Income Tax Appellate Tribunal - Delhi
Mcdonald'S India Pvt. Ltd., New Delhi vs Addl. Cit, New Delhi on 30 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-1", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.1426/Del/2014
Assessment Year : 2009-10
McDonald's India Pvt. Ltd., Addl.CIT, Range-6,
202 - 206, Tolstoy House, New Delhi.
Vs.
15, Tolstoy Marg,
New Delhi.
PAN : AAACM2007J
(Appellant) (Respondent)
Appellant by : Shri Ravi Sharma, Adv.
Respondent by : Shri Sanjay I. Bara, CIT-DR
Date of hearing : 20-12-2017
Date of pronouncement : 30-01-2018
ORDER
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 02.01.2014 passed by the Assessing Officer u/s 143(3) r.w.s. 144C of the I.T. Act relating to assessment year 2009-10.
2. The grounds raised by the assessee are as under :-
"Grounds relating to Transfer Pricing Matters That on the facts and circumstances of the case and in law:
Ground 1.
Hon'ble DRP/Ld. AO has erred in disregarding the order of higher appellate authorities ("Hon'ble ITAT") in the Appellant's own case for the Assessment Year 2001-02 and Assessment Year 2002-03, and applied a flawed approach which is also inconsistent with what has been adjudicated by the Hon'ble CIT(A) in the Appellant own case for the Assessment year 2003-04, 2004-05 and 2005-06. Ground 2.
Hon'ble DRP/ Ld. AO has erred by not understanding the business model of the Appellant and failed to comprehend the agreements entered into by the Appellant, without appreciating the legal and economic nexus between the Appellant, 2 ITA No.1426/Del/2014 McDonald's Corporation ("MDC") and Joint Venture ("JV") companies. Thus, Hon'ble DRP/ Ld. AO failed to appreciate that the receipts/payment of royalty and initial franchisee fee is being diverted by the overriding title at the very source. Ground 3.
Hon'ble DRP/Ld. AO has erred in concluding that the responsibility to undertake advertising and bearing the cost of such advertising lies with the Appellant. Thus, Hon'ble DRP/Ld. AO failed to give due cognizance to the commercial rationale and the legal obligations of the JV companies, the Appellant and McDonald's Corporation, by erroneously adding advertising cost to the cost base of basic management services for the purpose of arriving at an arm's length price. While doing so the Hon'ble DRP/Ld. AO failed to appreciate the following contentions of the Appellant:
• The advertisement expense is to be incurred by JV companies and is not an economic cost of the Appellant;
• JV companies are the prime beneficiaries of the advertisement expenses and the same are not for any direct benefit of McDonald's Corporation; • The nature of the advertisement is product promotion which is specific to India, and does not meant for developing the brand. It is common knowledge that food products have to be customized to suit local tastes and sensibilities. The food products promoted through advertisement are only those which can be sold in India;
• Advertisement expenses as notional cost cannot be considered in the cost base for purpose of determining arm's length price. Further, without prejudice to the same, if it were to become income for arm's length determination, it should not include the notional cost while calculating the arm's length price. For example:
Actual cost : Rs.100
Notional cost is : Rs.50
Total cost used by TPO is : Rs.150
Using a markup of 10%, mark up is : Rs.15
Arm Length Price : Rs.165
Hon'ble DRP/ Ld. AO has computed arm's length price as Rs. 165, since 50 was notional cost, the 'income' in relation to international transaction, having regard to such arm's length price should be Rs. 15 and not Rs. 65. Hence, without prejudice to the above grounds, in the alternative, the addition should be limited to the notional income of Rs.15 only and not Rs.65 as considered by Hon'ble DRP/Ld.AO. Ground 4.
Hon'ble DRP/Ld. AO has erred by not accepting the economic analysis undertaken by the Appellant's in accordance with the provisions of the Income-tax Act, 1961 ("the Act") read with the Income-tax Rules, 1962 ("the Rules"), and conducting a fresh economic analysis for the determination of the arm's length price of the impugned international transaction and holding that the Appellant's international transaction is not at arm's length.
Ground 5.
Hon'ble DRP/Ld. AO has erred in selecting/rejecting certain comparables merely on the basis of certain ad hoc filters, without establishing their functional comparability/ non comparability, and failed to undertake any functional, asset and risk analysis of comparable vis-a-vis the Appellant.3 ITA No.1426/Del/2014
Ground 6.
Hon'ble DRP/Ld. AO erred in ascertaining the risk profile of the Appellant by assuming that it undertakes substantial entrepreneurial risk while rendering market research services, without giving due cognizance to the fact that Appellant indeed enjoys a "No Risk" status, i.e., all authorized expenses incurred by the Appellant get reimbursed with a markup of 10 percent, irrespective of their commercial success. Thus, Hon'ble DRP/Ld. AO has erred by not making suitable adjustments to account for differences in the risk profile of the Appellant's (no risk) vis-a-vis the comparables (bearing full-fledged entrepreneurial risk).
Ground 7.
Hon'ble DRP/Ld. AO has erred in using single year data of comparable companies vis-a- vis multiple year weighted average data as considered by the Appellant. Ground 8.
Hon'ble DRP/ Ld. AO has erred in not applying the proviso to Section 92C(2) of the Act correctly and has failed to allow the benefit of downward variation from the arm's length price so computed.
Grounds relating to Corporate Tax Matters Ground 9: Disallowance of foreign exchange loss That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO has erred on facts and in law in disallowing the foreign exchange fluctuation loss arising on account of restatement of royalty payments amounting to Rs.1,75,31,988 on the ground that such loss is a part of the royalty payments made to McCorp for which the ALP has been computed as NIL by the Ld. TPO.
Ground 10: Disallowance of R&D Cess 10.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO has erred on facts and in law in disallowing the R&D cess payable on royalty payments amounting to Rs.1,41,95,363 on the ground that such expenditure is a part of the royalty payments made to McCorp for which the ALP has been computed as NIL by the Ld. TPO.
10.2 Without prejudice to the above, the Hon'ble DRP/ Ld. AO has erred in disallowing the R&D cess which has already been disallowed by the assessee in its return of income for A Y 2009-10 under Section 43B of the Act, therefore, leading to double disallowance of the same amount in the hands of the assessee. Ground 11: Disallowance under Section 14A of the Act 11.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO has erred in disallowing a sum of Rs. 1,59,60,691 under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ('the Rules') as expenditure incurred in connection with earning exempt dividend income. 11.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO has erred in invoking the provisions of Section l4A of the Act without considering the fact that no expense, whether directly or indirectly, has been incurred by the Appellant towards earning the alleged exempt income. 11.3 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in framing a disallowance in accordance with Rule 8D of the Rules without appreciating that the application of Rule 8D is not automatic and it is imperative to first establish that the assessee has actually incurred expenditure in relation to exempt income and arrive at a satisfaction in relation thereto. 11.4 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. 4 ITA No.1426/Del/2014 AO has erred in including loans and advances given to body corporate in the value of investment while computing the disallowance under Section 14A of the Act read with Rule 8D of the Rules.
11.5 Without prejudice to the above, that on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in disallowing an amount of Rs.
1,59,60,690 as against amount ofRs.l,58,89,594 under Section 14A of the Act read with Rule 8D of the Rules.
Ground 12: Disallowance of claim of brought forward losses and MAT credit That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred on facts and in law in disallowing the claim of brought forward losses amounting to Rs. 85,94,435 and MAT credit amounting to Rs. 9,99,691. The Appellant craves leave to add, amend, vary, omit or substitute, any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal."
3. At the time of hearing, ld. counsel for the assessee submitted that the assessee has accepted the transfer pricing additions as decided in the MAP resolution. Referring to the copy of the order dated 19.09.2017 addressed by the Assessing Officer to the assessee company along with annexure, he submitted that the assessee has accepted the TP adjustment of Rs.5,35,13,112/-. Therefore, the assessee is not pressing the grounds of appeal no.1 to 8.
4. In view of the above submissions by the ld. counsel for the assessee and in absence of any objection from the side of the ld. DR, the grounds of appeal no.1 to 8 raised by the assessee are dismissed as withdrawn.
5. Ground no.9 relates to disallowance of foreign exchange loss of Rs.1,75,31,988/-.
6. After hearing both the sides, we find the Assessing Officer at para 6.1 of the final order has discussed the issue which reads as under :- 5 ITA No.1426/Del/2014
"6.1 Assessee has debited foreign exchange fluctuation loss of Rs.1,75,31,988/- in the P&L A/c. Assessee submitted vide letter dated 06.02.2013 that the above loss is on account of reinstatement of location fees on 31.03.2009 payable to McDonald Corporation. It has been further observed that the assessee has paid Rs.5,35,13,112/- on account of License and Location fee to McDonald Corporation and the TPO has computed the Arm's Length Price of NIL in respect of this international transaction of assessee with AE and made Transfer Pricing adjustments of Rs.5,35,13,112/- on the above payment (mentioned as Initial Franchisee Fee in the order of TPO). It is evident that the foreign exchange fluctuation loss of Rs.1,75,31,988/- is part of the above payment and the assessee failed to furnish the above information either in the Audit Report filed in Form 3CEB or during the course of Transfer Pricing proceeding. Since, the TPO has already determined Arm's Length Price of NIL, hence, the foreign exchange fluctuation loss of Rs.1,75,31,988/- is disallowed and added back to the total income."
7. Ld. counsel for the assessee submitted that since the TPO has computed the arm's length price at Nil in respect of these transactions and since the assessee has accepted the MAP, therefore, there is no justification on the part of the Assessing Officer/TPO to make any further addition on this issue.
8. Ld. DR on the other hand submitted on this issue may be restored to the file of the Assessing Officer/TPO to pass a speaking order in the light of the MAP.
9. We find merit in the argument of the ld. DR that this issue requires a re- visit to the file of the Assessing Officer/TPO for deciding the above issue in the light of the MAP resolution. Accordingly, this ground by the assessee is allowed for statistical purposes.
10. So far as ground no.10 is concerned, the same relates to disallowance of Rs.1,41,95,363/- on account of royalty payment.
6ITA No.1426/Del/2014
11. After hearing both the sides, we find the Assessing Officer at para 7.1 of the order has discussed the issue by observing as under :-
"7.1 Assessee has paid Rs.1,41,95,363/- on account of R&D Cess on Royalty and Franchisee Fee (License and Location Fee) paid to McDonald Corporation during the F.Y. 2008-09 as submitted by the assessee vide letter dated 06.02.2013. It has been further observed that the assessee has paid Rs.22,37,10,767/- on account of Royalty Payment and Rs.5,35,13,112/- on account of Franchisee Fee (License and Location Fee) to McDonald Corporation and the TPO has computed the Arm's Length Price of NIL in respect of both of the above international transactions of assessee with AE and made Transfer Pricing adjustments of Rs.22,37,10,767/- and Rs.5,35,13,112/-, respectively, on the above payments. It is evident that the R&D Cess on Royalty and Franchisee Fee (License and Location Fee) of Rs.1,41,95,363/- is part of the above payments and the assessee failed to furnish the above information either in the Audit Report in form 3CEB or during the course of Transfer Pricing proceeding. Since, the TPO has already determined Arm's Length Price or NIL in respect of both of the payments mentioned above, hence, R&D Cess on Royalty and Franchisee Fee (License and Location Fee) of Rs.1,41,95,363/- is disallowed and added back to the total income."
12. Identical arguments have been made by both the sides, while arguing ground of appeal no.9 relating to foreign exchange fluctuation loss. Since we have already restored the issue to the file of the Assessing Officer/TPO to decide the above issue in the light of the MAP resolution which was made after the final order was passed, therefore, following the same reasonings, we restore this issue to the file of the Assessing Officer/TPO for deciding the issue afresh in the light of the MAP resolution.
13. Needless to say, the Assessing Officer shall give due opportunity of being heard to the assessee while adjudicating the ground of appeal no.9 and 10.
14. Ground no.11 relates to disallowance of amount of Rs.1,59,60,690/- u/s 14A of the I.T. Act.
7ITA No.1426/Del/2014
15. After hearing both the sides, we find the Assessing Officer made disallowance of Rs.1,59,60,691/- by invoking the provisions of section 14A r.w. Rule 8D on the ground that the assessee has made huge investment of Rs.317.79 crores. Rejecting the explanation of the assessee that no dividend income has been received by the assessee during the year and, therefore, no addition could have been made, the Assessing Officer, relying on various decisions disallowed an amount of Rs.1,59,60,691/-. It is the submission of the ld. counsel for the assessee that in absence of any dividend income received by the assessee during the impugned assessment year, no disallowance could have been made u/s 14A r.w. Rule 8D. We find merit in the above argument of the ld. counsel for the assessee. The Hon'ble Delhi High Court in the case of Cheminvest Limited vs. CIT reported in 61 taxmann.com 118 has held that section 14A will not apply if no exempt income has been received or receivable during the relevant previous year. Since in the instant case, it is an admitted fact that no exempt income has been received by the assessee during the impugned assessment year, therefore, in view of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Limited (supra) and in the absence of any contrary material brought to our notice by the ld. DR, we hold that no disallowance u/s 14A is called for. The ground raised by the assessee is accordingly allowed.
16. So far as ground no.12 is concerned, same relates to the disallowance of claim of brought forward losses and MAT credit.
8ITA No.1426/Del/2014
17. At the time of hearing both the sides agreed that this ground is consequential in nature and no speaking order has been passed. Therefore, we restore this issue to the file of the Assessing Officer with a direction to pass a speaking order as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground raised by the assessee is allowed for statistical purposes.
18. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on this 30th day of January, 2018.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 30-01-2018.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The DRP
4) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi