Income Tax Appellate Tribunal - Mumbai
Mondelez India Foods Ltd, Mumbai vs Addl Cit Rg 5(1), Mumbai on 4 July, 2019
THE INCOME TAX APPELLATE TRIBUNAL
"J" Bench, Mumbai
Before Shri Shamim Yahya (AM) & Shri Ramlal Negi (JM)
I.T.A. No. 4225/Mum/2014 (Assessment Year 2007-08)
Mondelez India Foods Pvt. Ltd. Addl. CI T Range-
(formerly known as M/s. Vs. 5(1)
Mondelez India Foods Ltd.) Aayakar Bhavan
Mondelez House, Unit No. 2001 5 t h Floor
20 t h Floor, Tower-3 M.K. Road
Wing-C, India Bulls Finance Mumbai-400 020.
Centre, Parel, Mumbai-400013.
PAN :AAACC0460H
(Appellant) (Respondent)
Assessee by Shri J.D. Mistry & Shri
Hiten Chande
Department by Shri Anand Mohan
Date of Hearing 16.4.2019
Date of Pronouncement 04.7.2019
ORDER
Per Shamim Yahya (AM):-
This appeal by the assessee is directed against the order of learned CIT(A) dated 19.3.2014 and pertains to A.Y. 2007-08.
2. Grounds of appeal read as under :-
Based on the facts and in the circumstances of the case and in law, Mondelez India Foods Limited (hereinafter referred to as 'the Appellant') craves leave to prefer an appeal against the order dated 19 March 2014 passed by the Hon'ble Commissioner of Income-tax (Appeals) -15, Mumbai [hereinafter referred to as the 'CIT(A)]' under section 250 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), on the following grounds:
Based on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred:
Transfer pricing adjustments 2 M o n d e l e z In d i a F o o ds P v t. L td .
1. In making an adjustment of Rs 21,37,70,000 to the total income of the Appellant under section 92CA(3) of the Act on account of adjustment in the arm's length price of international transactions of the Appellant.
Payment of Royalty
2. In not accepting the economic analysis undertaken by the Appellant using the Transactional Net Margin Method ('TNMM'), in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('the Rules'), for the determination of the arm's length price in connection with the international transaction of payment of royalty to its associated enterprises ('AE').
3. In determining the arm's length price for the trademark royalty paid to Cadbury Schweppes Overseas Limited at Rs NIL vis-a-vis the actual payment of Rs 10,74,54,000 on the ground that the same was subsumed in the technical assistance royalty paid by the Appellant.
4. In not considering the agreements submitted as Comparable Uncontrolled Price ('CUP') by the Appellant while determining the arm's length price.
5. In not considering the approvals received from Secretariat of Industrial Assistance/ Reserve Bank of India in respect of payments made by the Appellant while determining the arm's length price.
6. In restricting the payment of royalty to Cadbury Adams USA LLC at 1 percent on the ground that license to use the technology was not obtained directly from the licensor but from a sub-licensor and thereby making an adjustment of Rs 71,12,000.
7. In not considering the +/- 5% variation from the arm's length price permitted to the Appellant under the proviso to section 92C(2) of the Act.
Service fees to Cadbury Schweppes Asia Pacific Pte. Limited "
8. In concluding that the Appellant has failed to establish the basis for determining the consideration for services at the requisite amount.
9. In not accepting the economic analysis undertaken by the Appellant using the TNMM method, in accordance with the provisions of the Act read with the Rules, for the determination of the arm's length price in connection with the international transaction of payment of service fees to Cadbury Schweppes Asia Pacific Pte. Limited, Singapore.
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10. In determining the value of the services received from Cadbury Schweppes Asia Pacific Pte. Limited, Singapore at Rs NIL vis-a-vis the actual payment of Rs 9,92,04,000, without undertaking any comparability analysis for the same based on provisions of section 92C of the Act.
11. In not considering the +/- 5% variation from the arm's length price permitted to the Appellant under the proviso to section 92C(2) of the Act.
Corporate tax additions/ disallowances In confirming the adjustments made by the Additional Commissioner of Income-tax - 5(1) ('learned AC1') amounting to Rs 1 2,26,61 ,755 to the total taxable income of the Appellant on account of various additions/ disallowances under the provisions of the Act.
Denial of depreciation on marketing know-how
12. In upholding the disallowance of Rs 17,06,629 made by the learned AO with respect to depreciation on marketing know-how claimed by the Appellant under section 32 of the Act.
Allocation of expenses in respect of Appellant's unit at Baddi
13. In upholding the action of the learned AO of arbitrarily allocating on basis of sales turnover, the expenditure incurred by the Appellant to its unit at Baddi and disregarding the allocation by the Appellant on scientific basis, for determining profits eligible for deduction under section 80-IC of the Act. Thus, reducing the said deduction claimed in the Return of Income from Rs 41 ,06,18,903 to Rs 28,96,63,777.
