TaxTMI 
TaxTMI 
2020 (12) TMI 1073
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.....Y. 2009-10 and 2010-11 respectively passed by Ld. CIT(A) challenging the order passed by AO in consonance with the orders passed by the ld. TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short 'the Act') on the grounds inter alia that :- ITA No. 5774/Del/2014, A.Y.2009-10- Assessee's appeal The following grounds of appeal are mutually exclusive and without prejudice to each another. 1. That on the facts and in law, the Learned Commissioner of Income Tax (Appeals)-XX, New Delhi (hereinafter referred to as "the Hon'ble CIT(A)"/ Learned Assessing Officer (hereinafter referred to as "Ld. AO") erred in assessing the income of the Appellant for the relevant assessment year at Rs. 15,33,85,193 as against the returned income of Rs. 1,47,91,724. 2. Grounds pertaining to Corporate Tax 2.1 That the Hon'ble CIT(A) / Ld. AO have erred on facts and in law in disallowing the management fee amounting to Rs. 54,698,578 paid by the Appellant and questioning the need for availing such services from its associated enterprise, thereby challenging the commercial expediency of the services availed. The Hon'ble CIT(A) / Ld. AO have....
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.... any credence to the fact that the Appellant (being the sole distributor of Michelin products in India) is the primary and only direct beneficiary of the Advertisement, Marketing and Promotion ('AMP') expenses incurred locally, and any benefit what-so-ever which may have been derived by the AEs is purely incidental. 3.4 Without prejudice, the Hon'ble CIT(A) / Ld. TPO failed to apply the international guidance as espoused in the case of M/s DHL Incorporated and in the decision of the Hon'ble Special Bench of Delhi Tribunal in the case of M/s L.G. Electronics India Private Limited providing specific guidelines on the manner in which 'Brightline' approach may be applied. 3.5 That the Hon'ble CIT(A) / Ld. TPO erred on facts and in circumstances of the instant case by conveniently ignoring that the Appellant (which operates as a limited risk distributor) is reimbursed / remunerated for all its costs (including personnel cost, AMP expenses, finance cost etc.) along with an appropriate / arm's length mark-up. 3.6 Without prejudice, the Hon'ble CIT(A) / Ld. TPO erred on facts in holding that dealer's incentive, commission and discounts/rebates leads to creation o....
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.... of the hearing." ITA No.3167/Del./2017, A.Y. 2010-11-Assessee's appeal "The following grounds of appeal are mutually exclusive and without prejudice to each another. 1. Impugned order dated 07 November 2016 passed by Ld. Commissioner of Income Tax (Appeals)-44, New Delhi (hereinafter referred to as "the Ld. CIT(A)" is bad in law. 2. Grounds pertaining to Corporate Tax Matter 2.1 That the Ld. CIT(A) / AO erred on facts and in law by making the adjustment amounting to Rs. 8,17,64,429 in relation to management fee paid by the Appellant to its Associated Enterprise (AE). 2.1.1. That the Ld. CIT(A) / AO failed to give due cognizance to the detailed submissions and evidences filed by the Appellant which clearly demonstrate the nature of services availed, need of the Appellant of availing such services and the benefit reaped therefrom, and instead subjectively disallowed the expenditure purely based on presumed disposition. 2.1.2. That the Ld. CIT(A) / AO grossly erred by making the adjustment in relation to management fee paid by the Appellant to the AE without appreciating that the Learned Transfer Pricing Officer ("Ld. TPO") has....
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.... (CBDT) Instruction 3/2016 and making a transfer pricing adjustment under Chapter X of the Act in respect of specific domestic expenses relating to advertising, marketing and promotion ("AMP") 3.1.1. That the Ld. CIT(A) / AO erred in ignoring the fact that the Appellant (being the sole distributor of Michelin products in India) is the primary and only direct beneficiary of the AMP expenses incurred by it and any benefit what-soever which may have been derived by the AEs is purely incidental. 3.1.2. That the Ld. CIT(A) / TPO erred on facts and in law by conveniently ignoring that the Appellant (which operates as a limited risk distributor) operates under a 'Market - Minus' pricing model, wherein it is reimbursed / remunerated for all its costs (including personnel cost, AMP expenses, finance cost etc.) along with an appropriate / arm's length mark-up. 3.1.3. That the Ld. CIT(A) grossly erred in not applying relevant decisions of Hon'ble High Court and further in applying the decision of Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Private Limited (ITA No. 16/2014) and issuing directions to re-compute the arm's length adjustment in respect o....
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.... from profit determination to price determination and that AMP services rendered by the AE needs to be benchmarked separately? 5. Whether on facts and in circumstances of the case, Ld. C1T(A) is legally justified in rejecting the Bright Line Test (BLT) in benchmarking the AMP expenditure without considering a fact that BLT was not used as method to determine arm's length price but was used as economic tool to compute the cost of services rendered by the assessee requiring arm's length remuneration? 6. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in observing that benefit to the AE due to AMP expenditure is only incidental and not intentional? 7. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding that if mi comparison, the gross profit are found to be comparable then no adjustment is warranted on account of AMP expenditure by ignoring a legal position that separate benchmarking of each international transaction is stipulated under the transfer pricing provision as well as under international guidance? 8. Whether on facts and in circumstances of the case, Ld. CIT(A) is....
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....ue's appeal 3. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Michelin India Pvt. Ltd. is into import and resale (or trading) of tyres for passenger cars, trucks and buses under the brand name 'Michelin'. During the year under assessment, the taxpayer entered into International Transaction with its Associate Enterprises (AE) as under :- Sl. No Nature of transaction Value of transaction Benchmarking by the Assessee 1. Import of finished goods for resale 1147841543 RPM- The GP/Sales of the assessee has been worked out at 40.29% 2. Provision of marketing support services 41813397 TNMM-OP/OC has been worked out to be 12.07% as against 8.69% of the comparables 3. Availing of managerial services from AE's 54698578 AEs have been chosen as the tested party and OP/OC has been worked out at 2% as against 16.18% of comparables in the Asia Pacific Region. 4. Reimbursement of expenses by AE to assessee 2763814 No benchmarking required as cost recharge only 5. Reimbursement of expenses by assessee to AEs 4005143 6. Export of Finished Goods to AEs 4364120 No benchmarking ....
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....reement to know the nature of the services provided by MAP to the taxpayer and reached the conclusion that the assessee has incurred huge brought forward cost and establishment cost which include salary and wages of 14.60 crore as compared to 9.21 crore of last year. Taxpayer has also incurred legal and professional expenses of Rs. 2.58 crore as against 1.43 crore of last year, travelling expenses of directors and others to the tune of Rs. 6.85 crore. All these facts goes to prove that the taxpayer has full team of management and has incurred huge expenses on them and they are taking care of different departments. As such payment of management fee is clear diversion of income and as such is not a genuine business claim but put forth to avoid the tax liability and thereby disallowed the same. 9. AO also disallowed taxpayer's claim of brought forward losses to the tune of Rs. 6,50,98,677/- collectively for A.Y. 2005- 06 and 2006-07. 10. Assessing Officer also made disallowance of Rs. 5,31,75,329/- being 50% of the expenditure claimed by the taxpayer on account of advertisement and publicity expenses by treating the same capital in nature. AO also made disallowance of Rs. 12,83,....
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....ing of AMP expenses and the resultant creation of marketing intangibles as a separate international transaction and benchmarked the same separately. Ld. TPO selected five companies in A.Y. 2010-11 as comparables namely Dunlop India Ltd. ; T V S Srichakra Ltd. ; Krypton Industries Ltd. ; Eco Wheels Private Limited ; Falcon Tyres Limited. Having AMP/ Sales ratio of 3.05% as against 11.30% in case of the taxpayer which is into similar activities. 15. Ld. TPO applied bright line test and computed the arm's length of AMP i.e. the bright line at 3.05% of sales. The taxpayer spent AMP expenses to the tune of Rs. 335,999,199/- and Ld. TPO computed the amount in excess of the arm's length amount of AMP at Rs. 222,416,487/-. The Ld. TPO has also applied the mark-up of 12.88% on the cost of CPM (14.88%- assured markup on all costs minus 2% = 12.88%) and computed arm's length price of AMP expenses as under :- Arm's length margin for markup 14.88% Arm's Length AMP Expenses (A) 113,582,711 AMP expenses incurred by the assessee(s) 335,999,199 Expenditure incurred on creation of intangibles (B-A) 222.417.498 Mark up @ (12.88%=14.88%-2%) 28,647,243 16. Assessing ....
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.... the revenue filed written submissions which have been made part of the judicial file contended that facts of cases at hand are largely distinguishable than the case decided in AY 2008-09 and further contended that the deficiency and shortcomings brought out by the department in the documents/ evidences in form of service agreement and mail exchanges furnished by the assessee have not been appreciated by the tribunal. However, on putting specific queries the Ld. DR has failed to bring on record distinguishable facts of the cases at hands vis-à-vis case of the taxpayer of A.Y. 2008-09. 23. We have perused the order passed by the tribunal in assessee's own case in A.Y. 2008-09 and facts are identical. Coordinate Bench of Tribunal vide order dated 22nd June, 2020 passed in ITA no. 2415/Del/2014, A.Y. 2008-09 deleted the disallowance of management fee made by the Ld. CIT(A)/AO by returning following findings :- "8. Briefly in the facts of the case the assessee for the year under consideration had filed original return of income on 30.09.2008 declaring total income at NIL. The assessee then filed revised return of income on 14.10.2008 declaring total income of Rs. 13,....
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....ysis, credit control and administration, product distribution planning and logistics services, quality control services, legal services, information & telecommunication services....." 10. The Assessing Officer observed that submissions of the assessee were not correct as the assessee had incurred huge personnel cost and establishment cost. He also observed that from the details filed, it appears that the assessee had full team of management consisting of Mr. Jean Paul Caylar as Director and Mr. Herve Dub, as Director. The assessee had incurred huge expenses on their salaries and other perquisites. The Assessing Officer further observed that against total turnover of Rs. 132.81 crores, the assessee had incurred operating expenses of Rs. 49.97 crores where the assessee was only a trading company and had not established any manufacturing plant in India so far. The claim of the assessee in the form of management fee was not genuine claim as per the Assessing Officer. It was held to be a clear diversion of income and the claim of the assessee was held to be non genuine business claim and the same was disallowed and added to the total income of the assessee. Another point which ....
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..... He further stated that the losses had reduced over the period of years hence, the assessee had benefited from availment of such support services from its AE. The Ld.AR then referred to the additional evidence filed by the assessee. He also pointed out that though the Tribunal had decided the issue against the assessee but the same was on the premises that only one bill for the month of March 2008 was filed. He also brought to our notice that Miscellaneous Application was filed and pending against the order of the Tribunal relating to Assessment Year 2007-08. However, he stated that he was ready to argue the appeal for the instant assessment year. 13. The Ld.DR for the Revenue pointed out that undoubtedly TPO had examined the arm's length price of international transaction but the Assessing Officer can also conduct inquiry and carry out the exercise as he was within his rights to do so. Replying to the plea of the assessee that the reduction in losses are also attributable to the support services availed by the assessee, the Ld. DR for the Revenue pointed out that these were corroborating statement. Referring to the order of CIT(A), the Ld.DR pointed out....
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....t research and analysis: Assistance in financial and economic analysis. * Credit control and administration: Assistance in the selection of source of funds. * Product distribution planning and logistics services: Assistance in the management of products flows, determine resources necessary to ensure the efficient supply of products in a timely manner. * Quality control services: Expertise on quality assurance in all the fields of activity from the development of products to the service to final client. * Legal services: Legal services in all matters including but not limited to corporate, tax, intellectual property. commerce, finance, partnership, all legal aspects of business. * Information and Telecommunication services: Assistance in technical definition, implementation and maintenance of computers and telecommunication systems. Support operations management in identifying process evaluation requirements and in implement organizational changes." 17. The claim of the assessee before us is that the said managerial services were availed by the assessee from its AE in order to enable it to undertake its operation in more efficien....
