TaxTMI 
TaxTMI 
TaxTMI 
2020 (8) TMI 795
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....ubmissions made during the assessment proceedings 2. Erred in making an addition of Rs. 256.56 crore (Rs. 129.57 crore for the distribution segment and Rs. 126.99 crore for the manufacturing segment) to the total income of the Assessee under Section 92CA(3) of the Act on account of adjustments in the arm's length price of the alleged international transactions undertaken by the Assessee. Presumption of fictitious transaction in the nature of 'provision of brand promotion services' since AMP is not an international transaction 3. Erred in alleging that the AMP expense incurred by the Assessee is an international transaction under Section 92B of the Act; 4. erred in ignoring that the Appellant has not rendered any service to the Associated Enterprises ('AEs') and hence erroneously treating and categorizing AMP expenses incurred by the Appellant on its own behalf, as an international transaction between the Appellant and AEs under Section 92B of the Act; 5. failed to appreciate the fact that AMP expenses were incurred 'wholly and exclusively' for purpose of business of the Assessee in India and no benefit was passed on to the AE and hence, there s....
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.... a scientific search process for applying bright line test ('BL T') using 'Other Method' to determine the arm's length price of the AMP expenses incurred by the Appellant; Business and commercial expediency 13. erred in holding that the Appellant incurred AMP expenses for promoting the brands owned by overseas AE, instead of appreciating that the Appellant was only carrying out its business by using the well-established brands and any benefit derived by the AE is purely incidental; 14. erred in ignoring that the advertisements by the Appellant are product advertisements to enable higher sales of the products in the Indian market and not brand advertisements. Most appropriate method 15. without prejudice to the above, erred in applying bright line test ('BLT') and treating the same as routine ALP determination method under "Other Method" to determine the arm's length price of the AMP expenses incurred by the Appellant; 16. without prejudice to the above, erred in not appreciating that BL T does not take the functional and the accounting differences between the Appellant and the comparable companies; Mark-up on AMP expenses 17. without ....
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.... and the transaction value was commercially agreed between the two parties; 26. erred in holding that valuation of goodwill at Rs. 8.27 crore was not justified; 27. failed to appreciate that by entering into the transaction for purchase for purchase of existing business of RHC, the Appellant had acquired significant intangible assets, including but not limited to permits, approvals, registrations, licences, know-how, skilled manpower, contracts, other business or commercial rights, etc. 28. failed to appreciate that assets and liabilities (including goodwill) were valued at their respective fair values based on a valuation report in accordance with the prevailing accounting norms. 29. erred in not appreciating the documents submitted by the Appellant justifying the value of goodwill as well as other assets & liabilities and disregarded the same without giving any cogent reasons; 30. erred in not appreciating that the assessing officer cannot step in the shoes of the Appellant and define the commercials of the transaction which has to be adjudged from the point of view of the businessman and not of the Revenue; 31. erred in holding that: (i) the extra consideration was....
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....al transaction more than the prescribed limit of Rs. 15 crore, the assessing officer (AO) made reference to Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP). During the T.P. assessment proceeding, the TPO noted that the assessee has incurred huge expenses of Rs. 711.57 crore on advertising and marketing and promotion (AMP), and thus creating valuable marketing intangible by incurring huge expenses for L‟Orial brand. The assessee is not the legal owner of the brand in India and by way of huge marketing expenses which effectively translate into development of brand and thus contributing the huge expenses for development of brand AEs. On the aforesaid view, the TPO issued show-cause notice as to why the adjustment as undertaken in AY 2014-15 should not be adopted in AY 2015-16. The TPO also took his view that the function performed asset implied and risk assumption (FAR) is materially remains the same. 3. The assessee filed its detailed reply vide reply dated 17.10.2018. The extract of reply is recorded by TPO in paragraph-5.3 of his order. In the reply, the assessee apart from raising various legal and factual objections contended that the assessee inc....
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....isallowed. The assessee filed its reply dated 21.12.2018. The reply of assessee is extracted by AO in paragraph-4.4 of the draft assessment order, relevant part of the reply is extracted below: "The company vide that BTA had agreed to acquire various business assets and liabilities from Rahul Healthcare. Accordingly, the company had acquired the current assets and current liabilities from Rahul Healthcare. The details of the net current assets / liabilities purchased on going concern basis from Rahul Healthcare are as under: Particulars INR in million INR in million Inventory 160.14 Deposits 1.13 Trade Receivables 13.60 Loans & Advances 0.15 175.02 Less: Sundry Creditors (203.58) Less: Expenses payable (2.81) Net current assets (31.37) From the above, it is clear that the net current assets in negative because even the liabilities of Rahul Healthcare were also purchased by the company" Regarding basis for recognition of Goodwill and reasons for not considering non-compete and know-how, the assessee stated: "At the outset, L‟Oreal India‟s core busines....
