TaxTMI 
TaxTMI 
2020 (6) TMI 474
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....sons given in the petition for condonation of delay, we condone the delay and admit the appeal of the revenue for hearing on merits. 3. Since the issues involved in all the appeals are common and identical, therefore these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as facts narrated in ITA No. 625/Kol/2016, for A.Y. 2011-12, have been taken into consideration for deciding the appeals pertaining to transfer pricing issues, enmesse. 4. At the outset itself, we note that these appeals filed by the revenue as well as assessee for A.Y. 2010-11 and 2011-12, contained multiple grounds of appeal. However, at the time of hearing, we have carefully perused all the grounds raised by the revenue as well as assessee. The most of the grounds raised by the revenue as well as assessee, are either academic in nature or contentious in nature. However to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the revenue and assessee as well. With this background, we summarize and concise the grounds raised by the revenue as well as assessee as follows: ....
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....ol/2015 for A.Y. 2010-11 and Ground no. 3 raised by the revenue in ITA No. 518/Kol/2016 for A.Y. 2011-12. 3.Excess disallowance of interest income allocated to eligible units Rs. 23,400,187/-. This ground covers ground no. 4 of assessee's appeal in ITA No. 404/Kol/2015 for A.Y. 2010-11 Additional Grounds raised by the assessee 1.Refund of dividend distribution tax (DDT) paid in respect of non-residence share holders. This ground relates to A.Y. 2011-12 2.Deduction of education cess on income tax paid by the assessee is allowable expenditure. This ground relates to A.Y 2011-12. 5.Now, we shall take these grounds one by one. Grounds relating to Transfer Pricing 1.Transfer Pricing adjustment in relation to payment of royalty to the tune of Rs. 787,096,934/- This ground covers ground no. 5 to 7 of revenue's appeal in ITA No. 529/Kol/2015, for A.Y. 2010-11, Ground no. 6 of revenue's appeal in ITA No. 518/Kol/2016, for A.Y. 2011-12,Ground No.4a to4b of assessee`s appeal in ITA No.625/Kol/2016 for A.Y.2011-12 and additional grounds raised by the assessee in A.Y. 2011-12 wherein the assessee stated th....
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.... Polish and handy shine 1,12,91,673/- 10 Cherry Blossom-Cherry Wax Polish 2,81,77,923/- 11 Colin 2,66,06,148/- 12 Sweetex 14,29,947/- 13 Clearsils 20,68,889/- 14 Easy of Bang 97,81,751/- 15 Lizol 5,53,80,624/- 16 Mansion white and cardinal 98,28,670/- Total 19,47,78,665/- 9.1 You are requested to provide the details of such patents etc. received by you in case of products under these brand names which are of recent development so as to provide you with continuing benefit. In case this is not provided and established, then you are requested to show cause as to why the royalty for the same should not be taken as Rs. Nil as no benefit has been received and no patent or know-how has been transferred. Further, please specify which patents are registered for "Dettol Antiseptic Liquid" as the details given by you do not pertain to Dettol Antiseptic Liquid. In case you are not able to provide the same which has a recent origin/development and which can be considered to provide you with continuing benefits, then please show cause as to why the royalty should not be considered as Rs. Nil in case of thi....
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....se of brands specified in the notice. However, we appreciate that your goodself has expressed no doubt about the benefits derived by RBIL, it would be even more unreasonable to deny the otherwise accepted benefits only on the basis of non-availability of information with respect to details of patents. It must be carefully noted that, the 'benefits' derived by RBIL have been derived by use of the bunch of intangibles and not solely because of patents, which also has been agreed by your goodself in the subject notice. In facts and circumstances of the present case, the application of 'benefit test' is unwarranted, because payment of royalty has not been made by us on a standalone basis, it depends on the sales and thus application of 'benefit test' to royalty payment is irrational and erroneous. It is not correct to judge payment of royalty on the yardstick of 'benefit test'. Such a test to benchmark a transaction and arrive at the arm's length price is not based on any of the methods prescribed under section 92C of the Act. (b) Our submissions regarding applicability of CUP in the way suggested by your goodself as against TNMM adopted by the company for the transac....