The above grounds are without prejudice to one another.
The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal hearing.
Apropos issue relating to transfer pricing adjustment for payment of royalty. Ground No. 2 to 5 relates to this issue.
3. The assessee in this case is a listed company engaged in manufacturing and marketing of malted food and drinks and chocolates. On this issue the Transfer Pricing Officer (TPO) noted that Cadbury India had entered into Technical Assistance and Royalty Agreement with AE M/s. CSOL on 9.3.1993 4 M o n d e l e z In d i a F o o ds P v t. L td .
for availing itself of the benefits of the said technical knowhow developed by CSOL relating to the manufacturing, processing, distributing and marketing of products as well as the benefits of the continuing research and development undertaken by CSOL. This agreement was effective for a time of ten years from the date of ITA or seven years from the date of commencement of production. The TPO further noted that the Department of Industrial Policy and Promotion, Secretariat for Industrial Assistance had approved extension of the royalty rate of 1.25% of the internal sales and exports. During the year the assessee has shown to pay royalty to the tune of Rs. 9.18 crores at the rate of 1.25% on the relevant sales which comes to be 0.82% of the total sales of Rs. 1119.24 crores. After going through various agreements and another details, TPO observed as under :-
(a) Even without the agreement For trademarks dated 25th January 2002(AG-III), effective from 01-04-2001 to 31-03-2008 for trade mark liesnce, the assesses was very much enjoying the trade mark/brand of GSOL, UK.
(b) The rate of royalty for technical knowhow was reduced to 1.25% of the net sale in the present agreement (AG-II) as against 2% of the net sales in the earlier agreement (AG-I).
(c) For one full year, that is, for FY. 2000-01, the assessee paid royalty (total) @ only 1.25% of net sales.
(d) The Technical Assistance and Royalty Agreement (AG-III) also deals with the issue of distribution and marketing of the products.
(e) The payment of royalty under the Trade Mark Licence Agreement, include payments for the Provision of technical information and specifications.
(f) The clarification issued by the Govt. of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, Secretariat for Industrial Assistance vide Press Note No. 8(2)2001-FC.l dated 3rd January 2002 clearly states that in the case of Technical Transfer, payment of royalty for technical know-how subsumes the payments of royalty for the use of trade mark, and brand name of the foreign collaborator.5
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4. Submissions of the assessee were considered by the TPO. He concluded as under:-
The submissions of the assessee were considered by the TPO and it has been observed that the assessee has incurred advertisement and marketing expenses inter alia, on the following :-
Continuously reminding the customers of its products especially when competitors launches new products/Advertisement campaigns such as Kit Kat, Munch, Eclairs etc. Countering competition/acting as entry barriers for new players eg. Lindt, Mars etc. New product launches such as Bournville, Cadbury silk etc. To increase sales of its existing products especially where there is a downward trend.
To create awareness of discounts offered on various products at a particular point of time.
To create a recall vale of an Indian sweet on festive occasions such as Diwali, New year, Holi etc;
To reach out to rural markets for its low cost products.
To market its health drinks/nutraceutical products (Bournvita); etc. However, considering that similar adjustments made in the earlier assessment year, and the fact that it is a subject matter of appeal before the CIT(A), TPO proposed to follow the view taken in the preceding year and make similar adjustment in, the current year. Further, the observations made by the CIT(A) on advertisement and marketing expenses while adjudicating the appeal for AY 2002-03 is not binding since department proposes to appeal the same in the tribunal.
In view of the discussion above, TPO computed Rs. 2.56 crores (1.88%) as the cost apportioned or allocable out of the advertisement and marketing cost incurred by the assessee for the benefit accruing to the overseas AE. However, the cost was restricted to Rs. 1.12 Crores (being 0.82% of Rs. 136.58 crores) in view of the disallowance/adjustment in income made on account of royalty for trade mark as per discussions made earlier."6
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5. In view of the above, TPO held that the Assessing Officer will be required to disallow Rs. 1.12 Crores from the advertisement & marketing expenditure towards the cost allocable to CSOL, UK for the benefit accruing to it as per section 92(2) of the I.T. Act.
6. Upon assessee's appeal learned CIT(A) referred to the order of learned CIT(A) for A.Y. 2006-07 and finding facts identical. He confirmed the same.
7. We have heard both the counsel and perused the records. It transpires that this issue was earlier remitted by the Tribunal to the TPO. However, learned Counsel of the assessee submitted that in the last year there was issue of fresh documents. He submitted that this year all documents are there. He submitted that the TPO has held that arm's length price should be nil without applying any material. Learned counsel claimed that the TPO has held that no benefit accrues to the assessee. Learned counsel referred to several case laws for the proposition that benefit test is not for TPO. Learned Counsel of the assessee referred to several case laws for the proposition that when no method is applied adjustment for arm's length price taken is nil is not sustainable. Learned counsel referred to the decision of Hon'ble Delhi High Court for the proposition that the matter should not be set aside despite earlier order of remand.
8. Per contra, learned Departmental Representative submitted that there are no difference in the facts of the case as compared to earlier year considered by the ITAT. It is submitted that the matter should be accordingly set aside.
9. Upon careful consideration, we note that this Tribunal in assessee's own case for A.Y. 2006-07 in ITA No. 1512/Mum/2013 vide order dated 28.11.2018 considered the same issue as under :-
7. We have considered rival submissions and perused materials on record.
As could be seen from the order of the Transfer Pricing Officer, he has determined the arm's length price of royalty payment on trademark to SCOL at zero. In other words, he has disallowed royalty payment on 7 M o n d e l e z In d i a F o o ds P v t. L td .
trademark at 1% while allowing royalty payment on technical knowhow at 1.25% of net sales. The reasoning on which the Assessing Officer has denied royalty payment on trademark are basically that as per the terms of earlier agreement approved by the Government, the assessee can pay royalty for technical knowhow at the maximum rate of 2%, whereas, the assessee has paid royalty both for technical knowhow and trademark aggregating to 2.25%. He has also referred to the Press Note issued by the Government clarifying that royalty payment cannot exceed 2% and further the royalty payment for technical knowhow subsumes royalty payment for trademark. In this context, the Transfer Pricing Officer has also referred to similar dispute arising in the preceding assessment years. It is evident that the learned Commissioner (Appeals) has upheld the disallowance of royalty payment of trademark simply relying upon the order passed by him in assessee's own case for assessment year 2005-06. As could be seen from the material available on record, the assessee has entered into agreement with its current company in the year 1993, for availing technical knowhow for which it was required to pay royalty @ 2%. Subsequently, the assessee has entered into fresh agreements with the parent company for transfer of technical knowhow as well as use of trade mark for which assessee is required to pay royalty @ 1.25% and 1% of the net sales respectively. As could be seen from the materials placed on record, the payment of royalty for technical knowhow @ 1.25% has been approved by the Ministry of Commerce and Industry, Government of India, vide letter dated 14th September 2000 (copy is placed at Page-85 of the paper book). Similarly, payment of royalty for trademark @ 1% has been approved by the Reserve Bank of India, vide letter dated 25th June 2001, copy at Page-119 of the paper book. Thus, as could be seen, payment of royalty for trademark at 1% over and above the royalty paid at 1.25% for technical knowhow has been approved by the Reserve Bank of India. Though, the Transfer Pricing Officer has relied upon Press Note dated 3rd January 2002, to observe that in case of technology transfer payment of royalty subsumes the payment for royalty for use of trademark, however, in a subsequent Press Note issued by the Ministry of Commerce and Industry, Government of India, vide no.5(5)/2003-FC, dated 24th June 2003, has permitted royalty payment up to 8% on export sales and 5% on domestic sales. It is also relevant to note, the fact that the royalty paid by the assessee @ 2.25% both for technical knowhow and trademark is lesser than the royalty paid by other comparables and even group companies has not been disputed either by the Transfer Pricing Officer or by the learned 11 Mondelez India Foods Pvt. Ltd. Commissioner (Appeals). It is also relevant to note, identical dispute relating to payment of royalty for trademark at 1% over and above royalty paid for technical knowhow at 1.25% and its allowability came up for consideration before the Tribunal in assessee's own case for assessment year 2002-03 to 2005-06. While deciding the issue in the aforesaid assessment years, the Tribunal held that the payment of royalty on trademark to CSOL at 1% of sales is 8 M o n d e l e z In d i a F o o ds P v t. L td .
allowable and at arm's length. In fact decision of the Tribunal has also been accepted by the Revenue. In this context, we may refer to the relevant observations of the Tribunal while deciding identical issue in assessee's own case for assessment year 2005-06, in ITA no.5470/Mum./2012, dated 18th May 2016, which is as under:-
"2.3.We have heard the rival submissions and perused the material before us.We find that while deciding the appeal for AY 2002- 03(supra) the Tribunal has decided the issue as under:-
"37.We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage.
38.From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the assessee was incorrect. According to the TPO, the best method to ascertain ALP in the interest case was CUP, as the transactions were controlled. This was reasonable, as no data was available from independent source to benchmark the transactions.
39.On going through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its parent AE right from 1993, as, other group companies are paying across the globe. It has been accepted by the TPO that the payment does not effect the profitability of the assessee, if we are to examine the issue from that angle as well. In any case the payment of royalty on technical knowhow is at par with the similar payments from the group companies in other countries & region. Besides this, the payment is made as per the approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arm‟s length.
40.Coming to the issue of royalty payment on trademark usage, we find that the assessee, in fact is paying a lesser amount, if the payments are compared with the payments towards trademark usage, by the other group companies using the Brand Cadbury in other parts of the world. On the other hand, if we examine the argument taken by the TPO with regard to OECD guidelines. On this point the assessee‟s payment is coming to a lesser figure, as discussed in detail by the CIT(A).
41.We are not going into the arguments advanced by the DR/TPO on geographical differences, and payments made to Harshey, as these arguments gets merged in the interpretation and details available in the 9 M o n d e l e z In d i a F o o ds P v t. L td .
table supplied by the assessee and taken note of by the TPO and the CIT(A).
42.We are also not referring to the case of Maruti Suzuki Ltd. as we find that in so far as the instant case is concerned, there is really no relevance.
43.On the basis of the above observations, we are of the opinion that the royalty payment on trademark usage is within the arms‟ length and does not call for any adjustment." Respectfully, following the above order, and the order for subsequent AY.s we decide the Ground of Appeal No.1 in favour of the assessee."
8. There being no difference in factual position in the impugned assessment year, respectfully following the consistent view of the Tribunal on identical issue in assessee's own case as referred to above, we hold that the royalty payment on trade mark to SCOL @ 1% of net sales is at arm's length, hence, no further adjustment is required. Accordingly, we delete the disallowance made by the Assessing Officer. Ground raised is allowed.
10. Upon careful consideration, we note that the Assessing Officer as well as learned CIT(A) have also based their decision on their earlier orders. Since ITAT has considered those orders and remitted the issue to the file of the Assessing Officer, we deem it appropriate to follow the precedent and set aside the issue to the file of the Assessing Officer. The Assessing Officer is directed to consider the issue afresh keeping in mind additional submissions being made by learned counsel.
11. Another issue raised in Ground No. 6&7 relates to disallowance of payment of royalty on technology paid to Cadbury Adams USA LLC.
12. It transpires that this issue has been decided by learned CIT(A) by upholding the order of TPO by following his earlier year order. It transpires that in assessee's own case for A.Y. 2006-07, the ITAT has decided this issue as under:-
22. We have considered rival submissions and perused materials on record. Undisputedly, the assessee has paid royalty to CAUSA @ 2.7% of net sales as per the agreement executed on 1st June 2006. It is the claim of the assessee that the payment of royalty is for use of trademark as well as technical knowhow. However, the Transfer Pricing 10 M o n d e l e z In d i a F o o ds P v t. L td .
Officer after examining the agreement between the assessee and CAUSA has opined that the agreement only provided for use of trademark and it does not provide for use of technical knowhow. It is the say of the Transfer Pricing Officer that since as per the Government guidelines, payment of royalty on trade mark under the automatic route is fixed at the maximum rate of 1%. Royalty paid for trademark at 2.7% is not at arm's length. Accordingly, he has allowed payment of royalty for trademark at 1%. While doing so, the Transfer Pricing Officer has also observed that the agreement executed in December 2007, amending the terms of the original agreement having come in to existence after expiry of relevant financial year would not be applicable for a transaction undertaken in the relevant financial year. The learned Commissioner (Appeals) has also endorsed the aforesaid view of the Transfer Pricing Officer. No doubt, on a perusal of the agreement dated 1st June 2006 between the assessee and CAUSA it appears that the said agreement has been termed as trademark license agreement. However, reading the agreement as a whole and more particularly, Clause-7(b) of the said agreement, it becomes clear the licensee (the assessee) shall manufacture licensed product using any technology of the licensor provided to the licensee in accordance with all specifications and instructions provided by the licensor from time to time. It is not the case of the Revenue that in the relevant previous year assessee has neither manufactured nor sold 'Halls' brand products in India. Thus, it is necessary to ponder whether in absence of necessary technical knowhow/knowledge it would have been possible for the assessee to manufacture the aforesaid products? In our view, the answer would be No. Further, the assessee and CAUSA have entered into one more agreement on 24th December 2007, amending the terms of the original agreement. As per the aforesaid agreement, certain terms of the original agreement was amended to include licensing/sub-licensing of technology. It is the contention of the learned Sr. Counsel for the assessee that the amendment agreement executed on 24th December 2007, shall operate retrospectively from 1st January 2006, to emphasize this fact, the learned Sr. Counsel for the assessee has sought to produce letter dated 26th April 2016, issued by Mondelez International as additional evidence. From a perusal of the aforesaid letter, it appears that it has been issued to clarify that as per the original agreement executed on 1 st June 2006, effective from 1st January 2006, the parties to the agreement intended to transfer and avail technical knowhow / knowledge relating to the licensed product along with trademark. Considering the submissions of the learned Sr. Counsel for the assessee that in subsequent assessment years royalty paid by the assessee @ 2.7% of sales was accepted by the Transfer Pricing Officer, the letter dated 26th April 2016, sought to be produced by the assessee as additional evidence, in our view, is of much significance since it will have a crucial bearing in determining whether 11 M o n d e l e z In d i a F o o ds P v t. L td .
CAUSA has authorised the assessee to use technical knowhow along with trademark, hence, is admitted as additional evidence. Even, without taking cognizance of the aforesaid additional evidence, the original as well as amended agreement make it abundantly clear that assessee has also availed technical knowhow from CAUSA. Further, the Departmental Authorities don dispute the genuineness or authenticity of the amended agreement. What they are disputing is the date from which the amended agreement is effective. If the departmental authorities in the subsequent assessment years have allowed payment of royalty both for trademark and technical knowhow, there is no reason why it should not be allowed in the impugned assessment year, since, it cannot be said that the assessee was manufacturing 'Halls' brand products without obtaining the required technical knowhow.
Accordingly, we hold that payment of royalty to CAUSA is at arm's length. The ground is allowed.
Since identical issue has been decided by the ITAT in favour of the assessee, we decide the issue in favour of the assessee.
13. Another issue raised in Ground No. 8 to 11 relates to disallowance of service fees paid to Cadbury Schweppes Asia Pacific Pte. Limited.
14. Brief facts on this issue are as under :-
During the course of assessment proceedings TPO noted that the assessee made a payment of Rs. 9.92 crores to Cadbury Schweppes Asia Pacific Pte Ltd., Singapore (CSAPL). The TPO further noted that assessee had entered into a service agreement dated 21st October 2005, valid w.e.f. 01.04.2005, with CSAPL for providing certain services to the assessee as per Schedule-I of the Agreement. The services covered under the agreement were detailed in the order of the TPO at age 54 to 57 under the following heads:-
Business Strategy Value Based Management Financial Planning and Accounting Supply Chain Coordination and planning Human resources Legal Marketing 12 M o n d e l e z In d i a F o o ds P v t. L td .
TPO further mentioned the general basis for computing fees in relation to the services of Provider (CSAPL) as per the agreement asunder :- The consideration under the agreement will be a fixed fee of SGD 4.8 million per annum, revised to SGD 3.6 million per annum vide amendment dated 18th October, 2006.
The fixed fee is based, to a degree, on estimated effort for providing services. If Provider estimates that the level of effort required to perform the services will be significantly different or it estimates significant overruns, the same will be cleared with the Recipient on a timely basis.
TPO narrated the Payments term as per agreement as under:
Beginning from 1st April 2006, cost for services provided shall be charged on the basis of quarterly accounting periods.
TPO mentioned the Services term as per the agreement as under :
The services provided to Recipient by Provider (as the Regional Head Offices of the Group) under the Agreement will be separate and differentiated from any service provided to the Recipient by the Group parent.
15. TPO observed that in the 3CBB Report, the arm's length price determined by the assessee (at Rs. 9.92 crores) was the same as recorded in the books of accounts on the basis of the above referred agreement (4.80 million Singapore Dolar per anum). The assessee stated to have used Transactional net Margin Method (TNMM) for recording this transaction.
16. Before TPO the assessee submitted various details. The TPO observed that show-cause notice was issued to the assessee as to why regional management charges should not be made on last year basis. The TPO proceeded to reject the submissions of the assessee and treat arm's length price as nil by concluding that similar assessment has made by his predecessor in earlier year.
17. Upon assessee's appeal learned CIT(A) referred to his earlier order for A.Y. 2006-07 and upheld the action of the TPO.
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18. Against this order, assessee is in appeal before us.
19. We have heard both the counsel and perused the records. We find that this issue was remitted by the ITAT back to the file of the Assessing Officer by observing as under :-
27. We have considered rival submissions and perused materials on record. The dispute is with regard to payment of Rs. 13.02 crore to one of the A.Es towards availing of various services under an agreement executed with the A.E. On a perusal of the order passed by the Transfer Pricing Officer and the learned Commissioner (Appeals) it is evident, assessee's claim that aforesaid payment was made to the A.E. for services availed was disbelieved and the arm's length price was determined at nil basically on the allegation that assessee failed to furnish necessary and relevant documentary evidences to prove that services were actually rendered by the A.E. and any benefit in economic and commercial terms accrued to the assessee as a result of such services. Even, there is an allegation by the Transfer Pricing Officer that the assessee did not justify the bench marking under TNMM by offering comparables. Of-course, the learned Sr. Counsel for the assessee has submitted before us that various documentary evidences were furnished before the Transfer Pricing Officer as well as learned Commissioner (Appeals) to demonstrate that services were availed from the A.E. under the terms of the agreement. The learned Sr. Counsel, however, fairly submitted that the details of cost incurred by the A.E. were not furnished before the Assessing Officer, since, he never called for it. It is necessary to observe, in the course of hearing before us the learned Sr. Counsel has filed an affidavit obtained from CSAPL, the A.E., asserting that various services were rendered to the assessee on cost plus mark-
up basis. Admittedly, the aforesaid additional evidence was not before the Transfer Pricing Officer or the learned Commissioner (Appeals). Considering the fact that the affidavit produced before us may have a crucial bearing on deciding the issue one way or the other, though, we admit the additional evidence produced by the assessee, however, since the aforesaid additional evidences has not been examined either by the Transfer Pricing Officer or the learned Commissioner (Appeals), in our view, it would be fair and reasonable to allow an opportunity to the Assessing Officer to consider the additional evidence and decide the issue. Moreover, there is also allegation and counter allegation with regard to production of evidences. While the departmental authorities have alleged that relevant documentary evidences were not produced, the assessee claims that all evidences were produced. Without entering into the controversy as to whether assessee has produced the evidences or not, we are of the opinion that evidences brought on record, as 14 M o n d e l e z In d i a F o o ds P v t. L td .
contained in the paper books filed before us, deserve to be examined on their own merit before deciding the issue one way or the other. More so, when as per assessee's claim in the subsequent assessment years the Transfer Pricing Officer himself has allowed a part of the service charges paid by the assessee to CSAPL, though, the quantum is in dispute. If in the subsequent assessment years the Transfer Pricing Officer has accepted the fact that the assessee has availed services from CSAPL under the very same agreement, there is no reason to dispute assessee's claim of availing services in the impugned assessment year if the assessee can demonstrate such fact by furnishing proper documentary evidences. In that event, the Transfer Pricing Officer certainly cannot determine the arm's length price at nil by applying the benefit test. Therefore, on overall consideration of facts and circumstances of the case, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due opportunity of being heard to the Assessing Officer. The Assessing Officer/Transfer Pricing Officer must pass a speaking and well reasoned order dealing with all the submissions of the assessee. Accordingly, this ground is allowed for statistical purposes.
20. In this regard learned Counsel of the assessee has contended that this issue was remitted to the file of the Assessing Officer in preceding year by the ITAT as additional evidences were submitted during that year. Learned counsel submitted that this year all the documents are already submitted before the authorities below. Upon careful consideration we find that learned CIT(A) in this case has followed his earlier order of previous assessment year. It was this order of learned CIT(A) which was remitted by the ITAT to the file of the TPO for examination with direction. In these circumstances in our considered opinion the issue needs to be remitted to the TPO with the same directions as above. We order accordingly.
21. Another issue raised relates to disallowance of depreciation on marketing know-how in pursuance of worldwide stock and asset purchase agreement between Pfizer US and Cadbury UK.
22. Brief facts on this issue are as under :-
The Assessing Officer noted that assessee has during the year relevant to A.Y. 2002-03 acquired ongoing non-chocolate confectionery business of M/s.15
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Warner Lambert (I) Pvt. Ltd. in pursuance of the worldwide stock and asset purchase agreement between Pfizer and Cadbury Schweppers Pte of UK their respective parent compaies. Out of the total consideration, the assessee has allocated certain amount to marketing know-how and claimed depreciation on same in A.Y. 2002-03 by treating these as 'intangible'. The allocation was based on the valuation report of an independent valuer. The Assessing Officer observed that for the reasons stated in assessment order for A.Y. 2003-04, the claim of depreciation was not accepted by the department. He further observed that there is no change in the facts from the earlier assessment years and therefore, the depreciation claimed by the assessee on marketing know-how amounting to Rs. 17,06,629/- was disallowed.
23. Upon assessee's appeal learned CIT(A) referred to his own order of earlier year, wherein the issue has been decided against the assessee. Against this order, assessee is in appeal before us.
24. It transpires that this Tribunal in assessee's own case for A.Y. 2006-07 has decided this issue and allowed the claim of the assessee as under :-
33. We have considered rival submissions and perused materials on record. It is evident, the Assessing Officer disallowed assessee's claim on capitalized value of marketing knowhow simply relying upon the assessment order passed for the assessment year 2003-04. However it is a fact on record, while deciding similar issue in assessment year 2003-04 and 2004-05 in ITA no.3510/Mum./2011 and ITA no.4205/ Mum./2011, dated 13th March 2015, the Tribunal has allowed assessee's claim of depreciation. Same view was reiterated by the Tribunal while deciding assessee's appeal for assessment year 2005- 06 in ITA no.5470/Mum./2012, dated 18th May 2016. Therefore, respectfully following the consistent view of the Tribunal on this issue in assessee's own case in the preceding assessment years, we allow assessee's claim of depreciation.
25. Following the precedent as above, we decide this issue in favour of the assessee.
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26. Another issue raised in Ground No. 13 relates to allocation of expenditure at Baddi unit.
27. Brief facts on this issue are as under :-
During the course of assessment proceedings, assessing officer noted that in the year under consideration, assessee company has claimed deduction u/s 80IC at Rs. 41,06,68,903/- for Baddi Unit. On going through the consolidated Profit & loss Account for all the units including Baddi unit for which the assessee has claimed deduction u/s. 80IC of the I.T. Act, it was seen that the expenses claimed against the sales of Baddi Unit as compared to the expenses against sales of remaining units are disproportionate and on the lower side. Further it was seen that the net profit works out to 28.27% for the Baddi unit and 6.38% for remaining units. On comparison of the sales and expenses in respect of 80IC unit and non-8OIC units, AO found that the expenses shown are disproportionate to the sales made by these units. In view of the same, the assessing officer asked the assessee to explain as to why expenses should not be allocated proportionately on the basis of sales and the amount of deduction u/s.80IC should not be recomputed accordingly. In response to the above, the assesses has made its submissions which was reproduced by the AO in his assessment order as under:-
"The assessee company is, having number of units and Baddi unit is one of them. AH the direct expense and Indirect expenses of the units are debited to the particular unit only. Further the HO expenses are allocated amongst the various units in the following proportions :-
Direct marketing expenses relating to only Bournvita is allocated amongst various units on the basis of sale of Bournvita as in the Baddi factory at that time, only Bournvita was manufactured.
The expenses on other employee at H.O. are allocated on the basis of number of employees at each factory.
Other indirect expenses relating to the Directors are distributed amongst the, various units on the basis of the type of manufacturing done at the various-factories and services rendered by each director in particular field.17
M o n d e l e z In d i a F o o ds P v t. L td .
Sales and distribution expenses relating to Bournvita are distributed on the basis of ratio of sides effected at various factories Brand License Fees is 1% of total sales which is payable to the foreign parries.
28. Considering the above, the AO noted that the assessee in its letter stated that different methods are employed in allocating common expenses to various units of the company. That the broader question of uniformity in allocating expenses to various divisions has not been satisfactorily answered. That a multinational company like Cadbury India Ltd. needs to have a system of at least satisfactorily apportioning their expenses. That any allocation of expenses however should not depend upon the fact that the income generated from a particular division is chargeable to tax or not. That the apportionment need to be based on uniform and reasonable principles which are fair and transparent. From the response of the Assessing Officer observed that:-
"Direct market expenses relating to one particular product (Bournvita) are said to be allocated against various units on the basis of sale of that particular product.
The expenses on other employees at Head Office are allocated on the basis of number of employees at each factory. This allocation is totally unacceptable as the Head Office renders services to all divisions and sub-divisions of the company and by no stretch of imagination can it be estimated on the basis of number of employees working in each of these divisions/sub divisions.
It is stated that other indirect expenses of Directors are allocated on the basis of type of manufacturing done at the various factories. The claim itself is outrageous and absurd. Moreover, it is claimed that allocation was also made on the basis of services rendered by each Director in a particular field. How the common expenses can be allocated on the basis of services rendered by the Directors in one particular field has not been explained with any evidence.
Further the assesses submitted a letter dated 23.12.2010 stating that the assesses company is having factories at 5 places. Bournvita is manufactured at Baddi and Warna divisions and chocolates are manufactured at other divisions. The assessee also claimed later that sales and distribution expenses relating to a particular product are taken into consideration on the basis of ratio of sales effected at the 18 M o n d e l e z In d i a F o o ds P v t. L td .
various factories. The assessee further submitted that it manufactures Bournvita only at Baddi and Warna divisions and that at Warna, conversion charges are paid to a third party which runs die factory and raw materials are supplied by them. The assessee did not make any attempt to compare the expenses incurred in these two units producing the same product.
Net profit as worked out above of 38,22,65,208
Baddi Unit
Add i) depreciation as per books 40,949,018
ii) expenses disallowed u/s. 40(a)(ia) 81,35,479
iii) donations 21,100
iv) Cess on royalty u/s. 43B 905,295 5,00,11,892 43,22,77,100 Less Depreciation as per I.T. Act 14,26,13,323 Profit of Baddi Unit eligible for 28,96,63,777 deduction u/s. 80IC In view of the above, the deduction u/s. 80IC was allowed at Rs.
28,96,63,777/- as against Rs. 41,06,18,903/- claimed by the assessee."
29. Upon assessee's appeal learned CIT(A) confirmed the action of the Assessing Officer. Against this order assessee is in appeal before us.