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....l recognized (122.93) In view of the above facts, the Goodwill claimed by the assessee is not correct. Therefore, it is presumed that the assessee has claimed unjustified Goodwill amounting to Rs. 8,27,60,777/- towards purchase of running business from M/s Rahul Healthcare on "Slum Sale basis‟. 4.6 The claim of the assessee is not acceptable as the primary onus is on the assessee to establish the genuineness of the claim. As per section 101, 102 and 106 of the Evidence Act, the onus lies upon the assessee to prove all the claims to the satisfaction of the AO, which was not discharged by the assessee as it failed to prove the source of Goodwill claimed. Since, the primary facts are in the knowledge of the assessee; it is its duty to prove the genuineness of the transaction and identity & creditworthiness of the lenders. This view is supported by the decision of Hon‟ble Raj. High Court of India (2002) 178 CTR (RAJ) 420 MP High Court in the case of VISP(P) vs. CIT Indore (2004) 186 CTR 218 (MP). 4.7 Therefore, on the facts and findings in the case and considering the assessee‟s submissions in the matter, the assessee has claimed unjustified goodwill of....
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....of the parties and have gone through the orders of authorities below. We have also gone through the orders of Tribunal for various earlier years. We have noted that the TPO while passing the order under section 92CA basically followed the order for AY 2014-15. We have further noted that in appeal for AY 2014-15 in ITA No. 6448/Mum/2018, the Tribunal while considering the orders for earlier year passed the following order: "9. We have heard both the counsel and perused the records. Learned Counsel of the assessee submitted that identical issues have been considered by the ITAT in assessee‟s own case for earlier year except for the alternative adjustment on manufacturing segment. Submission of learned counsel in this regard is summarised as under :- (A) Adjustment on account of advertisement, marketing and brand promotion (AMP) expenses :- (i) Covered by appellant‟s own ITAT order for A.Y. 2013-14 (page No. 31 para 18) (copy of aforesaid orders were submitted during the course of hearing). (ii) Also appellant‟s own ITAT order for A.Y. 2008-09 to A.Y. 2010-11 (page 16-17 and para 2.4), A.Y. 2011-12 (page 13 and para 16) and A.Y. 2012-13 (page 23-24 and para 1....
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.... the manufacturing segment- international transaction of payment for availing of marketing support services to AEs. (a brief description of marketing support services availed is described in Annexure 2 to this note). 1. The TPO in his order has instead of examining whether or not the method adopted to determine the ALP is the most appropriate method or whether the comparable companies selected are appropriate or not, has gone into the question of determining the need for such services, proof of rendition of such services, commercial expediency, basis of cost allocation etc. It is submitted that it is not part of the TPO's jurisdiction to consider the above aspects. 2. In this regard, the Appellant relies on the Judgment of Bombay High Court in the case of CIT vs. Lever India Exports Ltd. (supra) 3. In any extent, Appellant has submitted extensive evidences to TPO including advertising creative/concepts developed by AEs, sample story boards for Television Commercial conceptualized by AEs and adopted by the Appellant, agreements, sample invoices, Organisation structure of Marketing support services team, sample email correspondences, product and marketing dossiers, public r....
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....ed by the TPO in remand proceedings. E) Alternate adjustment on the manufacturing segment- international transaction of payment for availing of consulting services. (Brief description 1). The TPO in his order has instead of examining whether or not the method adopted to determine the ALP is the most appropriate method or whether the comparables selected are appropriate or not, has gone into the question of determining the need for such services, proof of rendition of such services, commercial expediency, basis of cost allocation etc. It is submitted that it is not part of the TPO's jurisdiction to consider the above aspects. 2. In this regard, the Appellant relies on the Judgment of Bombay High Court in the case of CIT vs. Lever India Exports Ltd. (supra) 3. In any event, the Appellant has submitted extensive evidences inter alia including agreements, sample invoices, evidences for technical/ consulting advise provided by AE through sample emails etc. in support of receipt of consultancy services and the benefits derived [Page 536-678 (Paperbook Volume 1 and 2); Page 1092-1193 (Paperbook Volume 3)]. Further, the Appellant submitted additional evidences before DRP comp....
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....the Tribunal while disposing off the appeal of the assessee for A.Y 2012-13 in M/s L"Oreal India Pvt. Ltd. Vs. ACIT-7(1)(2), Mumbai [ITA No. 1417/Mum/2017; dated 30.01.2019], had followed the view earlier taken in the preceding years and had vacated the adjustment of 304.69 crores that was made by the TPO by alleging that the AMP expenses incurred by the assessee was an international transaction under Sec. 92B of the Act. The Tribunal while so concluding had observed as under: "12. We have also perused the agreement of assessee with its AE dated 4th January 2011 executed between assessee and its AE. Clause 7 of the agreement descries about right of distribution of licensed product in the territory. As per Clause 8 of the said agreement the assessee is responsible for the advertising the licensed product in the territory. The territory is defined under clause 1.5 of the agreement, which means the territory of Nepal, Bhutan, Bangladesh, Maldives, Mauritius, India and Sri Lanka. However, it excludes any free trade zone, which may exist or may be created. Further it excludes duty free shops located in the duty free or travel retail area which is specialized in sales against foreign c....
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....3. Ground no.19 to 23 relates to alternate adjustment on account of payment for packaging design, cost, training to Saloon customers and promotional goods. The ld. AR of the assessee further submits that these grounds of appeal are also covered by the decision of Tribunal for AY 2014-15. The ld. AR for the assessee submits that the assessee has also filed an application for admission of additional evidence. The additional evidences furnished by the assessee have direct relevance with the issue under consideration. The lower authorities however, did not give due cognizance to those evidences and made adjustment by taking view of insufficient documentation. Accordingly, the assessee wishes to furnish additional explanation/supporting documents to supports assessee‟s contention that no adjustment should be made on account of payment made in lieu of support services received by it. The assessee has filed various documents in the form of Annexure-1 to Annexure-4, details of which is annexed along with the application for additional evidence. The assessee is also furnished copies of all those evidences running from page no. 3046 to 3312 of Paper book (PB). The ld. AR for the asse....
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.... of Lever India Exports Ltd. (supra). In the said decision it was expounded by Hon'ble Jurisdictional High Court that it is not for the TPO to apply benefit test. Hence, this limb of TPO‟s reasoning is not sustainable. Further it is clear that the assessee has submitted enormous additional evidence before the DRP and they have been remanded to the TPO also. The TPO has not made any adverse comment rather he has again reiterated that expenses are excessive and has justification aspect in third party situation. In other words, TPO‟s has again reiterated the issue of benefit test which has been held by Hon'ble Jurisdictional High Court to be not applied by TPO in his adjudication. The Hon'ble Jurisdictional High Court in CIT vs. Johnson & Johnson Ltd., ITA No. 1030/2014, dated 7th March 2017, while dealing with similar issue of determination of arm's length price of royalty by resorting to estimation by theTransfer Pricing Officer has held as under:- "(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the ....
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....onsideration and verification at the end of AO, therefore, we remit the issue to the file of AO for consideration and decision on the issue afresh. The AO/TPO is also directed to follow the order of Tribunal for AY 2014-15 as well. Needless to order that before deciding the issue, the AO shall grant opportunity to the assessee. In the result these grounds of appeal are allowed for statistical purpose. 17. Ground No. 24 to 32 relates to disallowance on depreciation of goodwill. The ld. AR for the assessee submits the assessee acquired goodwill pursuant to acquisition of business from Rahul Healthcare, the valuation of business and goodwill cannot be questioned by revenue authorities. The price allocation was done on the basis of a report of Valuer /Chartered accountant, copy of which is placed on record. The lower authorities erred in holding that calculation for goodwill was not provided. The goodwill as computed by assessee is represented by various intangibles such as licenses, permits etc, amongst these are intangibles, one of the key intangibles was excise licence which allows manufacturing of goods without payment of excise duty due to area which based at exemption provided ....
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....with respect to acquisition of bundle of intangibles from Rahul Healthcare (RHC) as provided in the Business Transfer Agreement (BTA) viz; intangibles identified by the assessee are (i) Existing permits, approvals, licenses, registration etc.,( ii) skilled employees of RHC, which are inducted by the assessee and (iii) existing business contracts of RHC acquired for the business of the assessee. The ld. DR further submits that his First contention on the claim of "Goodwill" or depreciation is that it is not an automatic claim, had that been so, the assessee would pay any extra consideration viz., Rs. 50 crore or Rs. 100 crore and claim it as "goodwill" with depreciation entitlement. Amount of payment or business decision is not questioned here, since it is the prerogative of the business concern. There is bound to be some qualification attached, for which the payment are made to give it the character of "Goodwill" in order to get benefit of depreciation u/s 32 of the I.T. Act. It was submitted that "Goodwill" is not defined under the Income tax Act but the qualifications to get the character of Goodwill one has to look into the definitions of Goodwill as per Accounting Standard (AS)....
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....m connection and reputation". The ld. DR also refereed the decision of Hon‟ble Delhi High Court in Triune Energy Services (P.) Ltd. vs DCIT [2016] 65 taxmann.com 288 (Delhi), wherein it was has held as under; 13. Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base etc. The expression "goodwill" subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. 21. In the second alternative submissions the ld. DR for the revenue submits that no "Goodwill" exists as per the certificate of independent Auditor and in the Business Transfer Agreement dated 26.02.2014. In third alternative submissions the ld. DR submits that as per reply dated 21.12.2018, before assessing officer no goodwill exists. In fourth alternative submissions the ld. DR for the revenue submits that real reason for such a claim lies in the Sub-Contract Manufacturing Agreement between L‟Oreal India Pvt. Ltd. and Rahul Healthcare dated 20th February 2013. A perusal of various clauses of contract manufacturing ag....
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....Ltd. (2016) 76 taxmann.com 103 (Bangalore Trib.). The ld. DR also furnished his submissions in the form of written notes. 24. In the rejoinder submission the ld. AR for the assessee filed detailed written submissions running in to more than 30 pages. In rejoinder written submissions the ld. AR refuted all the submissions of the ld. DR for the revenue and re-treated his submission. Besides that the ld. AR for the assessee further submitted that the ld. DR is trying to make out an altogether new case, which is without any basis. It was argued that during the course of hearing, the ld. AR has put forth the same line of argument and stand as adopted by the AO/DRP. Moreover, the submissions of the ld. DR are based on the paper books submitted by the assessee itself and nothing has been additionally added. The Tribunal being the last fact-finding Authority, a duty is cast on him bring to the notice of Bench, all facts as apparent from records and from orders of the lower Authorities etc. Reliance in case of Mahindra & Mahindra Ltd. v. DCIT [2009] 30 SOT 374 (Mumbai) (SB) is totally misplaced. It is submitted that the ld. DR has only supported and elaborated the stand of the AO/TPO with ....
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....uring, marketing and sales of cosmetic product and not Soaps and that the assessee and Rahul healthcare were not in competition in anyway. 27. The reply furnished by assessee was not accepted by the assessing officer. The assessing officer while passing the draft assessment order on 28th December 2018 treated the goodwill recorded by assessee is at Rs. 8.27 crore as an unexplained investment under section 69 of the Act. The assessing officer also took his view that amount of current liabilities and expenses payable by Rahul Healthcare was taken into account as on 30th September 2013 instead of taking into account the liability as on 31st October 2014 which is the date on which the balance sheet was actually drawn and the transaction was concluded on 3rd November 2014, consequently the depreciation claimed by assessee was also disallowed. On filing objections before DRP, the DRP directed the assessing officer to delete the addition under section 69 by holding that even if the payment represents excess payments by the assessee, is still these payments were made from the books of the assessee and there is no question of applicability of section 69 in this case. However, the disallow....
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....uired not only tangible assets but also bundle of intangible assets collectively called goodwill, which includes various permits, employee, and contracts, though the assessee in Annexure-2 of its reply dated 21.12.2018 has specifically contended about its claim of "goodwill‟ (page 2237 to 2245 of PB). Considering the facts that neither the AO nor the ld. DRP considered the aforesaid facts as placed before us, therefore, we remit these grounds of appeal to the file of AO to consider these issues afresh by considering the aforesaid submission of the assessee and the evidences and pass the order in accordance with law. The AO shall consider the decision of Hon‟ble Apex Court in Smifs Securities Ltd (supra) and Delhi High Court in Triune Energy Services (P.) Ltd. Vs DCIT (supra). Needless to order that before passing the order the AO shall grant opportunity of hearing to the assessee. In the result these grounds of appeal are allowed for statistical purpose. 32. Ground No. 33 to 34 relates to treatment of income from other sources of Rs. 1.89 crore considering twice. The ld. AR of the assessee submits that computation of income for AY 2015-16 is placed on record evidencin....