TaxTMI 
TaxTMI 
2018 (11) TMI 1762
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....ome on 29th November 2006 declaring total income of Rs. 77,49,13,665. During the assessment proceedings, the Assessing Officer noticing that the assessee had entered into international transactions with the overseas Associated Enterprises (AEs) made a reference to the Transfer Pricing Officer to determine the arm's length price (ALP) of the international transactions. During the proceedings before him, the Transfer Pricing Officer noticed that the assessee has bench marked the arm's length price in respect of some of the international transactions with the A.E. by adopting Transactional Net Margin Method (TNMM). One of such international transaction related to payment of royalty to the AE for technical knowhow and trade mark. After calling for necessary information from the assessee, he found that it had entered into a technical assistance and royalty agreement with CSOL from 9th March 1993, for availing the benefit of technical knowhow developed by CSOL relating to the manufacturing, processing, distributing and marketing of products as well as the benefit of the continuing research and development undertaken by CSOL. Such agreement was effective for a period of 10 years f....
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....tice, stating that as per the earlier agreement, the assessee was required to pay royalty @ 2% of the sales towards technical knowhow. However, as per the subsequent agreement though the rate of royalty for technical knowhow was reduced to 1.25% of the sales, however, the assessee entered into another agreement for payment of royalty @ 1% on account of trademark. Thus, in effect, the assessee would pay royalty to CSOL at an enhanced rate of 2.25% of net sales. Thus, he called upon the assessee to explain why the royalty paid over and above 1.25% of net sales should not be adjusted towards the arm's length price of royalty. Though, the assessee objected to the proposed adjustment to the arm's length price, however, the Transfer Pricing Officer did not find merit in the submissions of the assessee. Referring to the clarification issued by the Government of India, Ministry of Commerce and Industries, vide Press Note no.8(2)/2001-FC.I, dated 3rd January 2002, he observed that as per the said circular, in case of technology transfer, payment of royalty for technical knowhow subsumes the payment of royalty for the use of trademark and brand name of foreign collaborator. He observ....
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....w @ 1.25% and for trademark @ 1% respectively. He also drew our attention to the copy of relevant Circulars placed at Page-85 and 119 of the paper book. The learned Sr. Counsel submitted, Press Note no.1 (2002 series) issued by the Ministry of Commerce and Industry, Government of India, does not restrict payment of royalty on trademark to the payment of royalty for technical knowhow. He submitted that the Transfer Pricing Officer has not disputed the TNMM as the most appropriate method adopted by the assessee. Therefore, he submitted, determination of arm's length price of royalty payment at nil is not in accordance with TNMM. The learned Sr. Counsel submitted, while deciding identical issue in assessee's own case for assessment year 2002-03 to 2005-06, the Tribunal has allowed royalty payment on technical knowhow and trademark @ 2.25%. In this context, he drew our attention to the relevant orders of the Tribunal placed in the paper book. He submitted, the decision of the Tribunal on royalty payment in assessment year 2005-06 has also been accepted by the Department as no substantial question of law has been raised by the Department before the Hon'ble High Court on that iss....
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....ich it was required to pay royalty @ 2%. Subsequently, the assessee has entered into fresh agreements with the parent company for transfer of technical knowhow as well as use of trade mark for which assessee is required to pay royalty @ 1.25% and 1% of the net sales respectively. As could be seen from the materials placed on record, the payment of royalty for technical knowhow @ 1.25% has been approved by the Ministry of Commerce and Industry, Government of India, vide letter dated 14th September 2000 (copy is placed at Page-85 of the paper book). Similarly, payment of royalty for trademark @ 1% has been approved by the Reserve Bank of India, vide letter dated 25th June 2001, copy at Page-119 of the paper book. Thus, as could be seen, payment of royalty for trademark at 1% over and above the royalty paid at 1.25% for technical knowhow has been approved by the Reserve Bank of India. Though, the Transfer Pricing Officer has relied upon Press Note dated 3rd January 2002, to observe that in case of technology transfer payment of royalty subsumes the payment for royalty for use of trademark, however, in a subsequent Press Note issued by the Ministry of Commerce and Industry, Government ....
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....the TPO that the payment does not effect the profitability of the assessee, if we are to examine the issue from that angle as well. In any case the payment of royalty on technical knowhow is at par with the similar payments from the group companies in other countries & region. Besides this, the payment is made as per the approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arm‟s length. 40.Coming to the issue of royalty payment on trademark usage, we find that the assessee, in fact is paying a lesser amount, if the payments are compared with the payments towards trademark usage, by the other group companies using the Brand Cadbury in other parts of the world. On the other hand, if we examine the argument taken by the TPO with regard to OECD guidelines. On this point the assessee‟s payment is coming to a lesser figure, as discussed in detail by the CIT(A). 41.We are not going into the arguments advanced by the DR/TPO on geographical differences, and payments made to Harshey, as these arguments gets merged in the interpretation and details available in the....
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....te written submissions the assessee objected to the proposed adjustment, however, the Transfer Pricing Officer rejecting the submissions of the assessee ultimately concluded that benefit has accrued to the A.E. on account of AMP expenditure incurred by the assessee. Accordingly, he quantified such benefit accruing to the A.E. on account of AMP expenditure at 1.77% of the net sales which worked out to Rs. 1.70 crore. However, observing that he has already made disallowance of the royalty payment on trademark he restricted the adjustment to be made on account of AMP expenditure atRs. 80 lakh. In terms of the orders passed by the Transfer Pricing Officer, the Assessing Officer made addition of Rs. 80 lakh to the income of the assessee. Being aggrieved of such addition, the assessee preferred appeal before the first appellate authority. 11. However, the learned Commissioner (Appeals) upheld the addition / adjustment made by the Assessing Officer / Transfer Pricing Officer. 12. The learned Sr. Counsel for the assessee submitted that there is no agreement with the A.E. for incurring AMP expenditure. He submitted, whatever expenditure incurred by the assessee was towards m....
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....he assessee holding as under:- "3.4.We have heard the rival submissions and perused the material before us. Before proceeding further it would be useful to understand the philosophy and to consider the historical background of the TP provisions. It is said that the purpose and object of introduction of the provisions contained in Chapter X is to prevent an assessee from avoiding payment of tax by transferring income yielding assets to non-residents even while retaining the power to enjoy the fruits of such transactions i.e. the income so generated. As a concept it is not totally a new idea. A reference to the provisions of section 42(2)to the Indian Income Tax Act,1922,could be made in this regard-as it was a somewhat similar section and dealt with the trans-border transactions. The provisions of the said section broadly provided that where a nonresident carried out business with the person resident in the taxable territory and it appeared to the AO that on account of a close connection between such persons the business was so arranged that the business conducted by the resident with the non-resident either yielded no profit or less than ordinary profit which may be expect....
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....he comparables at the rate of 3.57% that the FAA had held that higher rate profitability could not be a justification of this proportionate expenditure, that in the appellate proceedings the FAA had proposed further addition that finally he upheld the order of the TPO and confirmed the addition of Rs. 71 lakhs that there was no contractual obligation to recover money from the AE that it was separately paying royalty for use of brand and trademark. There is no reason for not holding that the increased AMP expenditure led to enhanced sales and profitability that for the purpose of analysing the AMP expenditure incurred by and the comparables it is necessary to consider various factors. If factors like growth rate, nature of business number of products launched territories serviced and turnover/profits achieved have necessarily to be considered for determining the AMP expenses. The entire expenditure was focused on the Indian consumer and it is evident from the local flavour/ language/concepts. It is also an undeniable fact that new players were entering India after liberalisation-era started. If the expenditure incurred by the assessee is considered in the back ground of the growth a....
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....lobe and that the brand related exercise at the cost of the AE for the overall brand positioning and management benefited the assessee also in an indirect manner. Nothing has been brought on record to prove that the assessee was directly or indirectly promoting the global brand rather than promoting its own products. In our opinion, there exists a fine but very important distinction between products promoted and nurtured by an assessee and the brand owned and supported by its AE. In the modern world both exist and play different and specified roles. Therefore until and unless some -thing positive is brought on record about sharing/incurring AMP expenditure under the head by an assessee on behalf of its AE,it cannot be held that it should have recovered some amount from the AE as the expenditure by it indirectly helped in augmenting the brand value owned by its overseas AE. In the case under consideration the assessee was incurring expenditure for its products whereas the AE was looking after the ground at global level. If the AMP expenditure incurred by them benefited indirectly in the local/ international market it would not mean that it was an IT. The basic purpose of introducing....
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....ises, either or both of whom are nonresidents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the 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 provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56.Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction ....
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....;whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (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." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v.. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. pa....
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....erising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: " 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can a....
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....ing the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 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 928 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 sample 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? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: " 75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) und....
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....o benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". Considering the facts-like absence of an agreement between the assessee and the AE.s. for sharing AMP expenses payment made by the assessee under the head AMP to the domestic parties failure of the TPO prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon'ble Delhi High Court delivered in the case of Bausch and Lomb(India) Pvt. Ltd (supra),we are of the opinion that the transaction-in - question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. 3.4.4. With regard to the submissions of the AR that the issue of AMP should be restored back to the file of the AO we want to mention that law as a concept is supposed to evolve with passage of time-it cannot be static always. Non availability of a particular decision of the higher forum cannot justify the restoration of issue/ca....
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....1st June 2006 for trademark license agreement relating to Halls, Maxair, Vita-C. As per the said agreement the assessee agreed to pay royalty to CAUSA @ 2.70% of the sales. In the return of income filed for the impugned assessment year, the assessee claimed deduction on account of payment of royalty to CAUSA for an amount of Rs. 32,41,691. In course of proceedings before the Transfer Pricing Officer, he called upon the assessee to produce the relevant documents relating to payment of royalty and also justify the arm's length price of the royalty paid. In response to the query raised by the Transfer Pricing Officer, the assessee furnished the required document and also submitted that the royalty payment to CAUSA is covered under the automatic route, hence, no approval either from RBI or any other authority is required. On a query raised by the Transfer Pricing Officer that royalty payment for brand name cannot exceed 1% of the sale under automatic route in the absence of approval by the relevant authority, it was submitted by the assessee that no approval from RBI for payment of royalty @ 2.7% of sales was obtained. It was submitted that the assessee has executed a deed of amend....
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....nt. However, considering the fact that the assessee has added back the entire royalty payment in the computation of income, the Transfer Pricing Officer left it to the discretion of the Assessing Officer to take appropriate view with regard to the addition of the amount. However, the Assessing Officer while completing the assessment made addition of the entire transfer pricing adjustment recommended by the Transfer Pricing Officer including the adjustment on account of royalty payment to CAUSA amounting to Rs. 20,41,065. Being aggrieved of such addition, the assessee preferred appeal before the first appellate authority. 18. The learned Commissioner (Appeals) after considering the submissions of the assessee and examining the material on record noted that the trademark license agreement between the assessee and CAUSA was with effect from 1st January 2006, and was due to expire on 31st December 2007. He observed, as per the Government guideline / regulation under the automatic rout, brand / trademark royalty is payable to the extent of 1% of the domestic net sales and 2% of the export net sales. Whereas, in case of manufacturing / technology royalty, the upper limit is fixed....
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....see entered into another agreement with CAUSA on 24th December 2007, amending certain clauses of the original agreement. He submitted, as per the amended agreement which is effective from 1st January 2006, i.e., the effective date of the original agreement, a specific clause was incorporated for sub-licensing technology / technical knowhow. In this context, he drew our attention to the relevant clauses of amended agreement a copy of which is at Page-132A of the paper book. He submitted, the amended agreement makes it implicit that the assessee has to use the technology for manufacturing the licensed product. He submitted, the scope and ambit of Transfer Pricing Officer's power is only to determine the arm's length price of the international transaction. He cannot look into the issue whether the company is authorised to transfer technology or not. For this proposition, he relied upon the decision of the Hon'ble Calcutta High Court in CIT v/s Arun Dua, [1990] 186 ITR 494 (Cal.). He submitted, in any case of the matter, the assessee itself has disallowed the entire royalty payment to the CAUSA on account of non-deduction of tax at source in the computation of income. Thus, he ....
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.... expenditure in the computation of income. The learned Departmental Representative drawing our attention to the agreement dated 1st June 2006, with CAUSA submitted that the agreement clearly says that it is for licensing of trademark. Therefore, the rate of royalty fixed under the said agreement is for trademark alone. He submitted, though as per the terms of the said agreement, there is no transfer of technology / knowhow. Even assuming that there is such a transfer no price is fixed for such transfer. He submitted, the assessee has not furnished any documentary evidence either before the Assessing Officer or before the learned Commissioner (Appeals) to demonstrate transfer of technology / knowhow to the assessee. He submitted, even as per the sub-license agreement between Cadbury Ireland and CAUSA, CAUSA is authorized to sub license only trademark of products. He submitted, in these circumstances, the contention of the assessee that the original agreement between the assessee and CAUSA provides for transfer of technology / knowhow is contrary to facts on record. As regards the agreement executed in December 2007, amending the original agreement by incorporating technology transfe....
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....als) has also endorsed the aforesaid view of the Transfer Pricing Officer. No doubt, on a perusal of the agreement dated 1st June 2006 between the assessee and CAUSA it appears that the said agreement has been termed as trademark license agreement. However, reading the agreement as a whole and more particularly, Clause-7(b) of the said agreement, it becomes clear the licensee (the assessee) shall manufacture licensed product using any technology of the licensor provided to the licensee in accordance with all specifications and instructions provided by the licensor from time to time. It is not the case of the Revenue that in the relevant previous year assessee has neither manufactured nor sold 'Halls' brand products in India. Thus, it is necessary to ponder whether in absence of necessary technical knowhow/knowledge it would have been possible for the assessee to manufacture the aforesaid products? In our view, the answer would be-No. Further, the assessee and CAUSA have entered into one more agreement on 24th December 2007, amending the terms of the original agreement. As per the aforesaid agreement, certain terms of the original agreement was amended to include licensing / sub-lic....
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....Cadbury Schwepps Asia Specific TTE (CSAPL) called upon the assessee to furnish necessary details. From the details furnished by the assessee, he found that the assessee has entered into a service agreement with CSAPL on 21st October 2005, effective from 1st April 2005, for provision of certain services to the assessee. As per the terms of the said agreement, the fees payable by the assessee for services rendered works out to Rs. 13.02 crore per annum. After examining the nature of services provided under the agreement, the Transfer Pricing Officer noticed that in Form no.3CEB report, the assessee has stated that the fees paid of Rs. 13.02 crore for services availed is at arm's length under TNMM. Noticing the above, the Transfer Pricing Officer called for further information / document from the assessee. As observed by the Transfer Pricing Officer, the assessee did not furnish transfer pricing study report. However, a note on the transfer pricing study was submitted. The Transfer Pricing Officer also alleged that, though, in the said note the assessee had stated that further details will be submitted after compilation, however, no such details were ever produced by the assessee.....
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.... chain co-ordination and planning, human resources, legal, marketing, etc. He submitted, for availing such services, the assessee has paid the amount of Rs. 13.02 crore and has benchmarked such transaction by applying TNMM as most appropriate method. He submitted, the assessee has considered itself as tested party since it does not own an intangible asset and its profitability can be ascertained most reliably. He submitted, since the margin earned by the assessee is higher than the margin earned by the comparable companies under TNMM, the transaction should be considered to be at arm's length. Refuting the allegation of the Departmental Authorities that the assessee has not furnished supporting evidences, the learned Sr. Counsel submitted, all necessary and relevant evidences were produced before the Departmental Authorities. In this context, he drew our attention to the documents submitted in the paper book. He submitted, the assessee has availed services from CSAPL on cost plus 5% mark-up basis. In this context, the learned Sr. Counsel sought to produce additional evidences as additional evidence an affidavit obtained from CSAPL stating that services have been rendered by CSAPL t....
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....tion of the learned Sr. Counsel that various evidences were produced before the Departmental Authorities the learned Departmental Representative drawing our attention to certain specific documents furnished in the paper book submitted that these documents pertained to subsequent financial years, hence, have no relevance for the impugned assessment year. He submitted, if the Tribunal admits the additional evidence, the Assessing Officer must be given an opportunity to examine such evidence and decide the issue afresh. 27. We have considered rival submissions and perused materials on record. The dispute is with regard to payment of Rs. 13.02 crore to one of the A.Es towards availing of various services under an agreement executed with the A.E. On a perusal of the order passed by the Transfer Pricing Officer and the learned Commissioner (Appeals) it is evident, assessee's claim that aforesaid payment was made to the A.E. for services availed was disbelieved and the arm's length price was determined at nil basically on the allegation that assessee failed to furnish necessary and relevant documentary evidences to prove that services were actually rendered by the A.E. and any....
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....ficer has accepted the fact that the assessee has availed services from CSAPL under the very same agreement, there is no reason to dispute assessee's claim of availing services in the impugned assessment year if the assessee can demonstrate such fact by furnishing proper documentary evidences. In that event, the Transfer Pricing Officer certainly cannot determine the arm's length price at nil by applying the benefit test. Therefore, on overall consideration of facts and circumstances of the case, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due opportunity of being heard to the Assessing Officer. The Assessing Officer / Transfer Pricing Officer must pass a speaking and well reasoned order dealing with all the submissions of the assessee. Accordingly, this ground is allowed for statistical purposes. 28. In view of our decision in grounds no.1, 2, 3 and 4, there is no need for adjudication of ground no.5, independently. 29. In ground no.6, the assessee has challenged disallowance of depreciation of Rs. 22,75,506, on capitalization of marketing knowhow relating to non-chocolate confectionary business of M/s. Warner ....
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.... assessee's claim of depreciation. 34. In ground no.7, the assessee has challenged disallowance of expenditure under section 14A of the Act amounting to Rs. 1,77,87,904. 35. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that in the relevant previous year, the assessee has earned exempt income by way of dividend and interest on tax free bond amounting to Rs. 8,02,14,485, called upon the assessee to explain why expenditure attributable to such income should not be disallowed under section 14A of the Act. In response, the assessee furnished a detailed explanation stating that investments in exempt income yielding fund were made out of surplus fund available with the assessee, hence, no interest expenditure was incurred. Further, furnishing the details of expenses incurred under various heads, it was submitted that only the salary relating to treasury manager and his assistant who look after the entire treasury and banking related functions and take decisions for putting the moneys from time to time in mutual fund and other investment can be attributed towards earning of exempt income. Accordingly, he worked out such disallowance at Rs. 1,25,452....