TaxTMI 
TaxTMI 
2019 (1) TMI 1567
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....cturing, marketing and sale of electronics, home appliances and I.T. products. For the year under consideration, assessee has disclosed total sales of Rs. 69,52,69,05,000/-. The assessee has also disclosed 'Other Income' of Rs. 2,03,43,86,000/-. Net profit was at Rs. 3,51,82,77,000/-. The assessee has claimed exempted income of Rs. 20,33,38,565/- u/s 10B of the Act and deduction of Rs. 44,50,635/- u/s 80JJAA of the Act. 5. The assessee had made international transactions with Associated Enterprises [AEs], namely : (i) Arcelik-LG Klima San Ve Tic A.S., Turkey (ii) Hitachi LG Data Storage INC, Japan. (iii) LG Alina Electronics, Russia. (iv) LG Chem Ltd, Korea (v) LG CNS INC, Korea, etc 6. Accordingly, a reference was made to the TPO for determining the ALP of international transactions. The TPO proposed to make an adjustment of Rs. 3,20,72,55,985/-. Based on the TPO's recommendation, draft assessment was passed on 30.12.2011 wherein the assessment was completed making an adjustment of Rs. 4,53,15,20,469/-. The assessee approached the DRP. The DRP passed order u/s 144C(5) of the Act and pursuant to the directions of the DRP, ass....
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....ee in ITA No. 5140/DEL/2011. 10. At the outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 has discarded the BLT. The Hon'ble High Court, at para 120 held as under: "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 broad-brush 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. Th....
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....L 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 having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses. XXX 60. As ....
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.... (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. XXX 68....................In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT." 14. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference. 15. The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence o....
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....acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX 39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. XXX 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any ....
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....intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE owing to the services of development of brand and markets by the assessee for the AE and that of compensation for rendering these services not provided unilaterally by the assessee. 19. We do not find any force in the aforesaid contentions of the ld. DR. As mentioned elsewhere, the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction of provisions of brand building service between the assessee and the AE. We find support from the decision of the Hon'ble Delhi High Court in the case of Honda Seil Power Products Ltd vs DCIT ITA No 346/2015. 20. The Hon'ble Delhi Court in its recent decision in the case of CIT vs Mary Kay Cosmetic Pvt Ltd (ITA No.1010/2018), too, dismissed the Revenue's appeal, following the law laid down in its earlier decision (supra) and held as under: "We have examined the assessment order and do not find any good ground and reason given therein to treat advertisement and sales promotion expenses as a separate ....
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..... The Revenue further contends that the assessee is not an independent manufacturer but is manufacturing for the benefit of the group entities and his status is akin to that of a contract manufacturer. Hence AMP activity is not for the sole benefit of the assessee but for the group as a whole. 24. It is the say of the ld. DR that pricing regulations are to applied keeping in mind the overall scheme of the tax payer's business arrangement. The contention of the ld. DR can be summarized as under: a) The assessee being part of a group is not completely independent in its pricing policies including price of raw material purchased from AE, payments in respect of copyrights and patents payable to the AE. Even their product pricing is not completely independent. Linder such circumstances, the benefits emanating from the AMP function cannot be enjoyed by the assessee alone. The assessee is not an independent manufacturer who takes all the risks and enjoys all the benefits of the functions performed by them. b) The assessee is not engaged only in manufacture. It is also engaged in distribution of goods by its own admission. In fact, the assessee has a dual function of m....
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....y only to limited risk distributors and not to full risk manufacturers like the assessee. The said para from OECD TP Guidelines read as under: "6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm's length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cases, the distributor's share of benefits should be determined based on what an independent distributor would obtain in comparable circumstances. In some cases, a distributor may bear extraordinary marketing expenditures bey....
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....pon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the contract would be renewed. 153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution-cum-marketing agreement or when economic ownership gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax. 154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. .... ..... ..... Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is ....
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....le High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd in Tax Appeal NO. 16 of 2014 has held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted. The Hon'ble Court held as under: "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into ....
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.... Name of Foreign Collaborator Name of Indian Company Date of approval Items of Manufacture Royalty Rates -Domestic Royalty Rates-Export Duration of the agreement (Years) Toshiba Corporation Japan Videocon International Limited Sep-99 Colour Television Receivers 4% 3% 7 Hitachi Limited Volta Limited Nov-99 Steam fired vapour 5% 5% 5 Eatco Williams Group Blue Star Limited Jan-03 Invicts PAC usage of Air Conditioning 5% 5% 5 Kenwood Design Corporation Videocon International Limited Mar-99 Television 5% 5% 5 Samsung Electronics Co. Limited Videocon Appliances Limited Mar-99 Showcase of Reach-in-type and open type reach-in-cooler and open freezer 5% 5% 5 Victor Company of Japan Mirc Electronics Limited Apr-03 Colour Television Receiver Set and Sub-assemblies 5% 5% 7 SRS Labs Inc Salora International Limited Apr-03 Speaker 5% 3 Vilter Manufacturing Corporation Frick India limited Jan-03 Refrigeration Compressors 5% 8% 5 37. Out of the aforesaid 8 comparables, DRP/TPO considered only 3 comparab....
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.... long-term may compromise some amount of rent, in comparison with a landlord finding a tenant requiring the premises for a short-term. The rate of rent in a former case will be lower for a variety of reasons, such as, not undergoing the process of finding a tenant every now and then, fear of the property remaining vacant for some time after the exit of the first tenant and incurring costs at the time of each let out. Difference between the rent charged by the landlord or paid by the tenants in the afore discussed two situations is nothing but a discount allowed to a tenant of long- term on the available market rate of rent. This analogy can be applied to the present facts by considering the discount which a licensor with a perpetual license may allow or the premium which a licensor with a fixed term license may charge. It can be seen that the TPO downgraded 2% on this score and reduced the unadjusted comparable rate of 3.5% to the adjusted 1.5%. To put it differently, the TPO treated the premium charged by the comparable licensors on account of fixed term licenses at 57% (2/ 3.5*100), or in other words, the discount at such rate to the prevalent market rate on account of p....
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....al head quarter charged fees on the basis of cost plus mark up of 5%, and accordingly, the assessee paid a sum of Rs. 4,59,20,550/-. 45. The Revenue alleges that the assessee is not even in possession of the information with regard to the utilisation of intra-group services of marketing and finance and, hence, it is not in a position to co-relate the exact application of the above mentioned services and benefit derived by the segment/ division of the company on account of intra group service charges and is only making a vague representation of deriving benefit. The Revenue further contends that the assessee has not adduced evidence sufficient to justify the need, benefit and arm's length nature of intra group service charges paid to its AE. 46. The ld. DR vehemently stated that there is a high possibility of duplication of services in the sense that the taxpayer itself could have performed the aforesaid services and there was no need for the same to have been done by AEs. The ld. DR further stated that the assessee has also not been able to demonstrate that any tangible gains achieved are indeed the result of efforts of the overseas team and not a result of the efforts of the....
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....es, provision of after sale services etc. and such activities cannot be termed as share holder activity. 51. We find that the assessee engaged a third party consultant to determine the arm's length price of the services provided by the RHQ. The consultant determined ALP at Rs. 6,521/- per hour as against the comparable uncontrolled price of Rs. 11,670/- per hour. Since the hourly rate charged by RHQ is lower than comparable hourly rate of third parties transaction of regional head quarter charges meets the arm's length test. 52. The Revenue has made the adjustment holding that the assessee was not required to incur such expenditure which are duplicative in nature. In our considered view, the assessee is free to conduct business in the manner that assessee deems fit and the commercial or business expediency of incurring any expenditure has to be seen from the assessee's point of view. 53. The Hon'ble Delhi High Court in the case of CIT vs Reebok India Co Ltd ITA No 213/2014, while deleting transfer pricing adjustment made by the TPO on the basis of similar reasoning held as under: "183. On the question whether the royalty should have been paid or not, we are in agr....
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....e TPO. 54. The Hon'ble Delhi High Court in the case of CIT vs Lumax Industries Limited ITA No 102/2014 held that the Transfer Pricing provisions do not authorize disallowance of any expenditure on the basis that it was not necessary for the assessee to incur the expenditure. The Hon'ble Court held as under: "16. On the question of addition made by the AO on account of ALP for the payment of royalty, learned counsel for the Assessee has rightly referred to the decision in Commissioner of Income Tax v. Sony Ericsson Mobile Communication (2015) 374 ITR 118 where the determination of the ALP of the royalty paid as Nil was not approved. The Court's attention has also been drawn to the decision in Commissioner of Income Tax v. EKL Appliances Limited (2012) 345 ITR 241 wherein it was held that Rule 10B (1) (a) did not authorize disallowance of any expenditure on the ground that it was not necessary for the Assessee to have incurred such expense. It was observed that though the quantum of expenditure could be examined, the entire expenditure could not be disallowed on the ground that it was not necessary." 55. Further, the Hon'ble Delhi High Court in the case of CIT vs C....
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....ional transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of 38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by ....
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....y, we restore this issue to the file of the TPO. The assessee is directed to furnish evidences specifically mentioning the issues under consideration and the TPO is directed to verify the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Ground Nos. 6 to 6.1 are allowed for statistical purposes. 64. Ground No. 7 relates to segregation of closely linked transactions. 65. This issue is covered by our findings given in Ground Nos 3 to 6 and, therefore, goes in favour of the assessee and against the Revenue. 66. Ground Nos. 8 to 8.1 relate to addition on account of Sales-tax subsidy of Rs. 46,29,42,435/- holding the same to be revenue receipt. 67. Brief facts relating to this issue are that the assessee set up a manufacturing unit with an initial investment of Rs. 62,05,18,132/- upto 28th March, 1998 and additional investment of Rs. 60,13,83,450/- was made during the financial years 1998-99 to 2000-01. 68. The U.P. Government, under U.P. State Industrial Policy, 1994, had formulated policy to encourage the setting up of new industrial units or substantial expansion of existing industrial units during a particular period ....
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....lowed is described hereunder: 72. The assessee sells the products at dealer price (DP) across the country, which is uniform in the State of U.P. and other States. This price is inclusive of sales tax. As per the said exemption, the appellant is not required to pay sales tax on sale in U.P. and is eligible to retain the entire selling price, i.e., DP inclusive of sales tax. However, by selling the products in states other than U.P., the appellant is required to deposit the corresponding sales tax with the State Government. Thus by selling the goods at the same DP in State of U.P. and other States, the company has received excess price in the State of U. P., by way of incentive allowed by the U. P. Government, in the form of Sales Tax, which is not required to be paid back to the U. P. Government, as compared to net price (DP less sales tax paid to the State Government) received in the other States. Thus, the amount of sales tax retained on sale of products in U.P is the subsidy received by the appellant. 73. In case of exempt units (unit at U.P.), sales tax was not separately reflected in the bills, unlike bills raised from non-exempt units, but was collected and retained by t....
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....ation by way of fixed capital investment of Rs. 50 crores or more. The exemption of from sales tax or benefit of reduced rate of tax is available to those units which have started production or have carried out expansion or modernisation or backward integration etc. between 1.12.1994 and 31.03.2000. Para 2 of the notification specifies that the exemption or reduction in the rate of sales tax including the additional tax would not be more than 5 per cent of sale of goods. In case where tax rate was more than 5 per cent including additional tax, the balance was to be paid by the unit. Para7 (2) of the notification provides for the exemption of sales tax to the extent of exemption or reduction in tax. Item (2) of the Schedule includes Greater Noida Industrial Development Area wherein exemption from sales tax to the extent of 200 per cent of capital investment has been provided. None of the clauses of the Notification authorises the assessee to collect the sales tax and retain the same with it. The exemption of sales tax was available from the date of first sale or the date within the period of six months from the date of production, whichever is earlier. The said notification....
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....s not liable to pay sales tax, as exemption has been provided to the extent of 200 per cent of fixed capital investment, the sales tax element which is embedded in the sale price have been retained by the assessee as excess sales consideration. At the year-end the assessee has allocated the sales tax element from dealer's price and has claimed the same as capital subsidy. Therefore, the collection of dealers' price has been made in the ordinary course of trading activities. When the assessee is not permitted to collect the sales tax under the notification issued by the State Govt. the collection of sales tax as a part of dealers' price is nothing but constitutes a trading receipt........" 79. In A.Y 2003-04, the coordinate bench in ITA No. 3729/DEL/2009 has held as under: "In view of the above, Ld. Departmental Representative claimed that the issue is squarely covered in favour of the Revenue. However, ld. Counsel of the assessee submitted that the Tribunal has not considered the matter properly. He submitted that the appeal against the tribunal order is pending in the Hon'ble High Court of All. However, upon careful consideration, we find that there is no prope....
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....sessee and against the Revenue, we do not find any reason why the same should not be followed for the year also. Respectfully following the findings of the coordinate benches, we direct the Assessing Officer to delete the addition of Rs. 38,02,141/-. Ground No. 9 is allowed. 86. Ground Nos 10 - 10.1 pertain to disallowance of payment of royalty of Rs. 85,75,19,908/- holding the same to be capital expenditure. 87. The AO has disallowed the royalty payments amounting to Rs. 85,75,19,908/- paid to LG Electronics Inc. Korea ('LGEK') as capital expenditure. 88. We find that the Tribunal in assessee's own case for A.Y. 2007-08 has decided this issue in favour of the assessee and against the Revenue. Respectfully following the findings of the coordinate bench, we direct the Assessing Officer to treat royalty payment of Rs. 85.75 crores as revenue expenditure. Ground No. 10 is allowed. 89. Ground Nos. 11 & 11.1 pertain to disallowance of payment of export commission of Rs. 8,78,45,287/- holding the same to be diversion of profits to LG Electronics Korea 'LGEK'. 90. An identical issue was considered by the coordinate bench in A.Y 2007-08 and has decided the same against the a....
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....orities below qua the issue. There is no dispute that he assessee satisfies all the conditions for claiming deduction u/s 80JJAA of the Act. For our convenience, section 80JJAA reads as under: "80JJAA. (1) Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided. (2) No deduction under sub-section (1) shall be allowed- (a) if the business is formed by splitting up or the reconstruction of an existing business. "Provided further that where an employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of two hundred and forty days or one hund....
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....member that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. In the case of R.B. Jodha Mal Kuthiala v. Commissioner of Income-tax, Punjab, Jammu & Kashmir and Himachal Pradesh (82 ITR 570), this Court said that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to made the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. This view has been accepted by a number of High Court. In the case of Commissioner of Income-Tax v. Chandulal Venichand ([1994] 209 ITR 7), the Gujarat High Court has held that he first proviso to section 43B is retrospective and sales-tax for the last quarter paid before the filing of the return for the assessment year is deductable. This decision deals with assessment year 1984-85. The Calcutta High Court in the case of Commissioner of Income-tax v. Sri....