TaxTMI 
TaxTMI 
2017 (4) TMI 1521
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....oyalty chargeable from two Associated Enterprises (AEs) as contemplated u/s 92A of the Act and consequently the order of the CIT (Appeals) upholding the chargeability of royalty from two AEs, as alleged by TPO, is arbitrary, unjust and bad in law. 2) That the CIT (Appeals) has erred on facts and under the law in upholding the jurisdiction of the TPO to determine "arms length price" in respect of alleged royalty transaction with Dabur International Ltd. and Dabur Nepal Pvt. Ltd. not referred u/s 92CA of the Act. 3) That in the absence of any contract as existing during the year between the assessee and two AEs, neither any royalty accrued during the year nor can it be presumed to be receivable and consequently the order of the TPO and sustained by the CIT (Appeals) are without any basis/material and are based on surmises and conjectures not permissible under the law. 4) That the TPO and CIT (Appeals) failed to consider the geographical conditions of working of Dabur International UAE and Dabur Nepal, having no substantial awareness about the Dabur brand in the area and consequently the presumption and assumption about the chargeability....
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....hat the "discounted cash flow" method as used by independent valuer for valuation of shares is proper, then no upward adjustment ought to have been sustained by CIT (Appeals) and consequently an upward adjustment by adopting 25% projected growth rate instead of 19% growth rate as adopted by the assessee in respect of Dabur Egypt is arbitrary, unjust and at any rate very excessive. 10) That the above grounds of appeal are independent and without prejudice to one another. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing." 4. In the departmental appeal grounds raised are as under: "1. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in reducing the royalty from Dabur Nepal (P) Ltd chargeable @ 2% of FOB sale value as against the royalty chargeable @ 7.5% as worked out by the TPO/AO? 2. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in reducing the royalty from Dabur International Ltd chargeable @ 2% of FOB sale value as against the royalty chargeable @ 4% as worked out by t....
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.... royalty which comprised of Rs. 5.34 lacs from Dabur Nepal Ltd. and Rs. 21.02 lacs from Asian Consumer Care Pvt. Ltd., Bangladesh. He also noticed that in the immediately preceding year, the assessee apart from the above two concerns received royalty from Dabur International UAE. He asked the assessee to furnish the reasons for receipt of low/no royalty from the AEs. It was explained by the assessee that the royalty had been accounted for on the basis of agreements in force. The TPO referred to the agreements with Dabur International Ltd. in para 7.3 of the order passed u/s 92CA(3) of the Act dated 26.10.2009, for the cost of repetition, the same is not reproduced herein. On the basis of the said agreement, the TPO noted the following important facts: "(a) The assessee has provided technical and R&D support, know-how, information operational improvement and skills in the areas of the cost management, manufacturing, production procurement, sale, marketing and distribution of products in the Territory to M/s Dabur International Ltd. and has charged licence fees @ 3% of FOB sale (net of taxes and sales return). (b) the assessee has allowed use of its tr....
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....irmed by Dabur international Ltd. is enclosed herewith." 8. The above submissions were not accepted by the TPO for the following reasons: "(a) the assessee did not furnish any evidence in the form of agreement of the termination of above royalty agreement as stipulated in clause 5(a) of the royalty agreement. No other corroborative evidence like nonuse of "Dabur" trade mark or non use of technical know-how by the AE was filed during the course of proceeding before me. In absence of any credible evidence, the self serving claim of the assessee of absence of right to receive royalty from AE to justify non charging of royalty cannot be accepted. (b) Another claim of the assessee that AE had incurred huge expenditure on development of brand of the assessee in overseas market is not supported by any credible evidence like quantum of expenditure and the evidence that the expenditure was actually incurred by the AE for brand development. (c) It is a matter of record as mentioned in above paragraph 7.1 of this order that the assessee has charged royalty of Rs. 164.41 Lakh from the AE in immediately preceding A.Y. 2005-06. However, t....
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....r is enclosed. The same was accepted by the assessee company". 11. The TPO did not find merit in the submissions of the assessee for the following reasons: "(a) the claim of the assessee that AE was under no obligation to pay royalty is based on Xerox copy of an undated letter of May, 2005 alledgly issued by the AE. In the letter the AE has claimed that due to increase in expenditure no royalty is payable to the assessee. It is pertinent to mention here that above extracted terms and conditions of the agreement between AE and the assessee do not stipulate nonpayment of the royalty on the ground of increase in operating cost. In fact as per terms and condition of the agreement the assessee had borne the marketing cost of the AE. Since, the one sided communication by the AE is in contravention to the terms and condition of a legally enforcement agreement, it is held that the assessee has right to charge the royalty from the AE. (b) Without prejudice to above finding I have examined the claim of the AE of increase in operating cost in this year in the above referred to letter, A careful scrutiny of annual audited accounts of the AE (which were filed ....
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....change in the business model of the assessee company during the year." 14. In response to the above show cause notice, the assessee submitted as under: "In view of the brand building exercise undertaken by Dabur International Limited the assessee is not entitled to any royalty, hence the same cannot be considered since there is neither any liability to pay by them nor any right to receive by the assessee is applicable." 15. The TPO did not accept the claim of the assessee that there was no liability to pay royalty by the AE or right to receive royalty by the assessee for the following reasons: "(a) it is not a claim of the assessee that right of both the AEs to use intangibles of the assessee has been withdrawn in the year under consideration by the agreement or otherwise. (b) It is a matter of record that both the AEs have used intangibles of the assessee in the year under consideration both in manufacturing and using the trademark of the assessee for the sale. These facts clearly prove that both the AEs have enjoyed the benefit of the intangibles to generate income in the year under consideration. (c) fr....
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....s at Rs. 248.96 Lakh. Since the assessee has wrongly computed the royalty, the correct arm's length price of the royalty is computed at Rs. 248.96 Lakh. (b) in the case of Dabur international UAE the assessee has computed royalty payable at Rs. 75.27 Lakh as against royalty of Rs. 301.07 Lakh payable to the assessee in the year under consideration as per clause 4 of the royalty agreement which stipulates for payment of the royalty @ 4% of net FOB sales." 17. The TPO computed the arm's length price of the royalty in the year under consideration as under: Company FOB Sales Rs. In Lakhs Royalty Rs. In Lakhs Royalty shown in the books of accounts Difference Rs. In Lakhs Dabur Nepal (P) Ltd., 3319.5 248.96 5.34 243.62 Nepal Dabur International UAE 7526.84 301.07 - 301.07 550.03 5.34 544.69 Accordingly, an adjustment of Rs. 544.69 lakhs was proposed by the TPO on account of arm's length price of royalty. 18. Thereafter, the AO asked the assessee to produce the books of accounts and to furnish the various details, the same were filed by the assessee. The AO observed ....
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....lacs) should not be made to the total income on account of aggregate difference in arm's length price of the transaction relating to sale of investments and receipt of royalty from Dabur Nepal and Dabur International UAE. The assessee vide reply dated 07.12.2009 submitted as under: "With regards to justification regarding transfer price of international transactions it is submitted that the action of TPO in assuming the role of verification officer and considering royalty payment which have never accrued to the assessee as income is illegal opposed to the facts of the case. The transfer price officer further erred in not considering the transfer price report of PWC submitted and ignoring the same is highly arbitraries and opposed to the facts under consideration The detailed submissions made before the transfer price officer and the valuation report submitted on projection basis and subsequently on the basis of actual basis clearly establishes without any doubt that the transaction at which Dabur Nepal shares and Dabur overseas shares transferred by the assessee company clearly satisfies the ALM principle and no additions is warranted....
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....ola", and others. Dabur India's overseas subsidiaries Dabur Nepal and Dabur UAE are using the Dabur India's trademarks and trade names and are not paying any royalties to Dabur India w.e.f. FY 2005-06. This has been the bone of contention and that the AO/ TPO opting to levy royalty for the said usage of brand by overseas AEs on a premise that no third party would ever allow any third person usage of its own brand without any consideration and accordingly the said transaction is violative of TP principles. Another crucial fact that was considered by the Ld AO/TPO is that Dabur India was charging royalties from its overseas AEs in the immediately preceding FYs. As the appellant has not brought out any revealing fact for not charging royalty, the AO took the royalty rates as applied in earlier years by the appellant as the basis for computing the arm's price. The appellant in its submission before AO/TPO did bring out the facts for not charging the royalty from its overseas AEs. The reasons were that Dabur India did not have any significant sales outside India and mainly its customers were Indian Diaspora. With a vision to explore overseas market, Dabur India had ....
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....ection (1). It is emphasized that the Ld. TPO has jurisdiction only of those 'international transactions' which are referred to him by the Ld. AO u/s 92CA(1). From the perusal of Form 3CEB, it is evident that there was no 'international transaction' pertaining to royalty with Dabur International Ltd, and that royalty transaction with Dabur Nepal was inadvertently reported at Rs. 5.34 lakhs . As there was no royalty transaction entered by the appellant during the relevant assessment year, the Ld. AO did not order a reference of the same to the Ld. TPO within the meaning of section 92CA(1). As the international transaction(s) of royalty was never referred by the AO to the TPO u/s 92CA, there was no occasion for the TPO to acquire jurisdiction and the hence the adjudication of arm's length price on royalty transaction is faulty and liable to be quashed. 8.5 Instruction No. 3 of 2003 issued by the Central Board of Direct Taxes on 20.05.2003 on the Role of TPO states that: (ii) Role of Transfer Pricing Officer: The role of the TPO begins after a reference is received from the Assessing Officer, In terms of section 92CA this role is lim....
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.... for determination of ALP the transactions set out in Form No. 3CEB by his letter dated 29-9-2003. The details of these transactions have already been set out above in the earlier paras. The transaction by which the assessee deputed three of its employees to ICICI Infotech, USA, was not considered as an international transaction to be set out in Form No. 3CEB by the assessee. The Assessing Officer, therefore, never referred the computation of ALP to the TPO the transaction of deputation of three of its employees by the assessee to ICICI Infotech, USA. The jurisdiction of the TPO is, therefore, restricted to the transactions referred to him by the Assessing Officer under section 92CA(1). The TPO, therefore, could not under section 92CA(3) determine the ALP in relation to an international transaction not referred to him by the Assessing Officer under section 92CA(1). In this regard, Instruction No. 3 of 2003, dated 20-5-2003 issued by the CBDT regarding computation of income from international transaction having regard to arm's length price, is very clear. In the said instructions, the CBDT explaining the role of TPO has instructed that in terms of section 92CA of the Act, the TP....
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....urt in case of Amadeus (supra) had the occasion to examine this issue and was of view that sub section (2) cannot have retrospective effect inasmuch as it deals with the jurisdiction of the Transfer Pricing Officer and , therefore sub-section (2A) cannot be regarded as being a mere procedural provision. At Para 20 of the Amadeus Ruling, the Hon' Delhi High Court stated that: Similarly, in the case before us, we find that there is nothing in the statute to indicate that sub-section (2A) was introduced in a manner so as to operate with retrospective effect. Subsection (2A) expands the jurisdiction of the TPO by empowering him to determine the arm's length price of any international transaction other than an international transaction referred to him by the Assessing Officer under sub section (1) of Section 92CA. This is clearly an expansion of the jurisdiction of the TPO and, therefore, subsection (2A) can only have prospective effect from 01.06.2011 and would have no application to the present appeal which is in respect of the assessment year 2006-07. 8.8 With respect to point of jurisdiction u/s 92CA(1) and enlarged scope under sub-section (2A....
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....d expired and not renewed by the parties and to effect the termination of the agreement, letter dated 7 April 2005 was given by Dabur International to the appellant stating its desire not to pay the royalty. This letter was accepted by the appellant and thereafter no royalty was payable by Dabur International to the appellant. 8.13 Given that there is no contractual obligation between the parties, no royalty can as such be enforced by the appellant from its associated enterprises. In the absence of contractual obligation, the right to use the Trademarks/logo etc was discretionary upon the associated enterprises due to which the appellant could not have compelled its associated enterprises to pay for the Trademark/logo. 8.14 In the ruling of Maruti Suzuki India Ltd. Vs. Addl CIT, Delhi High Court has recommended certain guidelines on payment of royalty which is reproduced below: "If a domestic entity, which is an Associate Enterprise of a foreign entity within the meaning of Section 92A of the Act, uses a foreign trademark and/or logo on its products or on containers, packaging, etc, manufactured and/or sold in India, no payment to the foreig....
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....a FMCG player was aware of the fact that marketing and promotion of a product is a huge task and that brand building takes years. Given this, a commercial understanding was put in place. That the overseas AEs are incurring substantial marketing and promotion cost it is worthwhile to look into the marketing spent incurred by Dabur International and Dabur Nepal over the years. Dabur International Ltd S.No FY Sales Turnover Rs in Lakhs AD spent- Rs in Lakhs % of AD spent on Sales 1 2004-05 (1st Year of operation) 5,427.15 631.01 12% 2 2005-06 7,643.00 1,416.85 18% 3 2006-07 11,425.00 2,298.77 19% 4 2007-08 14,926.00 2,241.14 15% 5 2008-09 21,728.00 2,918.08 13% Dabur Nepal Pvt Ltd S.No FY Domestic Sales Rs Lakhs AD spent- Rs Lakhs % of AD spent on sales 1 2003-04 2,401.00 14.91 1% 2 2004-05 3,878.00 258.72 7% 3 2005-06 3,772.00 320.79 9% 4 2006-07 4,416.00 368.39 8% 5 2007-08 5,836.00 421.08 7% 6 2008-09 12,324.00 847.48 7% 8.17 The abo....
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....nternational Ltd, UAE 2005-06 14.17 3.01 Dabur Nepal P Ltd 2005-06 3.21 2.48 8.20 From the above table, it can be seen that the appellant would have to incur more costs in India on account to marketing and promotion spends incurred by overseas AEs then earning on account of royalty. As stated earlier, the overseas AEs are incurring more than normal levels of advertisement expenses in their jurisdiction to get firm footage as they are in their early stage of operation in those countries. The appellant instead of first reimbursing the ad spent and then recover royalty thought it fit to adopt a model where the overseas AEs will themselves incur the ad spent without paying any royalty to the appellant. This business model, the appellant submits, is line with arm's length action. 8.21 Further, as per section 92(3) of the Incometax Act, any computation of arm's length price has effect of reducing the taxable income of the tax payer, the provision of section 92 shall not apply. Thus, in view of appellant, any reimbursement of advertisement expenses by the appellant at gain of royalty income would have been prejudicial to the tax base o....
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....sement and publicity expenses. On the contrary, the Appellant is getting hugely benefitted from the brand building exercise done by the foreign AEs which enhances the marketing intangible of the Appellant. Thus, the Appellant is, of considered view, that the Appellant is fully justified in not charging any royalty from its AEs. In light of the above, the appellant pleads to delete the addition made on royalty as the proposed action is unjustified and contrary to the principles of arm's length pricing." 23. The ld. CIT(A) after considering the submissions of the assessee held that royalty @ 2% of FOB sales would be at arm's length price in respect of Dabur International Ltd. and Dabur Nepal Pvt. Ltd. by observing in paras 9.1 to 9.13 of the impugned order which read as under: "9.1 I have carefully gone through various contentions raised by the appellant and other material placed on record. The relevant facts are that the appellant (Dabur India) is legal owner of brand 'Dabur' and other sub-category brands like 'Vatika', 'Hajmola' etc. Overseas AE's of the appellant had been using Dabur India's trademarks and trade names. ....
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....Nepal never accrued or received and the entry was reversed in subsequent year. The appellant has placed reliance upon CBDT instruction no. 3 of 2003 and CIT v Amadeus India Pvt. Ltd. 246 CTR 338 (Del). The appellant has further argued that subsection 2A of section 92CA as inserted by Finance Act 2011 w.e.f. 01.06.2011 is not retrospective in operation as held in case of Amadeus case supra. 9.3 I have carefully examined various arguments of the appellant. In Annexure-VIII of Form 3CEB, the appellant has reported international transaction in respect of royalty received from Dabur Nepal (5.34 lacs) and Asian Consumer Care P. Ltd., Bangladesh (21.02 lacs). The AO referred these international transactions in respect of royalty to TPO u/s 92CA(1). Since these international transactions have been duly reported by the appellant in Form 3CEB, the reference by AO to TPO is in order and TPO gets a valid jurisdiction to determine arm's length price of these transactions. Further, it is pertinent to notice that is no mention in Form 3CEB that royalty income from Dabur Nepal never accrued to the appellant. Once an international transaction is reported in Form 3CEBand it is re....
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....be computed having regards to arm's length price and it does not depend upon existence or otherwise of agreement to get royalty income. Hence contention of the appellant that in absence of an operative agreement for getting royalty income, a notional royalty cannot be assessed under TP regulations is not legally tenable. 9.5 Undisputedly, Dabur India is legal owner of brand name 'Dabur' and other sub-brands and Dabur Nepal and Dabur International which are AEs of Dabur India have been permitted by Dabur India to use its brand names. The appellant has contended that Dabur Nepal and Dabur International have spent significant AMP expenses (advertisement, marketing and prom.: expenses) and therefore 'Dabur' brand is being built-up in foreign territories by the efforts of AEs of the appellant and hence in-fact AEs are providing service to the appellant for which AEs need to be remunerated. However, no remuneration for such services is being given to AEs and accordingly no royalty is being charged from them because if such remuneration is taken into account, it will exceed the royalty chargeable and hence income of the appellant shall further go down. ....
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....rice. The reasoning given by TPO is two-fold. Firstly, royalty agreements under which the appellant had been receiving royalty income upto AY 2005-06 are operative during the year under consideration as there is no evidence that these agreements have been terminated. Secondly, without prejudice, even if it is assumed that these agreements are not operative during period under consideration, royalty chargeable as per these agreements represents arm's length price as per TP regulations. In view of various contentions of the appellant and reasoning given by TPO, royalty issue in respect of both AEs involved is being discussed in following paragraphs. 9.7 Dabur International Ltd. The appellant has entered into an agreement dated 01.04.2003 with Redrock Ltd. (presently Dabur International Ltd.) which inter-alia provided for technical and R&D support, know-how, information, operational improvements and skills in area of cost management, manufacturing, production procurement, sale marketing and distribution of products. It also permitted Redrock to use Dabur logo on both products manufactured by using Dabur's technology and know-how and also product....
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....ellant has argued that agreement with Dabur International has become inoperative w.e.f. 01.04.2005 and hence there was no obligation on part of Dabur International to pay royalty. As discussed supra in para 9.4, since income arising from international transaction has to be determined having regards to arm's length price, existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined by TP regulations. The undisputed fact is that Dabur International Ltd, has been permitted to use Dabur brand name and the appellant had been receiving royalty income for the same upto preceding AY. The TPO has treated said agreement dated 01.04.2003 as basis for arm's length price in the absence of any comparable provided by the appellant. Now the issue is whether TPO is correct in adopting 4% rate of royalty chargeable from Dabur International Ltd. Clause 4 of said agreement is reproduced as under: "In consideration for due discharge by Dabur of its obligations hereunder and use of its trademark/trade name, Dabur is ....
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....alty from Dabur International is Rs. 150.52 lakhs. The AO is directed to give relief to the appellant on this account accordingly. 9.10 Dabur Nepal Pvt. Lid. The appellant has entered into an agreement dated 05.11.1992 with Dabur Nepal Pvt. Ltd., clause 3 of which is reproduced as below: "That as Dabur is allowing DNPL to use its trademarks for sale of products in Nepal, India and other third countries and also entire marketing expenses including salaries and allowances of sales personnel would be borne by Dabur, DNPL will pay to Dabur inform of royalty @ 7.5% of net sales." Based on this, the TPO has computed royalty chargeable from Dabur Nepal @ 7.5% of sales while the appellant has declared royalty income of Rs. 5.34 lakhs. The appellant has contended that even the said declared royalty income never accrued to it and consequently it has been reversed immediately after PY. The appellant has contended that w.e.f. 01.04.2005, this agreement has ceased to be operative and has furnished letters dated May, 2005 and 05.02.2013 in support. The appellant has contended that TPO has wrongly applied rate of 7.5% as mentio....
