TaxTMI 
TaxTMI 
2020 (2) TMI 1487
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....905(B)/2017 is an appeal by the assessee against the final assessment order dated 06-10-2017 passed by the ACIT, Circle -2(1)(1), Bangalore, u/s.143(3) read with Sec.144C of the Act relating to assessment year 2013-14. IT(TP)A No.3328(B)/2018 is an appeal by the assessee against the final assessment order dated 30-08-2018 passed by the ACIT, Circle-2(1)(1), Bangalore u/s.143(3) read with Sec.144C of the Act, relating to assessment year 2014-15. 2. In all these appeal common issues arise for consideration under identical facts and circumstances. These appeals were heard together and we deem it convenient to pass a common order. 3. The first common issue that arises for consideration in the appeals by the Assessee for AY 2012-13 to 2014-15 and the appeal by the Revenue in AY 2010-11 is the addition made in the total income of the assessee by the revenue authorities, consequent to the conclusion of revenue authorities that the Advertising and Market Promotion expenditure (AMP expenditure) incurred by the Assessee was to promote the brand name of foreign associated enterprise (AE) and therefore, to the extent the expenses so promoted the brand name of the AE there was an inter....
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....h was about 10.12% of its revenue of Rs. 212,29,27,069/-. He was of the view that incurring of such high quantum of expenditure compared to other traders in ophthalmic lenses was unusual. The TPO found that one company by name M/s Techtran Polylenses Ltd., which was also in the business of trading in lenses, had incurred only 1.93% of its turnover as sales promotion and advertisement expenditure. The TPO was of the view that the assessee had incurred higher AMP expenditure by 8.19% compared to M/s Techtran Polylenses Ltd. According to the TPO the assessee ought to have got reimbursement of expenditure from its AE for promoting its brand and also percentage of such excess expenditure as remuneration for its services in promoting the brand name of the AE. The TPO issued show cause notice to the assessee. 5. In reply to the above show cause notice, the Assessee pointed out that the advertisement and sales promotion expenses debited in the Profit &Loss account included selling expenses also and the advertisement, and marketing expenses was only 18,37,38,482/- . The assessee submitted that the expenses so incurred did not promote any brand of the AE and were purely to enable the asse....
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....No simple trader would incur such huge expenditure to organize loyalty programme for opticians when it is only selling the lenses manufactured by a different party. Therefore, the TPO is of the view that such expenditure cannot be considered to be of the nature of selling expenses and has been incurred by the taxpayer for advertisement and marke promotion. Merchandising at optician outlets 24,632,655 No entity who is just a buyer and seller of products would incur such expenditure to organise conventions. The taxpayer has not furnished any supporting details not has give any justification for incurring such expenditure. Therefore,the TPO is of the. view that such expenditure cannot be considered to be of the nature of selling expenses and has been incurred by the taxpayer for advertisement and market promotion. Product training expenses 686,125 Accepted as selling expenses. New Product Launch 4,964,739 Accepted as selling expenses. expensesOpticians - _ 2,858,420 Accepted as selling expenses. Others 246,678 Accepted as selling expenses. Warranty replacements 6,860,385 Accepted as selling expenses. Exibition 1,680,498 Ac....
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....P & Transfer Pricing Adjustment A Particulars Amount (Rs.) Excess AMP Expenses incurred by the taxpayer for promotion of brand on behalf of AE. Rs. 141,837,115/- Arm's Length Price Rs. 141,837,115/- Reimbursement received for AMP expenses incurred for brand promotion of AE's products Nil Shortfall being adjustment u/s 92CA Rs. 141,837,115/- Comparable (M/s Techtran Polylenses Limited) Profit margin with Advertisement & selling expenses (ASE) 7.61% Comparable (M/s Techtran Polylenses Limited) Profit margin without Advertisement & selling expenses (b) 18.24% ASE difference in margin (c )= (b-a_ 10.63% Value of sales promotion and advertisement expenditure by taxpayer for AE(d) 141,837,115 Mark up@ 10.63%(e) =(c ) x (d) 15,077,285 Total adjustment Amount (Rs. Shortfall being adjustment u/s 92CA 141,837,115 Mark-up thereon 15,077,285 Total adjustment 156,914,400 7. The assessee filed objections before the DRP against the aforesaid proposal of the TPO which was incorporated by the AO in the draft order of assessment. The DRP deleted the addition made by the O by rendering the conclu....
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.... the 'bright line test' when the paragraphs, actually recognize the fact of remuneration being payable where an entity carries out significant marketing activities when the legal owner of the brand is another entity without mentioning 'Bright Line Test as such'. 5.Under the facts and circumstances of the case and in law the Hon'ble DRP has erred in not appreciating that fact that bright line is a mere step [of the Most appropriate method for benchmarking the AMP services] carried out to bifurcate expenditure pertaining to the taxpayer for its own routine distribution function and the expenditure incurred on AMP service provided to the AE-in a situation where the assessee has not reported the international transaction pertaining to marketing function". 9. Aggrieved by the order of the DRP holding that out of the AMP expenditure a sum of Rs. 9.91 Crores which was incurred on media advertisement and brand ambassadors are in the nature of capital expenditure which result in enduring benefit in the form of creating the brand of the Assessee and therefore it cannot be allowed as revenue expenditure, the Assessee has preferred appeal and in Assessee's appea....
