Income Tax Appellate Tribunal - Mumbai
Kodak Polychrome Graphics India P. Ltd ( ... vs Assessee on 26 November, 2008
आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'क
के' मंुबई
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" BENCH, MUMBAI
ी बी.
बी रामकोट
रामकोट य,
य लेखा सद य,
य एवं ी अ मत शु ला, या यक सद य के सम
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
आयकर अपील सं. / ITA no. 1557/Mum./2009
( नधारण वष / Assessment Year : 2004-05)
Kodak Polychrome Graphics (I) P. Ltd. .................... अपीलाथ /
3rd Floor, Kalpataru Synergy
Opp. Grand Hyatt, Santacruz Appellant
Mumbai 400 055
बनाम v/s
Addl. Commissioner of Income Tax ................... यथ /
Circle-7(1), Mumbai Respondent
थायी लेखा सं./ Permanent Account Number - AABCK1644C
राज व क ओर से / Assessee by : Mr. P.J. Pardiwala a/w
Mr. Jitendra Jain
नधा रती क ओर से / Revenue by : Mr. Ajit Kumar Jain a/w
Mr. Mahesh Kumar
सनवाई
ु क तार ख / आदे श घोषणा क तार ख /
Date of Hearing - 03.06.2013 Date of Order - 26.06.2013
आदे श / ORDER
अ मत शु ला, या यक सद य के ारा /
PER AMIT SHUKLA, J.M.
The present appeal has been preferred by the assessee challenging the impugned order dated 26th November 2008, passed by the learned Kodak Polychrome Graphics (I) P. Ltd.
2Commissioner (Appeals)-XXXII, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"), for the assessment year 2004-05.
2. In ground no.1 and 2, the assessee has challenged the disallowance of ` 60,00,000, claimed in respect of the provisions made for expenditure incurred in connection with trade fair and exhibition. Alternatively, it has been claimed that the said claims should be allowed in the year in which trade fair and exhibition took place i.e., in the assessment year 2005-06.
3. The assessee has made a provision of ` 60,00,000, in its books of account for Prolpex fair and exhibition to be held in Singapore. Before the Assessing Officer, the assessee submitted that it had sponsored the visit of some of its major distributors / customers to the trade fair and exhibition held at Singapore and such a sponsorship was in the nature of incentive and, hence, in the nature of revenue. Based on certain estimate, the assessee has made provision in the books of account. This exhibition was held in the beginning of the financial year 2004-05, relevant for assessment year 2005-
06. The Assessing Officer disallowed the same on the ground that, firstly, the exhibition was held during the period relevant to the assessment year 2005- 06, and secondly, the assessee has already paid ` 2,09,01,000, as incentive to their major distributors / customers and, therefore, it is difficult to believe that such a provision pertains to incentive given on achieving the sales target for the financial year 2003-04. He finally held that the said trade fair and exhibition took place in the next assessment year and, therefore, the same cannot be allowed as a provision made on estimate basis in this year.
4. The learned Commissioner (Appeals) too dismissed the assessee's contentions on the ground that these expenditures cannot be claimed in this year as the trade fair took place in the assessment year 2005-06 and the provisions cannot be allowed on the basis of estimated value of expenditure Kodak Polychrome Graphics (I) P. Ltd.
3because the revenue expenditure can be allowed only when the liability is ascertained. Moreover, the assessee has not stated as to how the amount has been estimated or arrived at. Accordingly, he upheld the disallowance.
5. Before us, the learned Sr. Counsel, Mr. P.J. Pardiwala, representing the assessee, submitted that the estimate of expenditure was based on value of air tickets, hotel bills and boarding and lodging expenses. In support of this contention, he also referred to the actual bills and vouchers for the expenditures incurred during the trade fair, copies of which have been placed in the paper book from Pages-21 to 57. He submitted that there is no dispute that such expenditure has actually been incurred for the purpose of the business and to the extent of actual incurring of expenditure, the same should be allowed. Alternatively, he submitted that the same should be held allowable in the assessment year 2005-06 on the basis of actual expenditure incurred.
6. On the other hand, the learned Departmental Representative, Mr. Mahesh Kumar, on behalf of the Revenue, strongly relying upon the findings of the learned Commissioner (Appeals), submitted that the provisions cannot be allowed unless liability in respect of this expenditure has been crystallized and ascertained. The basis of estimate also could not be proved by the assessee either before the Assessing Officer or before the learned Commissioner (Appeals). Therefore, such provision for incurring expenditure in future cannot be allowed.
7. We have heard the rival contentions and perused the findings of the Assessing Officer as well as of the learned Commissioner (Appeals) and the material placed on record. The assessee has made provision for the expenditure with regard to the sponsorship of its major distributors and customers for participating in trade fair and exhibition in Singapore. This provision was made on the basis of estimated expenditure to be incurred on Kodak Polychrome Graphics (I) P. Ltd.
4such trade fair and expenditure. This trade fair and exhibition in Singapore was actually held during the period relevant for assessment year 2005-06 for which the bills and vouchers have been produced before the lower authorities and has also been placed before us in the paper book. We agree with the conclusion drawn by the learned Commissioner (Appeals) that such a provision cannot be allowed in this year and if at all it is to be allowed, the same can be allowed only in the assessment year 2005-06, wherein such expenditure has been incurred. Accordingly, we direct the Assessing Officer to verify this expenditure and to allow the same on the actual basis in the assessment year 2005-06. Consequently, ground no.1 and 2 are treated as partly allowed.
8. In ground no.3, the assessee has challenged the disallowance of office expenses aggregating to ` 82,878.
9. The Assessing Officer, on scrutiny of the details of office expenditure observed that some capital expenditure and prior period expenses have been claimed as office expenditure. The Assessing Officer sought explanation from the assessee as to why the following office expenses should not be disallowed:-
Amount in ` Reason
8700 Purchase of tea table
14544 For March 2003 prior period expenses
59634 No details filed, invoice not traceable
According to the Assessing Officer, the assessee did not offer any explanation as the assessee could not file invoices in support of the said expenditure. Accordingly, the aforesaid amount aggregating to ` 82,878, was disallowed.