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....to the assessee against the availment of such support services is not necessary to be proved by the assessee. The assessee in its wisdom to carry on its business, where the business has worldwide presence, needs to keep its standards high and to maintain similar terms and conditions, not only for running business but for providing services to customers, has to avail such management advices and services from its AE. In the present scenario where the assessee is dealing in items, which were available in international market also, then same practice has to be adopted worldwide and hence the necessity of availment of management services. Merely because the assessee was increasing expenditure on its personnel and other expenses, cannot be the yardstick for deciding whether assessee had any need to avail the services. It is outside the domain of Assessing Officer to traverse in such direction. The Assessing Officer categorically states that assessee had availed services in various fields, but it is outside his domain to decide whether there was any necessity to avail such services or not. The assessee having availed the support services for its day to day running of business, is entitled....
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....ct that the matter is pending before the Tribunal for disposal. So, this issue is remitted back to the AO to verify the facts and grant the set off claimed by the assessee if admissible. Ground No. 2 of ITA No. 6128/Del/2014, A.Y. 2009-10 Revenue's Appeal AND Ground No. 12 of ITA No. 3125/Del/2017, A.Y. 2010-11, 26. Ld. DR for the revenue challenged the impugned deletion of addition of Rs. 12,83,663/- and Rs. 9,90,383/- for A.Y. 2009-10 and 2010-11 respectively by the Ld. CIT(A) by relying on the order passed by the Tribunal. However, Ld. AR for the taxpayer brought to the notice of the bench that this issue has also been decided by the Tribunal in taxpayer's own case in A.Y. 2009-10. This fact has not been controverted by the Ld. DR. 27. We have perused the order of the Co-ordinate Bench of Tribunal passed in assessee's own case bearing ITA No. 2946/Del./2014 for A.Y. 2008-09 in favour of the taxpayer by upholding the order passed by Ld. CIT(A) by returning following findings : "21. The first issue raised by the Revenue vide Ground of appeal No.1 is against the deletion of disallowance made of Rs. 27,83,732/- on account of impairment of stock. ....
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....Standard and the stock or net realizable value, whichever is less, the disallowance on the basis of surmises is not permissible. Hence, we find no scope to interfere into the findings returned by Ld. CIT(A) and accordingly, aforesaid grounds in A.Y. 2009-10 and A.Y. 2010-11 raised by the Revenue are dismissed. Ground. No. 1 of ITA No. 6128/Del/2014, A.Y. 2009-10 Revenue's Appeal AND Ground No. 10 & 11 of ITA No. 3125/Del/2017 A.Y. 2010-11 29. Revenue has challenged the deletion of addition of Rs. 5,31,75,329/- and Rs. 4,78,89,110/- for A.Y. 2009-10 and 2010- 11 respectively by Ld. CIT(A) made by the AO on account of advertising and publicity expenses by treating the same as revenue in nature. Ld. AR for the assessee contended that this issue has also been decided in favour of the taxpayer by the tribunal in taxpayer's own case for A.Y. 2008-09 in ITA No. 2415/Del/2014 and this fact has not been controverted by the Ld. DR. 30. We have perused the order passed by the Co-ordinate Bench by the Tribunal in A.Y. 2008-09 deleting the addition by the Ld. CIT(A) made by the AO on account of AMP expenses by treating the same as capital expenses. The Ld. CIT(A) in 2008-09....
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....he assessee. 28. The Ld. DR for the Revenue pointed out that in Assessment Year 2007- 08, the disallowance was made in the hands of the assessee on account of TP adjustment whereas in the present case, the aforesaid disallowance was made u/s 37(1) of the Act hence, the decision of Tribunal for the preceding year is not binding. 29. The Ld.AR for the assessee pointed out that the issue raised was whether any adhoc disallowance can be made in the hands of the assessee out of advertisement and publicity expenses which had been struck down by the Hon'ble Delhi High Court in the case of Nestle India Ltd. vs DCIT (supra). 30. We have heard the rival contentions and perused the record. The assessee was engaged in the trading of world renowned tyres of cars and the expenditure made by the assessee benefitted its business in India. The issue which arises vide Ground No.2 raised by the Revenue is against the allowance of particular expenditure or its part disallowance as made by the Assessing Officer. The expenditure in question was advertisement expenses, wherein the assessee during the year under consideration had claimed expenditure totaling to Rs. 6.72....
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....deration questions of commercial experience and principle of ordinary commercial trading. Another test is whether the transaction is properly entered into as a part of the Assessee legitimate commercial undertaking in order to facilitate the carrying on of its business and it is immaterial that the third party also benefits thereby.....; 33. Further, the Delhi Tribunal of ITAT in Nestle India Ltd. vs DCIT 111 TTJ 498 (Del. Trib.) had held as under:- "22.................... The expenditure incurred by the Assessee company on advertisement/sales promotion of some Nestle Products in India may give rise to certain benefit to Nestle SA, but this cannot be a ground to disallow the claim of the Assessee, once it is established that the expenditure in question has been incurred by the Assessee for the purpose of business of the Assessee in as much as the expenditure by the Assessee on advertisement/sales promotion has direct nexus with the earning of income by the Assessee." The appeal of the Revenue against the same has been dismissed by Hon'ble Delhi High Court. 34. In the entirety of the facts and circumstances of the case, the entire expenses on adve....
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.... @ 60% on the license fee paid to Oracle by clubbing the said payment with computer and software. So, Ground No. 2.2 of ITA No. 3167/Del/2017, A.Y. 2010-11 raised by the taxpayer is allowed. Ground No. 2.4 of ITA No. 3167/Del/2017, A.Y. 2010-11 Taxpayer's Appeal 34. Ld. AR for the taxpayer contended that AO has not given the full credit for tax deducted at source (TDS) and self-assessment tax deposited while computing the tax demand. We are of the considered view that when taxpayer has brought on record the evidence for deducting the TDS and self tax deposited while computing the tax demand the AO is directed to verify the facts and to provide full credit of TDS and self-assessment tax deposited by the taxpayer in its computation of income. Consequently, Ground No. 2.4 ITA No. 3167/Del/2017, A.Y. 2010-11, Taxpayer's Appeal is determined in favour of the assessee. TRANSFER PRICING ISSUES Ground No. 3.1 to 3.8 of ITA No. 5774/Del/2014, Taxpayer's Appeal AND Ground No. 3.1, 3.1.1 to 3.1.4 of ITA No. 3167/Del/2017, A.Y. 2009-10 and A.Y. 2010-11 respectively Ground No. 1 to 9 of ITA No. 3125/Del/2017, A.Y. 2010-11 Revenue's Appeal 35. Taxpayer in ....
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....10-11 in taxpayer's own case in the similar set of facts and circumstances, is allowed. So, both the applications moved by taxpayer are allowed without prejudice to the merits of this case. 39. So far as Ground No. 3.1 to 3.8 and additional Ground No. 3.9 raised by taxpayer in A.Y. 2009-10 are concerned the taxpayer has brought on record additional evidence giving working of adjustment on the basis of RPM analysis by following order passed by CIT(A) in A.Y. 2010-11 by relying upon decision of Soni Ericsson Mobile Pvt. Ltd. 374ITR 118, rendered by Hon'ble Delhi High Court which need to be examined by the TPO. Since, revenue is required to follow the rule of consistency in the identical facts and circumstances of the case these grounds are remitted back to the TPO to decide afresh in view of additional evidence brought on record by the assessee by following order passed by Ld. CIT(A) in taxpayer's own case for A.Y. 2010-11 which is based upon the decision rendered by Hon'ble Delhi High Court in case of Soni Ericsson (supra). 40. However, the Ld. AR for the taxpayer contended that freight need not considered for adjustment as it is outward freight and not freight for import of m....
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....building namely Michelin India owned by the AE. I am not going into the question as to whether AMP expenditure can be considered as international transaction as per the decision of Hon'ble Delhi High Court in various decision such as Whirlpool India (ITA No. 228/2015). I am relying on the decision on the jurisdictional High Court in the case of Sony Eracssion Mobile Pvt. Ltd. cited at 374/14- 12-11 where Hon'ble High Court has held that gross profit margin should be computed after including AMP expenditure when RPM is considered as most appropriate method. In Present case also RPM is considered as the most appropriate method for import segment for resale. Accordingly the decision of Hon Delhi High Court in the present case will apply. The relevant portion of High Court is reproduced as under:- "However, it would be wrong to assert and accept that gross profit margins would not inevitably include cost of AMP expenses. The gross profit margins could remunerate an AE performing marketing and selling functions. This has to be tested and examined without any assumption against the assessed. A finding on the said aspect would require detailed verification and ascertainm....