30. Learned Counsel of the assessee submitted that the Assessing Officer has allocated following items to Baddi unit on the basis of sales ratio as under:-
(i) Interest
(ii) Operation and Establishment expenses
(iii)Voluntary retirement expenses
(iv) Decrease in stock
31. As regards decrease in stock, learned Counsel of the assessee submitted that this is actually change in inventory at Baddi unit and it is submitted that there is no question of any allocation of sales ratio. As regards voluntary retirement scheme expenses, learned counsel contended that Baddi unit was a new unit and none of the employee at Baddi unit has opted for VRS, hence he submitted that there cannot be any allocation. However, learned counsel agreed that for actually verifying this aspect this matter can be remitted to the file of the Assessing Officer. As regards interest expenditure learned counsel 19 M o n d e l e z In d i a F o o ds P v t. L td .
submitted that there are no financial charges attributable to Baddi Unit. He submitted that financial charges comprise majority of bill discount, letter of credit charges, bank charges etc. They cannot be allocated to Baddi unit since Baddi unit is a cash surplus unit. As regards allocation of operation and establishment cost, learned counsel made following written submissions :-
Cost As per MIFPL's allocation keys Direct expenses such as Power & Fuel, Actual expenditure incurred at freight, consumable repairs and other Baddi similar direct factory costs Direct marketing costs Proportion of sale value of Bournvita and Cadbury diary milk manufactured at Baddi to Total sales of the company Selling and distribution expenditure Proportion of sales volume of Bournvita and Cadbury milk manufactured at Baddi to Total sales of the Company.
Royalty and technical fees Royalty percentage of sales of Bournvita and Cadbury milk manufactured at Baddi to Total sales of the Company.
Other overheads (which includes direct Based on sales ratio, production related expenses) ratio, full time equivalent MIFPL manufactures Bournvita and Cadbury Dairy milk at its Baddi factory while it manufactures only chocolates at other factories. Because of the product mix, cost of the material for Bournvita is lower than the cost of the materials for manufacturing chocolates. In Bournvita, the materials used are malt extract, dairy fat, skimmed milk powder, liquid glucose, sugar, cocoa powder etc. while in chocolates the materials used are crumb (which is an extract of cocoa, milk and sugar of which is higher) cocoa, sugar, dry fruits, wafers etc. depending on the quality of chocolate.
The employee cost in Baddi factory is lesser than other units since Baddi factory is situated in backward area and therefore, labour cost is cheaper. Further, new staff and labour are appointed in Baddi while in other units, old staff and labour are working since long and have proportionately higher salary.
Excise exemption is available to Baddi unit under excise law. Accordingly, the sale price at Baddi Unit is total sale price while in other factories, sale price is sale price minus excise duty and thereby, the ratio of cost on sale is lower at the Baddi factory. Due to the excise exemption, 20 M o n d e l e z In d i a F o o ds P v t. L td .
the net profit at Baddi unit is greater by approximately 10-12% than other units (after considering the CENVAT credit which is available only to other units).
The cost of packing materials of chocolates is higher than packing materials for Bournvita since different types of wrappers are required for chocolates.
The operation and establishment expenses are lesser at Baddi as compared to Warna due to the following reasons :-
i) The Baddi factories are situated in backward areas and operation and establishment cost are comparatively lower as compared to Warna.
ii) The factories located at other units are old. Hence, the operation and establishment expenses increase on year on year basis.
iii) Further, Baddi unit enjoys a scale benefit since the production of Bournvita at Baddi unit is much higher than production of Bournvita in Warna. Therefore the unit fixed cost at Baddi is mower resulting in higher profit percentage.
iii) Thus the ratio of establishment expenses has decreased due to increase in sales at Baddi factory leading to higher margin at Baddi unit.
32. Upon hearing both the counsel and perusing the record, we agree with the submissions of the learned counsel of the assessee, as regards allocation of interest, voluntary retirement scheme and decrease in stock. As agreed by learned counsel above the fact that no VRS expenditure pertains to the employees of Baddi unit may be checked by the Assessing Officer.
33. As regards operation/establishment expenses, we find considerable cogency in the allocation key used by the assessee for direct expenses, direct marketing cost and selling and distribution expenditure, royalty and technical fees. We approve the same subject to factual verification by the Assessing Officer. We find that the method of allocation of other overhead as mentioned above appears to be opaque. We remit the same to the Assessing Officer for verification.
21M o n d e l e z In d i a F o o ds P v t. L td .
34. In the result, assessee's appeal is partly allowed.
Order has been pronounced in the Court on 4.7.2019.
SD/- SD/-
(RAMLAL NEGI) (SHAMIM YAHYA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 4/7/2019
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT
5. DR, ITAT, Mumbai
6. Guard File.
BY ORDER,
//True Copy//
(Assistant Registrar)
PS ITAT, Mumbai