TaxTMI 
TaxTMI 
2020 (2) TMI 1487
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....inst 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 international transaction and the Arm's Length Price (A....
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....69/-. 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 assessee to sell products. The assessee gave the details o....
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....s 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 Accepted as selling Seminar & Conference Expenses 2,118,554 Accepted as selling expenses. Gift 565,974 Accepted as selling expenses. Total ....
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....ducts 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 conclusion that the incurring of marketing and advertisement expenses was not an international transaction. In doing so, the DRP followed the decision of the Hon'ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd Vs CIT 381 ITR 117(Del.) and also in the case of M/s Sony Ericsson Mobile Communications Pvt.Ltd. Vs CIT 374 ITR 118(Del.). The DRP how....
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....ting 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 appeal Gr.No.2 to 4 deal with this aspect of the grievance of the revenue. It is the plea of the Assessee in Gr.No.4 that the DRP did not confront the Assessee with its decision to disallow Rs. 9.91Crores out of AMP expenses as capital expenditure and did not allow opportunity of being heard to the Assessee. 10. So far as in assessment year 2012-13, 2013-14 and 2014-15 similar addition was made ....
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....r 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 on set off of determination of ALP on account of AMP expenses. 11. Aggrieved by the decision of the revenue authorities in assessment year 2012-13, 2013-14 and 2014-15 the assessee is in appeal before the Tribunal. There is a a delay of about 3 days in filing of this appeal by the assessee for assessment year 2013-14 which has been stated in an affidavit fileld by the Director before the Tribunal to be due to the absence of Shri J. Shivaku....
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....s 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 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." 13. The ld. counsel for the assessee pointed out that none of the reasons given by the TPO in the order for assessment year 2013-14, for not following decision of the ITAT can be sustained. In this regard, the ld. counsel brought to our notice the facts which were highlighted by the a....
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....e 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 Supplier. In any case, the assessee has used the trademarks/brand name belonging to Chemiglas in media advertisement. Therefore, the issue of promoting the brand name of Chemiglas is non-existent. 4. On the aspect of reference to BEPS report by the TPO, it was submitted that BEPS report cannot be preferred over the judicial decisions which binding on the TPO. Even otherwise, the BEPS report deals with a case where there is a divergence between the written agreement and the conduct of the associate enterprises. It states that....
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....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 learned counsel highlighted the fact that the DRP however, upheld the order of AO without dealing with various contentions to be verified by the assessee. He submitted that the order of the Tribunal for assessment year 2009-10 and 2010-11 should be followed and it should be held that there was no international transaction and consequently, there is no requirement for determination of ALP. 15. The ld.DR reiterates the stand of the revenue as contained in the order of the TPO for the assessment year 2013-14. 16. We have given our careful consideration t....
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.... 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 co-branded trade mark "MarutiSuzuki" on the vehicles. In the assessment of MSIL for assessment year 200506, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of Rs. 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards th....
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....tional 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 such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert.....
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....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 and other electronic items and accessories cannot be said to be capital expenditure. The learned DR relied on the order of the DRP. 21. After considering the rival submissions, we are of the view that the expenditure in question cannot be regarded as capita in nature. Even the TPO has considered these expenses as routine selling expenses. From the nature of these expenses which are set out in Paragraph-5 of this order, it can be seen that they are routine selling expenses and cannot be regarded as capital expenditure. The decision of the Delhi High Court in the case of Spice Distribution ....
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.... 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 following details. In view of the above, the disallowance u/ 14A r.w.r.8D is worked out as below; A Total amount of direct interest/other expenses pertaining to tax exempt investments Nil B Total amount of indirect interest pertaining to tax exempt investments 77,10,866 AY: 12-13 AY 11-12 Average C Average amount of tax exempt 448,49,31,085 305,70,40,480 377,09,85,783 Investments D Average amount of total assets 679,54,92,909 468,80,33,198 574,17,63,054 E Proportionate indirect interest to be disallowed BXC D 50,64,223 F 0.5% of a....
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.... 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, the disallowance u/s 14A of the Act as made by the AO as follows; "In view of the above the disallowance u/s 14A r.w.s.Rule 8D is worked out as below: A Total amount of direct interest/other expenses pertaining to tax exempt investments NIl B 3,31,16,593 AY 2012-13 AY 2013-14 Average C Average amount of tax exempt investments 408,19,46,568 423,47,51,677 415,83,49,123 D Average amount of total assts 629,05,78,304 692,28,57,496 660,67,71,900 E Proportionate indirect interest to be disallowed B x C D 2,08,43,989 F 0.5% of average amount of tax exempt investments 2,07,91,746 G Total disallowance attracted u/s14A A + E + F 4,16,35,735 Less 14A disallowance already disallowed by the assessee itself in its computation of income. NIL &nbs....
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....s concerned the disallowance u/s 14A of the Act was made by the AO as follows; Disallowance u/s 14A r.w.s.Rule 8D is worked out as below: A Total amount of direct interest/other expenses pertaining to tax exempt investments Nil B Total amount of indirect interest pertaining to tax exempt investments 4,50,20,135 AY 2014-15 AY 2015-16 Average C Average amount of tax exempt investments 423,47,51,677 428,40,63,487 425,94,07,582 D Average amount of total assts 692,28,57,496 741,76,05,228 717,02,31,362 E Proportionate indirect interest to be disallowed B x C D 2,67,43,782 F 0.5% of average amount of tax exempt investments 2,12,97,038 G Total disallowance attracted u/s14A A + E + F 4,80,40,820 Less 14A disallowance already disallowed by the assessee itself in its computation of income. 11,95,245 Disallowance u/s 14A r.w.Rule 8D 4,68,45,575 Based on the above, disallowance u/s 14A r.w.Rule 8D was worked out to Rs. 4,68,45,575/- which was added to the income of the assessee. 31. Before the DRP the assessee submitted that no borrowed funds were used for the purpose of making investments that yielded ....
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....t. The Assessee pointed out as to how certain tests were laid down to decided the allowability of such losses and as to how the Assessee's case is also similar to the facts of the case decided by the Hon'ble Supreme Court. The said table is given below: Tests laid down by Hon'ble Supreme Court Assessee' Response 1 Whether the system of accounting followed is mercantile system Yes 2 Whether the same system is followed by assessee from the very beginning and if there was change in the system, whether it was bonafide? Yes The assesee is consistently following this system of accounting for numbers years. The question of change does not arise as it is following this system consistently. 3 Whether the assessee has given the same treatment to the losses claimed to ha accrued and the gains that may accrue to it? Yes 4 Whether the assessee has been consistent and definite in making entries in the books account in respect of losses and gains? Yes 5 Whether the method adopted by the assessee for making entries in books both respect of losses and gains I as per nationa accepted accounting standards. Yes The accounting policy in respect of foreign exchange loss/....
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.... the case laws. The courts and the Tribunals have consistently held that the marked to market losses are not contingent in nature and not motioned. Moreover, this circular is with reference to the valuation of financial instruments and not with reference to forward contracts or hedge against exchange fluctuations. Therefore, it was prayed that a sum of Rs. 35,40,261 be allowed as a revenue loss. 35. In assessment year 2013-14, the fact are identical but the only difference is that a sum of Rs. 35,40,261/- was income and not expenditure and since this is already taxed and offered to tax by the assessee making another addition would amount to double taxation of the same income. 36. We have considered submissions of the ld.counsel for the assessee. In the light of the facts of the case and legal position as laid down under decision cited by the ld.counsel for the assessee, we are of the view that the claim had to be allowed. The DRP has rejected the claim of the assessee for the assessment year 2013-14 and in doing so seems to have placed reliance on the decision of the ITAT 'B' Bench in the case of M/s Shankara Infrastructure Vs ACIT 53 Taxmann.com 429(B). On perusal of the aforesa....