Kodak Polychrome Graphics (I) P. Ltd.
510. Before the learned Commissioner (Appeals), the assessee submitted as under:-
"The Appellant has submitted the copy of invoices along with submissions made vide letter dated November 13, 2006. The bill for the service of security guards of ` 14,544 was received in the month of April 2003 and the Appellant has not claimed the same in Financial Year 2002-03. ` 8,700 was incurred towards miscellaneous office expenses such as tea tables, etc. Further merely because the relevant invoices could not be traced at that time did not imply that the expenditures were not supported or not explained, when the account heading in the books indicated the nature of expenses and the accounts were subjected to statutory audit by auditors of the company."
11. The learned Commissioner (Appeals) held that these expenses cannot be allowed in absence of any documentary evidence and, accordingly, he confirmed the disallowance made by the Assessing Officer.
12. Before us, the learned Sr. Counsel, submitted that insofar as the expenditure of ` 14,544, is concerned, the same relates to the bill for the month of March 2003 for the services of security guard at Chembur office. Copy of the said bill has been placed in the paper book at Page-58. He submitted that though the bill pertains to March 2003, but the bill is dated 2nd April 2003 which was received in this financial year, therefore, the same is to be allowed in this year only. Regarding the expenditure of ` 8,700, incurred, he submitted that the same was on account of purchase of tea table which the Assessing Officer has treated as capital expenditure. Once that is so, the depreciation should be allowed on such expenditure. Regarding details of expenditure incurred for ` 59,634, he submitted that no vouchers could be produced because they were not readily available. However, the details have been mentioned in the books of account and looking to the huge turnover of the company, such a miniscule expenditure should not be adversely viewed.
13. On the other hand, the learned Departmental Representative relying upon the findings of the learned Commissioner (Appeals) and submitted that Kodak Polychrome Graphics (I) P. Ltd.
6in case of the major amount of ` 59,634, the assessee was unable to give any proper explanation and evidence and, hence, the same cannot be allowed.
14. After carefully considering the submissions of the parties and the findings of the Assessing Officer and the learned Commissioner (Appeals), we are of the opinion that insofar as the expenditure for ` 14,544 is concerned, the same is allowable in this year as the bill is dated 2nd April 2003 and was received in this year for the services of security guards though pertaining to the month of March 2003. In such cases, expenditure relating to rendering of services can be allowed in the year when bill is received. With regard to the expenditure incurred on tea table for ` 8,700, the same cannot be allowed as revenue expenditure, however, looking to the fact that the Assessing Officer has treated it as capital expenditure, depreciation should be allowed as per rules on this amount. With regard to expenditure of ` 59,634, admittedly, no details or invoice could be filed before any of the authorities and, therefore, the same cannot be allowed. Accordingly, the disallowance of ` 59,634, is confirmed. Consequently, ground no.3, is treated as partly allowed.
15. In ground no.4, the assessee has challenged disallowance of claim for depreciation of ` 9,23,774.
16. Facts in brief:- M/s. Kodak Polychrome Graphics and Kodak India, entered into an agreement dated 29th October 1999 for transfer of business of graphic art products. The Kodak India Ltd., transferred the assets and liabilities and intangible assets as a going concern. The consideration paid for transfer of business was mainly on account of transfer of marketing data base, use of network and transfer of human resources. The assessee, in response to the show cause notice issued by the Assessing Officer, submitted that the amount paid for such transfer of marketing data base, use of Kodak Polychrome Graphics (I) P. Ltd.
7network and transfer of human resources was intangible asset and can be termed as "Any other business or commercial right of similar nature"
acquired after 1st April 1998, in view of the provisions of section 32(1)(ii). The Assessing Officer disallowed the assessee's claim for depreciation on the ground that depreciation cannot be allowed on "goodwill" under the provisions of Income Tax Act, 1961.
17. Before the learned Commissioner (Appeals), it was submitted that consideration paid for transfer of business was mainly for transfer of certain business or commercial rights which were marketing data base unit of network and transfer of human resources. All these are in the nature of intangible assets within the meaning of section 32(1)(ii). There was no element of "goodwill" as held by the Assessing Officer. Detailed explanation was made before the learned Commissioner (Appeals) in this regard which has been incorporated by the learned Commissioner (Appeals) in his order from Paras-7.2 to 7.4. The learned Commissioner (Appeals) held that similar claim has been disallowed by the learned Commissioner (Appeals) in the earlier year and the matter is pending before the Tribunal and held that the learned Commissioner (Appeals) had observed that transfer of marketing data base and facility for use of network and human resources is not in the nature of intangible assets like knowhow, patents, copyrights, trademarks, license, franchise and other business or commercial rights. Accordingly, the claim of depreciation was disallowed.
18. Before us, the learned Sr. Counsel, submitted that the assessee has treated this intangible asset in the "block of assets" in the earlier years and the depreciation on such asset has been allowed by the Department in the assessment years 2000-01, 2001-02 and 2002-03. In the assessment year 2003-04, the depreciation which was disallowed had come up for consideration before the Tribunal. However, the Tribunal has restored the matter to the file of the Assessing Officer on the ground that the details of Kodak Polychrome Graphics (I) P. Ltd.
8intangible has not been given. The effect of such order dated 13th May 2009, has not been given by the Department till date. Otherwise also, he submitted that once the depreciation has been claimed on the assets forming part of "block of assets" entered in the earlier years, the same cannot be disallowed in the subsequent years. Moreover, transferring of marketing data base facility for use of network and human resources is a commercial right and is, therefore, an intangible asset eligible for depreciation under section 32(1). He, however, submitted that if the Assessing Officer's conclusion is taken into consideration that it is a "goodwill", then in view of the judgment of Hon'ble Supreme Court in CIT v/s Smifs Securities Ltd., [2012] 348 ITR 302, the assessee is eligible for depreciation.
