- 13; and the 'Other Method' in A.Y 2013-14 and on different reasons. The amount of adjustments made and the method applied for making the adjustments in the various years are as under: A.Y. ADJUSTMENT AS COMPUTED BY TPO METHOD APPLIED BY TPO ADJUSTMENT AS COMPUTED BY DRP METHOD APPLIED BY DRP 2006-07 174,39,58,880/- BLT 174,39,58,880/- BLT 2007-08 215,09,88,807/- BLT 215,09,88,807/- BLT 2008-09 255,12,79,469/- BLT 255,12,79,469/- BLT 2009-10 316,66,11,827/- BLT 316,66,11,827/- BLT 2010-11 290,20,73,215/- PSM 290,20,73,215/- PSM 2010-11 134,46,25,674/- PSM 134,46,25,674/- PSM 2011-12 561,32,18,691/- PSM 561,32,18,691/- PSM 2012-13 601,59,21,918/- ....
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....he TPO proceeded to examine the total advertisement expenditure incurred by the assessee company during the year. For that the TPO referred to the financials of the assessee company and observed that the assessee company had incurred selling and distribution expenses of Rs. 46,38,000/- and advertising & marketing expenses of Rs. 202,34,16,000/- on sales turnover of Rs. 303,19,65,000/-. Having observed so, the TPO concluded that the assessee company had created marketing intangible by incurring expenditure of Rs. 202,80,54,000/- on advertisement, marketing and promotion of the AE brand and products, without receiving any compensation for the same. He was of the view that the assessee company had incurred huge AMP expenditure to promote a trademark owned by its AE and develop marketing intangibles for the product of the AE. He further observed that the AEs of the assessee company had received benefit in form of enhanced brand value in India. Further, referring to provisions of section 92B (1) that arrangement between two AEs for allocation or apportionment of or any contribution to any cost or expense incurred or to be incurred in connection with a benefit, service or facility provid....
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....ome Tax Appellate Tribunal (ITAT) fell into error in remitting the matter for examination by the Transfer Pricing Officer (TPO) for AY 2006-07 in respect of the AMP expenses?" The relevant observations and findings by their Lordships were as under: - "The assessee had filed its Transfer Pricing Report; the Assessing Officer (AO) referred it to the TPO, who made adjustments based upon the prevailing understanding as to the applicability of the Bright Line Test, holding that the AMP expenses were subject to adjustment. The Dispute Resolution Panel (DRP) affirmed this view. In the meanwhile, the Special Bench had in LG Electronics v. ACIT (2013) 22 ITR 1 (SB) enunciated and affirmed the Bright Line Test rule. That view was subsequently overruled by this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT (2015) 374 ITR 118. The ITAT in this case has remitted the entire matter for reconsideration to the TPO. This Court has heard learned counsel for the parties. In Le Passage to India Tour & Travels (P) Ltd. v. DCIT [ITA 368/2016 & connected matter, decided on 12.01.2017], this Court stated as follows: "4. This Court is of the view that whilst L.G. E....
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....djudicated by this Tribunal. Contention raised by the Ld. Counsel of the Assessee on the AMP issue in all the years: 11. Before us, learned counsel for the assessee, Mr. Deepak Chopra, first of all referred to Transfer Pricing study report and catena of other documents in support of his argument that incurring of AMP expenses by the assessee company did not fall within the ambit and definition of "international transaction" within the meaning of Section 92B. The assessee company manufacturer of soft drink/ juice based concentrates and other agro products and was exposed to normal risks associated with carrying on such business. He submitted that the assessee company did not own any significant intangibles and neither does it undertake research and development on its account that could lead to the development of non-routine intangibles. The assessee company had obtained a license from its US parent AE, viz. M/s PepsiCo Inc., USA for the technology to manufacture the concentrates and to use and exploit the brands owned by PepsiCo Inc., in the regions allocated to the assessee company. Under the aforesaid agreement, the assessee company had been granted a non-transferable, royal....
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.... AMP expenses mainly for the reason that there was an international transaction of expenses reimbursed by the assessee to its AE, which were incurred by the AE on behalf of the assessee company in connection with the sponsorship of ICC events; and on the ground of excessiveness of the AMP expenditure. Ld. Counsel tried to clarify that the reimbursement of expenses by the assessee company to its AE was for purely commercial reasons and was not at the behest of the AE. The assessee company is in the industry where it faces stiff competition and the products sold by the assessee company do not fall in the category of daily need products and therefore, the assessee company is required to market its products aggressively, in order to boost / promote its sales. 13. The learned counsel further submitted that, India being a cricket loving nation, Assessee Company strategically promotes its products by advertising at cricketing events. Keeping the aforesaid in view, one of Pepsi's AE, namely, PCIC, Ireland, on behalf of all group entities located in cricketing nations, entered into a Global Partnership Agreement dated 28.10.2004 with Global Cricket Corporation PTE Limited (GCC) for obtai....
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....n record a Global Partnership Agreement dated 20.08.2008 entered into between the Assessee Company and ICC Development International Limited. All these contentions placed by the Ld. Counsel were to counter the view of the TPO and DRP that AMP activities of the assessee company were controlled by its AE. 14. Thereafter, Mr. Chopra submitted that the action of the TPO in treating incurrence of AMP expenses as a separate international transaction requiring separate benchmarking under section 92B of the Act, was not in accordance with the settled legal position in law and therefore, deserved to be quashed. It was submitted by him that the AMP expenditure incurred did not result in a separate international transaction as per Section 92B read with Section 92F (v) of the Act, which together define an 'international transaction'. He stressed on the point that these do not apply in the absence of any arrangement/ understanding/action in concert between the two AEs. In the present case he submitted that, AMP expenses incurred by the assessee company would rather fall under the category of domestic transaction as it was undertaken with the third parties which are not covered under the d....
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....ted that the assessee company had incurred expenditure on AMP to cater to the needs of the customers in the local market. Such AMP expenditure was neither incurred at the instance/ behest of overseas AEs, nor was there any mutual agreement or understanding or arrangement as to allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by the assessee company for the purpose of its business. In absence of any understanding, arrangement, etc., it was submitted that no 'transaction' or 'international transaction' could be said to be involved with respect to such AMP expenditure incurred by the domestic enterprise, which may be covered within the provisions of Transfer Pricing regulations. Further it was reiterated that payment for advertisement, marketing and sales promotion was made by the assessee company (which is a tax resident of India) to other Indian third parties. The reimbursement made by the assessee to its AE in lieu of sponsorship fees paid to ICC was wholly and exclusively for assessee company's business and was not at the behest of the AE. He submitted that the twin requirements of section 92B did not exist in the present case, ....
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....5650/Del/2011]. He submitted that the Revenue in this case as well had relied upon the clause in the Trademark and License Agreement, under which the assessee was required to submit its advertisements for review and approval to its AE, to allege that this goes to show that AE was actively controlling and supervising the AMP expense of the assessee and hence, there existed an international transaction. He strongly pressed the point that the mere review of the advertising material by the AE did not indicate existence of any international transaction in terms of the aforesaid decision. There is no obligation on the assessee company to incur AMP expenses to promote the brand of the AE and no such obligation has been brought out by the TPO on the facts of the present case and therefore there arose no question of existence of any transaction let alone an international transaction on the facts of the present case. 19. The learned counsel for the assessee, thereafter, referred to clause 13 of the agreement dated 09.11.1989 to contend that the risk and rewards of incurring the AMP expenditure lied with the assessee company only as the foreign AE was completely insulated from such risks a....
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....for part of the country keeping in mind operating efficiency of operations. 21. As regards, the allegation of TPO that certain brands such as Kurkure (1999), Aliva and Nimbooz were conceptualized and developed in India but the trademark in respect of these brands was owned the foreign AE, it was submitted by him that the sales of these brands were largely limited to India and since, it were not widely sold outside India, no benefit could have been said to have accrued to the AE on account of promotion of these brands. Further, it was submitted that in cases where such brands were sold outside India, it used different flavours and spices suitable for local consumption on which the advertising and marketing was carried by the local entity present in those jurisdictions. It was because of the fact that, the AE had not charged the assessee any royalty for use of its trademarks in India; hence it was unfair on part of the TPO to allege that the assessee should have been compensated for brands conceptualized and developed by it. The allegation of the TPO that the assessee company merely duplicated the advertisements of PepsiCo Inc., USA is also not correct since there were various ....
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.... where the Assessee, being an enterprise resident in India eXports goods to an unrelated person abroad, and there is a separate arrangement or agreement between the unrelated person and an associated enterprise which influences the price at which the goods are exported. In such a case the transaction with the unrelated enterprise will also be subject to transfer pricing regulations." Based on the above, the learned counsel submitted that the TPO in his order had not recorded / identified any such separate arrangement or agreement and hence the domestic transactions entered by the assessee with the uncontrolled third parties in the local market, fell outside the scope of section 92B(2) of the Act. He further stressed on the point that no evidence had been brought on record to establish the manner in which the AEs of the assessee had influenced the price paid by the assessee to independent third parties (AMP vendors) in India, so as to bring the transaction within the fold of sub-section (2) of Section 92B of the Act. It was submitted that the TPO proceeded to aver that the assessee was contributing to global profits and therefore, AMP expenses assumed the characteristics of an in....
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..... 26. The learned counsel for the assessee also submitted that the reliance of the TPO on the decision of Toshiba India Pvt Ltd (supra) was also misplaced since the same stood overruled by the decisions of the Hon'ble Delhi High Court in Maruti Suzuki India Pvt. Ltd (supra), Whirlpool of India Ltd (supra), Bausch & Lomb Eyecare (India) Pvt Ltd (supra), Honda Siel Power Products Ltd (supra) and the decisions of the coordinate benches of this Tribunal in M/s Essilor India Pvt Ltd vs. DCIT: IT(TP)A No. 29/Bang/2014, M/s Heinz India Private Limited vs. ACIT: ITA No. 7732/Mum/2010, L'oreal India Private Limited vs. DCIT : ITA No. 7714/Mum/2012 and Goodyear India Ltd (supra) and Honda Siel Power Products Ltd vs. DCIT: ITA No. 551/Del/2014. 27. Mr. Chopra, thereafter directed our attention towards the benchmarking yardstick used by the TPO over the years to compute the transfer pricing adjustment pertaining to AMP expenses. He submitted that for the AYs 2006-07 to 2009-10, the TPO used Bright Line Test, not only to benchmark the alleged international transaction but also for concluding that there existed an international transaction in the first place. He stressed heavily that the t....
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....e worked out nor there is any involvement of transfer of any in tangibles. In fact no profit has derived by the AE in India and when no FAR is being carried out by the AE in India and hence no ALP is required to be determined under PSM.there is 30. Mr. Chopra also referred to the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 (TP Guidelines), which has also been relied upon by the TPO. He submitted that under the said guidance and as per the Rules, the TPO was required to determine the combined profit arising from the impugned "international transaction" of incurring AMP expenses. Thereafter, the TPO was required to split the combined profit in the proportion of the relative contribution of the assessee and the AE. However, the TPO did not apply PSM correctly and did not analyse the contribution made by both the entities, i.e., the assessee company and the US Parent AE, on the relative value of the FAR of each of the entities. He also pointed out various other inconsistencies in the TPO's application of PSM for benchmarking the alleged international transaction of AMP expense....
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.... under the Rules as against the application of PSM for the subject transfer pricing adjustment. 33. Mr. Chopra, then brought our attention towards the application of the "Other Method" as employed by the DRP for AY 2013-14 and submitted that the same was a disguised BLT method instead. He submitted that the DRP for AY 2013-14, had directed the application of "other method" as per the Rules and had computed the adjustment by comparing the AMP/sales ratio of the US Parent AE with that of the assessee company. Thereafter, the DRP considered the excessive AMP spent by the assessee company to be transfer pricing adjustment on account of AMP expenses for AY 2013-14. The only difference between the approach adopted by the DRP with that of the Department was that Department compares the AMP/sales of the tested party with that of third parties and in the instant case, the AMP/Sales of the assessee company has been compared with that of its parent AE. He submitted that even in AY 2013-14, the "other method" has been incorrectly applied. He also drew our attention to Rule 10AB and pointed out that erroneous interpretation of this Rule has been made by the DRP by comparing the AMP / Sales r....
