TaxTMI 
TaxTMI 
2021 (11) TMI 1124
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....penses incurred by the appellant are excessive, on the basis of an incorrect set of comparable without following any of the methods prescribed in Section 92C(1) of the Act. 1.2Concluding that such A&M expenses incurred by the Appellant constitute a service to Associated Enterprise, and therefore is an international transaction, merely on the basis of an assumption that an arrangement exists between the Appellant and the Associated Enterprise for incurring such expenses, without demonstrating the same. 1.3Assuming that such A&M expenses automatically contribute to an enhancement of the brand value and creation of marketing intangibles without appreciating that such expenses were incurred by the Appellant on its own behalf and that these expenses were incurred due to the unique product category and competitive market conditions which also resulted in reactive marketing. 1.4Computing the arm's length price of such alleged international transaction in an arbitrary manner without following any of the methods prescribed in Section 92C(1) of the Act and by using an incorrect set of comparables. 1.5Including selling and distribution expenses such as trad....
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....idering that the reimbursement of additional trade discount extended by the Appellant to HUL in order to promote sale of its products is in the nature of managerial service warranting a disallowance under Section 40(a)(ia) of the Act for non-withholding of tax at source under Section 194J of the Act. 4. erred in not appreciating the fact that expenditure on additional discount extended by Appellant to HUL amounting to Rs.8,37,15,151 is already subject to transfer pricing adjustment by TPO treating it as an AMP expense incurred for the benefit of AE and hence, the same cannot be again disallowed. Incorrect disallowance under section 40(a)(ia) of the Act of Rs 1,78,19,577 to taxable income of the Appellant in respect of reimbursement of salary cost of employees deputed to the Appellant by HUL 5. erred in considering that the reimbursement of actual salary cost of the employees of HUL deputed to work under the control and supervision of the Appellant is in the nature of managerial service warranting a disallowance under Section 40(a)(ia) of the Act for non-withholding of tax at source under Section 194J of the Act. Incorrect disallowance of Rs. 4,51....
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.... the facts and in the circumstances of the case and in law, the learned AO based on directions of the Hon'ble DRP has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 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 2009-10 was filed on 23.10.2009 declaring total income of Rs.50,70,130/-. The appellant company also reported the following international transactions within the meaning of section 92B of the Income Tax Act, 1961 ('the Act' for short) :- Sr.No. Nature of Transactions Amount of Transactions Method Adopted 1. Purchase of materials spare parts & consumables 41,39,64,114 CPM 2. Purchase of finished goods 23,20,53,599 TNMM 3. Purchase of Machinery 3,18,34,424 - 4. Payment of Royalty 1,79,29,715 CUP 5. Payment of Global License Fees 38,14,24....
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....) * (e) = Rs.21,17,81,020 6. Accordingly, the TPO proposed upward adjustment of Rs.21,17,81,020/- u/s 92CA(3) of the Act on account of A&M expenses. As regards to transaction of import of Raw material. 7. The Appellant is a manufacturer of diapers and sanitary napkins. For qualitative supply of raw material at a lower price, the AE of the Appellant has entered into agreements with third party vendors for supply of raw material to all the group entities including the Appellant at an agreed price. According to the appellant, the aforesaid arrangement with third parties results in standard quality of supply of raw material and reduced price of the raw material due to collective buying. The AEs of the Appellant also supply raw material to the Appellant only in exceptional circumstances when the third party vendors are not able to supply the same for some reason. During the year, the Appellant has imported raw materials from third party vendors under global sourcing arrangement and its AEs as under: Name of the parties Amount (in Rs.) Third party vendors under global sourcing arrangement 37,18,66,093 Yuhan-Kimberly Limited 2,38,39,095 Kimberly Clark Glob....
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....e details i.e. Annual reports, RPT calculation and calculation of the margins of the foreign comparables. - Up to last year the Transaction Net Margin Method ("TNMM") was used to benchmark the transaction however, the method is changed in this year without there being any reason for the same. 11. Pursuant to the TPO's order, a draft assessment order dated 14.03.2013 was passed by the Assessing Officer wherein the following disallowances were proposed by the Assessing Officer :- (a) Disallowance on account of International Transaction - Rs.21,17,81,020/-. (b) Disallowance of payments to Hindustan Unilever Limited on account of Advertising and Marketing expenses - Rs.8,37,15,151/-. (c) Disallowances on account of Management Cost - Rs.1,78,19,577/-. (d) Disallowance on account of Selling Discount to HUL - Rs.4,51,43,992/- (e) Disallowance on account of Freight and Material Handling Charges - Rs.16,27,824/- (f) Disallowance on account of IT Support Expenses - Rs.48,08,167/- (g) Disallowance of payments to Star India Private Limited on account of Advertising and marketing Expenses - Rs.3,21,20,238/- (h) ....
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....party vendors wherein they have confirmed that discount of i0%-20% has been given to the Appellant on the raw material supplied during the year. The certificates also confirm that the price that they have charged to the Appellant is lower than the price it would have charged if the Appellant had not purchased the raw material under the global sourcing arrangement (Pg. 411 to 418 of the paper book). Therefore, it is submitted that the raw material has been purchased from third party vendors at arm's length price and the adjustment made by lower authorities is unsustainable and bad in law. 15. The Appellant also submits that the lower authorities have erred in rejecting the certificates and other evidence produced by the Appellant to substantiate the arm's length price of raw material purchased from the third party vendors on the footing that the third party vendors are deemed AEs of the Appellant. It is submitted that the transactions with the third party vendors are required to be benchmarked since they are considered as "deemed international transactions" under section 9213(2) of the Act as the price for such transactions is agreed by the AEs under the global pricing arrangemen....
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....arm's length margin comes to 10.62% and 10.18% respectively (Pg. 587to 599 of the paper book). Despite the fresh benchmarking submitted by the Appellant justifying the price charged by the AE for supply of raw material, the lower authorities made the adjustment without considering the evidence submitted by the Appellant. 19. The Appellant also submits that the rejection of gross margin under the cost plus method used by the Appellant in the transfer pricing report is also incorrect. The lower authorities failed to appreciate that the net operating margin of the Appellant during the year was under severe pressure due to the competition faced from the rival companies, who reduced the price of the products to achieve higher market share which resulted in increase in the sales volume for the competitors of the Appellant however, the sales volume of the Appellant decreased for the year under consideration and, therefore, it was incorrect to compare the net operating margin of the Appellant with that of the comparable companies as the net operating margin of the Appellant was lower due to commercial reasons and, not on account of the raw material purchased from AE and third party vend....
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....he addition of Rs.21,17,81,020/-on account of Transfer Pricing adjustment in respect of Advertisement and Marketing expenses incurred by the appellant. The TPO as well as the Hon'ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A&M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A&M expenses incurred by the AE. In the process, the TPO as well as the Hon'ble DRP presumed that the benefit of this expenditure had endured to its foreign AE. 25. Before us, ld. Sr. Counsel submitted that the TPO/DRP ought not to have recharacterized the A&M expenses by itself as international transaction. He further argued that the inference of benefit to its foreign AE is purely based on the surmises and conjectures and there is no explicit of arrangement or agreement between the assessee and its foreign AE to incur the A&M expenditure for the benefit of its foreign AE. The sum and substance of the argument of the ld. Sr. Counsel as to whether there is an international transaction is that the very ....
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....incurred by the appellant company on account of A&M expenses and expenditure incurred by the comparables chosen by the TPO. The lower authorities had inferred that the benefit had enured its foreign AE on account of excesses expenditure incurred by the assessee on account of A&M. The main contention advanced by the appellant is that the existence of international transaction cannot be inferred by the TPO in the absence of any actual transactions and the presumption by the lower authorities that the benefit had enured to its foreign AE is merely based on the conjectures. In the absence of any agreement between the assessee and its foreign AE to incur any A&M expenses to the benefit of its foreign AE, the presumption of existence of international transaction is incorrect. An identical issue was considered by the Co-ordinate Bench of Tribunal in assessee's own case for immediately preceding A.Y. 2009-10 wherein the Co-ordinate Bench of the Tribunal after making reference to the decision of Hon'ble Delhi High Court in Hon'ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra) and in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 and placing reliance on the....
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....o. Accordingly, we do not find any merit in this ground of appeal. Hence, ground of appeal No.1 filed by the Revenue is devoid of merit and stands dismissed. 30. The issue in GROUND OF APPEAL NO.2 pertains to the determination of arm's length price with regard to the transaction of import of raw materials. 31. During the financial year 2011-12 relevant to the assessment under consideration, the respondent assessee has imported raw materials costing Rs.37,18,66,093/- from the third party vendors under global sourcing arrangement across the world. The assessee sought to justify the transaction of import of raw materials is at arm's length price by using CUP method. However, the TPO while using TNMM has benchmarked the transaction and determined the margins of comparables at 7.49% as against the margins of appellant at (-) 6.68% and thereby suggested TP adjustment of Rs.15,42,54,297/-. In the process, the TPO also rejected the contention of assessee company that the profitability of AE as well as the margins of external comparable companies for import from group companies should be considered. Even the certificates given by the vendors, which according to the TPO are dee....
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.... Ltd., 72 taxmann.com 325 (Bombay) and (ii) CIT vs. Ratilal Becharlal & Sons, 65 taxmann.com 155 (Bombay). Thus, this ground of appeal stands partly allowed. 35. The GROUND OF APPEAL NO.5 challenges the addition on account of management cost of Rs.1,78,19,577/-. This payment of Rs.1,78,19,577/- 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 also recorded a finding that no adequate evidence in support of its case by the assessee to prove that the employee and employer relationship. The ld. Sr. Counsel reiterated the very same submission which are made before the Hon'ble DRP, that the payment is towards reimbursement of salary of employee and no independent services were rendered by the HUL to the appellant company. It is nature of reimbursement of the expenditure to the HUL and the HUL in turn had not made any profit and gain and thus it was submitted that the expenditure had not incurred towards provis....
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....ost. 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. 40. On the other hand, ld. CIT-DR submitted that the selling discount was given to the group companies and the HUL was directly or indirectly responsible for the promotion of sales and, therefore, it is nothing but consideration paid towards rendering of services towards the sales attracting the provisions of section 194H of the Act. 41. We heard the rival submissions and p....
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....son to entertain question (b) raised by the Revenue." 42. 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.8,37,15,151/-. In the immediate preceding assessment year, similar addition was deleted by this Tribunal and on the parity of same reasoning, the grounds of appeal no.3, 4, 6 and 7 stands allowed in favour of the assessee. 43. The GROUND OF APPEAL NO.10 challenges the disallowance of Rs.3,21,20,238/- being the payment made to Star India Pvt. Ltd. towards advertisement charges. The Assessing Officer disallowed the expenditure on the ground that no TDS was made on said payment. It was submitted before us that it was under bona-fide belief that no TDS was required to be made as in the earlier years, as the Star India Pvt. Ltd. had obtained 0% certificate under the provisions of section 197 of the Act authorising the appellant no....