19. On the other hand, the learned Departmental Representative submitted that similar issue has been restored to the file of the Assessing Officer by the Tribunal in the earlier year and, therefore, the same should also be restored to the file of the Assessing Officer for proper examination and verification of the assets.
20. We have considered the rival contentions, perused the relevant findings of the Assessing Officer as well as the learned Commissioner (Appeals) and the material placed on record. It has not been disputed before us that the assets on which the depreciation has been claimed in this year are forming part of block of assets and the written down value on such assets is coming from the earlier years. On such assets, depreciation has been allowed by the Department in the assessment year 2000-01 and 2002- 03 and also in the subsequent assessment years. Once the depreciation has been allowed on "Block of Assets", the same cannot be disallowed in this year on the written down value. Thus, without going into the aspects as to whether marketing data base and facility for use of network and human resources are in the nature of business or commercial rights of similar nature in the nature of intangible assets within the meaning of section 32(1)(ii), we Kodak Polychrome Graphics (I) P. Ltd.
9set aside the impugned order passed by the learned Commissioner (Appeals) and direct the Assessing Officer to allow the depreciation on such assets as it has been allowed in the earlier year and is part of "block of assets". Consequently, ground no.4, raised by the assessee is treated as allowed.
21. In ground no.5, the assessee has challenged the disallowance made under section 40(a)(ia) on various payments aggregating to ` 10,84,802.
22. The Assessing Officer noted that the assessee has made payment to non-resident persons on which TDS has not been deducted. The assessee, in response to the show cause notice issued by the Assessing Officer, submitted the following payments in which there was non-deduction of TDS:-
Name of Party Amount Reason for non-deduction Insight Asian Pacific ` 5,48,682 As per Article 7 of DTAA with Malaysia GLEG ` 2,61,807 Adjust against debit note Paul Software ` 2,74,313 - do -
23. Insofar as the payment made to Insight Asian Pacific, the Assessing Officer noted that the invoice dated 30th November 2008, raised by the said party described the services as "Selling the Workshop-I Needs Analysis, Alignment, Preparation, Delivery and facilitation of workshop with one lead tutor and one facilitator" is in the nature of technical service as defined under section 9(1)(vii) of the Act. Since the fees for the above service was accrued in India, therefore, in view of the provisions of section 9(1)(vii), the said income is taxable in India and, hence, liable for TDS. With regard to assessee's explanation that no TDS is to be deducted in view of Article-7 of Indo Malasian DTAA he held that such an argument is not tenable because services rendered were technical in nature and was rendered in India and irrespective of whether the said enterprise has P.E. in India or not, the said income is liable to be taxed in India in view of the provisions of section Kodak Polychrome Graphics (I) P. Ltd.
109(1)(vii). Accordingly, he disallowed a sum of ` 5,84,682 under section 40(a)(i).
24. Regarding payment made to GLEG of ` 2,61,807 and Paul Software of ` 2,74,313, the assessee submitted as under:-
"This amount charged was on account of expenses paid on our behalf. This credit note was set off against a debit note (KPGI/002/04-05) raised on Singapore during the same period hence there was no outflow of money."
Thus, it was contended that the said payment was in the nature of reimbursement of expenses and further due to exchange of debit note and credit note, there was no outflow of money and, therefore, there was no requirement of deducting TDS.
25. The Assessing Officer rejected the assessee's contention and relying upon the following case laws;
"i. Steffen, Robertson and Kirsten Consultant Engineers & Scientists (1998) 230 ITR 206 (AAR) ii. Danfoss Industries P. Ltd. (2004) 268 ITR 1 (AAR) iii. Timken India Ltd. (2005) 143 Taxman 257 (AAR)"
He disallowed the said payment under section 40a(i).
26. The learned Commissioner (Appeals) too confirmed the said disallowance after observing and holding as under:-
"8.2 I have considered the above submissions. Regarding the payment of ` 5,48,682 to Insight Asian Pacific, Malaysia, The A.O. has held the same to be in the nature of technical services as per Explanation 2 to section 9(1)(vii) of the Act. The A.O. has examined the invoice received in this regard from Insight Asia Pacific, Malaysia dated 30.11.2003. The invoice contains details of services rendered by the said Malaysian Company to the appellant, the services which included analysis, alignment, preparation and delivery as well as training workshop were provided in India at Bangalore preparation and delivery as well as training workshop were provided in India at Bangalore from 24th to 25th November 2003. Hence, this is an income accrued and Kodak Polychrome Graphics (I) P. Ltd.11
arisen in India from services rendered in India and therefore the said income is taxable in India. DTAA with the Malaysia will be applicable only to those services which are rendered for business or profession carried on by a resident outside India or to a non-resident outside India. In the case of the appellant, therefore, services rendered are to a resident for a business or profession carried on in India and hence these are in the nature of fees for technical services. Therefore, provision of tax deduction at source will be applicable. The A.O. has rightly disallowed these expenses under section 40(a)(ia) and his action is upheld.
8.3 Regarding the other two payments of Rs. 2,61,807/- to M/s. GLJE and of Rs.2,74,313 to M/s Paul Software, Singapore, it is submitted that these payments are by way of reimbursements. The AC has relied on certain decisions of the AAR. It is submitted by the Appellant that the said rulings are based on the peculiar facts in those cases and are not to be applied in its case. However, it is seen that even the reimbursement of expenses is in the nature of payments for services and hence subject to tax deducted at source in India. The 3 case laws cited by the AC in the assessment order in which the decision has been given by the authority by Advance Rulings also support the view of the AC. From the assessment order, it is evident that the appellant has not submitted full facts in regard to reimbursement of these expenses. Therefore the AC has rightly disallowed these payments made without tax deducted at source as per provision of section 40(a)(ia). His decision is upheld."