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.... was within the range as computed by the TPO for comparables using BLT. 36. He submitted that the dispute with respect to the applicability of method for benchmarking was secondary and the real or the primary dispute was with respect to the existence of any 'international transaction' qua AMP expenditure incurred by the assessee in its commercial wisdom and expertise. As per assessee's business model, assessee has been engaged in the manufacture of concentrate, which is an intermediate product and is sold only to licensed bottlers who complete the product which is sold in the market to the consumer. He submitted that the concentrate as such was not a marketable commodity. To distinguish its case from the decision of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (supra), he pointed out that the Sony decision involved distributors and the said distinction has also been recognized in the subsequent decision of the Hon'ble Delhi High Court in Maruti Suzuki India Pvt. Ltd. (supra), which was a case of manufacturer. Thus, the assessee's case was squarely covered by the Maruti decision. For this reason, Special Bench of this Tribunal in LG Electro....
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.... was held that the assessee would be entitled to avail of the input service credit in respect of service tax paid by the assessee on advertising and marketing services availed off. 38. In light of the above, it was submitted that it is established beyond doubt that the AMP expenditure formed part of the cost of manufacture for the assessee and could not be considered for any adjustment by the TPO whether on the grounds of excessiveness or otherwise. 39. Thereafter, the learned counsel brought our attention towards the Final Report of Action 8-10 of the Base Erosion and Profit Shifting Project (BEPS) of the OECD titled as "Aligning Transfer Pricing Outcomes with Value Creation". He submitted that even under this latest development in international tax, there has been no adjustment suggested on account of AMP expenditure incurred by a full-fledged manufacturer. He took us through the examples provided in the report to contend that none of the examples therein pertained to a manufacturer, thereby indicating a consistent logic that AMP expenditure incurred by a manufacturer could not be subjected to transfer pricing adjustment. 40. He thus, contended that in assessee's case th....
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....Maruti Suzuki India Ltd. vs. CIT (supra); (ii) Whirlpool of India Ltd. vs. DCIT (supra); (iii) Bausch & Lomb Eyecare (India) Pvt. Ltd. vs. ACIT (supra); (iv) Honda Siel Power Products Ltd. vs. DICT (supra); (v) Valvoline Cummins Pvt. Ltd. vs. DCIT (supra); (vi) Goodyear India Ltd. vs. DICT (supra); (vii) Honda Siel Power Product Ltd. vs. DICT: ITA No. 551/ Del/ 2014 (Delhi ITAT); (viii) M/s Essilor India Pvt. Ltd. vs. DCIT: IT(TP)A No. 29/Rang/2014 (Bangalore ITAT); (ix) M/s Heinz India Private Ltd. vs. ACIT (supra); (x) L'oreal India Private Limited vs. DICT: ITA/7714/Mum/2012 (Mumbai Tribunal); (xi) Thomas Cook (India) Ltd. vs. DCIT: [2016] 70 taXmann.com 322 (Mumbai Trib.); (xii) Diageo India Private Limited vs. DCIT: I.T.A./7545/Mum/2012 (Mumbai Trib.); (xiii) Mondelez India Foods (P) Ltd. Vs. ACIT: [2016] 70 taXmann.com 112 (Mumbai-Trib.); (xiv) DCIT vs. Mattel Toys (India) Pvt Ltd: ITA No. 4415/Mum/2014 (Mumbai Tribunal); (xv) WideX India Pvt. Ltd. vs. ACIT: 117/Chandi/2016 (Chandigarh Tribunal); (xvi) Nippon Paint India Pvt. Ltd vs. ACIT: ITA No.779/Mds/2016 (Chennai Tribunal); (xvii) Nikon India Pvt. Ltd. vs. DCIT: ITA No. 457....
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....the real question was whether the assessee's main business was manufacture of concentrates of whether it was development of brand through AMP expenditure. He submitted that in light of the fact that AMP expense was huge in comparison to other direct and indirect expenses, it was clear that the assessee company was developing market and creating marketing intangible and hence the AMP function dominated the manufacturing function. He further submitted that the assessee's alleged manufacturing business itself was processing of essence with sugar etc. to make drink concentrates; therefore, these activities can at the best be called processing and not manufacturing where normally huge mechanical processes are required. The entire sale was based on advertisement of brand owned by the AE. Hence, the assessee was providing services to the AE by way of strengthening the brands and creation of brands for the AE. 44. The learned DR further submitted that the benefit for the assessee by way of increase in sale was incidental and the main purpose of the AMP was the creation of market intangible namely brand owned by the AE. The assessee mainly existed and carried out the activity for the cre....
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....enchmarking purposes. 46. The learned DR, thereafter submitted that, since the assessee was providing services to the AE by way of AMP spend, there was an action in concert between the assessee and its AE which constituted an 'international transaction' for the purposes section 92F(v). On PSM, he strongly relied upon the order of the TPO and contended that the same may be upheld. 47. In his rejoinder, the learned counsel for the assessee submitted that the averments made by the learned DR were never raised earlier by the authorities below and hence the same were not permissible at this stage. Further, he placed reliance on the financials of the assessee company from AY 2006-07 to 2013-14 to contend that the expenditure incurred by the assessee on AMP activities fell from 67% when compared to sales in AY 2006-07 to less than 10% when compared to sales in AY 2013-14. He submitted that the quantum of expenditure in the earlier years was high given the issue raised by the food inspector in Kerala in 2006 which had affected the goodwill of the company substantially and hence there was a commercial rationale for the assessee company to incur such huge expenditure to sustain in the ....
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....rdships referring to the judgment of its own court, in 'Le Passage to India Power and Travels Pvt. Ltd.' (supra), wherein it has been observed that Bright Line Test has been overruled by the judgment of Sony Ericsson Mobile Communication India Pvt. Ltd and endeavour should not be made to conclude that all transaction relating AMPs are to be treated as international transaction and the fact of each case needs to be examined after deliberation. 49. Thus, in light of the aforesaid direction, first of all we have to see, whether at all by incurring of higher AMP expenses, a conclusion can be reached that it is an international transaction which warrants determination of Arm's Length Price. Ergo, if it is held that there is no international transaction, then ostensibly there is no requirement of any kind of AMP adjustment. Accordingly, we would like to first dwell upon whether the incurring of expenditure on account of AMP amounts to international transaction or not. In a succinct manner we would like to analyze function and the profile of the assessee company. The assessee is a subsidiary of US entity, PepsiCo Inc, which is mainly involved in the manufacturing of Softdrink/ juice ba....
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....X 100 2006- 07 303,19,65,000 312,07,86,000 11,00,72,000 3.53% 202,80,54,000 66.74% 53,80,272 0.18% 2007- 08 353,35,63,000 354,73,89,000 28,88,96,000 8.14% 222,20,62,000 62.78% 77,08,654 0.22% 2008- 09 447,44,79,000 375,50,58,00 101,50,22,000 27.03% 237,88,52,000 53.16% 56,57,871 0.13% 2009- 10 591,76,85,000 498,54,32,000 124,29,00,000 24.93% 306,50,13,000 51.79% 77,13,883 0.13% 50. The FAR analysis of the various functions performed, assets and risks involved of the Parent AE, assessee company and the third parties can be summarized in the following manner: - Particulars AEs PFL PIH/ Third Parties Functions performed Legal ownership of trademark Yes Nil Nil Registration/ protection of trademark Yes Nil Nil Supply of keys and essences for manufacturing of concentrates Yes Nil Nil Manufacturing of concentrate Nil Yes Nil Bottling of final beverage Nil Nil Yes Advertisement and marketing of products in India Nil Yes (FO....
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....ovision of Section 92B(1) such an arrangement between two AEs for allocation or apportionment or any contribution to any cost or expenditure incurred or to be incurred in connection with the benefit is an international transaction and if the assessee company had incurred the cost in connection with benefit and services provided to the AE under a mutual agreement though not in writing but if it can be proved from the conduct then it amounts to an international transaction u/s.92B(1) r.w.s. 92F(v). Accordingly, he held that such an AMP expenditure was in the nature of intra-group services provided to the AE which required compensation on an Arm's Length basis and in order to arrive such ALP, he applied Bright Line Test and after applying such method, he made an adjustment of Rs. 174,39,58,880/-. 52. First of all, in so far as the reimbursement of cost of expenditure incurred by Ireland (AE), it has been brought on record that the said AE has entered into a global partnership agreement dated 28.10.2004 with Global Cricket Corporation PTE Ltd. for the sponsorship right of Cricketing event world-wide. Since, assesseecompany is mainly based in India where game of cricket is immensely ....
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....of AMP of Rs. 202.34 crores. The reason being, the amount of Rs. 202.34 crores have been incurred by the assessee on its own volition and business requirement to be in competition with other big players in the field of aerated and non-aerated beverages and food products. It is acclaimed fact that industry in which assessee company is operating has to face stiff competition not only from the Indian companies but also from many multinational companies; and to remain in the competition as a lead brand it has to aggressively promote its product under the brand to remain in the competition and to augment its sale. All the necessary functions of strategizing, advertising and marketing activities, its implementation for market penetration in India is solely carried out by the assessee and there is no material on record to infer that there is any arrangement or agreement with the AE at any point of time that assessee is required to spent on AMP or it has been done at the behest of the AE. The reason adopted by the Revenue to conclude that the incurrence of AMP expenditure by the assessee for promoting the brands which is owned by its AE constituting a separate international transaction for....
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....d to any of such parties. Relevant Explanation to Section 92B as inserted by the Finance Act, 2012 reads as under: - "i. the expression "international transaction" shall include- .............................. (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; Clause (ii) of the said explanation reads as follows ii. the expression "intangible property" shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;...................." Thus, under the expanded definition of the term 'international transaction' intangible property has been defined to include marketing related intangible assets such as trademark, trade name, brand name and logos, etc. This inter alia means that where two AEs engaged in the transaction which involved, purchase, sale, transfer, ....
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....e customers in the local market and such an expenditure was neither incurred at the instance or behest of overseas AE nor there was any mutual understanding or arrangement or allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by it for the purpose of its business. If no such understanding or arrangement exists, then no transaction or international transaction could be said to be involved between the AE and the assessee which can be reckoned to be covered within the provision of Transfer Pricing Regulation. The incurring of expenditure by the assessee is in fact purely a domestic transaction by a domestic enterprise with a third party in India for its own business purpose. Even the reimbursement, as discussed above, by the assessee to its AE was in lieu of sponsorship fee paid to ICC which again was wholly and exclusively for the assessee's own business and was not at the behest or mandate of AE. This contention of the learned counsel on the face of record is liable to be accepted and in absence of any material or any kind of arrangement discovered or brought on record by the Revenue, remains unrebutted. The onus is on the Revenue to s....
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.... only for the purpose of advertisement content and not for the quantum of the AMP expenditure. The mandate of the AE was to only ensure that same brand guardrails are being followed by the AEs all across the world, i.e., the logo of the Pepsi or any other brand or trademark owned by the AE should be presented in the same manner all across the world. The AE does not have any direct control of the marketing functions of any AE in various geography. This contention of the learned counsel is also borne out from the material on record and nothing has been brought by the TPO to rebut that the AEs had any direct control over the marketing functions or has any say in the quantum of expenditure to be spent. Marketing of such an impulse product like beverages had to be managed locally as per the ethos, customs and preferences/choices of the local population and neither the content nor the quantum can be remotely managed by a non-resident AE. It has been brought on record that the assessee company had a full-fledged marketing team in India who with the help of local marketing agency and consultant managed the marketing function across the country. Further, mere review of marketing mater....
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....es which was a separate function and for strategic reason it has been given to third party bottlers also for the efficiency of the operation. Another allegation made in subsequent years by the TPO certain brands such as 'Kurkure', 'Nimbus', etc. though were conceptualized and developed in India but the trade mark in respect of these brands were owned by the foreign AE. It has been stated by the learned counsel that these brands were largely sold in India and no benefit could have been said to accrue to the AE in other territory on account of promotion of these brands in different territory and geographical location because such kind of different brands are peculiar to a native choice and are sold in their respective territory with different flavour and spices which is suitable for local consumption on which advertising and marketing was carried out by the local entity in those jurisdiction. Such an argument has a strong basis for the reason that, firstly, AE had not charged any royalty for use of trademark in India from the assessee, and therefore to allege that assessee should have been compensated for the brand conceptualized and developed by it, is too farfetched and; secondly, ....
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....ured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP exp....
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....tion 92CB which provides for the "safe harbour" rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus, for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What 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....
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....o such expense enures. The 'nonroutine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the ample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 75. As an analogy, and for no other purpose, in the context of a domestic transacti....
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....ere exists international transaction and there were other set of cases where the assessee has disputed the international transaction. This is clear from the following passage of the judgment: - "120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the 'bright line test' on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broadbrush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied 'bright line test' to decipher and compute value of international transaction and thereafter applied 'Cost Plus Method' or 'Cost Method' to compute the arm's length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascerta....
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....d even by applying separate methods. This will be in terms of the provisions of the Act and the Rules and also as per the general principles of international taxation accepted and applied universally. On the other hand, as recorded by us above, applying 'bright line test' on the basis of parameters prescribed in paragraphs 17.4 and 17.6 would be adding and writing words in the statute and the Rules and introducing a new concept which has not been recognised and accepted in any of the international commentaries or as per the general principles of international taxation accepted and applied universally. There is nothing in the Act or the Rules to hold that it is obligatory that the AMP expenses must and necessarily should be subjected to 'bright line test' and the nonroutine AMP expenses as a separate transaction to be computed in the manner as stipulated." 58. Thus, form the plain reading of the aforesaid principles laid down by the Hon'ble Jurisdictional High Court, the key sequitur is that: (i) International transaction cannot be identified or held to be existing simply because excess AMP expenditure has been incurred by the Indian entity. (ii) Inte....
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....it reflects customers' experience and faith. Brand value is not generated overnight but is created ever a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described "a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. Khorshedbann Dabida Boatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the customer together with circumstances which make the connection durable. The definition given by Lord MacNaghten in Commissioner of Inland Revenue v. Midler and Co. Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of "goodwill" it was observed: "It is very difficult, as it seems to me, to say that goodwill is not ....
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.... for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal) ; AIR 1971 Cal 70, it would mean : "It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 as the 'sap and life' of the business." There is a line of demarcation between d....
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....and name. Reputed brands do not go in for advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands. Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits but it may not insult in creation of an intangible asset in....
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....ng or fluctuating with numerous imponderables pouring into and affecting the business. Thus, the date of acquisition or the date on which it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4. . . . Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the prod....
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....al owners of the brand name/trade mark). 112. Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in higher price and margins. Trans-border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects and contentions in favour of the Revenu....
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....reasoning given by the TPO is rejected. 61. Further in the final report of Action 8-10 of Base Erosion and Profit Shifting Project (BEPS) of OECD titled as "Aligning Transfer Pricing Outcomes with Value Creation'. It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quoted hereinbelow: "6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contracts, then the member of the MNE group that, based on the facts and circumstances, controls decisions concerning the exploitation of the intangible and has the practical capacity to restrict others from using the intangible will be considered the legal owner of the intangible for transfer pricing purposes. 6.41 In identifying the legal owner of intangibles, an intangible and any licence relating to that intangible are considered to be different intangibles for transfer pricing purpos....
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....s it uses, and the risks assumed; and if the legal owner does not perform any relevant function, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, then the legal owner of the intangible will not be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than the Arm's Length compensation if any for holding the title. Here also the PepsiCo Inc which is legal owner of the trademark license to the assessee has not performed any relevant function or used any assets or assumed any risk albeit has acted only as a title holder. It is not even entitled to any return for holding such title and in such circumstances, there seems to be no reason as to why it should compensate its subsidiary in India for the marketing activities while operating in India as a full-fledged manufacturer who alone is reaping the profit from the operation in India. It has been clearly demonstrated by the assessee that the risk with respect to its manufacturing operation in India was undertaken wholly by the assessee and not by the US parent AE. This is even evident from the various clauses of the agreement also. ....
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....ricing provisions, it has been well established over the period of time that detailed FAR analysis has to be carried out to identify all the functions of resident tax payer company and the non-resident AEs pertaining to all the international transactions like purchase of raw material, payment of royalty, purchase of finished goods, export of finished goods, support services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non-resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the tax payer company and the AE. It is also very relevant to examine, whether the AE is assuming any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functions is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of such attributes which is being carried out by the non-resident AE in India ....
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....s to provide it with a basic return appropriate for the type of international transaction, in which it was engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution as per (ii) and (iii) above, and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise is to be taken to be the net profit arising to that enterprise from the international transaction." The OECD Transfer Pricing Guidelines, 2010 provides that PSM first requires the identification of the profits which is to be split among the AEs, from the controlled transactions in which the AEs were engaged (the combined profit). Thereafter, the combined profit between the AEs is required to be split on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. The combined profit to be split should only be those arising fr....
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....ied PSM by taking the finance of the US part AE and has determined the rate of 35% allocable towards marketing activities by relying upon judgment of the Tribunal in Roll Royce PLC vs. DDIT (supra) and has applied the same to the global net profit of the US parent AE to arrive at the global profit of US parent AE from marketing activities. Thereafter, he has compared the AMP spent by the AE with that of the assessee company and multiplied that ratio with the global net profit of the US parent AE arising from marketing activities to compute the Transfer Pricing Adjustment on account of AMP expenses. Such an approach of the learned TPO at the threshold is wholly erroneous, because PSM is applicable mainly in international transaction involving transfer of unique intangibles or in multiple international transactions which are interrelated and interconnected that they cannot be evaluated separately for the purpose of determining the Arm's Length Price of any one transaction. Here in this case this is not in dispute that no transfer of any unique intangibles has been made accept for license to use trademark which too was royalty free. According to the Rule, under the PSM, combined ne....
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....akes into account the price which had been charged or paid for the same or similar uncontrolled transaction with or between non-associated enterprises under similar circumstances. Comparison of the AMP over sales ratio of the assessee with the AMP ratio of Pepsi Co Group on a worldwide basis was nothing but a distorted version of the BLT. 67. In view of the above discussion, we hold that in none of the years impugned before us, the AMP adjustment made by the TPO/Assessing Officer can be sustained and accordingly, same is directed to be deleted. 68. In result thereof, Grounds No. 4 to 4.14 in I.T.A. No. 1334/CHANDI/2010 pertaining to AY 2006-07; Grounds No. 4 to 4.10 in I.T.A. 1203/CHANDI/2011 pertaining to AY 2007-08; Grounds No. 5 to 5.30 in I.T.A. 2511/DEL/2013 pertaining to AY 2008-09; Grounds No. 4 to 6.22 in I.T.A. 1044/CHANDI/2014 pertaining to AY 2009-10; Grounds No. 3 to 26 in ITA 4516/DEL/2016 pertaining to AY 2010-11; Grounds No. 3 to 26 in ITA 4517/DEL/2016 pertaining to AY 2010-11; Grounds No. 3 to 26 in ITA 4518/DEL/2016 pertaining to AY 2011-12; Grounds No. 7 to 32 in ITA 6537/DEL/2016 pertaining to AY 2012-13; and Grounds No. 3 to 28 in I.T.A. No. 6582/DEL/2....
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....cussions and relying upon the provisions of section 92B(1) read with section 92F(v), held that it was an international transaction and after detailed discussion, held that interest rate of 4.45690% per annum based on 6 months LIBOR plus 400 basis points should be applied; and accordingly, made the adjustment after detailed calculation which worked out to INR 10,42,067/-. The DRP confirmed the said action of the TPO, which culminated in the final assessment order dated 27.09.2017. 72. Before us, the learned counsel for the assessee, at the outset, submitted that as per commercial policy of the assessee, it does not charge interest from AEs as well as Non-AEs and thus, there is an internal CUP for benchmarking the transactions, i.e., both for the controlled and uncontrolled transactions assessee had not been charging interest, and therefore, no adjustment could be made. In support, he drew our attention to Note 21 to the Profit & Loss A/c of the assessee for AY 2013-14. It was also brought to our notice that the assessee had availed interest free External Commercial Borrowings (ECBs) amounting to INR 705 crores from its AE. The said ECB was disclosed in Note 5 to the Profit & Loss....
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....2 (Mum)-TP]. 74. Thereafter, he cited the decision of a coordinate bench of this Tribunal in BC Management Services (P.) Ltd. v. DCIT [2017] 83 taxmann.com 346 (Delhi Trib.), wherein it was observed that when a similar credit period is given to both AEs as well as third parties, then, there cannot be any adjustment as in such situations there is a direct comparable uncontrolled price to analyze. Further, as per the terms of the agreement, there was no credit period specified for the transactions to which the receivables pertained and as picked up by the TPO. In this regard, our attention was drawn to the decision of a coordinate bench of this Tribunal GSS Infotech Limited vs. ACIT TS-298-ITAT-2016(HYD)-TP, wherein, the Hon'ble Tribunal deleted the interest charged on receivable outstanding beyond two months. In addition to above, the Ld. counsel submitted that the TPO and the DRP fell in error as it is settled position of law that where outstanding receivable are inextricably linked with the main international transaction, benchmarking of which has been accepted by the TPO, no further adjustment on account of notional interest is warranted. In this regard, the learned counsel fo....
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.... When the international transaction is that of 'sale', the interest aspect is embedded in it. There can be no separate international transaction of 'interest' in the international transaction of sale. Early or late realization of sale proceeds is only incidental to the transaction of sale, but not a separate transaction in itself. If the ALP in respect of an international transaction of 'sale' is determined, then there can be no question of treating the nonreceipt of interest in such sale transaction as a separate international transaction warranting any further adjustment. One may also contend that the expression 'any other transaction having a bearing on the profits, income, losses .' as employed in section 92B defining international transaction would encompass such interest from sale as the non-receipt of due interest would have the effect on profits or income. This contention also does not merit acceptance because when 'sale' and 'lending money' have been specifically included in definition of 'international transaction' under section 92B, then the expression 'any other transaction' used in the later part of ....
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....that receivable dues from AEs were Rs. 317 crore, whereas from the non-AEs it was Rs. 320 crore. Once, no interest has been charged on receivables from unrelated parties, then to allege that assessee is conforming any benefit to its AE by not charging the interest on its outstanding receivable would not be correct under the Arm's Length scenario, because here in this case in a comparability analysis of both control and uncontrol transaction, no benefit has arisen from delay in trade receivables from the AE. Now it is quite well settled proposition in the wake of various judicial pronouncements as has been relied upon by the learned counsel that, when there is a complete uniformity in the act of the assessee in not charging interest from both AEs and non AEs debtors for delay in realization of export proceeds then Assessing Officer/TPO cannot make addition on account of notional interest on delay receivables, because similar credit period of given to both related and unrelated parties. Hence, no adjustment should be called for. Accordingly, we hold that no adjustment on account of notional interest is warranted. 78. In the result, Ground No.3 pertaining to Assessment Year 2013-14....
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....tant year at Rs. 50.95 crore was less than the preceding year's figure of Rs. 62.52 crore. The assessee further provided details of parties to whom domestic sales exceeding Rs. 5 lac were made during the year and who were allowed volume discount/price support....... 8. The AO noticed that there was a wide variation in the percentage of price support given vis-à-vis the sales turnover to various bottlers, which ranged from as low as 0% to maximum of 32.9%. He observed that total price support given to the bottlers stood at Rs. 43.72 crore on the sales made to the tune of Rs. 370.68 crore. After excluding the bottlers, to whom no price support was paid, the AO worked out the percentage of total price support to total sales at 11.79%. This percentage was applied as a reasonable basis and the excess amount of price support was disallowed by means of tabulation as under:- ....... 9. That is how, the disallowance of Rs. 12,04,92,210 was made. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). This led to the making of the first disallowance of Rs. 12.04 crore. 10. The AO further observed from the details of Price support given to unrelated....
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....or not and further whether it was commensurate with the business requirements and trade practices. Nothing of this sort has been done by the AO, who went by a mathematical exercise in making disallowance of Rs. 12.04 crore. Such a mechanism for making disallowance in our considered opinion cannot be sustained. We, ergo, overturn the impugned order on this score and order for the deletion of this addition. 12. The next part is disallowance of Rs. 10.67 crore, which again has been made by the AO on an improper understanding of the facts. Whereas the assessee paid total Price support amounting to Rs. 50.95 crore, the AO picked up certain items of debits and credits from the same Price support account which were categorized by the assessee as provision. The difference between two such totals of debits and credits was disallowed. This disallowance was made on the premise that the provision for Price support could not be allowed as deduction. On the contrary, the assessee is paying Price support in two ways. While to some of the parties, the amount is straight away paid and directly debited to this account, to others, a monthly provision is made on the sales made to them during ....
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....re." It has been pointed out that the said ruling has now been affirmed by the Hon'ble High Court of Delhi in PCIT vs. Pepsi Foods Pvt. Ltd. ITA No. 474/2017 (judgment delivered on 13.11.2017). He placed on record the order of the Hon'ble High Court, wherein the Hon'ble Court observed as under: "1. The Revenue's Appeal, under Section 260A of the Income Tax Act, 1961, complains that the Income Tax Appellate Tribunal (ITAT) fell into error in directing that the sum of Rs. 12,04,92,210/- brought to tax, on the ground of excessive price support paid by the assessee, is erroneous. 2. The business model, which the Assessee adopts, is premised upon sales of its product i.e. bottlers, its various parts and other articles to its distributors in various parts of the country. 3. For Assessment Year 2006-2007, the Assessee claims deduction for Rs. 50.95 crores on account of price support expenses; its profit and loss account reflected sale turnover of Rs. 358.05 crores. The price support was provided to 21 parties - 18 of them concededly were unrelated. The other three were related parties, of which the transaction in question is concerned with two parties. The Assessing Officer wa....
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.... this issue in favour of the assessee. 83. Accordingly, Grounds No. 5 to 5.5 in I.T.A. No. 1203/CHANDI/2011 for AY 2007-08, Grounds No. 6 to 6.4 in I.T.A. No. 2511/DEL/2013 for AY 2008-09 and Grounds No. 8 to 8.5 in I.T.A. No. 1044/DEL/2014 for AY 2009-10 are decided in favour of the assessee and against the Revenue. In that manner, the appeals of the assessee are allowed to such extent. Re: Addition of INR 11,35,700/- on account of un-utilized MODVAT credit. 84. In Ground No. 6 in I.T.A. No. 1203/CHANDI/2011 for AY 2007-08, the assessee has challenged the addition on account of un-utilized MODVAT credit. The Ld. Counsel informed that assessee is not pursuing this ground and therefore, this ground is dismissed as not pressed. Re: Addition of INR 73,57,892/- on account of un-utilized CENVAT credit 85. In Ground No. 7 in I.T.A. No. 2511/DEL/2013 for AY 2008-09, the assessee has challenged the addition on account of unutilized CENVAT credit under section 145A of the Act. The Ld. Counsel informed that assessee is not pursuing this ground and hence, this ground is dismissed as being not pressed. Re: Addition of INR 70,30,540/- being provision for bad and doubtful debts....
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....an advertising platform. It was also to our notice that payment of sponsorship fees to ICC was remitted by the assessee after deduction of tax at source as instructed by the Income Tax Department. Further, the assessee had obtained the approval of the Ministry of Youth Affairs and Sports for sponsoring the events covered under the agreement. Copy of the order under section 195 of the Act and the approval received from the Ministry of Youth Affairs and Sports has been enclosed at pages 247 to 249 and 224 of the paper-book respectively. He further submitted that the expenditure was wholly and exclusively for the business of the assessee company and had not been disputed by the revenue. Any incidental benefit that may arise to any other person or entity cannot be a bar for allowance of expenditure under section 37 of the Act, as per the settled position of law. Reference in this regard was made to the decisions of the Hon'ble Supreme Court of India in CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), Sasson J. David and Co. P. Ltd vs. CIT 118 ITR 261(SC) and SA Builders Ltd. vs. CIT 288 ITR 1(SC. He further submitted that the Revenue cannot step into the shoes of an assessee t....
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....lowance is called for. Accordingly, Grounds No.7 to 7.3 in ITA No.1044/Del/2014 pertaining to A.Y. 2009-10 are allowed. Re: Disallowance under section 14A of the Act. 92. In Grounds No. 27 to 31 in I.T.A. No. 4517/DEL/2016 pertaining to AY 2010-11, Grounds No. 27 to 31 in I.T.A. No. 4518/DEL/2016 pertaining to AY 2011-12 and Grounds No. 33 to 36 in I.T.A. No. 6537/DEL/2016 pertaining to AY 2012-13, the assessee has challenged the disallowance computed by the AO as per the provisions of section 14A read with Rule 8D. Details of the dividend income earned by the assessee company and the consequential disallowance computed by the AO, is as under: - AMOUNTS IN RS. SL. NO. AY EXEMPT INCOME EARNED BY ASSESSEE DURING THE YEAR DISALLOWANCE MADE BY AO 1. 2010-11 54,46,12,846/- 1,18,82,315/- 2. 2011-12 35,33,15,430/- 69,84,350/- 3. 2012-13 6,81,75,880/- 24,36,362/- Further, during the course of the hearing and also vide submissions dated 13.03.2018, details of the investment which had fetched exempt income during the year(s) under consideration was furnished and the same is as under: - NAME OF THE INVESTEE ....
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....High Court in these cases had held that no disallowance under section 14A of the Act was warranted where investments were made with the objective of acquiring controlling interest in the company and not for the purposes of earning exempt income. The AO, however, did not delete the entire disallowance made under the draft assessment order. He restricted the disallowance to 0.5% of the average investments as under Rule 8D(2)(iii). The assessee, before us, is aggrieved by such disallowance. 95. The learned counsel for the assessee referred to the financial statements of the assessee for AY 2010-11 to 2012-13 and demonstrated that all the investments held by the assessee were strategic investments/investments in group companies. However, he fairly admitted that the same had no relevance after the decision of the Hon'ble Supreme Court in Maxopp Investments Ltd. vs. CIT (Civil Appeal Nos. 104-109 of 2015, judgment dated 12.02.2018). However, the AO had computed the disallowance made under section 14A of the Act, without establishing any nexus between the expenditure incurred and exempt income earned during the relevant previous year. He submitted that the statute did not envisage that....
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....nable. 96. Thereafter, the learned counsel for the assessee invited our attention to a recent decision of a special bench of this Tribunal in ACIT vs. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB), wherein it was observed that for the purposes of computing average value of investment under Rule 8D(2)(iii), only those investments were to be considered which have yielded exempt income during the year. He referred to following paragraph from the said decision: - "11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year." In view of the aforesaid submissions the learned counsel submitted that, since there was no nexus established by the AO between the expenditure that he sought to disallow and the exempt income that the assessee earned, coupled with aforementioned decision of the Hon'ble special bench, the disallowance made under section 14A of the Act read with Rule 8D(2)(iii) of the Rules deserves to be quashed. 97. On the other hand, the learned....
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....ble Apex Court in case of Maxopp Investments Ltd. is not acceptable. It is only when the assessee is able to substantiate its claim from the nature of exempt income from the investments made and having regard to accounts maintained and the nature of expenditure debited that nothing is attributable for the earning of exempt income, the onus stands discharged. If assessee is able to demonstrate its claim, then onus shifts upon the Assessing Officer, who has to then examine the nature of accounts and having regard to such accounts maintained, he has to record his satisfaction that assessee's claim is not correct before proceeding to make the disallowance u/s.14A. Thus, contention of the learned counsel cannot be accepted under the facts and circumstances of the case. Accordingly, Assessing Officer is directed to compute the disallowance in view of the aforesaid direction. Re: Industrial Promotion Assistance (IPA) Subsidy 100. In Grounds No. 37 to 39 in I.T.A. No. 6537/DEL/2016 pertaining to AY 2012-13 and Grounds No. 42 to 44 in I.T.A. No. 6582/DEL/2017 pertaining to AY 2013-14, the assessee has challenged the addition made by the AO on account of IPA subsidy received by the ass....
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.... IPA received to be in the nature of revenue receipt and sought to tax the same. 102. The DRP for both the relevant years, upheld the action of the AO in the following manner: "The Ld. AR argued at length and placed reliance on various case laws also which have been considered by the Panel. It has been submitted that is the purpose of subsidy and not the time, mode and manner of subsidy which conclusively determines the nature - revenue or capital and accordingly, the Ld AR submitted that the subsidy was capital in nature. It is seen from the material placed before this panel that the subsidy was given to assessee in form of reimbursement of Sales tax @ 75% on operations of the assessee and it is directly relatable to the operations - as more the operations, more would be the subsidy. Ultimately, the state subsidizes the private enterprise to help in expansion of the industrial enterprise to enhance the economy of the area. In the instant matter, the state is doing this by facilitating the assessee growth in terms of increased turnover and volumes. The certificate issued by WBIDC for incentives under WBIS 2004, the assessee was declared eligible for the following incentives: ....
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....ng up of new unit and such repayment of term loans was on capital account whereas in the present case the subsidy is in the form of sales tax exemption, electricity duty exemption etc. which were revenue in nature. Hon'ble Supreme Court after noting similar scheme where the Hon'ble High Court of Madhya Pradesh had held that the subsidy to be of capital nature in the case of Dusad Industries (supra) had held as under:- "The Madhya Pradesh High Court, however, failed to notice the significance fact that under the scheme framed by the Govt. no subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify for industrialization for getting any subsidy. The subsidy was given as help not for setting up of the industry which was already there but is an assistance after the industry commenced its production. The view taken by the Hon'ble Madhya Pradesh High Court is erroneous." The above observations of Hon'ble Supreme Court put the whole gamut of grant of subsidy for setting up of the enterprises in proper perspective. The contextual clarification here above helps us see the matter in correct perspective to determine income taxabl....
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....stment crossed the limit of INR 25 crores; and (ii) On commencement of commercial production. He submitted that the in the said scheme, it was stated that the total value of incentive was to not exceed 100% of the Fixed Capital Investment in any case. Therefore, it was patently clear that the subsidy was based upon the fixed capital investment made by an enterprise and only the mode of disbursement was in the form of repayment of sales tax paid. It is a settled law that the objective of the scheme had to be considered for the purposes of determining the nature of subsidy given and not the mode and manner of payment. He also drew our attention towards various decisions, wherein, Courts have held that the character of subsidy in the hands of the recipient, whether capital or revenue, was to be determined after having regard to the purpose for which the subsidy was given. He placed reliance on the decision of the Hon'ble Supreme Court in Sawhney Steel and Press Works Ltd vs CIT [1997] 228 ITR 253 (SC) wherein it was observed that the it was not the source from which the amount was paid to the assessee which was determinative of the question whether the subsidy payments were o....
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....e subsidy was available only to new units or to existing units who were undertaking expansion. Merely the quantification of subsidy was based upon reimbursement of sales tax. In view of the said object of the scheme of 2004, the assessee treated the IPA receipt as a "capital receipt". He submitted that the AO and DRP erroneously treated the subsidy as a revenue receipt by looking at the mode of payment, which was by way of reimbursement of sales tax, and that the benefit was to be given only after the commencement of commercial production. He thereafter submitted various decisions wherein on the basis of similar facts that is (a) where subsidy was given in form of reimbursement of taxes paid on production / sales; and (b) subsidy was available only after the commencement of production / commercial operations; and (c) subsidy was not linked to any specific fixed assets; and (d) there was no stipulation in the scheme of subsidy regarding the manner in which the subsidy amount was to be utilized by the assessee, still, solely on the basis of object of the scheme, subsidy was held to be capital in nature. Explaining the decision of the Hon'ble High Court of Calcutta in CIT vs. Rasoi....
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.... by accelerated industrial development." 106. On the other hand, the learned DR relied upon the order of the AO and the DRP. 107. We have heard the rival submissions and also perused the relevant findings given in the impugned orders. The assessee has received subsidiary from Government of West Bengal for WBIDC plant and Government of Maharashtra for Paithon plant. The subsidy from the Government of West Bengal was received for setting up for a new project in West Bengal under the West Bengal incentive scheme 2000 and 2004 which was to promote the establishment of the industries in the state. The nature of subsidy has already been described above. The Assessing Officer has allowed the claim of subsidy from Government of Maharashtra and also the State Capital Investment Subsidy by the West Bengal Govt. as it was computed on 15% of fixed capital investment which has been treated as capital in nature and allowed the claim of assessee. However, AO has disallowed the claim of the assessee on the IPA subsidy received from Government of West Bengal on the ground that the subsidy received from Government of West Bengal was given to the assessee for business promotion and not speci....
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....ning to AY 2011-12 and Grounds No. 33 to 36 in I.T.A. No. 6537/DEL/2016 pertaining to AY 2012-13 are allowed. 109. In Grounds No. 32 to 33 in I.T.A. No. 4518/DEL/2016 pertaining to AY 2011-12, the assessee has challenged the wrongful levy of interest under section 234A and 234B of the Act. 110. The learned counsel pointed out that the assessee had filed its return of income within the due date prescribed under Section 139(1) of the Act, i.e. on 26.09.2011. Since, the return of income had been filed within the due date, no interest under Section 234A could have been levied. As regards interest under Section 234B of he pointed out that as per the provision, no interest liability can arise if the amount of advance tax paid exceeds 90% of the assessed tax. In the instant case, the assessee had deposited advance tax amounting to Rs. 64,20,00,000/-. The assessee had filed an application before the AO for rectification of mistakes apparent from his order and pursuant to his order on such, the amount of assessed tax stood at INR 70,97,80,046. Since, the amount of advance tax deposited was greater than 90% of the assessed tax, no interest under Section 234B of the Act could have been ....