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....f the agreement, it would not prudent to apply rate of 3% as mentioned in amended agreement to work out royalty chargeable. It is also seen that international transaction of allowing use of trade name/trade mark to its AEs by the appellant is the same with respect to Dabur International and Dabur Nepal. Therefore, there is no reason to assign higher price in respect of international transaction with Dabur Nepal than that with Dabur International. As discussed supra, I have held that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur International. Accordingly, I hold that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur Nepal also and this would take care of non-discharge of obligations on part of the appellant. In this manner, royalty chargeable from Dabur Nepal comes out to be Rs. 66.39 lakhs. The AO is therefore directed to give relief on this account accordingly." 24. Now the assessee is in appeal against the sustenance of addition while department is in appeal against the relief allowed to the assessee. 25. The ld. Counsel for the assessee submitted that the assessee is engaged in the busine....
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....Ltd., UAE for providing technical information, R&D support and skills in the areas of cost management, manufacturing etc. in the territory of UAE vide agreement dated 1st April, 2003, a reference was made to page no. 114 of the assessee's paper book. It was further contended that as per the said agreement, the products manufactured with the R&D support and technical know-how provided by the assessee, M/s Redrock Ltd., UAE shall be entitled to use 'Dabur' mark on the products manufactured and for that the assessee was entitled for royalty of 3% on FOB sales. It was pointed out that the assessee and M/s Redrock Ltd. agreed that for the products manufactured by the said company without technical know-how and R&D support etc. of the assessee, M/s Redrock Ltd. may use the Dabur mark on the products subject to the consent of assessee and in turn the assessee would be eligible for royalty @ 1% of FOB sales of the products manufactured by Redrock Ltd. without the technical know-how and R&D support of the assessee. This agreement was to remain effective for the period of 24 months w.e.f. 1st April, 2003. It was submitted that later on, the assessee acquired the controlling stakes of M/s Red....
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....International UAE for market penetration strategy for enhancing the value of product and establishing the name. In other words, Dabur International by way of such functioning has become the economic owner in that area though legal ownership remains with the assessee. (vi) Dabur International UAE had not manufactured any product with R&D support and technical information of the assessee but it had manufactured all products as per the local requirement and acceptability in the local public. (vii) The assessee vide letters dated 18th July 2011 and 20th July 2011 had brought to the notice of TPO and CIT (Appeals) that the products as manufactured by Dabur International UAE are totally different from the products manufactured by the assessee in India. A list of the products manufactured by Dabur International UAE was also furnished to the CIT (Appeals). See page 125 of Paper Book. (viii) In the year under consideration, the use of Dabur's name on the products manufactured by Dabur International UAE is not on account of any support provided by the assessee but it was on account of ownership interest because after the acquisition of Rodr....
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.... November 1992." 26. It was contended that the ld. CIT(A) did not accept the assessee's contention that in the absence of operative contractual agreement, no royalty was chargeable to tax and that M/s Dabur International Ltd., UAE and M/s Dabur Nepal Pvt. Ltd. had spent significant AMP expenses and accordingly Dabur brand was being built up in foreign territories by the efforts made by AEs and hence in fact, the AEs were providing services to the assessee for which those AE's need to be remunerated and because no remuneration for such services was being paid to AEs, hence no royalty was being charged from them. It was stated that for the purpose of sub-section (2) of Section 92C of the Act, the procedure for various methods had been prescribed under Rule 10B of the IT Rules, 1962 and that the provisions of Sub-Rule (2) of Rule 10C provides that the comparability of international transactions with an uncontrolled transaction shall be judged with reference to the following: "(a) The specific characteristic of the property transferred or services provided in either transactions. (b) The function performed, taking into account the assets employ....
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....ing identical name, the raw material and medium used in the manufacture were totally different from the raw material and medium used in India. So merely on the basis of Dabur's name, the products manufactured by Dabur International were not accepted in UAE and that M/s Dabur International ltd. had manufactured the products as per the local needs and taste of the public residing in the public area of UAE. It was stated that the brand value in a particular area does not depend upon ownership but it depends upon various factors like quality and acceptable products in local public and that M/s Dabur International Ltd. UAE by incurring expenditure and making efforts had become the economic owner of the mark in commercial sense for that area. Therefore, instead of charging the royalty from M/s Dabur International Ltd. UAE, the assessee had to make some payments for providing the services for establishment of its name in UAE. It was explained that earlier, royalty agreement dated 1st April, 2003 was with M/s Redrock Ltd. and at that time it was not the associated company/enterprise of the assessee but later on the assessee had acquired the controlling stakes of M/s Redrock Ltd. in the....
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....greements which had already expired. It was further submitted that no royalty was being chargeable to tax neither from the M/s Dabur International Ltd., UAE nor from Dabur Nepal Pvt. Ltd. because as far as M/s Dabur International Ltd. was concerned, the agreement which was entered by M/s Redrock Ltd. in the year 2002, at that point of time, M/s Redrock Ltd. was considering the manufacturing of the products with the technical and R&D support of M/s Dabur India i.e. the assessee in respect of the Ayurvedic/herbal products in which the assessee was one of the pioneers. But later on, M/s Redrock Ltd. realized that the Ayurvedic products were not acceptable in UAE because there were no Ayurvedic doctors available and only Unani system of medicines was acceptable as per the local trend and custom, then, it had abandoned the idea of manufacturing the Ayurvedic/herbal products and entered into the business of FMCG products which too were manufactured by them with their own technology as per the requirement and taste of the local public keeping into consideration the geographical & market situation, used "Dabur" name on its products and as the agreement was in force up to 31st March 2005, M....
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.... where the geographical conditions, economic conditions, market situation and the products are totally different from UAE. It was pointed out that earlier agreements on the basis of which royalty was payable, were not inexistence and the assessee did not incur any expenditure for the year under consideration and that when the assessee was having 100% ownership it could not have received the royalty from itself. It was also stated that the assessee was purchasing 80% products manufactured by M/s Dabur Nepal Pvt. Ltd., therefore, no royalty could have been paid to the assessee in respect of those goods which were sold to the assessee. It was pointed out that the Nepal Government had not renewed the agreement, as such, no royalty was payable by M/s Dabur Nepal Pvt. Ltd. The ld. Counsel for the assessee submitted that the arbitrary addition made by the AO/TPO and sustained by the ld. CIT(A) was not justified. 32. In his rival submissions the ld. DR strongly supported the orders of the authorities below and reiterated the observations made in their respective orders. It was further submitted that the assessee was receiving the royalty in the preceding years from the AEs situat....
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....e acquired the controlling stake of M/s Redrock Ltd. and name changed to M/s Dabur International Ltd. UAE. In the present case, on completion of the agreement, the said company informed the assessee vide letter dated 07.04.2005 that heavy advertisement expenditure were to be incurred by them and the assessee had not agreed to reimburse such expenditure incurred, therefore, the royalty payment agreement ceased to exist w.e.f. Financial Year 2005-06. For the said proposition, both the parties agreed (copy of the said letter is placed at page no. 122 of the assessee's paper book). So, there was no agreement for the year under consideration to make the payment of royalty as agreed in between M/s Redrock Ltd. UAE and the assessee. In the instant case, when the agreement was in existence, the assessee provided technical know-how and R&D support in respect of the products which were mainly Aurvedic medicines and Herbal products. But later on, the assessee entered into business of FMCG products and acquired M/s Redrock Ltd., UAE and also changed its name to M/s Dabur International Ltd., UAE. In the earlier year, M/s Dabur International Ltd., UAE formerly known as M/s Redrock Ltd. had paid ....
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....ions operate, including the geographical location and size of the market, the lodge and Government orders in force, costs of labour and capital in the market, overall economic development and level of competition and whether the markets are wholesale or retail." 35. From the co-joint reading as contemplated u/s 92C of the Act read with Rules 10B and 10C of the Income Tax Rules, 1962, it would be clear that for the purpose of making transfer pricing adjustments, the arm's length price has to be determined on finding out similar type of payments received by similarly situated and comparable independent entities. But in the present case, no comparable case has been brought on record by the TPO or the ld. CIT(A) while making adjustment on account of royalty. Moreover, no agreement was inforce to charge royalty from the AEs and that the FMCG products are new to the assessee who is known for its Herbal and Aurvedic products. In the instant case, it is not brought on record that the assessee had incurred any expenses for marketing the products manufactured by M/s Dabur International Ltd. (AE) in UAE and that the assessee either made any efforts or contributed any money for the e....
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.... for the year under consideration and in the preceding year, the royalty @ 1% was paid to the assessee for the reason that Ayurvedic products were made with the technical know-how and R&D support of the assessee. However, for the year under consideration, the FMCG products were manufactured which were different from the Indian products having different raw material and medium used in the manufacture. At the same time, the brand name of the assessee was used by the AE and in the earlier years the assessee provided the R&D support, know-how technologies etc. which helped the AE for the year under consideration also to some extent. It is also noticed that the assessee received the royalty @ 1% in the preceding year. The TPO also while working out the royalty rate for the year under consideration was of the view that the royalty @ 1% was chargeable on the products manufactured without the aid and support of assessee company but marketed by using "Dabur" name, however, no basis has been given for the same. In our opinion the estimate made by the TPO for the rate of royalty was highly excessive. We, therefore, after considering the totality of the facts are of the view that the ld. CIT(A....
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.... has not been rebutted. It is also not in dispute that the royalty was payable earlier on the sales, therefore, it is unbelievable that the assessee charged the royalty on the purchases made by it from M/s Dabur Nepal Pvt. Ltd. to increase the cost of purchases. Even if it is presumed that the royalty was to be charged by the assessee then same amount was to be added in the purchases thus the impact will be revenue neutral i.e. on the one hand, income will be increased by crediting the royalty and on the other hand, the cost of purchases will be increased by the same amount, since the sale was made by M/s Dabur Nepal Pvt. Ltd. to the assessee. In the present case, it is an admitted fact that there was no agreement in existence between the assessee and the AE i.e. M/s Dabur Nepal Pvt. Ltd. and nothing is brought on record to substantiate that the assessee incurred any expenditure which benefited M/s Dabur Nepal Pvt. Ltd. in any manner. Therefore, no royalty was payable to the assessee by M/s Dabur Nepal Pvt. Ltd. By considering the totality of the facts as discussed here in above, we are of the view that the royalty @ 2% directed to be charged by the ld. CIT(A) was not justified, th....
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....r the execution of the aforesaid transactions, the share holdings structure of the assessee represented the following diagram: 40. During the course of proceedings before the TPO the assessee furnished the copy of valuation report prepared by M/s Agarwal and Ahluwalia, Chartered Accountants for the valuation of shares of M/s Dabur Nepal Ltd. and M/s Dabur Overseas Ltd. including the shares of M/s Dabur Egypt Ltd. According to the TPO, M/s Dabur Nepal Ltd. was an investment holding company and its valuation was dependent upon the valuation of M/s Dabur Egypt Ltd. The assessee furnished the valuation and working of M/s Dabur Nepal Ltd. and M/s Dabur Egypt Ltd. as under: Dabur Nepal Limited 2002-03 2003-04 2004-05 Income statement 2005-06 2006-07 2007-08 2008-09 2009-10 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 3Ist March 31st March 31st March 31st March 31st March 31st March 31st March 31st March Actual Actual Actual Estimated For....
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....bur Egypt Limited 2002-03 2003-04 2004-05 Income statement 2005-06 2006-07 2007-08 2008-09 2009-10 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 3Ist March 31st March 31st March 31st March 31st March 31st March 31st March 31st March Actual Actual Actual Estimated Forecast Forecast Forecast Forecast 1147796 1067450.28 2054711 Sales 2445106.09 2909676.25 3462514.73 4120392.53 4903267.11 -7% -5% 116589 -719 193567 EBIDTA 230328.99 274091.50 316168.89 388140.98 461887.76 10% 0% 9% EBIDTA/Sales 9% 9% 9% 9% 9% 97048 021374 135037 EBIT 185328.99 233091.50 288168.89 353140.98 429887.76 56170 -58563 79908 PBT 185328.99 233091.50 288168.89 353140.98 429887.76 56170 058563 79908 PAT 185328.99 233091.50 195954.844 240135.864 292323.678 Sh....
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.... * Market Price method * Discounted Cash Flow Value method * Net Assets value method. - Market value method cannot be adopted since; Dabur Overseas Ltd.'s shares are unquoted shares. - Discounted value method-was adopted since there is no net cash outflow. - However, the value of its Dabur Overseas Holding in Dabur Egypt was valued at discounted value method after considering various methods of valuation namely; i) Market Price Method ii) Net Assets Value method iii) Discounted cash flaw method - Discounted cash Flaw method was found suitable in view there being net cash flow and being a manufacturing company engaged in manufacture, import, export warehousing & distribution of beauty care product. - Thus the shares of Dabur Overseas having only investment activity, for valuing the valuer has adopted net assets value method being most appropriate method satisfying Arm's Length Principle. - It continues to have losses from F.Y. 2004-05 onwards. - Dabur Overseas Ltd. incurring losses and there was decline in PBT in FY. 2004-05 b....
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.... Dabur Nepal Pvt. Ltd.'s shares are unquoted shares. - Discounted cash flow value method was adopted since the assessee company reduced dependence on its Nepal subsidiary and having alternate facilities available in Siliguri, W.B. and Newai at Rajasthan. - Thus according to the estimate, the sales value were estimated to come down in view of alternative supply available to assessee company. - The valuation report obtained after duly considering various factors as per accepted methods of valuation by Aggrawal & Ahluwalia, Chartered Accountants. Dabur Nepal Pvt. Ltd sales had been projected keeping in view less dependence in future years by the assessee company. Growth in sales for F.Y. 2005-06." 42. The TPO after considering the submissions and the reports furnished by the assessee observed as under: "a. The valuation report is dated 07.06.2005. b. On the date of valuation the actual financial for the financial year 2004-05 were available. c. However projected Profit and Loss Accounts and Balance Sheets for all the companies under valuation for the financial year ending on Mar....
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....on reports prepared by Agarwal and Ahluwalia Chartered Accountants have been filed. During the course of proceedings Mr. Sanjay Agarwal, CA also appeared and attained the method of valuation. A detailed note was also filed in this respect by the AR on 07.10.2009. (ii) On the basis of various information filed, it is seen that the valuation report of Dabur Overseas Limited, Dabur Egypt Limited and Dabur Nepal Limited has been prepared using following methods: 1. Dabur Overseas Limited Net Asset Value Method 2. Dabur Egypt Limited Discounted Cash Flow Method 3. Dabur Nepal Limited Discounted Cash Flow Method (iii) The valuation reports have used the actual data for financial years 2002-03, 2003-04 and 2004-05 and have used the projected financials for the financial years 2005-06 to 2009-10. As mentioned in Para 2 of the reports, the projected profit and loss account and balance sheet for Dabur Overseas Limited, Dabur Egypt Limited and Dabur Nepal Limited for financial year ending as at March 2006, 2007, 2008, 2009 and 2010 is based on management projections. (iv) It is further seen from the computation c....
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.... b. In the proposed valuation, increased cost on account of interest paid, capex expenditure, incremental cost of working and increased tax outflow has been ignored. c. The valuation has been duly accepted by the Exchange Control Authority on the basis of valuation report of Agarwal and Ahluwalia Chartered Accountants. d. Fresh Valuation reports were submitted by the assessee prepared by Agarwal and Ahluwalia Chartered Accountants using the figures of actual audited figures for the period from 2006 to 2009. e. It has been pointed out by the AR for the assessee that Dabur International Limited has purchased the shares of Dabur Nepal Limited from unrelated parties viz. Lunar Trading Company and Bibhuti Pvt. Ltd. and the cost of acquisition is comparable with the cost at which the shares have been sold by Dabur India Limited." 46. The TPO with regard to M/s Dabur Egypt Ltd., did not find merit in the objection of the assessee by observing as under: "As already mentioned the growth of 89% has been projected by me on the basis of figures of sales of preceding year i.e. FY 2004-05, whereas the assesses company has ....
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....ed parties at almost the same rate. The TPO observed that only certificate had been filed by the assessee which was issued by M/s Dabur International Ltd. and that buying a small stake in any company and buying the whole company through managing stakes were two different issues which would carry two different prices i.e. purchase price of quoted shares for the purpose of having controlling right in a company would be different from purchase prices of small investment and there was difference in strategic investment and routine investment. Thereafter, the assessee furnished fresh valuation reports of the shares by substituting the figures of projected sale with the actual sale achieved during the period 2006-09 as under: Dabur Egypt Limited 2002-03 2003-04 2004-05 Income statement 2005-06 2006-07 2007-08 2008-09 2009-10 12 months 12 months 12 months In USD 12 months 12 months 12 months 12 months 12 months 3 1st March 31st March 31st March 31st March 31st March 3 1st March 3 1st March 3 1st March Actual ....
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....nbsp; Less Debt as on 31.03.2009 5.54 Shareholder value 6.91 Dabur Nepal Limited 2002-03 2003-04 2004-05 Income statement 2005-06 2006-07 2007-08 200849 2009-10 12 months 12 months 12 months Nrs In Lakhs 12 months 12 months 12 months 12 months 12 months 31st March 31st March 31st March 31st March 3 1st March 3 1st March 3 1st March 31st March Actual Actual Actual Actual Actual Actual Actual Forecast 27961.79 28347.35 29634.41 Sales 31040.46 35181.33 39159.92 43519.23 22930.54 10% 1% 4310.15 3864.07 3074.02 EBIDTA 2790.96 3028.50 2995.23 2232.29 2376.98 15% 14% 10% EBIDTA/Sales 9% 9% 8% 5% I0% 3210.80 2781.70 2044.61 EBIT 1593.26 1695.81 1632.78 674.62 ....
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....imated by applying any growth rate. It can be seen that the projected sales for the year ending March 2010 is almost 52% of the actual sales of March 2009 in the case of Dabur Nepal Limited. Similarly the projected sale for the year ending March 2010 is almost 34% of the actual sales of March 2009 in the case of Dabur Egypt Limited. It cannot be believed that the sales would go down to such an extent in the year 2009-10. Even otherwise any projection without any basis is a pure guess work and such pure guess work cannot determine the price of shares. c. Various other figures for the Capex and incremental working capital have been changed for the purpose of fresh report." 49. The TPO was of the view that it would not be prudent to use the actual data (for financial year) to compute the value of M/s Dabur Nepal Pvt. Ltd. and M/s Dabur Egypt. For the aforesaid view, he mentioned that the provisions of Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. 50. According to the TPO, the assessee was required to ensure its international transactions with the....
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....ace. Thereafter, the AO passed the assessment order and made the aforesaid addition to the declared sale consideration of immovable assets. 52. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the share valuation arrived by the TPO by just altering the projected figures (corresponding figures of expense side were not altered) was totally without any basis because the actual audited results for the financial year 2005-06 were not available and accordingly estimated figures were used, since the sales of shares of Dabur Nepal Pvt. Ltd. and Dabur Overseas Ltd. had happened in financial year 2005-06. The assessee provided a brief history of background and past financial results of the entities as under: "11.5 Dabur Nepal Pvt. Ltd., Nepal Dabur Nepal is owned by Dabur India wherein Dabur India holds 79.96% and balance is held by Dabur International Ltd and Mr. SS Rana with stake of 17.50% and 2.54% respectively. The share holding pattern of Dabur Nepal Pvt. Ltd. is provided below. FY 2005-06 FY 2004-05 FY 2003-04 Share Holding in % 1. Dabur India Ltd., India 0 79.96%....
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....on report is submitted. As stated, this valuation report was considered as an external benchmark / CUP method for the compliance of Transfer Pricing regulations. Further, two more shareholders also sold off their investment in Dabur Nepal to Dabur International at same price. The copy of such sale of shares by such shareholders is furnished. The price received by Dabur India Ltd from Dabur International Ltd is almost similar to price received by two independent parties disposing their 17.53% within a span of about 3 months. Thus, appellant submits, that price charged by it is fully in compliance of transfer pricing regulations and cannot be further enhanced as alleged by the Ld. TPO in his order. Name of seller Financial Year of Sale No of Shares Price USD Date of Purchase/Agreement Date of Valuation report Dabur India Ltd, India 2005-06 6,38,520 6.1852 15-06-2005 07-06-2005 Bibuti Pvt Ltd, Nepal 2004-05 60,000 6.4133 28-03-2005 NA Lunar Trading Co, Nepal 2004-05 80.000 6.0800 28-03-2005 NA Total 7,78,520 In relation to sale of shares of Dabur Nepal, the ap....
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....-03 1,147,796 56,170 4.89% 2001-02 1,224,010 77,856 6.36% It can be seen from above, that Dabur Egypt is earning a nominal return. Dabur Egypt holds no intangibles and accordingly, the return would also be nominal. Dabur India decided to sell its total stake in Dabur Overseas in 2005 for which a valuer was appointed to value the shares of Dabur Overseas / Dabur Egypt. As per the valuation report, the value of 100% of stake was arrived at Rs. 4.70 crores, in which the 76% stake of Dabur Egypt is also factored. The appellant took that valuation as the basis of arriving at the sale consideration. This report was also submitted to the authorized banker per the FEMA guidelines. The copy of the valuation report is submitted. As stated, this valuation report was considered as an external benchmark / CUP method. In relation to sale of shares of Dabur Overseas/ Dabur Egypt, the appellant submits that: - The basis of valuation of shares was done per the prevailing market conditions and projected financial of Dabur Overseas/ Dabur Egypt; - The appellant arrived the value of sale consideration by an a....
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....luation, thereby confirming that the projected report dated 07.06.2005 was not faulty and could have been taken as a basis of CUP method. The assessee stated that the following vital key assumptions were missed by the TPO: Factors Assumptions of Appellant Assumptions of TPO Objections to TPO's assumptions Sales Forecast In case of Dabur Nepal, the projected sales figure of -5% was taken as forecasted business of Nepal was dim. This is because India which use to source from Nepal had developed its own facilities. Thus future for Nepal looked bleak. The business of Nepal was also facing challenge in terms of recent political and other factors. In case of Dabur Egypt, the sales projected number was based on future outlook of the management and 19% growth factor was not minuscule number. TPO took the sales growth of 5% purely on the basis of actual for FY 2004-05. Similarly, for Dabur Egypt, the TPO took actual number of FY 2004-05 as 89% to forecast for all future years The ld. TPO has considered a single year data of FY 2004-05 as a basis to project the future years. The appellant believes that the TPO cannot enter into the shoes of businessman while foreca....
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.... The appellant's submits that analogy drawn by the Ld TPO is faulty. CUP here is directly available and should have been accepted as discharge of ALP. 56. On the basis of the aforesaid submissions the assessee stated that the TPO had wrongly assumed factor of 5% and 89% as basis to forecast future sales. While he had no basis in taking such number and also committed another error in keeping all costs constant as provided by the assessee in arriving at the new valuation. Therefore, the TPO had wrongly computed the arm's length price in relation to the shares which was liable to be quashed and in case of Dabur Nepal Pvt. Ltd., he ignored strong internal CUP information leading to wrong adjustment. 57. The ld. CIT(A) after considering the submissions of the assessee held that the arm's length value of shares as determined by the independent valuer need not be disturbed and accordingly upward adjustment of Rs. 11.64 crores in respect of sale of shares of M/s Dabur Nepal Pvt. Ltd. was directed to be deleted. The relevant findings have been given in paras 12.1 to 12.4 of the impugned order which read as under: "12.1 I have carefully gone through various su....
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....r adopted -5% projected growth. The reasoning given by the appellant for using (-)5% as projected growth is that there was political turmoil in Nepal state during that period and therefore atmosphere in Nepal was not conducive for normal business. This is a fact that Nepal had been facing acute political turmoil since long and it has a bearing on business climate. Further, valuation study is based on projected figures when actual figures were not available. During assessment stage, appellant furnished fresh valuation report from same independent valuer in which actual figures were used and this report shows valuation of shares at a lower figure than that reported in earlier report Now, question arises which figure of value of shares is more near to the reality - value as worked out in original valuation report with -5% projected growth OR value worked out by TPO using +5% projected growth. Subsequent valuation report using actual financial figures shows value at lower figure and it indicates that the value determined in original valuation report is naturally more close to reality than the value determined by TPO. Now, question arises whether subsequent valuation report using actual....
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.... Thus, it is seen that even CUP method supports that value of shares determined by independent valuer." 58. As regards to the valuation of Dabur Overseas Ltd., the ld. CIT(A) held that arm's length value of the shares was to be determined by adopting 25% projected growth rate. He, therefore, directed the assessee to furnish required financial data before the AO, so as to work out the arm's length price of shares by adopting 25% as projected growth instead of 19% as taken in valuation report. The relevant findings have been given in paras 12.6 & 12.7 of the impugned order which read as under: "12.6 The relevant facts are that the appellant has 100% stake in Dabur Overseas Ltd., an investment company (DOS) which has its registered office at British Virgin Islands, which in turn has 76% stake in Dabur Egypt Ltd. Remaining 24% of stake in Dabur Egypt Ltd. was held by Dabur International Ltd. The appellant, Dabur India Ltd. sold its 100% stake (50,000 shares) in DOS to Dabur International Ltd. and since these shares were unquoted, it obtained a report for valuation of shares as on 31.05.2006 from an independent valuer wherein value of shares has been determined at Rs.....
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....ased on projected figures. However, even the appellant could not explain why figure of 19% has been chosen as projected growth. In view of this, it was proposed that it will be more realistic to adopt figure of projected, growth by taking average of growth figures available for three preceding years which comes out to be 25%. The appellant did not furnish any cogent objections to this proposal." 59. Now both the parties are in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee had got valued the shares from an independent valuer M/s Agarwal & Ahluwalia, Chartered Accountants, who had determined the value of shares on the basis of discounted cash flow method which was prevalent in the commercial market and the TPO had also taken the same method of valuation in to consideration. It was further submitted that for the purpose of valuation, the valuer had adopted the actual data for the earlier 3 years i.e. 2002-03, 2003-04 and 2004-05 whereas for the subsequent 5 years he had adopted the data based on estimate. It was submitted that for the subsequent years, the growth rate was estimate....
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....ssessee had sold the shares of M/s Dabur Overseas to M/s Dabur International Ltd. for an amount of Rs. 4.69 crores. It was further stated that M/s Dabur Overseas Ltd. was basically a holding company and no actual business was being carried out, though the M/s Dabur Egypt was in the business of manufacturing of hair care oil, vinegar, rose water and glucose etc. and operated in low risk area. However, in order to work out the valuation of shares of M/s Dabur Overseas Ltd. and the valuation of shares of M/s Dabur Egypt was also made, on the basis of discounted cash flow method as per the guidelines of FEMA. It was contended that while preparing the valuation report the valuer used the actual data for the financial years 2002-03 to 2004-05 and for subsequent years, in the absence of any actual data, the estimated data had been used by keeping into consideration the past history as well as the future growth potential and the political volatility present in Egypt. It was pointed out that in the financial year 2002-03, the actual growth rate was (-) 7% in financial year 2003-04, it was (-) 5% whereas in financial year 2004-05 it was 89%. However, for the subsequent years by keeping in vi....
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....the assessee obtained a report dated 07.06.2005 from an independent valuer wherein the value of shares had been determined at Rs. 17.16 crores as on 31.05.2005 by following discounted cash flow method. At the time of sales of shares, actual figure of financials of Dabur Nepal Pvt. Ltd. were available upto financial year 2004-05 and for the succeeding years, projected sale growth of (-)5% was taken on the basis of political turmoil in Nepal state. However, the TPO rejected the negative sale growth of (-)5% and had taken +5% projected growth rate to work out the valuation of shares sold at Rs. 28.80 crores. In the present case, during the course of assessment proceedings, the actual figures of the financials for subsequent years were available and on the basis of those figures the valuer prepared the revaluation report which was on the lower side and indicated that the value determined in original valuation report was more closed to the reality than the value determined by the TPO. Therefore, the said valuation was rightly accepted by the ld. CIT(A) particularly when the TPO had also accepted this position and had relied upon the discounted cash flow method as used by an independent ....
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.... the TPO ignored the actual growth figure of (-) 7% and (-) 5% for the preceding two years i.e. FY 2002-03 & 2003-04 respectively. He had also not given any cogent reason to adopt an astronomical figure for several future years at 89% as projected growth. Moreover, he had not altered the corresponding outgoing/expense for those future years. Therefore, the approach adopted by the TPO was not reasonable, particularly when, in the subsequent valuation report obtained from an independent valuer, the actual financials which were available during the course of assessment proceedings were adopted. In the present case, the ld. CIT(A) although directed the AO to adopt average of growth figure available for three years which came to 25% but ignored the growth rate based on actual figures for the future years. In the instant case, it is not pointed out as to how and in what manner the average growth figure taken by the assessee at 19% for succeeding years, on the basis of valuation report of an independent valuer was wrong. Therefore, we are of the view that the ld. CIT(A) was not justified in adopting the figure of average growth at 25% instead of 19% adopted by the assessee. Accordingly, w....
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....n the record. In the present case, the ld. CIT(A) categorically stated that all the payment had been made by the assessee before due date of filing the return of income u/s 139(1) of the Act. Therefore, such payments could not be disallowed as per the provisions contained in first proviso to Section 43B of the Act. The view taken by the ld. CIT(A) was inconsonance with the ratio laid down by the Hon'ble Supreme Court in the case of CIT Vs Alom Extrusions Ltd. (2009) TIOL 125 (supra). We, therefore, do not see merit in the appeal of the department on this issue. 69. The next issue vide Ground No. 5 relates to the deletion of addition of Rs. 3,05,088/- made by the AO on account of club expenditure. 70. The facts related to this issue in brief are that the AO disallowed the impugned amount on the ground of personal expenses. The submission of the assessee before the ld. CIT(A) was that the assessee incurred expenditure on account of club partnership etc. keeping in view the trend in the nature of business as per the commercial requirement in order to promote its business interest. It was stated that club partnership had been provided which was neither personal nor ....
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....er, did not consider the following sums while computing deduction available u/s 80IB/80IC of the Act: "1. Disallowance u/s 40(a)(ia) Rs. 12,09,492 2. Scrap sales Rs. 1,35,35,376 3. Rental income Rs. 102,769" 76. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the above the issues relating to the above said disallowance were decided in favour of the assessee by the then ld. CIT(A) for the assessment year 2005-06. It was further submitted that the disallowances u/s 40(a)(ia) of the Act were the additional sum of business income, so it was eligible for deduction u/s 80IB/80IC of the Act. 77. As regards to the scrap sale, it was stated that the assessee purchased raw material, packing material which constituted the expenditure for the manufacturing of finished products and during that process some scrap resulted. Therefore, the realization from the scraps had a close proximity to the profit and gains derived from industrial undertaking. The reliance was placed on the judgment of the Hon'ble Madras High Court in the case of CIT Vs Sundaram Clayton Ltd. reported at 133 ITR 34. 78. As regards to t....
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.... having close proximity to running of business, which accordingly is eligible for computation of deduction u/s 80IB/80IC. As regards the disallowances made u/s 40(a)(ia) and 43B are concerned, it is held that once these disallowances are made from computation of business income which is in accordance with provisions contained in section 30 to 43D, it is but a logical corollary that deduction u/s 80IB/80IC would also be required to be given on eligible profits taking into account such disallowances. In this connection, reliance is placed on decision CIT v Gem Plus Jewellery India Ltd. 233 ITR 248 which has been relied upon by the appellant as also on case of Raj Kumar Exports Pvt. Ltd. v ACIT (2009- T1OL-808-ITAT-MAD). As a result, the above grounds of appeal are decided in favour of the appellant." 21.2 In view of above, following the reasoning given by my predecessor for AY 2005-06, I hold that all the three items, i.e. disallowance u/s 40(a)/(ia), income from sale of scrap and rental income constitute eligible profits of the units for purpose of computing deduction available u/s 80IB/IC. The grounds of appeal are accordingly allowed." 80. Now the departm....
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....iced that the additional ground has been raised by the assessee relating to the ESOP expenses which were debited in the profit and loss account but added back while computing the income allegedly under some misconception of facts and law. The issue raised by the assessee is a legal issue. 88. As regard to the admission of the legal ground, the Hon'ble Supreme Court in the case of National Thermal Power Company Ltd. Vs CIT (1998) 229 ITR 383 (supra) held as under: "The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 2....