27. Before us, the learned Sr. Counsel submitted that under Indo Malaysian treaty, there is no clause for "fees for technical service" and moreover the assessee's case has been that it was a business of income of non-resident company i.e., Insight Asia Pacific and, hence, the same can be taxed only under Article 7(1) of the DTAA. Since the said non-resident company had no P.E. in India, therefore, the same cannot be taxed. He further submitted that before the authorities apart from the invoice, certificate from a Chartered Accountant was also filed stating that remittance was on account of business income and the same is covered under article 7 of the DTAA with Malaysia. A copy of the said certificate has been placed in the paper book from Pages-96 to 98. He submitted that, on a perusal of the invoice, which has been placed in the paper book at Pages-94 and 95, it is evident that it was not in the nature of fees for technical services and the TPO as well as the learned Commissioner (Appeals) has not discharged the burden that this was taxable in India and is in the nature of "fee for technical service" or business profit. The personnel from the said company had come Kodak Polychrome Graphics (I) P. Ltd.
12to India only for two days and, therefore, there cannot be any P.E. in India, hence, the same cannot be taxed under the head "Business Income" . In support of his contention, he strongly relied upon the decision of the Tribunal, Mumbai Bench, in Channel Guide India Pvt. V/s ACIT, [2012] 20 ITR (Trib.) 438 (Mum.).
28. Regarding reimbursement of expenditure, he submitted that the assessee has reimbursed the expenditure to Singapore A.E. who has issued debit note which relates to training expenses and software expenses. These are purely reimbursement of expenses which do not attract any tax liability, hence, the question of deduction of TDS does not arise. In support of his contentions, he relied upon the judgment of Hon'ble Jurisdictional High Court in CIT v/s Siemens Aktiongesellschaft, [2009] 310 ITR 320 (Bom.).
29. On the other hand, the learned Departmental Representative submitted that the assessee has not produced any evidence that Insight Asia Pacific was in the business and it is not clear what was the service rendered by the said company to the assessee. On a perusal of the invoice, it is seen that it is some kind of technical or consultancy services which has been provided at a workshop for two days in India. The nature of such services definitely falls within the ambit of section 9(1)(vii) and, therefore, the Assessing Officer and the learned Commissioner (Appeals) has rightly held that the same is taxable under section 9(1)(vii).
30. Regarding other two payments, he submitted that the lower authorities have not agreed that it was in the nature of reimbursement and the assessee has also not filed the details as to what was the nature of expenditure incurred for which the assessee has reimbursed the said expenditure. If the expenses have been paid on assessee's behalf by the Assessing Officer to the third party, then it cannot be termed as "reimbursement of expenses". In support of his contention, he has relied upon the decision of Mumbai Bench Kodak Polychrome Graphics (I) P. Ltd.
13of the Tribunal in C.U. Inspections India Pvt. Ltd. v/s DCIT, ITA no.577/Mum./ 011, order dated 6th March 2013 and the decision in ACIT v/s First Advantage Pvt. Ltd., ITA no.3029 and 3030/Mum./2010, order dated 18th May 2012.
31. In the rejoinder, the learned Sr. Counsel submitted that the said decisions relied upon by the learned Departmental Representative are not applicable at all, as in those cases, services were rendered by the third party to the assessee for which payment was made by the A.E. and the assessee has reimbursed the said payment to the A.E. In the present case, the facts are entirely different. Thus, the ratio of the said decisions will not apply to the facts of the present case.
32. We have heard the rival contentions and perused the material placed on record. With regard to payment of ` 5,48,682, to Insight Asian Pacific, the Assessing Officer has treated the said payment towards "fees for technical service" within the definition of section 9(1)(vii) as the fees for the above services has accrued in India and, therefore, the same is taxable in India. Thus, the assessee was liable to deduct TDS. The assessee's case has been that the nature of said payment falls within Article-7 of Indo-Malaysian DTAA as Insight Asian Pacific to whom payment was made was doing business and it was its business income and, therefore, in view of the Article 7(1), the same cannot be held to be taxable in India, as it had no P.E. Further, under the Indo Malaysian DTAA, there is no clause of "fee for technical service", thus, there was no reason to deduct TDS on such payment. On a perusal of the invoice, it is seen that the content mentioned therein reads as under:-
Kodak Polychrome Graphics (I) P. Ltd.14
Particulars Amount Selling the value workshop-I USD 11,500.00 Needs Analysis, Alignment Preparation, Design & Development, Delivery & Facilitation of Workshop with 1 lead tutor and 1 facilitator Travel internal India Travel only
- Travel - Kingsley Weber (Chennai Bangalore - Mumbai) USD 316.06
- Travel - Steve Robinson (Chennai -
Bangalore - KL) USD 211.16 Expenses - minor external - not charged
33. From the above, it is not very clear as to whether the bill has been raised for any kind of supply of goods or for rendering of any services.
Neither the Assessing Officer nor the learned Commissioner (Appeals) has analysed as to what was the nature of work / service rendered and whether it falls within the ambit of "fees for technical service" as defined in section 9(1)(vii) i.e., for rendering of any managerial, technical or consultancy services. Such a payment can only be brought to tax once it falls within the ambit of "fees for technical service". Further, the assessee has also not shown as to how there was a business income of Insight Asian Pacific and is covered under Article 7 of Indo-Malaysian DTAA. Even the certificate given by the Chartered Accountant also does not describe the business activity of the said company except mentioning that it is covered under Article-7. Due to such vagueness of facts and proper material on record, we are of the considered opinion that this matter should be restored back to the file of the Assessing Officer to re-examine the issue denovo. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer to re-examine this issue afresh after verifying the nature of payment and also the assessee's contention that it is a business income covered under Article-7 of Indo-Malaysian DTAA. Needless to say that the Assessing Officer shall Kodak Polychrome Graphics (I) P. Ltd.
15provide due and effective opportunity of hearings to the assessee to present its case.
