TaxTMI 
TaxTMI 
2021 (3) TMI 71
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....erred in disallowing A&M expenses of Rs. 2,47,13,051/- reimbursed to Hindustan Unilever Limited ('HUL'). The learned DRP erred in confirming the same. b. The learned ACIT / DRP erred in holding that HUL was managing directly or indirectly the advertisement network for the appellant thereby rendering managerial services to the appellant. c. The learned ACIT / DRP erred in holding that the provisions of section 194J of the Act were applicable to the reimbursements made to HUL. d. The learned ACIT / DRP erred in not appreciating that: i. the expenditure on the various trade promotion schemes run by the appellant to promote the sale of its products was entirely controlled by the appellant; ii. the above trade promotion schemes were merely administered through the existing selling and distribution network of HUL; and iii. the amounts paid to HUL were towards reimbursement of the trade spends incurred by HUL on behalf of the appellant and therefore the question of deduction of tax at source and consequent disallowance under section 40(a)(ia) of the Act did not arise. e. The learned ACIT / DRP erred in not considering the submissions of the appellant / documentary evidence f....
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....turn of income furnished under section 139 of the Act and tax due on the income declared in the return of income filed had also been paid by HUL; ii. in terms of the amendment to section 40(a)(ia) of the Act made by the Finance Act, 2012, it would be deemed that tax on the aforesaid reimbursements made / discount given to HUL had been deducted and paid by the appellant for the purpose of allowing deduction under the said section; iii. the amendment in section 40(a)(ia) of the Act made by the Finance Act, 2012 was clarificatory in nature and therefore has retrospective effect from 1 April 2005, being the date on which the said section was inserted by the Finance (No.2) Act, 2004. c. Without prejudice to the above, the learned ACIT erred in not restricting the disallowance, if any, to the amounts payable to HUL as on 31 March 2008. The learned DRP erred in not giving any directions in respect of the same. d. The learned ACIT / DRP erred in not appreciating that the provisions of section 40(a)(ia) of the Act were applicable only to the amounts of expenditure which were payable as on 31 March of the previous year and could not have been invoked to disallow expenditure which had....
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.... refund had been received by the appellant for the aforesaid assessment year, no interest could be charged under section 234D of the Act. 8. Initiation of penalty proceedings under section 271(1)(c) of the Act. a. The learned ACIT erred in initiating penalty proceedings under section 271(1)(c) of the Act. The learned DRP erred in not giving any directions in respect of the same. b. The learned ACIT / DRP erred in not appreciating that there was no concealment of income or furnishing of inaccurate particulars of income by the appellant for penalty proceedings to be initiated in this regard. 9. Each one of the above grounds of appeal is without prejudice to the other. 10. The appellant reserves the right to amend, alter or add to any of the above grounds of appeal." 3. Briefly, the facts of the case are that the appellant company is incorporated under the provisions of the Companies Act, 1956. It is a joint venture between Hindustan Unilever Limited (HUL) and Kimberly Clark Corporation, a USA based company. It is engaged in the business of manufacturing of Infant Care and Feminine Hygiene Care Products. The return of income for the assessment year 2008-09 was filed on 30.0....
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....er, the same reads as under :- Sales of the assessee for the A.Y. 2008-09 = Rs. 146,09,05,405 The advertisement spent in the case of the assessee (A) = Rs. 38,62,38,410 Ratio of advertisement expenses to sales (B) = 26.44% The mean ratio of routine advertisement expense of the Comparables (C) = 4.10% Difference [D = (B - C)] = 22.34% (26.44 - 4.10) 6. Accordingly, the TPO proposed upward adjustment of Rs. 32,63,66,267/- u/s 92CA(3) of the Act on account of A&M expenses and had not proposed any other adjustments in respect of other international transactions which were entered into by the appellant company with its AE. 7. Pursuant to the TPO's order, a draft assessment order dated 23.12.2011 was passed by the Assessing Officer wherein the following disallowances were proposed by the Assessing Officer :- (a) Addition on account of TP adjustment of A&M expenses - Rs. 32,63,66,267/-. (b) Disallowance on account of Advertising & Marketing expenses - Rs. 2,47,13,051/-. (c) Disallowance on account of management cost - Rs. 1,54,77,351/-. (d) Disallowance on account of selling discount to HUL - Rs. 3,25,68,847/-. 8. Being aggrieved by the ....
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....is placed on Hon'ble High court's order in case of Maruti Suzuki India Ltd. versus Additional Commissioner of Income Tax Transfer Pricing officer New Delhi W.P.(C) 6876 / 2008. * That the assessee pays royalty on the incremental sales attributable to the increased marketing spend. Thus, the advertisement and marketing expenditure of the Company, if at all resulted in indirect benefit to the AE, it could be in the form of increased royalty. * The assessee has also requested the arm's length price should be determined after considering the +/- 5% range as provided under the Proviso to Section 92C(2) of the Income-tax Act, 1961." 9. It is contended, inter-alia, that the A&M expenses was incurred by the appellant company for its own business purposes and in order to promote the sale of the products manufactured by the appellant company, no benefit had approved on account of incurring such expenditure to its foreign AE. No inference as to existence of international transactions can be drawn without any actual transaction. Further, it is contended that in the absence of any prescribed method to compute the arm's length price of the alleged transactions, no adjustment is per....
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....he disallowance of advertising and marketing expenses of Rs. 2,47,13,051/-. The ld. SR. Counsel submitted that these expenses represent the amounts spent on various trade promotion schemes which are run by the appellant company to promote the sales of its products. The ld. Sr. Counsel had taken us through the contentions raised before the Hon'ble DRP, while reiterating the same it is urged that the expenditure incurred is in the nature of reimbursement of the expenses which does not result the income in the hands of the payee and, therefore, the question of deduction of tax at source does not arise. In this connection, he placed reliance on the decision of the Hon'ble Karnataka High Court in the case of DIT(IT) vs. Abbey Business Services India (P.) Ltd., 122 taxman 174 and the decision of the Hon'ble Bombay High Court in the case of Pr.CIT vs. Goldmansach (India) Finances Pvt. Ltd. (ITA No.1742/2016 dated 26.02.2019). He further submitted that since the payee has already paid the taxes including cost receipts as income, the benefit of second proviso to section 40(a)(ia) of the Act should be granted. The ld. Sr. Counsel also placed reliance on the following decisions in support of ....
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.... rendered any independent services to the appellant company, remains uncontroverted by the assessing authority. 17. Therefore, it cannot be said that the payment is made for managerial services as defined under the provisions of section 194J of the Act. However, in our considered opinion whether the subject payment was made for managerial services or not is of no relevance in view of the fact that the expenditure is only in the nature of reimbursement of cost to HUL. It had not resulted in any income to the HUL. Therefore, in the absence of income in the hands of the payee, the question of deduction of tax at source does not arise having regard to the ratio of the judgement of the Hon'ble Jurisdictional High Court in the case of CIT vs. Siemens Aktiongesellschaft, 310 ITR 320 wherein the Hon'ble High Court referring to the judgement of the Hon'ble Delhi High Court in the case of CIT vs. Industrial Engineering Projects (P.) Ltd., 202 ITR 1014 and the judgement of the Hon'ble Calcutta High Court in the case of CIT vs. Dunlop Rubber Co. Ltd., 142 ITR 493 had affirmed the view of the Hon'ble Delhi High Court in the case of Industrial Engineering Projects (P.) Ltd. (supra). In the said....
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....a Pvt. Ltd. (ITA No.893 of 2014); (iv) Karnataka Power Transmission Corporation Ltd. vs. DCIT, 383 ITR 59; and, (v) CIT vs. Kalyani Steels Ltd., 91 taxman 359. 19. In the light of this legal position, we are of the considered opinion that neither the impugned expenditure falls within the ambit of "managerial services" as defined in section 9(1)(vii) of the Act nor liable to deduct tax at source u/s 194J of the Act. Therefore, the Assessing Officer was not justified in invoking the provisions of section 40(a)(ia) of the Act to disallow the A&M expenses of Rs. 2,47,13,051/-. Accordingly, we direct the Assessing Officer to allow the A&M expenses of Rs. 2,47,13,051/-. Thus, this ground of appeal no.1 stands allowed. 20. The ground of appeal no.2 challenges the addition on account of management cost of Rs. 1,54,77,351/-. This payment of Rs. 1,54,77,351/- was made to HUL towards the cost of reimbursement of salary of the employees who are deputed to the appellant company. The Assessing Officer disallowed the expenditure for non-deduction of tax at source treating the same as expenditure under the provision of managerial services. It is undisputed fact that the Assessing Officer als....
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....n 40(a)(ia) of the Act. Thus, the ground of appeal no.2 stands allowed in favour of the assessee. 24. The ground no.3 challenges the disallowance on account of selling discount of Rs. 3,25,68,847/- given to HUL. It is submitted that the HUL is the distributor of products of the appellant company and selling discount was given to the HUL towards the sale cost. It is submitted that the HUL was not responsible for the control and conduct of the business of the appellant company and no services towards sales were rendered by the HUL but merely acted as an independent distribution agent of products. Therefore, the discount offer does not fall within the definition of commission and the question of attracting the provisions of section 194H of the Act does not arise. He placed reliance on the following decisions :- (i) Pearl Bottling (P) Ltd., (ITA No.271/Vizag/2010) (Vish. ITAT); (ii) Jai Drinks Pvt. Ltd., (ITA No.399/2010) (Delhi HC); (iii) Piramal vs. DCIT, 53 SOT 253 (Mum ITAT) (approved in CIT vs. Piramal Healthcare, 230 Taxman 505 by Hon'ble Bombay High Court); (iv) Intervet India Pvt. Ltd., 364 ITR 238. 25. On the other hand, ld. CIT-DR submitted that the selling discoun....
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....ot arise, because the assessee is not making any payment to the stockist. Therefore, whatever be the margin made available to the stockist, so long as the assessee is not making any payment to the stockist, the question of invoking Section 194-J against the assessee does not arise. Hence, we see no reason to entertain question (b) raised by the Revenue." 27. In the light of the above decisions, we are of the considered opinion that the impugned expenditure does not fall within the meaning of commission thereby attracting the provisions of section 194H of the Act. Therefore, we are of the considered opinion that the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the selling discount of Rs. 3,25,68,847/-. Accordingly, the ground of appeal no.3 stands allowed in favour of the assessee. 28. The ground of appeal no.4 raised by the appellant relates to reimbursement of cost. By this ground of appeal, the appellant contended that no disallowance u/s 40(a)(ia) of the Act can be made for the reason that the reimbursement on account of A&M expenses, management cost and selling discount given to HUL does not result any incom....
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....n the absence of any explicit arrangement between the assessee and its foreign AE it cannot be said that the benefit of the expenditure incurred on A&M expenses would also enure to the foreign AE, so as to, infer the existence of an international transaction. The Hon'ble High Court further held that a Transfer Pricing adjustment cannot be made by deducing the difference between the excess A&M expenses incurred by the assessee and the A&M expenses incurred by comparable entities chosen by the TPO. Finally, the Hon'ble High Court referring to the judgement of the Hon'ble Apex Court in the case of CIT vs. B. C. Srinivasa Setty, 128 ITR 294 and PNB Finance Ltd. vs. CIT, 307 ITR 75 held that in the absence of any machinery provisions to compute the arm's length price of transactions the provisions of Chapter X cannot be invoked for the purpose of making the TP adjustments. 31. On the other hand, the ld. CIT-DR submitted that the issue of computation of TP adjustments should be remanded back to the file of the Assessing Officer/TPO in the light of the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra). 32. In the rejoinder, the ld. Sr. Counse....
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....that the law laid down by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPOD for fresh decision in the light of law laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), the Hon'ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda SeilProducts In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court....
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....uted having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means a transaction between two or more a....
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....ely on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', i....
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....o cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being." 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re- characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such ....
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....P, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ......... 74. The problem with the Rev....
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....tory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherw....
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....penditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed." 34. Thus, the ratio laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) is reiterated in series of decisions like Bausch and Lomb Eyecare (India) Pvt. Ltd., 381 ITR 227 and the Hon'ble Rajasthan High Court followed the decision in the case CIT vs. Gillette India Ltd. (2019) 411 ITR 459 and the Hon'ble High Court had categorically ruled out the applicability of bright line test on advertising and marketing promotion expenditure. The ratio that can be culled out in all the decisions cited above is that (1) In the absence of any agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expenditure on those items as compared to expenditure incurred by comparables. (2) Furthermore, in the absence of any machinery provisions to compute....