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.... analyzing conduct of Assessee in the matter on determination of ALP. According to TPO there were five brand name owned by the Essilor International, the foreign AE namely varilux, crizal,liberty uc, varilux ellipse uc etc. There were expenditures for the advertisement of the aforesaid names by the assessee in electronic and print media. 6. The assessee was also a party to proceedings initiated by M/s Essilor International for infringement of the trade mark and trade name by Essilor by some third party. 7. The assesee had distribution agreement with 338 optometrists and 1233 optical outlets located in different parts of the country. The assesee by creating systematic net work and service agents created intangible asset to the assessee which benefit the AE. There were reasons given by the TPO for making addition on account of determination of ALP of AMP expenses and those reasons were the same as were given for making similar addition in assessment year 2011-12 which is also not been accepted by the Tribunal and therefore, those reasons are not being set out in this order. The DRP in all these year accepted the stand taken by the TPO and sustained the addition made....
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....of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should 'co treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we r....
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....arried out should be in the suppliers sole interest and it does not amount to brand promotion. This clause has to be understood in the context. Clause 8 of the agreement deals with the right of the distributor to use the trademarks and symbols of the supplier and in that context it has placed many restrictions on such use. The restrictions placed in clause 8 are normal restrictions. The other sub clauses of clause 8 are summarized below: a) Distributor is prohibited from using the trademarks of the supplier with its own commercial name. (Clause 8.1) b) Distributor shall not represent that it is in ownership of the trade marks. (Clause 8.3) c) Distributor shall not register the trademarks. (Clause 8.4) d) Distributor has a limited right to use the trademark for the purpose of advertisement. (Clause 8.5) e) Distributor has right to use intellectual property which are specifically granted by supplier (Clause 8.6) It was submitted that the above clauses in the agreement do not in any way suggest that assessee is promoting the sole interest of the Supplier through an obligation to ii advertising and promote the brand name of the Supp....
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....ibution network thereby creating marketing intangible for the benefit of its AE, it was submitted that the TPO has failed to recognize the importance of having distributorship network by the assessee. The lenses imported and sold by the assessee are used by individual retail customers. Like any other consumer products, it is necessary for the assessee to have an efficient and effective distributor network to ensure that it is able to sell its products. The purpose of setting up the distributor network is to sell the lenses of the assessee and not to promote the brand name of Essillor International. It was submitted that mere creation of a vast distributor network does not mean that it is promoting the brand name. 7. As regards the TPO's contentions in paragraph 9.3,9.4,9.5,9.6 of the order u/s 92CA, it was submitted that these arguments are the same as advanced before the Hon'ble Delhi High Court in Maruti Suzuki's case, Sony Ericsson's case and assessee's own case before the Tribunal. These arguments have been dealt with in an elaborate manner by the court and the Tribunal and the contentions of the revenue have been rejected. The assessee relies on the same. 14. The l....
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....hat the fact that the benefit of such AMP expenses would also ensure to the AE is itself insufficient to infer the existence of an international transaction. Similar decision was also rendered by the Hon'ble Delhi High Court in the case of CIT (LTU) v. Whirlpool of India Ltd., 381 ITR 154. The bright line test which was applied by the AO in the present case was also applied by the AO in the aforesaid cases. The bright line test which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon'ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. The co-branded trade mark "Maruti-Suzuki" was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the ....
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....n was 11.19 per cent. which was higher than that of the comparable companies whose profit margin was 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there was no question of a transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure. The advertisement, marketing and sales promotion expenses incurred by MSIL could not be treated and categorised as an international transaction under section 92B of the Act." 18. In the case of Whirlpool of India Ltd. (supra), it was held that there had 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 arm's length price. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of ....
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....t comparable in terms of Functions performed, Assets employed and Risks assumed (FAR) analysis and other aspects of determination of ALP does not require any consideration. Therefore the addition made on account of determination of ALP of AMP expenses in AY 2011-12 to 2014-15 is directed to be deleted. 20. As far as the grievance of the Assessee in its appeal for AY 2011-12 which is challenged in Gr.No.2 to 4 raised in its appeal for the said AY in IT(TP)A.No.542/Bang/2016, is concerned, the break-up of the sum of Rs. 9,91,79,703 which was regarded as capital expenditure and disallowed by the DRP is given at paragraphs 9.1.1 and 8.1.2 of the TPO's order. Perusual of the nature of expenses shows that none of them is capital in nature. Even in paragraph 8.1.2 of the TPO's order, these expenses have been accepted as selling expenses and not forming part of the AMP expenses that result in brand building. The learned counsel for the Asssessee has placed reliance on decision of the Hon'ble Delhi High Court in the case of CIT Vs. Spice Distribution Ltd., 374 ITR 30 (Delhi) wherein the Hon'ble Delhi Court held that advertisement expenditure incurred by a person selling mobile hand-sets ....
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....ividend income. We are of the view that such general statement will not help the plea of the assessee. Sec.14A contemplates disallowance having regard to the book of accounts of the assessee. It is therefore, necessary to allow the expenses debited in P&L account and come to a conclusion as to what would be the expenses incurred in earning dividend income. The exercise has to be done while considering the nexus between the expenses incurred and exempt income earned. No such exercise has been carried out by the assessee or by the AO. Rather the assessee has sought to plead based on several judicial pronouncements for the deletion of the addition, without any factual background regarding the nature of expenses debited in the P&L account. We therefore, deem it fit and proper to set aside the order of the AO and remand the issue of determination of quantum of disallowance u/s 14A of the Act to the AO after due opportunity to the assessee. 24. As far as assessment year 2012-13 is concerned, the disallowance u/s 14A of the Act, the facts are that the assessee earned dividend income of Rs. 87,08,080/- which was claimed as exempt. The AO disallowed a sum of Rs. 2,39,19,152/- per the fol....
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....8D(2)(iii) of the Rules is concerned, the facts are identical as the facts in assessment year 201112. The learned counsel for the Assessee has also filed a statement before us showing availability of own funds and the investments which actually yielded the dividend income. The same is placed on record. We are of the view that it will be just and proper to set aside the order of the DRP/AO in this regard and remand the issue for fresh consideration by the AO. As far as disallowance of expenses u/s 8D(2)(ii) of the Rules is concerned, the AO is directed to see the availability of own funds and also to see whether the borrowed funds on which interest was paid for the purpose of making investments that can yield dividend income. The AO is also directed to keep in mind the decision of the Hon'ble Karnataka High Court in the case of M/s Micro Labs India Pvt.Ltd 383 ITR 490.(Kar.). In so far as the disallowance u/s 8D(2)(ii) of the Rules is concerned, the AO shall examine the disallowance afresh in the light of the directions given in this regard while deciding the identical grounds of appeal in assessment year 2011-12. 27. As far as the assessment year 2013-14 is concerned, ....
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.... 4,718,245,164 3,396,347,788 Non-current liabilities 4 14,052,585 13,202,565 Long term borrowings 5 28,034.386 22,315,289 Current liabilities 6 Short term borrowings 210,101,015 Trade payables 7 889,101,096 612,359,373 Other current liabilities 8 436.441,286 266,264,990 Short term provisions 9 499,517,377 377,543,173 Total 6,795,492,909 4,688,033,198 29. The DRP however, did not deal with any of this submissions and preferred to uphold the order of the AO. The learned counsel for the Assessee has also filed a statement before us showing availability of own funds and the investments which actually yielded the dividend income. The same is placed on record. After considering the rival submissions we are of the view that the issue in assessment year 2013-14 needs to be decided afresh by the AO and order of the DRP/AO is set aside, to be decided afresh by the AO in the light of the directions given in similar issue in assessment year 2012-13. 30. As far as assessment year 2014-15 is concerned the disallowance u/s 14A of the Act was made by t....
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....n the import and the date of payment, the assessee enters into forward contracts to guard itself against exchange fluctuation and consequent losses. As at the year end, the outstanding contracts are marked to market and accordingly, the resultant foreign exchange loss is provided for. It was the plea of the assessee that the marked to market losses in respect of forward contract is allowable as a deduction. The Assessee placed reliance on decision of the Hon'ble Bombay High Court in DIT (International Taxation Vs Citibank N.A.377 ITR 69 wherein it held that the provision for foreign exchange loss on unmatured foreign exchange contract is not a notional loss and is allowable as deduction. The Hon'ble High Court approved the decision of the Special Bench of Tribunal in DCIT Vs Bank of Bahrain and Kuwait 5 ITR (Trib.) 301 where it was held that the provision of loss on unmatured forward contract is allowable. The Assessee also placed reliance on the decision Supreme Court in CIT Vs Woodward Governor India Pvt.Ltd.(312) 254. It was held therein that the loss suffered by an assessee on account of the fluctuation in the rate of foreign exchange as on the date of balance sheet is an item ....
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....ed by the learned counsel for the Assessee that just because there is no separate provision dealing with marked to market losses, it cannot be said that the assessee is not entitled to deduction. Unless there is a specific provision prohibiting the allowance of expenditure or loss which is revenue in nature incurred during the course of business, it has to be allowed. The learned counsel also distinguished the case of Sanjeev Woolen Mills 279 ITR 234 and Oriental Motors case in 124 ITR 74 by pointing out that in those cases it was clearly held that the loss was a notional loss. It was submitted that the courts have consistently held that the loss due to foreign exchange fluctuation in respect of outstanding contracts is not a notional loss. In the case of Oriental Motors the issue was whether the disputed claim can be allowed as a deduction. This case has no relevance to the facts of the present case as the issue is not one of the claim for disputed items. As regards the reliance on Instruction no. 3/2010 issued by CBDT is concerned, it was submitted that these instructions have not been followed by the various High Courts and Supreme Court. It was submitted that the opinion expres....