34. Similarly, with regard to the reimbursement of expenses, it is also not clear as to what was the nature of payment and what was the services rendered to the assessee company for which the payment was made by the A.E. and reimbursement of such expenses was made by the assessee. Even if the debit note has been issued against the credit, then also the nature of expenditure has to be ascertained. Accordingly, this issue is also restored to the file of the Assessing Officer for denovo adjudication. However, if it is found that the payment made to the A.E. is only in the nature of reimbursement of expenditure, then surely there cannot be any liability the assessee to deduct the TDS on such payments. The Assessing Officer shall provide adequate opportunity of being heard to the assessee to present its case. Thus, ground no.5, is treated as allowed for statistical purposes.
35. In ground no.6, the assessee has challenged the disallowance of ` 1,75,000, towards sample demonstration expenses.
36. Before the Assessing Officer, the assessee was asked to submit the bills / evidence to show that the assessee company has distributed samples worth ` 1.75 lakhs. However, the same could not be furnished. Accordingly, the Assessing Officer disallowed the entire claim of ` 1.75 lakhs on account of sample demonstration expenses. Even before the learned Commissioner (Appeals), no supporting documents could be filed and, hence, the same was confirmed by the learned Commissioner (Appeals) also.
37. Before us, the learned Sr. Counsel submitted that looking to the fact that the assessee has sales of more than ` 57 crores, the distributive samples are only to the extent of ` 1.75 lakhs which is minuscule and no adverse inference could be drawn because distribution of samples are given on a normal business conduct in such types of business.
Kodak Polychrome Graphics (I) P. Ltd.
1638. On the other hand, the learned Departmental Representative submitted that such expenditure cannot be allowed without any cogent material or evidence or proper explanation, therefore, the learned Commissioner (Appeals) as well as the Assessing Officer have rightly disallowed the same.
39. After carefully considering the rival submissions and also the relevant findings of the Assessing Officer and the learned Commissioner (Appeals), we find that the assessee was unable to produce any documentary evidence or proper explanation about the sample distribution expenses. There has to be some iota of evidence or material to show that such an expenditure was for the purpose of business and these are the requirement of carrying out the business activity. If it is distribution of samples, the same should have been taken into account in stock account. If it is a direct expenditure, then nature of expenditure can be verified from relevant vouchers or placed any details on record. In the absence of such details, we do not find any reason to deviate from the conclusion drawn by the learned Commissioner (Appeals) and decline to interfere in the matter as such. Accordingly, the disallowance of ` 1.75 lakhs is hereby confirmed. Thus, ground no.6, is treated as dismissed.
40. In ground no.7, the assessee challenged the transfer pricing adjustment of ` 3,83,08,000 to the Arm's Length Price (for short "ALP") of the transactions relating to purchase of graphic plates from the Associate Enterprise (for short "A.E").
41. Relevant facts, apropos this issue, are that the assessee is wholly owned subsidiary of Kodak Polychrome Graphics B.V., Netherlands. The company deals in the business of graphic art films, graphic art chemicals, graphic plates and other allied products required in the printing industries. The international transactions entered by the assessee with the A.E. mostly Kodak Polychrome Graphics (I) P. Ltd.
17related to purchases of various items which has been elaborated in Para- 11.2 of the assessment order as well as Para-4 of the TPO's order. It has been noted by the TPO that the assessee has shown net profit before tax of ` 4.34 crores upon the sales of ` 54.04 crores. The assessee has bifurcated its activity into plates segment wherein the assessee has bought plates from the A.E. for sale in India and other non-plates segment which consist of graphic art films and various consumables and equipments. The segmental working of the non-plate segment showed the operating profit of 12% whereas under
the plates segment, the assessee reported loss at gross level being (-) 7% of sales. The assessee, in its transfer pricing study report, applied TNMM for the purchase of rolls of graphic art films and for various other items it has applied Resale Price Method (for short "RPM"). It has been noted by the TPO that the assessee has made a loss of 7% at gross level in its transactions relating to import of plates. However, the assessee did not provide the working or the basis of its bench marking of ALP for this segment. The assessee, in response to the query raised by the TPO, submitted that it has justified the arm's length nature of its transactions as it has imported these plates at the prices based on global price list of the suppliers. The main submission of the assessee was that selling price of plates in Indian market are driven by competition and marketing strategy of the company whereas the import purchases are at comparable prices at which some of the other importers have also imported such plates from different sources such as Denmark and Korea on some prices. It relied on customs data relating to import of plates in India to show that prices on which it has made purchases from the A.E. was similar to that of purchases / import made by the third parties. The TPO observed that the items imported by the third party are not exactly similar to that of the assessee and also what the assessee has bought are branded products. Regarding assessee's plea that goods are being supplied by its A.E. at the global price list, he observed that the terms and conditions of the discount which might have been extended to other Kodak Polychrome Graphics (I) P. Ltd.18
entities over and above the price reported in the global price list is not known. It has been further observed by him that the supplier A.E. ensured that the transfer pricing goods are supplied by them as such, that 6% of the profit over sales remains as margin to the buyer A.E. Therefore, the loss in plates as accrued to the assessee is because the A.E. has over charged the assessee. The assessee informed the TPO that company has imported these conventional plates for the first time during the year for its clients who were expected to buy digital plates in future. Hence, as part of marketing strategy to win such customers for future also, the assessee has sold these products on a negative margin, ensuring turnover level of ` 10.90 crores for the plates.
42. This plea of the assessee has not been accepted by the TPO and held that the A.E. has over charged the assessee which has resulted in loss at gross profit level and further the assessee has itself submitted the bench marking of the transaction using RPM. However, while doing so, the assessee has not provided margin of comparables with which its international transactions relating to the import of items valuing to ` 7,83,48,953, could be bench marked. He also held that the assessee should have obtained the price from the A.E. at which it could have earned final net profit of at least 6% by supplying those goods to the customers. Accordingly, he made an upward adjustment in the following manner:-
"The assessee as per its own calculation has earned a gross profit margin of 28.56% on sales (sales ` 43,16,44,000/- gross profit ` 12,32,84,000, cost of goods sold ` 30,83,60,000/-). Over cost, the gross profit margin translates to 39.98% (` 12,32,84,000/- & ` 30,83,60,000/-).
11.12 The import of goods wherein the assessee has claimed to have used resale price method is ` 7,83,48,953/-. On such items, the assessee has returned a loss of 6.16% over cost (approx 7% over sales). The bench marking of these purchases of ` 7.83 crores is as under:-"
Kodak Polychrome Graphics (I) P. Ltd.
19COMPUTATION OF ARM'S LENGTH PRICE IN TRADING SEGMENT FOR PLATES AND OTHER ITEMS (` in '000) Trading Sales of the assessee of plates and other items 1,09,064 Arm's Length GP margin @ 28.56% on sales 31,149 Arm's length cost 77,915 Actual total cost of goods sold 1,16,223 Purchases from AE in trading segment for plates and 78,349 other items Non-tainted costs (1,16,223 less 78,349) 37,874 Arm's length purchase price from AE (77,915 less 37,874) 40,041 Safe Harbour Limit of purchase (40,041 x 1.05) 42,043 Assessee's purchase at 78,349 are higher than the permissible safe harbour limit of 42,043. As such adjustment amounting to ` 38,308 (78,349).
Total adjustment in Trading Segment for plates and other 38,308 items 11.13 It is established that the assessee has paid ` 7.83 crores to it's A.Es for purchases, the arm's length price of which was ` 4 crores (approx.). Thus, an adjustment of ` 3,83,08,000 is being made to the arm's length price of transaction relating to purchase of plates and other minor items from the AEs. The arm's length price of other transactions of the assessee is not being disturbed."
41 Before the learned Commissioner (Appeals), the assessee reiterated that to justify its arm's length transactions to the A.E., it has filed global price list of the supplier, confirmation from such supplier that there was no specific debit notes / credit notes given to the buyers effecting the price and customs data from independent public website for import of plates during the relevant period by various parties before the TPO. These materials placed before the TPO itself goes to show the assessee's purchase / import by the A.E. were at ALP. Before the TPO, the assessee also had made a very important plea that import price of plates were duly supported by comparable uncontrolled price (CUP) in uncontrolled transactions in the form of purchases made by other parties and, therefore, CUP method should have been followed for bench marking imports from the A.E. The learned Kodak Polychrome Graphics (I) P. Ltd.
20Commissioner (Appeals), after dealing with the observations and conclusions drawn by the TPO rejected the assessee's entire contentions after observing and holding as under:-
"11.17 I have considered the submissions of the Appellant, as against the observations of the AO. I do not agree with the arguments of the appellant. The appellant followed Resale Price Method (RPM) to benchmark the transaction of purchase of plates. However, when the TPO required the appellant to submit full details of the transactions as well as comparable transact!ons, the same were not furnished. Th TPO had required the appellant to provide exact description of the items imported by other third parties in India and compare the same with the description of items imported by the appellant. The TPO had also required the appellant to state the terms and conditions on which the other importers had got such goods from the appellant's AE as well as from other third parties. The TPO had also required the appellant to furnish details of discount if any which may have been extended to other importers by the appellant's AEs or other third parties. However, none of these details were furnished by the appellant. Further more since the TPO noted that the appellant had suffered losses in respect of purchases and sale transactions of the plates, he had required the appellant to provide such results or margins earned by the comparable companies in respect of the purchase and sales transactions of plates. This information was also not supplied to the TPO by the appellant. The appellant has also not given any reason as to why these details were not furnished or else as to why these details were not available with the appellant specially when they have themselves used RPM for bench markng the transaction of import of plates. I find from the details filed that the appellant has only compared the prices of other importers of plates with that of its own import prices to justify his purchases through RPM. However if RPM is followed the methodology as per Rule 10B would he as under:-
xxx xxx xxxx 11.8 It is seen from the analysis made by the appellant that the above methodology has not been followed by them to justify their prices in RPM. It is only on this account that the appellant has taken an alternate argument that their prices are justified through CUP method. I do not agree with this alternate claim because the transactions of import of plates by the appellant and other importers cannot be said to be homogeneous in the sense that exact description of items imported by the other importers as well as terms and conditions and discounts available to them is not available nor furnished by the appellant. CUP method can be adopted only when the two transactions to be compared are either identical or have very close similarity. Hence the argument for adoption of CUP is hereby rejected.
11.9 It is thus observed that the appellant has earned 12% of gross profit on non plate segment whereas they have incurred a loss of 7% in the transaction of import of plates although both the products are similar in nature which are used in the printing industry. The observations of the TPO as per para 11.3 above in this regard are quite valid and and the appellant has not been able to give satisfactory explanation in this regard on this issue. Hence, I agree Kodak Polychrome Graphics (I) P. Ltd.21
with the TPO that the transaction of import of plates was not at length price. Therefore, I uphold the adjustment on the basis of G.P. rate of 28.56% on sales at whole entity level returned by the appellant by applying the said rate to the transaction of import of plates."
43. Before us, the learned Sr. Counsel, Mr. P.J. Pardiwala, on behalf of the assessee, explaining the entire facts of the case, submitted that the assessee has imported the plates from its A.E. which was based on global price list and has also supplied customer data before the TPO to show that price on which it has imported the plates where at arm's length as the third parties have also purchased these plates on such prices only. In support, it has furnished customs data for the relevant year. The TPO has gone by the assumption that the A.E. should have given the margin of 6% on such price list to the assessee. Such presumption itself was uncalled for. Before the TPO and the learned Commissioner (Appeals), it was contended that the best way for bench marking the transactions was to apply the CUP method based on similar transactions carried out by the third parties as per the customs data. Before the TPO, the assessee has furnished sample purchase invoice in respect of its purchases of lithographic plates to show that the same has been purchased at the prices mentioned in the global price list of the A.E. The major expenditure has been incurred due to business strategy of penetrating the market among the Indian customers for which the assessee had to sell at a low margin or negative margin also. This has nothing to do with the transactions carried on with the A.E. In support of the prices on which the assessee has purchased the same as provided in custom data of comparable import transactions during the financial year 2003-04, the assessee has also filed additional evidence in the form of further exhaustive custom data to show that the prices on which the other importers have purchased the plates were on the same range. A petition for additional evidence dated 28th May 2013 filed on 29th May 2013 was also placed before us. He submitted that these additional evidences are purely corroborative and to buttress the evidences filed before the TPO and the learned Kodak Polychrome Graphics (I) P. Ltd.
22Commissioner (Appeals), therefore, the same should be admitted. The TPO has applied gross profit margin earned by the assessee in respect of purchase of graphic art films from the A.E. which is a totally different product and the same cannot be bench marked for the transaction for purchase of plates. For the bench marking of the plates, CUP method is the most appropriate and comparison can be made from the similar transactions made by the third parties as available from the custom data. He further submitted that one of the main reasons for loss is also due to high custom duty which was around 55%, which is evident from the fact that the total trading sales of plates was ` 10.90 crores on the purchase of ` 7.83 crores and the actual cost after custom duty was ` 11.62 crores. This factor has not been taken into consideration by either of the authorities, the details of which are appearing at Pages-143 to 149 of the paper book. Lastly, he submitted that no adjustment is required in the present case as the price shown for the purchases is on account of worldwide price list which was submitted before the Assessing Officer as well as the learned Commissioner (Appeals). He also referred to the certificate issued by the foreign A.E. certifying that the transfer pricing of the plates sourced from Europe are same across all the regions as per the price list and no subsequent debit notes and credit notes were issued with respect to these sales that reduce the effective prices. The certificate along with the list has been placed in the paper book pages-127 to 129.
44. On the other hand, the learned Departmental Representative, Mr. Ajit Jain, on behalf of the Revenue, submitted that in the transfer pricing report, the assessee has adopted RPM as most appropriate method for bench marking of transactions of purchase made from the A.E. As per the RPM, the gross profit margin has to be bench marked with the comparables. In the present case, there is no reference to the comparables and how the same has been bench marked by the assessee. Now the assessee is harping upon the application of CUP method based on the custom data report to justify its Kodak Polychrome Graphics (I) P. Ltd.
23arm's length and even in the present case also there is no short listing of comparables and the comparability analysis as to how there is a product and functional similarity with the third parties. For applying CUP method, exact nature of product comparability is required which, in the present case, has not been demonstrated by the assessee either before the TPO or the learned Commissioner (Appeals). Regarding furnishing of additional evidence, he raised strong objection as there are no cogent reasons as to why the same was not furnished before the authorities below. Regarding use of custom data for bench marking the transaction, he relied upon various Tribunal decisions, that valuation done by the custom authorities and custom data cannot be applied under the transfer pricing mechanism of the Income Tax Act. In support of this contention, reliance was placed on the following case laws:-
i) Panasonic India Pvt. Ltd. v/s ITO, ITA no.1417/Del./2008, order dated 24th September 2010;
ii) ACIT v/s Denso India Pvt. Ltd., ITA no.3104/Del./2009 and ITA no.887/Del./2010, order dated 27th February 2013;
iii) Serdea Pharmaceuticals India P. Ltd. v/s ACIT, ITA no.2469/Mum./ 2006, ITA no.3032/Mum./2007 and ITA no.2531/Mum./2008 order dated 31st December 2010.
45. Regarding the assessee's contentions that list price of the A.E. on which it has been selling its products to various parties, he submitted that the same cannot be given much credence because the prices are mostly negotiable between the parties and is dependent upon various factors which has not been analysed by the assessee or by the TPO. In support of this contentions, he has relied upon the decision of Chennai Bench of the Tribunal in Redington Ltd. v/s ACIT, ITA no.2164/Mad./2010, order dated 2nd May 2013. Regarding learned Sr. Counsel's plea that the reason for incurring of loss was on account of custom duty, he submitted that when bench marking is made at gross margin level, then custom duty has to be taken in resale price method as it is a part of direct cost. Therefore, such a plea should be Kodak Polychrome Graphics (I) P. Ltd.
24rejected. Lastly, he submitted that the assessee has not justified as to who was bearing the risk of entering into the market, whether it was the assessee or the A.E., because selling the product at a lower cost without the backing of the A.E. or any mark-up is hard to believe without any cogent material on record. Therefore, the TPO was not only justified in applying the gross profit margin vis-a-vis assessee's internal segment but also justified in making the adjustments.
46. In the rejoinder, the learned Sr. Counsel, submitted that, before the TPO level itself, the assessee had submitted about the applicability of CUP method and in support of that, data base was given. It was only to buttress the same, the assessee has furnished new data in the form of custom data in the petition for admission of additional evidence. The assessee has urged before the TPO and the learned Commissioner (Appeals) to apply CUP method instead of RPM because this would lead to proper determination of arm's length transaction for the products purchased by the A.E. in comparison with the similar products purchased by the third parties. Regarding the reliance placed by various Tribunal decisions for the custom data, he submitted that in all these decisions, the issue involved was whether the valuation and price determination by the custom authority should be given precedence on transfer pricing provisions under the Income Tax Act, and not for the use of custom data per-se. The custom data is available in public domain which is relevant for the price on which various goods are imported in India. It is not the case of the assessee that custom valuation should be adopted but the purchases at which graphics plates have been imported has to be looked into. Insofar as the risk factor is concerned, the same has been borne out by the assessee because the A.E. has sold the graphics plates based on the list price sold to everybody. Thus, the addition made in the present case cannot be sustained on the reasoning given by the TPO and the learned Commissioner (Appeals).
Kodak Polychrome Graphics (I) P. Ltd.
