TaxTMI 
TaxTMI 
2025 (5) TMI 193
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.... law, the impugned Assessment Order dated 12 July, 2024 passed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax Income Tax Officer. National Faceless Assessment centre, Mumbai or the Learned Assessing Officer ('Ld. AO'), under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ('the Act) is erroneous and bad in law. 2 That the final assessment order dated 12 July 2024 passed under section 143(3) read with section 144C(13) of the Act by Ld. AO is not in conformity with the directions of the Hon'ble Dispute Resolution Panel-2, Mumbai ('Ld. DRP") and is liable to be quashed being in gross violation of the strict mandate of section 144C(13) of the Act. 3. On the facts and circumstances of the case, and in law, the Deputy/Assistant Commissioner of Income Tax, Transfer Pricing-Circle 3(3)(1), Mumbai ('Ld. TPO')/Ld. AO and the Hon'ble DRP have erred in not appreciating the contentions raised by the Appellant. 4 On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in enhancing/confirming the additions/disallowances proposed in the draft assessment order passed by the Ld. AO wi....
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....erein all the transactions (including payment of franchisee fee) have been aggregated and tested at net level, 6. On the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Hon'ble DRP have erred in enhancing the income of the Appellant by INR 9,65,65,885 by arbitrarily disallowing the payment for intra group services. In doing so, the Ld. AO/TPO have grossly erred in: 6.1. not following the mandatory statutory procedure as laid down under Rule 10B(1)(a) and Rule 10C of the Rules to identify the MAM end application of the same, merely based on presumptions that the arm's length price value of the transactions is 'Nil' without furnishing details of the price charged in any comparable uncontrolled transaction; 6.2. disregarding the documentary evidences furnished and the service agreements entered into by the Appellant for availing the services from overseas AEs: 6.3. not appreciating the fact that the need for services is a commercial/business decision made by the Appellant as part of its business operations, thereby disregarding sound transfer pricing principles and relevant judicial pronouncements in India when und....
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....ch other The Appellant craves leave to add, alter, amend, modify or withdraw all or any of the aforesaid grounds of appeal as may be considered necessary at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case." 3. The brief facts of the case are that the assessee, M/s Royal Canin India Private Limited (RC India), is a wholly owned subsidiary of Royal Canin S.A.S. (RC SAS' or Overseas Affiliate', or 'Franchisor"). The assessee is primarily engaged in the marketing, sales and distribution of pet care products. The assessee group manufactures, processes, and sells food products worldwide. During the alleged assessment year, the assessee undertook the following international transactions with its AEs: Particulars Most Appropriate Method ('MAM') Value of international transaction (INR) Tested party Margin Arm's length range Payment of franchisee fees Comparable uncontrolled price ('CUP') 244,691,341 9% 8% to 10% with median of 9.5% Purchase of finished goods Transactional net margi....
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....t and the assessee complied the said before the DRP. In addition to the remand report, the BRP issued a notice under Section 144C (8) dated 05/05/2024, wherein the DRP proposed to enhance the assessee's income and disallow the entire amount of Franchisee fee and the intra-group services under section 37(1) of the Act. In response to the same, the assessee filed a detailed submission, wherein the assessee contented against the enhancement of income proposed by the DRP. The DRP passed the directions dated 12/06/2024, accepting the assessee's contention on disallowance u/s 40(4)(ia) and disregarded the assessee's contentions & disallowed the payment of Franchise Fee, Intra-group services and deduction claimed under section 80G which is restricted to the amount of Rs. 962,917/-.Additionally, the DRP proposed an alternate disallowance of the sum paid in respect of franchisee fee and intra-group service charges by the assessee to its Associated Enterprise(s) (in short "AE"), as being ineligible for deduction under Section 37(1) of the Act E. Approach adopted by the Ld. AO in the Final Assessment Order. The Ld. AO in the Final AO order dated 12/07/2024, ....
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....l Finding by the DRP: ....................................................................... However, apart from the ALP of so-called IGS Fees being determined as "Nil", the Panel holds that the Assessing Officer is also liable to undertake the alternate disallowance of the payments as failing to fulfil ingredients of section 37. The Assessing Officer is directed to go through the Paragraphs above and succinctly assess the income accordingly. Needless to mention, there would not be double addition/disallowance of Rs. 9,65,65,885/-, but the Assessing Officer will provide the additional supporting argument that the sums have not only "Nil" ALP as determined; but also are not eligible for deduction under s.s. 37(1) of the I.T. Act. This is an additional ground raised by the Panel. The Assessing Officer is directed to comply with the additional ground and incorporate the same." 6. The Ld. AR argued that the Ld. AO has not followed the directions issued as no alternate disallowance has been proposed or discussed, thereby violating the mandatory provisions of the section 144C(13) of the Act. Thus, the final assessment order dated 12/07/2024 pa....
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....) Ltd. v. ACIT (2018) 89 taxmann.com 339 (ITAT Bangalore) held that Where Assessing Officer/TPO passed impugned final order of assessment under section 143(3) read with section 92CA without giving effect to or carrying out binding directions of DRP as required under section 144C(10) within time specified under section 144C(13), said impugned final order was to be set aside 7.2. Respectfully reliance is placed on the order of the Hon'ble Delhi High Court wherein the any exercise of powers by the AO in contravention of the specific directions of the DRP was held to be excessive and hence illegal: ESPN Star Sports Mauritius S.N.C. ET Compagnie us UOI, [2016] 68 taxmann.com 377 (Delhi). 8. The Ld. DR argued filed a written submission which is kept in record. The Ld. DR prayed to set aside the issue before the Ld. AO for reconsideration the issue. 9. We have heard the rival contention of both parties in the matter and perused the material on record. The undisputed facts on record, as brought out by the discussions above, is that the Ld. AO, as per law, was required to pass the final order of assessment dated 12/7/2024 for asst. year 2020-21 u/s 143(3) r.w.s 14....
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....s defined under the term 'System', granted by the Franchisor to the assessee. In lieu of the franchisee fees, the assessee gets bundled IP rights for its business operations manufacturing as well marketing activities. The Ld. AR stated that RC India received a consolidated 'bundle' of services and intangibles ('System' rights), under the Franchise Agreement. The rights granted by RC SAS to the assessee in lieu of the franchisee fees are outlined below: 11.1. IP Rights (manufacturing) Under the franchisee agreement, RC SAS provides IP rights required for manufacturing of products. It also provides the Standards of quality required to be maintained by the franchisee. 11.2. Marketing support-RC SAS make available to RC India continuous marketing assistance in form of various merchandising and promotional tools, and packaging materials. Market team of RC SAS continuously performs various marketing services including market analyses, press announcements, leaflets and websites design, among others and publish the research insights on its library for RC India and other affiliates. Further, RC SAS, having immense experience about the worldwide tren....
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....is squarely covered in assessee's own case for AY 2016-17 wherein the coordinate bench of ITAT-Mumbai Bench- J in ITA No. 1298/Mum/2021, order dated 22/09/2022. accepted the contentions of the assessee with respect to disallowance of payment of Franchisee fee by the Ld. TPO and held the finding of the Ld. TPO/AO to be unsustainable directing to delete the adjustment, by holding the following observations: "11. In the instant case, we observe that the TPO at threshold has discarded payment of franchise fee on the ground of need of such payment. The TPO has exceeded his jurisdiction in making such observation. The TPO cannot step into the shoes of assessee to decide prudence of expenditure. The TPO failed to examine the documents furnished by assessee to benchmark the transaction by applying one of the methods specified in Chapter-X of the Act. Thus, in the facts of the case and in the light of decisions refereed above, we hold that the findings of the TPO/Assessing Officer in making adjustment in respect of franchise fee are unsustainable. The adjustment is deleted and ground No. 3 of appeal is allowed." 13. The Ld. DR argued and supported the order of the ld. ....
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....e jurisdiction vested under transfer pricing provisions to the TPO is only to find out whether the prices paid by the services are at Arm's Length Price or not, as held in Sony Ericson Mobile Communication vs. CIT, 374 ITR 118; CIT vs. EKL Appliances, (2012) 345 ITR 241 (Del) and many other decisions. We further note that Co-ordinate Bench in DCIT vs. Apollo Gleneagles Hospital Ltd., (2013) 150 taxmann.com 210 (Kol), it was held for the purposes of determination of analyzing the benefit test has no great relevance in TP analysis." The Ld. AR argued that DRP/Ld. AO/Ld. TPO by not identifying any comparable uncontrolled transaction and by considering the benchmark price of the said international transaction as 'Nil', has violated the explicit provisions of the Indian TP regulations. In our considered view the issue is squarely covered by assessee's own case ITA No. 1298/Mum/2021 for AY 2016-17 (supra). We direct to delete the adjustment as proposed in relation to franchise fees. 15. In the result, the appeal of the assessee ground no-5 is allowed. Ground No 6 &7 (adjustment on account of disallowance of payment of intragroup service charges) 16. The adjust....
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....visions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an Appellant on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein." (Emphasis added) From the above, it is clear that, no deduction will be allowed for CSR expenditure as business expenditure but the Explanatory Memorandum to The Finance (No.2) Bill, 2014 makes no reference to ineligibility or restriction in claiming deductions under section 80G of the Act for donations made pursuant to section 135 of Companies Act, 2013. No restrictions imposed on claim of CSR expenditure made towards donations under Section 80G of the Act. 19. The Ld. DR argued and relied on the or....