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....the most appropriate method. The TNMM examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction. It is a well accepted principle that net margins are less affected by transactional difference than are prices (as in the case of CUP) and gross margins (as in the case of RPM / CPM). In this case, since the functions performed by comparables identified by us were broadly similar to the functions performed by RBIL, the TNMM, which involves net margin comparison, was considered as the most appropriate method for testing the margin of RBIL". 9. However, the TPO rejected the contention of the assessee and worked out the transfer pricing adjustments in respect of royalty as follows: "36. Thus on conjoint reading of the agreement entered into by the asseseee with its A.E and above facts it well established that the A.E also provide the formula and trade name to the assesse to fracture the products the products which has application in Skincare etc. Hence, the contention of the assesse is rejected and the royalty is restricted to 1.5% of the net sales. The calculation of Royal....
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....ith minimal side effects. Uspharm is negotiating with a leading Japanese pharmaceutical company, Jpharm for the exclusive Japanese distribution rights to Nograine. What royalty rate should Jpharm pay? To answer this question, four companies were identified that are engaged in the manufacture and marketing of generic drugs. Their median return on sales (ROS) was 14 percent. Uspharm has been realizing a 34 percent ROS on Nograine. This suggests that the patented status of Nograine has allowed it to generate profits that are 20 percent above the generic level. Therefore, the total intellectual contribution (TIC) of Nograine is estimated at 20 percent. The transfer pricing regulations provide no guidance on how to allocate the TIC. The only example in the regulations [Treas. Reg. [section] 1.482-5(e), Example 4] allocates the entire TIC to the developer. It is, however, unrealistic to allocate the entire TIC to the developer of the intangible asset. Because the licensee assumes the risks and challenges of commercialization, the licensee will expect to capture some of the benefits produced by the technology. The simplest way to split the TIC between the licensor and licensee is....
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....mparables which have been selected are paving any intangible related royalty payments are not. Consequently, even if on a without prejudice basis it is considered that TNMM is the most appropriate method for benchmarking royalty payments, the analysis carried out by the assessee is absolutely incorrect, faulty and is not an indicator of the arms length nature of royalty payments. 38. Further on the basis of submissions made and details filed by the assessee, it is seen that the assessee has not been able to show any evidence of receipt of any technical know-how etc for the products pertaining to 'Mincream' and 'Robinson Barley' - two brands continuing from 1940s up to the limitation period. Accordingly, based on the documents submitted to date, it is held that the assessee has not received any support/ know-how w.r.t. these two brands/products to support any payment of royalty and the arm's length price of the royalty paid in case of these two items is determined to be Rs.Nil under the CUP Method. Thus, the total income of the assessee is required to be adjusted upwardly by Rs. 39,55,843/- on this account. Total Adjustment in respect of Royalty....
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....essee has given following submission in the matter:- "We submit that RBIL has entered into royalty agreements with its AEs [RCO & RBNV] for production, sales, distribution & marketing of products. Royalty payment is made by RBIL for the right to use the Intellectual Property Rights which includes Trademarks, Patents, Design and Model Rights, Know How and all current and future copyrights and rights to databases relating to the design, production, distribution, marketing and sale of the Products. In this regard, RBIL submitted the details of Patents and Trademarks of the products for which Royalty has been paid by RBIL to its AEs. RBIL also submitted the detailed write-up on the benefits received by the company from its AEs in the form of various intellectual property rights, improvements and developments, design & model, know-how, patents, products, trademarks etc. We submit that the RBIL has received services on an ongoing basis w.r.t. intellectual property rights, products/ brands, designs & model rights, know how from its AEs. The same has resulted in the significant growth in all segments despite tough competition only due to the active involvement and contribution fro....
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....expenditure of royalty has a direct nexus with the business of RBIL. It is not the case that such expenses are incurred in isolation or are not connected with RBIL's business. The expenditure incurred on payment of royalties are completely bona fide and have been in connection with the business of the assessee. We wish to place reliance on the judicial pronouncement of Delhi Tribunal in the case of Reebok India Co. vs. Addl CIT (ITA No.5857/Del/2012) wherein the following have been held - • As per the terms of License Agreement between assessee and the AE, the Licensor has agreed to grant exclusive right to utilize the technology in manufacturing and distribution of products and the assessee in fact has got the goods manufactured on the basis of technology. • That the assessee does not undertakes any significant research and development activity on its own and totally depends upon the associate enterprise for provision of technology and thus agreed that the entire business of the assessee depends upon the technology provided by the AE and without the license to use such technology, the assesses would not be able to continue its business. •....
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.... distributor of a large number of products/brands for which are owned by its AEs. The assessee has been paying royalty to its AEs for a number of years which has been allowed in the assessment of earlier years. Even in the year under consideration also, the TPO has allowed royalty in respect of all but two products manufactured and sold by the assessee. However, in respect of two products viz. Mincream and Robinson Burley, the TPO has held that no benefit was derived by the assessee from its AE. It is not denied that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm's length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does no....
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....as been allowed in the assessment of earlier years. This year there is no change in facts and law so far assessee company and its Associate Enterprises (AEs) are concerned. It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular view or proposition in the past, it is not open for the Revenue to take an entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the TPO/Assessing Officer on the basis of change in facts. For that we rely on the order of the Hon'ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all....
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....ty. The CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) re-sale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: - "(a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such p....
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....h could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises wh....
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.... guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the rev....
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....eworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or incom....
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....nance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs." (ii) Frigoglass India Pvt Ltd V DCIT [2016] 180 TTJ 401(Del-t....
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....ate of 4% on sale of products for the use of trademarks and ICM technology was considered to be an arm's length rate. It was also submitted that no independent third party will let any other entity use its Intellectual Property Rights (IPR) and allow to enjoy the benefits from the usage of such IPR without charging a fee. It was submitted that FIPL enjoys a lot of benefits in manufacturing and marketing from the use of the IPRs owned by Frigoglass SAIC. It was submitted that FIPL had started enjoying the benefits from the usage of the trademarks and ICM technology from very inception although a formal agreement was entered into in September 2007 and had started making payment for such services from Assessment Year 2009-10 only. It was further submitted that the activities performed by the AE in terms of the royalty agreement were ICM sales, customer service, marketing services, product development and future technologies. It was submitted that most of the clients of the FIPL were global clients and the use of the trademark had a positive impact on the sales of FIPL in India. The Ld. AR made a reference to the comparative profitability chart from FY 2005-06 to FY 2009-10 and submitt....
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....n conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm's length principle, the guidelines provide for recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by t....
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....to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 17. The significance of the aforesaid guidelines lies in t....
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....that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is nonetheless a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody , (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is....
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....on is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above,....
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....of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A (d) defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered, and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty" 19. In the case of DCIT - LTU vs CLSA India Ltd. (2013) 33 taxmann.com 260 (Mumbai Tribunal), the Bench held that CUP method cannot be applied if the relevant information is not availab....
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....maceutical products. Some of the key products are Dettol Soap, Dispirin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortein insecticide, Colin, etc. The RBIL is registered in India under the Companies Act, 1956.TheRBIL has entered into a License Agreement with Reckitt Benckiser N.V. and Reckitt & Colman Limited for the transfer of Intellectual Property Rights for the production, sale, distribution and marketing of Reckitt Benckiser "products" domestically and internationally. These include all IPR(s) owned by the AEs such as trademarks, design and model rights, know-how', and all current and future copyrights and rights to databases relating to design, distribution, marketing and sale of licensed products in the licensed territory. The assessee company incurred Advertisement, Marketing and promotion (AMP) expenses. The TPO issued the notice to the assessee company stating that why not an adjustment on account of Advertisement, Marketing and promotion (AMP) expensesin excess of'bright line test' laid down by the Special Bench in M/s LG Electronics India Pvt. Ltd vs. ACIT (1TA NO. 5140/Del/2011) should be made? In response, the assessee submitted tha....
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....ce adjustment (ALP) of Advertisement, Marketing and Promotion(AMP) expenses has to be computed in the case of the assessee, as directed in the LG Electronics case(supra). With regard to determination of the arm's length price of the international transaction pertaining to brand promotion based on excessive AMP expenses, ld. ITAT (SB), Delhi (supra) have held in para 23.5 of their order that an arm's length margin needs to be added to the cost as determined by using the bright line test. Based on the assessee's own comparables, the cost part of the price of the international transaction pertaining to brand promotion is computed as under: Company AMP (Rs in lacs) Sales (Rs in lacs) AMP/ Sales Dabur India Limited 39003 285687 13.65% Godrej Consumer Products Ltd. 10168.9 126788.12 8.02% Jyothy Laboratories Limited 2620.25 57476.16 4.56% Marico India Limited 351.12 2024.3 17.35% Nirma Limited 54.35 3329.18 1.63% Coroma Plus Industries Limited 7019716 300719404 2.33% Hipolin Limited 549.44 3609.67 15.22% Jocil Limited 9.64 16820.65 0.06% Jyothy Laboratories Limited 2620.25....
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....upra) is applicable on the assessee's case. This ground is accordingly 24. Aggrieved by the order of the DRP/TPO, the assessee is in appeal before us. 25.We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP and other materials brought on record. Learned Counsel for the assessee submitted before us that the facts of the case of the Special Bench ruling in LG Electronics (supra) is different from the facts of the present case of the assessee. Assessee Company is engaged in only product promotion and not brand promotion and hence benefit of AMP accrues to the assessee and not to its AE(s).The Bright Line Test ('BLT') is not one of the prescribed methods under the Act and hence cannot be applied in the assessee`s case under consideration. The various expenses in the nature of sales promotion expenses, business promotion expenses (including free gifts/freebie/bonus packs etc.) market research expenses has to be excluded from the computation of AMP expenditure. Ld Counsel also pointed out that addi....
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....ction/undertaking/agreement between RBIL and its AE, as different from that which was existed in LG Electronics case(supra). Therefore, assessee company`s case cannot be compared with LG Electronics case(supra). 26. We note that incurrence of the AMP expenses, being a domestic transaction cannot be touted as an instance of profit-sharing exercise. We note that the TPO failed to appreciate that, though a 'transaction' under section 92F(v) includes arrangement or understanding; it per se involves a bilateral arrangement or contract between the parties. A unilateral action by one party in absence of any understanding or contract or binding obligation could not be termed as 'transaction'. In the assessee`s case, RBIL has incurred AMP expenditure in respect of its business operations in India and in order to boost its sales in India. Thus, no 'transaction ' could be said to exist in respect of such AMP expenditure incurred by the assessee. At the cost of repetition we state that there is no term or condition or provision in either of the Licensing Agreements to the effect which create any sort of obligation on RBIL to carry out marketing and promotional activities in order....
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...., SMC is engaged in AMP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. Absence of a machinery provision 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 at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. 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 t....
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....an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, canno....
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....spend that the Indian entity should be compensated for? 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 40A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by n....
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.... the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act, 1961. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE's therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited vs. CIT reported in 381 ITR 117 wherein it was held as under: "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 Mobile Communications India (P) Ltd. case (supra) 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 Ass....
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....port services. Hence wide letter dated 06.01.2105 the assesse was asked to explain the same and the assesse was also show caused to as why not the margin be in respect of support Services Company be calculated in this regard. 31. In response to that the assessee in its letter dated 16.01.2015 submitted before TPO as follows: "5.07 Chargeback of expenses by RBIL to AEs During the financial year 2010-11, RBIL has incurred certain expenses on behalf of RB group companies. The same has been cross-charged to RB group companies. We understand that these expenses have been charged-back based on actual cost incurred by RBIL on behalf of AEs. We further, understand that the expenses incurred by RBIL on behalf of RB group companies, the function performed by RBIL relates to mere facilitation of payment on behalf of group entities. In this regard, RBIL is a facilitator and it provides no additional service. Accordingly, the 'cost only' reimbursement by RB group companies to RBIL could be regarded as the arm's length price for the above expenses." In view of the above, we submit that the 'cost only' reimbursement by AEs to the Company ....
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....22.34% In view the above the assesse would have 22.34% on such recoveries. The value is calculated as under 22.34% on transaction purported to be recoveries ie. 22.34% of Rs. 19,30,38,246/- =4,31,24,744/- Thus the income of the assesse is to be upwardly adjusted by Rs. 4,31,24,744/- on this count." 33. Aggrieved by the addition made by the ld TPO, the assessee filed objections before the ld DRP. The ld DRP confirmed the order of TPO, observing as follows: "DRP Directions: The assessee has rendered services to its AE. The assessee was procuring material from the third parties for its AE for its usage and consumption. The assessee has recovered costs from the AE for such services. The contention in respect of the recovery of only costs as third parties were involved is not tenable if the assessee was the channel for such procurement services so as to ensure proper delivery of such services. This being a critical function and involving costs for the assessee should definitely entail a cost plus markup model to ensure arm's length compensation for the assessee for the services rendered. Based on nature of services rendered, it is also appropriate ....
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....is no adjudication by the TPO or DRP as to what serviceswere rendered. As per ld Counsel, the expenses in question were in respect of system upgrade of the Assessee which costs were reimbursed to the Assessee by the AE. Hence, there was no element of any service that the Assessee rendered to the AE. The assessee submitted, 3 volumes of documents before the TPO and DRP to establish that these were cost to cost reimbursements and therehas been no adjudication on the same. Therefore, in the interest of justice and fair play we think it fit and appropriate to remit this issue back to the file of the TPO to adjudicate the issue taking into account 3 volumes of documents already submitted by assessee. For statistical purposes, the ground raised by the assessee and revenue are allowed. 36.Summarized ground No. 4 reads as follows: "4.That on the facts and in the circumstances of the case, the DRP erred in not considering the specific objections raised by the appellant with respect to overall adjustment of Rs. 21,842,032/- made to transaction of "Export of raw materials and finished products". (This covers ground No.6 of assessee`s appeal in ITA No.625/Kol/2016, for A.Y....
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....ritten off, as given in Page 145 of the P.B is as follows: The deduction claimed by the assessee was in respect of Unit 1,2,3 & 4. The Unit 1 commercial operation commenced only on 02.02.2004 which is evidenced by the audit report in Form 10CCB which is placed at Page 90 of the assessee's Paper Book. The Unit No.2 commenced commercial operation only w.e.f. 03.04.2004 which is evidenced by Form No.10CCB, placed at Page 79 of the assessee's Paper Book. The Unit No.3 commenced commercial operation only on 08.12.2004 as it is evidenced by the Form No.10CCB, copy of the Page 101 of the assessee's Paper Book. The Unit No.4 commenced commercial operation w.e.f, 02.02.2005 which is evidence by Form No.10CCB from placed at Paper Book page 68. It can thus perusal of the bad debts written off would show that all the debts pertained to assessment year 2002-03 and earlier Financial Years. The units for which deduction u/s 80-IB and 80-IC were claimed by the assessee, came into existence only in F.Y. 2004-05. Thus, it is clear that the bad debts written off which was claimed as deduction did not pertain to any of the units for which the assessee claimed deduction u/s 80-IB and 80-IC of ....
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....itial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. (emphasis supplied)". As per Section 80IA(5) r/w Section 80IB(13) and 80IC(7), for the purposes of computing the quantum of allowable deduction u/s 80IB, the profits and gains of the eligible unit of the assessee has to be computed as if such eligible business were the only source of income of the assessee during the year. The above expenses, even though booked centrally in the head office books, have been incurred for all the units of the assessee company. Hence; in order to arrive at the true and correct value of the profits & gains derived from the eligible units, these expenses are required to be allocated to all the units in the proper manner. The best way to divide these expenses would be to allocate among eligible and non-eligible units in the ratio of workers of eligible undertakings to the total number of workers across all the ....
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.... appellant's argument that the residual costs pertain to those cost which could not be allocated or identified with single function or unit due to the general utility to all the functions and units of the company. The basis of allocation of this cost is the number of executive. These costs include the residuary costs of all the support functions which have not been allocated to the Cost of Goods Sold. As per the appellant, at corporate office level there were 101 persons during the FY 2004-05 out of which, persons were working in supply function which is directly linked to factory operation. This worked out to 21.78%. The ratio of sale of fiscal units to overall sales was 26.10%. The effective percentage of residual cost thus worked out to 5.68% (21.78% * 26.10%), which the appellant applied for allocating the residual cost to the eligible units. For allocation expenses, the appellant has taken into consideration number of person as well as sales of the eligible units. The AO has allocated the residual costs of the corporate office on the basis of the number of workers. Hence, I find more logic on the basis of allocation of expenses adopted by the appellant as the appellant has als....
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....s ground covers ground no. 9 raised by the revenue in ITA No. 529/Kol/2015 for A.Y. 2010-11 and Ground no. 3 raised by the revenue in ITA No. 518/Kol/2016 for A.Y. 2011-12." 44. When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 23.12.2014, passed by the Hon'ble Calcutta High Court in assessee's own case in GA No. 1420 of 2014, ITAT No. 41 of 2014, whereby the issue of eligibility of income from sale of scraps have been discussed and adjudicated in favour of the assessee. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the, Hon'ble Calcutta High Court, a copy of which is also placed before the Bench. 45. The ld. DR relied upon the orders of the authorities below. 46. We see no reason to take any other view of the matter then the view so taken by the decision of Hon'ble Calcutta High Court in assessee's own case vide order dated 23.12.2014. In this order, the Hon'ble Calcutta High Court has inter alia observed as under: "On the question raised by the revenue in its appeal,- we 2 decision thereon by the High. Court of Madras in Fenner (....
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....his issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 14.09.2018, passed by the Tribunal in assessee's own case in ITA No.2113,2150,2114&2151/Kol/2013 & ITA No. 760&762/Kol/2014 for A.Y. 2006-07, 2008-09, 2009-10, whereby the issue of excess disallowance of interest income allocated to eligible unitshave been discussed and remanded the matter back to the AO for factual verification. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the Tribunal, a copy of which is also placed before the Bench. 50. The ld. DR relied upon the orders of the authorities below. 51. We see no reason to take any other view of the matter then the view so taken by the co-ordinate Bench of ITAT Kolkata in assessee's own case vide order dated 14.09.2018. In this order, the Tribunal has inter alia observed as under: "Assessment year 2009-10 assessee's and Revenue's cross appeals in I.T.A. No 760 & 762/Kol/2014.The assessee's first substantive ground seeks to reverse both the lower authorities' action disallowing its section 80IB/80IC deduction claim to the tune of Rs. 16,02,07....
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....a the rate of tax towards payment of dividend to the shareholders namely Reckitt Benckiser Pic., UK and Lancaster Square Holdings, Spain. The AO also failed to appreciate that in terms of section 90(2), dividends being the income in the hands of the non-resident could not be subjected to tax by applying DDT at a rate in excess of the rate prescribed under the DTAA and hence, erred in subjecting the Appellant to additional income tax in terms of section 115-0 of the Act and the AO also erred in not granting refund of the excess Dividend Distribution Tax paid by the Appellant. We are of the view that this issue should be remitted back to the file of the ld AO for factual verification. The assessee is directed to file before AO, the amount of dividend paid, copy of agreement and other relevant documents, as required by AO.Therefore we direct the AO to examine relevant Double Taxation Avoidance Agreements between India - UK with reference to payment of dividend to the shareholders and adjudicate the issue in accordance to law. For statistical purposes, the additional ground raised by the assessee is allowed. 55. The second additional ground raised by the assessee reads as follows....
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....ot tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee." 58. We note that Coordinate Benches of this Tribunal in the following cases held that education cess should be allowed as an expense. The relevant judgments are given below: (i) M/s ITC Limited -vs.-ACIT (ITA No. 685/Kol/2014) - "The assessee's additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317 u/s 37 of the Act. We note that hon'ble Rajasthan high court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue's contentions supporting the impugned disallowance. The assessee's instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant....
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....ing note of CBDT's Circular No. 91/58/66 dated 18-05-1965 as well as co-ordinate bench's order in ITC Limited V/s. ACIT( ITA No. 685/Kol/2014 dated 27- 112018 hold that such a claim of education cess is very much allowable in computing total income under the provisions of the Act." 59. The Ld Departmental Representative relied on the earlier decision of ITAT dated 27- 02-2019, wherein this Tribunal had disallowed the claim on the basis of two contentions: (i) Education cess is an additional surcharge and hence forms of income tax and (ii) Decision of Kalimati Investment Company Ltd. -vs.- ITO (ITA No.2706,4508/M/2010,2552,2553/M/2011) and Sesa Goa Ltd. -vs.- JCIT (ITA No. 72/PNJ/2012) squarely applicable against the assessee. 60. We accept the submissions of the assessee concurring with the decisions of Rajasthan High Court and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. This additional ground raised by the assessee is allowed. 61.Before parting, it is noted that the order is being pronounced after 90 days....