2547. We have given our anxious consideration to the rival contentions, perused the relevant findings of the TPO and the learned Commissioner (Appeals) as well as the material placed on record. The main issue involved in the present ground is upward adjustment of ` 3,83,08,000, on the purchase price in respect of international transaction of import of photographic plates from various A.Es in Europe. In the TPR (Form 3CEB), the assessee has adopted RPM for bench marking the import of finished goods plates as the most appropriate method. The assessee's case has been that the procurement price of various finished plates was as per the prices decided by the supplier for supplies over worldwide on FOB basis. It has been claimed that this was the first time that the assessee has imported these plates and as a part of marking strategies to win customers for the future, the assessee has sold this product on a negative margin basis. Thus, even though the RPM was followed, no bench marking was done by undertaking any comparability analysis from the independent comparables. Before the TPO, the assessee also did not justify as to how the bench marking of its transactions has been carried out except for stating that the price on which plates have been purchased / imported from the A.Es is based on their price list worldwide. Thereafter, before the TPO, the assessee took a different plea that CUP method should be followed based on certain data on which third parties have been importing similar kind of plates. This has been rejected by the TPO on the ground that the assessee could not show as to whether similar kind of plates were imported by third party as the Kodak will sell its plates only to its A.E. and not to the third party. Regarding assessee's plea that negative margin was on account of marking strategy of penetrating the Indian market by selling it at lower margin, the TPO rejected the same and held that the A.E. should have given the margin of at least 6% to the A.E. in such a situation. Ultimately, he has bench marked the gross profit margin of the assessee on sales of various other segments which was at 28.56% and thereby made the adjustment in trading segment of plates. The Kodak Polychrome Graphics (I) P. Ltd.
26main argument of the learned Sr. Counsel is that the CUP method should be followed and the custom data which was made available to the Assessing Officer and further data now made available before us in the form of additional evidence should be considered to examine the fact that the assessee's purchase has been at ALP.
48. From the record, it is not very clear as to how the assessee which has initially adopted RPM as most appropriate method come to the conclusion that it is not suitable or appropriate for bench marking the purchase transactions and determination of ALP. Even while adopting the RPM in TPR, no comparability analysis has been carried out to compare it with uncontrolled independent transactions. Such a comparability analysis is the key factor under the transfer pricing mechanism. Simply relying on the fact that the A.E. has supplied the products at a price list worldwide cannot justify the assessee's stand because no analysis has been done on the supplies made by the A.E. to the other countries. If any comparability analysis would have been carried out in the case of other parties to whom the A.E. have supplied the same plates, then such a plea of the assessee could have been accepted. Similarly, certificate issued by the A.E. in this regard cannot be accepted in the absence of any proper analysis being done. The assessee is, in fact, engaged in distribution activities as it has been importing the plates from its A.E. and selling them to the third parties in India without any value addition. In such an activity, RPM can be considered to be the most appropriate method because the bench marking is done at a gross profit level. Even if the assessee's plea is to be accepted that CUP is the most appropriate method, then also it has not been examined as to whether the third party were also importing the similar products and carrying out similar business functions. For applying the CUP method, products and functional comparability are most relevant factors. No reason whatsoever has been given as to why RPM cannot be followed as most appropriate method and by following CUP method, it will result into most appropriate Kodak Polychrome Graphics (I) P. Ltd.
27determination of ALP. The basic tenet of the transfer pricing mechanism is to determine the most appropriate determination of ALP by following any of the prescribed method. The initial burden is on the assessee to demonstrate as to which appropriate method should be followed for carrying out comparability analysis of controlled transactions with the uncontrolled transactions for bench marking its transaction and justify that it is at ALP. In the present case, the assessee has sought to change its method from RPM to CUP by relying upon various custom data without carrying out any comparability analysis as to how the third party have been procuring the similar products in the similar circumstances. This exercise has to be done by the assessee to demonstrate its change of stand. It is also noted that even the presumption raised by the TPO that the A.E. should have been given margin of at least 6% on such prices is not correct and cannot be upheld and further the gross profit margin of entire sales which mainly consist of other product segment like graphics films, rolls, etc., would be appropriate for bench marking the gross profit margin of the finished plates also, has not been properly analysed or examined.
49. Therefore, in the interest of justice, we are of the considered opinion that the entire issue needs to be restored back to the file of the TPO for denovo adjudication. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the entire issue back to the file of the TPO for adjudication afresh after taking into consideration firstly, what should be the most appropriate method, that is, whether RPM or CUP method for bench marking the purchase / import of finished plates and the onus would be on the assessee to demonstrate as to why CUP method should be followed and what would be the comparables based on which comparability analysis can be done. The assessee can file before the TPO all the additional evidences which have been filed before us to justify that unrelated parties / third parties were also procuring similar products by and large on the same price range. Secondly, all the relevant details which are Kodak Polychrome Graphics (I) P. Ltd.
28required for adjudication of this issue can be furnished by the assessee to justify its arm's length transactions. Needless to say that the TPO will provide due and effective opportunity of hearing to the assessee to present its case. Accordingly, ground no.7, is treated as allowed for statistical purposes.
50. प रणामतः नधा रती क अपील सां यक य उ े य के लए आं शक वीकत ृ मानी जाती है ।
50. In the result, assessee's appeal is treated as partly allowed for statistical purposes.
आदे श क घोषणा खले
ु यायालय म दनांकः 26th June 2013 को क गई ।
Order pronounced in the open Court on 26th June 2013
Sd/- Sd/-
बी.
बी. रामकोट
रामकोट य अ मत शु ला
लेखा सद य या यक सद य
B. RAMAKOTAIAH AMIT SHUKLA
ACCOUNTANT MEMBER JUDICIAL MEMBER
मंुबई MUMBAI, दनांक DATED : 26th June 2013
आदे श क त ल प अ े षत / Copy of the order forwarded to:
(1) नधा रती / The Assessee;
(2) राज व / The Revenue;
(3) आयकर आयु (अपील) / The CIT(A);
(4) आयकर आयु / The CIT, Mumbai City concerned;
(5) वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai;
(6) गाड फाईल / Guard file.
स या पत त / True Copy
आदे शानसार
ु / By Order
द प जे. चौधर / Pradeep J. Chowdhury
वर नजी स चव / Sr. Private Secretary
उप / सहायक पंजीकार / (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai