TaxTMI 
TaxTMI 
2019 (1) TMI 1567
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....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, assessment order was framed. 7. Coming to the grounds of appeal Nos. 3 to 3.3....
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....ns 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. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that com....
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....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 far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non-resident AE of MSIL. While it does....
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....8....................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 on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such ....
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....hinery 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 TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP." 16. The case of the Revenue is that Indian subs....
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....ndering 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 and independent international transaction and not to regard and treat the said activity as a function performed by the respondent-assessee, who was engaged in marketing and distribution. Further, while segregating / debundling and treating advertisement and sales promotion as an independent and....
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....4. 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 manufacturer and distributor. In any case, given its distribution function, the assessee is covered by the judgement of Hon'ble Delhi High Court in M/s Sony Ericsson. c) The benefits to the AE from AMP function continue to be the same as in the case of distributor like increase in sale of raw material, compo....
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.... 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 beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate." 28. The Hon'....
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....ship 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 not directly a subject matter of these appeals. As noted above, in a given case where the Indian AE claims economic ownership of the brand and is deprived or transfers the said economic ownership, consequences would flow and it may require transfer pricing assessment." (emphasis supplied) 29. As held by the Hon'ble Delhi High Court in the case of Sony Ericsson Mob....
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....s 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 account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissib....
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....roup 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 comparables engaged in manufacture of colour television, viz., Toshiba Corporation, Japan, Kenwood Design Corporation and Victor Company of Japan and disregarded the remaining 5 comparables. Accordingly, the TPO arrived at average royalty rate of 4.50%. The DRP/TPO further made an adhoc adjustment of 1% from the average rate of royalty of 3 comparables of 4.5%, allegedly on the ground that the royalty agreement of the assessee is in perpetuity, while the agreeme....
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.... 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 perpetual license. However, the DRP treated such discount for perpetual license at 22% (1/4.5*100). Considering the entirety of the facts and circumstances of the instant case, we find that the rate of premium on the license with fixed term at 22% is on a higher side. In our considered opinion, the rate of such premium should be restricted to 10% of the average rate of royalty of the comparable cases. 10.9. It has been held above that the DRP rightly considered thre....
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....s 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 assessee. The ld. DR further stated that the allocation key for the allocation of expenses, which is the ratio of turnover of various entities is also not justified since the turnover cannot be co-related to the services claimed to be received from the AE. It is the say of the ld. DR that the assessee has failed to establish any direct nexus which may have helped its case of having received enhanced turnover as a result of services provided by the AE. 47. In our considered opinion, for the purpose o....
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....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 agreement with the finding of the Tribunal that question of payment of royalty cannot be determined on the basis of profitability or earnings of the assessed, once it is accepted that know-how and technical information was provided. It is not alleged or the case of the Revenue that the technology or know-how was hopeless and useless. The finding of the Assessing Officer/TPO, that the assessee had not derived any commercial benefit as technology and know-how had not resulted in any substantial profit increase, has been rightly rejected as tot....
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.... 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 Cushman and Wakefield (India) Pvt Ltd. ITA 475 of 2012 has held that the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives a benefit from the service. The Hon'ble Delhi High Court has opined that the determination of benefit to the tax payer is in the domain of the AO. The Hon'ble High Court held as follows: "34. The Court first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from w....
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....y 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 the TPO/AO in respect of the technical fee payment too." 58. Considering the facts in totality in the light of the judicial decisions discussed hereinabove, the adjustment computed by the TPO/DRP on account of allocation of RHQ expenses is uncalled for and deserves to be deleted. Ground Nos. 5 to 5.5 are allowed. 59. Ground Nos 6 - 6.1 relate to Transfer Pricing adjustment on account of payment of overseas marketing related services of Rs. 1,30,08,500/-. 60. Facts on record show that during the year under consideration, the assessee requested its associated enterprises to....
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....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 in certain specified areas of U.P. in the form of, inter alia, sales tax exemption, with the object of achieving economic & industrial development and generation of employment opportunities. The scheme and the purpose for which it was framed by the State shows that the incentive was given for encouraging setting up of manufacturing facilities, resulting in enhancement of necessary industrial infrastructure for rapid industrialization of the state and creating employment opportunities. 69. For purposes of the aforesaid policy, the Government issued Notification dated 31.3.1995, clarifyin....
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....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 the appellant as part of incentive / subsidy, by virtue of exemption granted by the U.P. Government. The sales tax incentive was the subsidy given to the appellant under the Industrial Policy of the State to encourage setting up of industries, with the object of achieving economic & industrial development and generation of employment opportunities, in backward area and not for assisting the appellant in carrying out its business operations. 74. During the relevant year, the appellant received subsidy in the form of sales tax exemption for an amount of Rs. 46,29,42,435/- which was treated as c....
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....fication 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 also provided that the eligibility certificate to the assessee will be issued by the joint/additional director of concerned Development Authority and the same will be produced before the concerned assessing officer. The Addl. Director Industries, Greater Noida Industrial Development Authority, vide letter No. 1344 dated 23/06/1999 issued eligibility certificate to the assessee. As per this certificate fixed capital investment is of Rs. 51,57,95,446/-. The date of commencement of production is 9/03/1998 and the first sale was affected on 27th March, 1998. The assessee applied for exemption from trade tax [sale....
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....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 proper justification to deviate from the decision of the ITAT in assessee's own case. The appeal against the Tribunal order is still pending in Hon'ble High Court. Under the circumstances, the judicial propriety mandates that we adhere to the decision of the Tribunal in assessee's own case. Accordingly, respectfully following the precedent as above, we uphold the order of the Ld. Commissioner of Income Tax(A)." 80. We find that the assessee's appeal against the order of the Tribunal for A.Y 2002-03 is pending before the Hon'ble High Court. Judicial propriety mandates that we adhere to the decision of the coordinate bench ....
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....as 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 assessee. The ld. AR contends that certain documents were not furnished by the assessee and if the same are considered as additional evidence, the issue may be set aside for fresh adjudication. 91. It is not in dispute that in A.Y 2007-08 this issue was decided against the assessee by the Tribunal. The assessee has filed application u/r 29 of the ITAT Rules for admission of additional evidence in support of payment of export commission to its AE. In our considered opinion, such additional evidences need to be verified before deciding this issue. We, accordingly, restore this matter to the file of the Assessing Officer. The assessee ....
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....ee 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 hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly;". 97. The claim of the assessee is that the workmen who joined in the preceding year in which such workmen worked for less than 300 days should be considered provided that the period of employment of such workmen is equal to or more than 300 days in the relevant previous year. What the assessee contends is that new workmen, who did not fall in the category of "regular workmen", on account of employment being for less than 300 days in the year of appointment, should....
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....ation 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 Jagannath Steel Corporation ([1991] 191 ITR 676), has taken a similar view holding that the statutory liability for sales-tax actually discharge after the expiry of accounting year in compliance with the relevant stature is entitled to deduction underSection 43B. The High Court has held the amendment to be clarificatory and, therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence retrospective. The Patna High Court has also held the amendment inserting the first proviso to be explanatory in the case of Jamshedpur Motor Accessories Stores v. union of India and Ors. ([1991] 189 ITR 70.), It was held that amendment ....