Income Tax Appellate Tribunal - Delhi
Bausch & Lomb Eyecare (India) Private ... vs Assessee on 4 March, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I" NEW DELHI
BEFORE SHRI R.P. TOLANI: JUDICIAL MEMBER
AND
SHRI B.C. MEENA : ACCOUNTANT MEMBER
ITA Nos. 3861/Del/2010, 4924/Del/2011,
6382/Del/2012 & 6580/Del/2013
Asstt. Yrs: 2006-07, 2007-08, 2008-09 & 2009-10.
Bausch & Lomb Eyecare (India) Vs. Addl. CIT, Range-2,
Pvt. Ltd., Rajendra Bhavan, New Delhi.
210, Deen Dayal Upadhaya Marg,
New Delhi-110012.
PAN: AABCB 3877 E
(Appellant ) ( Respondent )
Appellant by : Shri Mukesh Bhutani Adv.
Sh. Vrinda Tulshan Adv.
Shri Sanjeev Malhotra Adv.
Respondent by : Shri Yogesh Kumar Verma CIT (DR)
Date of hearing: 04-03-2014.
Date of order : 23-05-2014.
ORDER
PER R.P. TOLANI, J.M::
This is a set of 4 appeals by the assessee filed against the respective assessment orders of AO, passed under the directions of Dispute Resolution Panel (DRP) u/s 144C, pertaining to assessment years 2006-07 to 2009-10. Various grounds are raised involving TP and corporate issues. For the sake of convenience the grounds are tabulated in following abridged form:
2S. AY ITA No. Filed by Issues involved
No.
1. 2006- 3861/Del/2010 Appellant Transfer pricing - Adjustment on
07 account of AMP expenditure.
2. 2007- 4924/Del/2011 Appellant Transfer pricing - (i) Adjustment on
08 account of AMP expenditure.
(ii) Disallowance on account of
intra-group Support services.
(iii) Corporate tax issues.
3. 2008- 6382/Del/2012 Appellant Transfer pricing - Adjustment on
09 account of AMP expenditure
(ii) (ii) Disallowance on account of
intra-group Support services
4. 2009- 6580/Del/2013 Appellant Transfer pricing - Adjustment on
10 account of AMP expenditure.
(ii) Adjustment in relation notional
interest on outstanding receivables.
2. A perusal of above reveals that one common issue in all the years pertains to adjustment on account of Advertising, Marketing and Promotion ("AMP") Expenditure incurred by the Appellant for AY 2006-07, 2007-08, 2008-09 & 2009-10. Brief Facts in this behalf are:
2.1. The Appellant is a wholly owned subsidiary of Bausch & Lomb South Asia Inc., USA, primarily engaged in the business of
(i) manufacturing and distribution/trading of vision care products such as soft contact lenses, toric lenses, infra-ocular lenses, eye care solution and protein removing enzyme tablets ("vision care segment").
(ii) distribution/trading of surgical equipment such as excimer laser system, cataract machines and intra-ocular lenses ("surgical equipment segment").
Page 2 of 47 32.2. For each of these segments, the Appellant acts an independent manufacturer and distributor/ trader which involves undertaking normal risks thereto including market risks, price risks and other incidental risk factors. All costs of expanding and maintaining the market for B&L India's vision care products and surgical equipments are attributable to the assessee. Thus, the assessee is to be characterized as a manufacturer and distributor/ trader i.e. one that utilizes routine assets and undertakes normal business and economic risks.
2.3. The Appellant's marketing efforts in this behalf are focused towards expanding and maintaining the sales of its products in India since market penetration of contact lenses in India is lower than other developed economies. It is to be appreciated that assessee is engaged in the sale of technology related products wherein the primary customers are doctors, who are not influenced by the brand of a product but by the product utility. To promote this segment, the Appellant's marketing efforts are focused towards participating in technical seminars, conferences and educating the doctors about features of its products. Thus, these expenses are predominantly selling in nature rather than related to advertisement.
2.4. During the impugned assessment years, the Appellant entered into various international transactions with B&L group companies from time to time including agreement dated December 16, 2002 placed on PB Pg. 157-163 of PB for AY 2006-07) with its Associated Enterprises ("AE") for its own manufacturing operations and distribution of product manufactured by its group companies i.e., the AE and other subsidiaries. They do not pertain to trademark or brand enhancement activities.
2.5. This expenditure being purely sales related incurred wholly and exclusively for assesses business in India was claimed as routine revenue Page 3 of 47 4 expenditure and accordingly the assessee's TP report is prepared keeping this view in mind.
2.6. Apropos TPO's objections thereon, they have been duly replied by the assessee, however, they have not been considered objectively, as TPO was determined to some how consider them as brand building expenses and make consequent TP adjustments, which are as under:
Approach adopted by the Transfer Pricing Officer ("TPO"):
2.7. Ld. TPO held assessee's AMP expenditure to be excessive and benchmarked the same by comparing it with that of the his chosen comparables.
Post determination of ALP qua AMP, a transfer pricing adjustment was carried out on this account in these years holding that the Appellant should have been compensated by AE for the alleged brand promotion services alleged to be rendered by the assessee. Besides ld. TPO further added a mark-up on rendition of such services.
2.8. The TPO thus calculated the adjustments as under:
Particulars AY 2006-07 AY 2007-08 AY 2008-09 AY 2009-10 (INR) (INR) (INR) (INR) AMP of 20,90,47,349 25,67,02,198 17,60,95,512 12,95,73,460 appellant including trade discount/ commission Less Arm's 3,08,74,221 3,16,33,605 5,84,81,920 4,36,18,644 Length AMP (ALP=2.77%) (ALP=3.61%) (ALP=5.62%) (ALP=3.71%) expenditure (as computed by TPO) Expenditure 17,81,73,129 22,50,68,593 11,76,13,592 8,59,54,816 Page 4 of 47 5 incurred for developing intangibles Add: Mark-up 1,78,17,312 3,36,02,740 1,76,42,039 1,31,25,300 (@10%) (@14.93%) (@15%) (@15.27%) Adjustment on 19,59,90,441 25,86,71333 13,52,55,631 9,90,80,116 account of transfer pricing 2.9. Against the proposed adjustments assessee approached the ld. Dispute Resolution Panel ("DRP"), again without giving cogent reasons on detailed objections filed by the assessee ld. DRP upheld the TP adjustments made in this behalf and the final assessment order was passed by AO in accordance with such DRP directions.
2.10. Aggrieved on the consequent orders passed by ld AO in all the impugned years, appellant has filed these appeals before this Tribunal.
3. Ld counsel for the Assessee Shri Mukesh Butani addressed this issue based on categorical augments in following manner:
Effect of Special Bench order in the case of LG Electronics India Ltd:
3.1. The AMP related issues are influenced by ITAT Special bench judgment in LG Electronics India Ltd vs. ACIT case (ITA NO. 5140/Del/2011). The Appellant was one of the intervener. Following two main propositions are adjudicated by the Special Bench:
"1. Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee?Page 5 of 47 6
2. Whether the Assessing Officer was justified in holding that the assessee should have earned a mark up from the Associated Enterprise in respect of AMP expenses alleged to have been incurred for and on behalf of the AE?"
3.2. The Special Bench vide order dated January 23, 2013 laid down broad parameters in relation to the TP adjustment on account of AMP. The key principles emerging from the Hon'ble Special Bench Ruling may be categorized into three categories as under:
Category 1 - Treatment of selling expenses such as trade discount, volume rebates etc, and; receipt of subsidy from the parent company in respect of AMP which have been decided by the Hon'ble Special Bench in favour of the tax payers.
Category 2 - Criteria/ factors to be considered by the TPO while benchmarking AMP, such as business model, contractual arrangements, product life cycles, choice of comparables, etc. Category 3 - Legal issues before the Special Bench, such as validity of TPO jurisdiction, qualification as transaction/ international transaction, use of bright line approach, etc. 3.3. That Special Bench has decided them in following manner:
Category 1 - Selling Expenses such as Trade/ Channel Discounts, Commission are not part of AMP. In assessee's case however, they have been held to be AMP expenses, which is against the Special Bench Page 6 of 47 7 judgment, relevant grounds are raised in respective grounds of appeal as under:
AY 2006-07 - Ground no. 11 & 12 AY 2007-08 - Ground no. 9 AY 2008-09 - Ground no. 8 & 8.1 AY 2009-10 - Ground no. 6
a) It is submitted that the Appellant provided certain channel discounts to its dealers depending on the sales volumes achieved. These discounts are essentially in the nature of trade discounts provided to incentivize dealers to increase the sales volume of the Appellant. The Appellant also incurred commission expenses which were in the nature of normal dealer commission paid to distributors/ channel partners depending upon approved commission percentage.
In addition to the above, the Appellant also incurred expenses directly related to sales such as (i) point of sale related expenses like booking stalls, erecting stalls, dispensers, etc; (ii) conference related expenses like costs incurred for participation in various conferences organized by leading ophthalmic associations wherein various trends and technologies are discussed by leading doctors; (iii) Market research; (iv) free trial of contact lenses related expenses, (v) freebies provided to promote sales, etc. These expenses are purely sales related and have no bearing whatsoever to the brand of the AEs.
b) In the case of the Appellant, while benchmarking AMP, the TPO included the amount relating to trade/channel discount (for AY 2006-07, 2007-08 & 2008-09), commission (for AY 2008-09 & 2009-10) and other selling expenses relating to point of sale, conferences, market research, Page 7 of 47 8 free trial, freebies, etc (for AY 2006-07 to 2009-10) as part of AMP and such AMP was then compared with the AMP spent of the comparables while determining the arm's length price of AMP and eventually leading to a higher TP adjustment.
c) The Special Bench in its judgment (Para 18.3, 18.4, 18.5 and 18.6) have categorically expressed that the expenditure in connection with the sales has to be distinguished from the expenditure for promotion of sales and as such expenditure in connection with the sales cannot be covered within the expression of AMP. Reference is also made to the provisions of erstwhile section 37(3B) of the Act and the legal precedents in this regard to elucidate the scope of 'advertisement, publicity and sales promotion' [an expression used in the erstwhile section 37(3B)], which is pari materia to AMP as is used in the present context.
d) The Special Bench has categorically laid down a divider to distinguish expenses incurred with respect to promotion of sales and expenses incurred in connection with the sales. It has been elaborately appreciated by the Special Bench that the expenses in connection with sales are incurred post occurrence of sales and such expenses reduces the cost of goods sold and are directly linked to sales. Therefore, the same cannot be categorized as sales promotion expenses and by any parameter can not be held for helping in building brand.
e) It is submitted that the principles enunciated by the Special Bench have been followed by ITAT Delhi Bench as in various cases including Canon India Ltd. (ITA No. 4602/Del/2010, 5593/Del/2011 & 6086/Del/2012), Whirlpool of India Ltd. (ITA No. 426/Del-2013) (Para 6,7 & 8) and Sony India Pvt. Ltd. (ITA No. 4978/Del/2011 & Page 8 of 47 9 6389/Del/2012) and Chandigarh Bench in the case of M/s Glaxo Smithkline Consumer Healthcare Ltd. (ITA No. 1148/Chd/2011).
f) Thus ld. TPO has summarily held that it has incurred excessive expenditure in the form of AMP which leads to brand building for its foreign AE in India. Thus, the lower authorities have purposely avoided going into the actual expenditure and the fact that they were sales related as against alleged brand building.
g) It is submitted that following earlier pattern of accounts heading even if the appellant included trade/channel discount, commission, other selling expenses, etc under the nomenclature AMP and has claimed the same as revenue expenditure as against reducing the same directly from sales. The expenditure cannot be classified as AMP expenditure, merely on the basis of entries in the books of account. The entries in the books of accounts are not determinative of deductibility of an item of expenditure for the purposes of computation of taxable income under the provisions of the Act. Reliance, in this regard, is placed on Kedarnath Jute Mfg. Co. Ltd. vs CIT: 82 ITR 363 (SC). As such expenses go to reduce the cost of goods sold and have a live nexus to the sales made during the year(s). The Special Bench of the Tribunal appreciating the same, therefore, held that such expenditure should be excluded from the AMP before benchmarking.
h) Thus applying principles enunciated in LG India Special Bench decision, expenses having direct correlation with sales cannot, be brought within the ambit of AMP for determining the cost/ value of the international transaction.
Page 9 of 47 10i) Schedule 14 of the Audited Financial Statements categorically classifies the expenses under the heads of 'advertisement', 'channel discount' and 'commission'. The inconsistency in the approach adopted by the TPO while benchmarking AMP Expenditure incurred by the Appellant is as follows:
- In AY 2006-07 and 2007-08, the TPO has included the amount of trade discount and not included commission. (Pg. 212 of PB for AY 2006-07 and Pg. 412 of PB for AY 2007-08)
- In AY 2008-09, the TPO has included both channel discounts as well as commission (Pg. 419 of PB for AY 2008-09)
- In AY 2009-10, the TPO has included commission and not trade discounts (Pg. 369 of PB for AY 2009-10)
j) Without prejudice to above contentions, the computation of net AMP expenditure post reduction of trade/ channel discounts and commission has been tabulated as under:
Particulars AY 2006-07 AY 2007-08 AY 2008-09 AY 2009-10 (INR) (INR) (INR) (INR) AMP including 20,90,47,349 25,67,02,188 17,60,95,512 12,95,73,460 trade discount/ commission Less: Trade 12,52,63,219 16,20,44,325 12,08,47,641 -
Discount Less: Commission - - 10,11,787 14,47,646 Less: Other selling 3,76,92,008 3,49,56,215 3,49,17,733 4,65,70,351 expenses relating to point of sale conferences, trial general, market research, freebies etc. Total AMP incurred 4,60,92,122 5,97,01,658 1,93,18,351 8,15,55,463 by appellant
k) Ld. TPO further noted that the total AMP tabulated above (after deletion of trade discount/ commission/ Other selling expenses relating to point of sale, conferences, trial generation, market research, freebies etc) Page 10 of 47 11 may still include certain expenses in the nature of selling expenses and dealer incentives.
l) Assessee has provided all the relevant details in this behalf which have not been controverted by TPO in any manner. In this situation, the assumption that the details may still contain some element towards brand building is purely a guess work bereft of any cogent reasoning and not form a basis for further interference. It is pleaded that the AO/ TPO may be directed to grant relief with regard to the expenditure relating to trade discount, commission and any other selling expenses incurred by the Appellant, and the same shall be excluded from AMP at the threshold itself before even initiating the benchmarking exercise.
3.4. Category 2 - Key factors enumerated by Special Bench to be considered by TPO during benchmarking exercise 3.5. The Special Bench of the Tribunal (Para 17.4) has categorically suggested factors for determination of cost/ value of international transaction. The factors enumerated by Hon'ble Special Bench along with Appellant's facts have been reproduced below:
Criteria's/ Factors Appellant's facts Suggested by Special Bench (para 17.4)
FAR of the tax The TPO has grossly erred on fats of the business model payer of the appellant in assuming (i) the entire AMP expenditure was incurred for the distribution activity of
(ii) the appellant is a limited risk distributor.
In this regard it is submitted that the appellant is engaged in both distribution and manufacturing activities as mentioned in the TP Documentation and, accordingly, the appellant is a routine manufacturer and distributor- marketer that utilizes routine assets and undertakes normal business and economic risks.
Terms of The appellant entered into agreement with its AE for its Page 11 of 47 12 arrangement/ own manufacturing operations and distribution of agreements between product manufactured by its group companies i.e. the AE tax payer and AE and other subsidiaries and the same have been placed on record.
Use and existence of There is no explicit arrangement or agreement entered brand name into by the appellant with its AEs for exclusive use of brand. All marketing strategy is India Specific although brand identity is global.
The brand names are owned by the AEs. These brands have been in existence from much before the appellant started its operation in India.
3.6. In view of the above, It is pleaded that appropriate orders/ directions may be given to the AO/TPO to identify comparables for computation of the ALP of B&L India in light of the factors suggested by the Special Bench for determination of cost/value of international transactions.
3.7. Category 3 - Appellant's submission against interpretation of legal issues The legal issues have been decided by the Special Bench in favour of the revenue and against the assessees. The Appellant reserves its right to challenge the same before Hon'ble High Court in appeal under section 260A of the Act, submissions in regard to such findings of the Hon'ble Special Bench are pleaded as under:
S. Issues LG's decision Appellant's remarks/ facts No.
1. Jurisdiction of Upholds retrospective The appellant emphatically TPO application of Sec. claims that provisions of 92CA(2B) enhancing Sec. 92CA(2B) are not TPO's powers - Sub- applicable retrospectively.
section (2B) of section The settled law in this
92CA covers all types of behalf propounds that such
Page 12 of 47
13
international transactions laws which create
in respect of which the unanticipated liability can
assessee has not furnished be brought into force with report, whether or not prospective effect.
these are international Retrospectivity cannot be transactions as per the assumed by implications.
assessee's version.
2. Transaction Incurrence of high AMP It will be appreciated that and use of foreign brand the questions referred to entails understanding and Special Bench were constitutes transaction - actually fact specific i.e. (para 9.11, 9.12 (last 4 they were required to be lines) & 12.1 to 13) answered by the Special Bench in light o facts and circumstances of the principal applicant i.e. LG India. Thus, to a great extent, the observations of the Special Bench were restricted in the context of the facts of the principal applicant and did not consider the facts in the case of interveners.
Therefore, a judgment cannot in our respectful submissions, be applied uniformly to the instant case de hors appreciation of the relevant facts involved herein.
Further, it is submitted that the TPO himself had accepted that the AMP expenses are payments to unrelated entities and has not, anywhere, incurred in relation to the business of the entity. The same should be included as operating Page 13 of 47 14 expense while computing the margin of Appellant under TNMM.
Without prejudice, if such
AMP is considered as an
international transaction,
then the benchmarking
should have been
aggregated with the
principal transaction of
appellant i.e. import of
finished products for
distribution.
3. Cost/ value of Bright line considered as a Section 92C of the Act
transaction tool to determine cost of provides that arm's length
international transaction. price in relation to an
(paras 15.7 & 15.10) international transaction
shall be determined by any
of the prescribed methods,
being the most appropriate
method, having regard to
the nature or class of
transaction or class of the
associated enterprise or
functions performed by the
entities participating in the
transactions. Bright line is
not a method as prescribed
under the Indian
Regulations.
4. Methods for AMP is a transaction The Bench though on
determination distinct from other specific facts of LG's case
of ALP of transactions, having has upheld the cost plus
international independent effect on the method for determining the
transaction overall net profit of the mark up on such brand
Indian AE. Thus, required building services. However, to be separately bench the Bench ahs also held at marked as per the TP para 22.11 that the AMP provisions and the expenditure has to be bench methods prescribed under marked as per the methods the Act. prescribed under the Act.
Page 14 of 47 15(Refer Rule 10.) Arguments relating to application of mark-up
a) On specific facts of LG's case, Special Bench upheld that a mark- up is to be applied and ruled that the DRP has erred in arbitrarily determining a mark-up without showing what are the FAR parameters of the independent comparable entity would have earned from a similar international transaction. The Special Bench on this issue restored the matter back to the file of TPO for determination of correct mark-up.
b) In the wake of these findings it is contended that if no service has been rendered then there should not be any question of mark-up thereon. Further, the AMP expenses have been benchmarked using TNMM. Thus, if the transaction is already at arm's length then an additional mark up should not be further charged thereon.
c) In the case of the Appellant, the TPO / DRP followed an inconsistent approach to determine the mark-up on following counts:
- For AY 2006-07 and 2007-08, the TPO applied mark-up of 10 percent and 14.93 percent respectively wherein TPO has not undertaken any meaningful search for selection of appropriate comparables. Further, the TPO did not ever provide an opportunity to the Appellant to respond to the comparables as finally disclosed in the transfer pricing order. The comparables used by the TPO / DRP to compute the arm's length mark-up are not comparable to the alleged marketing services rendered by the Appellant. The specific objections of the Appellant pertaining to the use of the comparables are placed at Pgs 61-62 of PB for AY 2006-07 & Pgs. 87-89 of PB for AY 2007-08.
- For AY 2008-09 and 2009-10, the TPO applied mark-up of Prime Lending Rate ("PLR") plus an associated service charge and arrived at a mark-up of 15 percent (PLR of 12.5 percent plus 2.5 percent mark-up) and 15.27 percent (PLR of 12.77 percent plus 2.5 percent mark-up) respectively. It is respectfully submitted that the application Page 15 of 47 16 of PLR to compute the mark-up is erroneous. The specific objections of the Appellant are placed at Pgs. 130-132 of PB for AY 2008-09 & Pgs. 158-159 of PB for AY 2009-10.
d) Without prejudice to other contentions, it is submitted that the TPO/AO be directed to follow a consistent approach in light of the decision of the Hon'ble Special Bench.
4. Disallowance on account of payment made for availing Intra-group Support Services for AY 2007-08 & 2008-09 4.1. During AY 2007-08 & AY 2008-09, the Appellant entered into a support services agreement dated April 1, 2006 with B&L Hong Kong Ltd. ("B&L HK") (Pg 313 & 320 of PB for AY 2008-09). Thereafter, during AY 2008-09, the Appellant entered into similar agreements dated April 1, 2007 with B&L Incorporated, USA ("B&L Inc") (Pg 303 & 309 of PB for AY 2008-09) and Bausch & Lomb (Singapore) Private Limited ("B&L Sing") (Pg 294 of PB for AY 2008-09). As per the terms of the agreements, the Appellant paid a cost plus 5 percent in lieu of certain support services received.
4.2. Details of the services received by Appellant are placed at Pg. 94-100 of PB for AY 2007-08 and Pg. 137-140 of PB for AY 2008-09. Key services provided by the AEs are as follows:
B&L HK B&L Inc. B&L Sing
• Consulting • Legal • Surgical Marketing
• Manufacturing • Corporate IT • Clinical
Applications
• Credit and Asset • Corporate Tax • Sales Support
Mgt.
Page 16 of 47
17
• Advisory Services • Corporate Treasury • Technical
• Vision Care • Global Product • Supply Chain
Marketing Category
• Professional Training • Regulatory
• Sales Support • Global Sourcing
• Insurance • Lean Manufacturing
• IT • Safety
• R&D IT
• Global Operations
and Engineering
Executive
• Quality
4.3. Thus, the Appellant paid INR 3,75,90,391 for AY 2007-08 and INR 9,69,30,610 for AY 2008-09 to its AEs for availing support services. While conducting the benchmarking, the foreign AE was considered as the tested party using TNMM as the most appropriate method. The Appellant's international transaction relating to receipt of support services was concluded to be at arm's length since the average margin earned by the comparables was higher than the 5% mark-up over total costs charged by the foreign AEs. (Pg 164 of PB for AY 2008-09) 4.4. The TPO made an adjustment alleging that no service has actually passed to the Appellant and, further, no independent party shall pay for availing the services similar to those received by the Appellant from its AEs. In other words, the TPO, while rejecting the TNMM as benchmarking methodology stated that TNMM should be applied at transactional level and not entity level. Accordingly, the TPO applied CUP method for determining the ALP as 'Nil' and not acknowledging the fact that the services were actually received by the Appellant and the same have benefitted the Appellant.
Page 17 of 47 184.5. It is submitted that services availed from the AEs are utilized by the Appellant in its operations and serve as a business maintaining tool for the Appellant. Such services assist with strategic planning, management and monitoring of the Appellant's operations and provide material benefits to the Appellant in terms of revenue growth, cost savings, operational efficiency and sustainability. By incurring these expenses, the Appellant has access to network, expertise, skills, knowledge, information, etc., that is available within the B&L Group. Further, the Appellant has not procured / purchased similar services from unrelated parties during these years and the respective jurisdiction from where the Appellant's AEs are operating earn an arm's-length markup on its service activities.
4.6. It is submitted that the industry in which Bausch and Lomb operates i.e. the vision care industry has its inherent risks as the products closely relate with health and the high sensitivity of human eyes. Consequently the risk of quality event is naturally higher than other industries. Accordingly, support in terms of manufacturing support, advisory support, consulting etc. is essential for the Indian company. Besides, the Appellant provided economic justifications as well as a cost benefit analysis for the payment of support service fee to its AEs along with sample documentation to substantiate the same. The detailed submissions in this regard containing emails, agreements, cost allocation sheet, cost benefit analysis, TP documentation of the overseas AE are placed at Pgs 282-366 of PB for AY 2008-09.
4.7. Ld. TPO has proposed an adjustment on account of reimbursement of support services by stating that Appellant had neither provided evidence of receipt of such services from AEs nor submitted what was the benefit received / derived from such services. In this regard, it is submitted that the "benefit test"
is not a method prescribed under the realm of the Act and in specific under the Page 18 of 47 19 transfer pricing provisions. Reliance is placed on the following judicial precedents copies whereof are placed on the case laws paper book:
- CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 (Del)
- Hive Communications Pvt. Ltd. vs. CIT (ITA No. 306 of 2011)
- Lumax Industries Limited (ITA No. 5252/Del/2011) - The ITAT has laid down the principle that benefit test is not a method.
- Dresser Rand vs. Addl. CIT (2011) 47 SOT 423 (Mum)- ITAT held that benefits derived by the assessee is not relevant criteria for determination of ALP of an expenditure incurred by the assessee.
- Air Liquide Engineering India P. Ltd. vs. DCIT (ITA No. 1040/Hyd/2011)
- Ericsson India Pvt. Ltd. vs. DCIT (2012-TII-48-ITAT-Del-TP) - It has been held that the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not.
- SC Enviro Agro India Ltd. vs. DCIT (ITA No. 2057 & 2058/Mum/2009) - The TPO is not authorized to disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same and, therefore, the TPO exceeded the jurisdiction in examining the arms length price on a transaction.
4.8. Incorrect application of CUP: CUP cannot be considered as the most appropriate method since, CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. However, no such data is available for comparability purposes. The TPO while proposing such an adjustment did not identify any unrelated comparable transactions for application of CUP and arbitrarily considered the ALP as Nil, thereby, proposing an adjustment amounting to the total value of reimbursements. It is respectfully submitted that the TPO erred in adopting such an arbitrary approach for making an adjustment per se which is not the intent of Chapter-X. Reliance is placed on the recent judgment of the Page 19 of 47 20 Hon'ble Delhi of Bench of the Tribunal in the case of Hero MotoCorp Limited (2013)156 TTJ 139 (Del) wherein, the applicant had paid model development fee and the TPO applied CUP for determining the ALP to be Nil. The DRP arbitrarily used 25 percent as the CUP. The Tribunal rejected the approach of the DRP/ TPO stating that it is TPO's responsibility to compute the appropriate ALP and the same cannot be determined as NIL or a randomly assigned percentage.
4.9. Reliance can also be placed on the Delhi Tribunal ruling in the case of Abhishek Auto Industries Ltd (ITA No. 1433/Del/2009) wherein the Tribunal has emphasized that legally binding agreements cannot be disregarded without assigning any cogent reasons. The above case is directly applicable to the case of the Appellant, wherein, there is an inter-company service agreement that stipulate that the Appellant will pay a portion of its AEs total costs in a given year. Since it is not possible to individually identify each of the services rendered by the Appellant's AEs and to directly establish the corresponding costs, the appropriate allocation keys and template have been prepared.
4.10. The Appellant paid for support services with a sole intention of improving its operations and align them with B&L Group's global standards. It is clearly a business decision which is to be considered from the point of view of a normal prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the objective point of view of commercial expediency principle. The objective behind the sections stipulated under law is to prevent evasion of tax and not to clothe the role of business man on the tax collector.
Page 20 of 47 214.11. It is well-established principle laid down by the courts that the Revenue cannot sit in the arm chair of the assessee for determining business expediency of the expenditure incurred. By disputing the benefit arising out of the expenditure and the method of allocating the costs, the TPO has exceeded his powers which is in clear violation of such principles. Reliance is placed on following judicial pronouncements:
- SA Builders Ltd. vs CIT: [2007] 288 ITR 1 (SC)
- CIT vs Walchand & Co Ltd: [1967] 65 ITR 381 (SC)
- CIT vs B. Dalmia Cement Ltd.: [2002] 254 ITR 377 (Del)
- CIT vs Oracle India (P) Ltd.: [2011] 199 TAXMAN 181(Delhi)
- McCann Erickson India Private Limited vs ACIT (ITA No.
5871/Del/2011)
4.12. It is vehemently contended that in the immediately successive year i.e. AY 2009-10, no transfer pricing adjustments have been made by the TPO/AO in this behalf i.e. on account on receipt of support services.
4.13. In view of the above contentions Shri Butani pleads that ld. TPO has erred in:
(a) not appreciating the benefits received by the Appellant from the services rendered by AEs.
(b) determining the ALP of the transaction as Nil. Accordingly, the said adjustment is not sustainable.
5. Re-characterizing "delayed" payments as unsecured loans to AE and imputing a notional interest on such alleged loan. Ground no. 12 & 13 for AY 2009-10 5.1. It is contended that ld. TPO held as under in this behalf:
Page 21 of 47 22a) certain receivables, namely, amounts outstanding from the Appellant's AEs being B&L Sing and B&L HK, have not been received within the stipulated time and, therefore, treated the receivables as unsecured loans advanced to AEs.
b) as a consequence of insertion of Explanation (i)(c) to Section 92B retrospectively "receivables" have been included in the definition of international transactions.
c) interest rate was arrived at 15.77% by using PLR as the average lending rate of SBI plus 300 basis points, to account for the various risks involved (namely financial risk, credit risk, business risk and structural risk) and the same was considered as the CUP for making an adjustment of INR 3,12,643.
5.2. Adverting to the TPO adjustment qua notional charging of interest on receivables from AE ld. Counsel contends that at the outset the interest on receivables beyond a stipulated credit period is not an international transaction from Indian transfer pricing perspective and, thus, does not warrant an imputed charge. Besides, Transfer Pricing adjustment cannot be made on hypothetical and notional basis unless there was some material on record that there had been under charging of such interest or real income.
5.3. The assessee as a policy, does not charge any interest on any delayed payment irrespective of whether the other party was an AE or not. Since, the Appellant did not charge any interest on delayed payments from its unrelated customers, not charging any interest from its AEs is consistent with the arm's length principle while applying the CUP method for determining ALP. In this regard, reference is drawn to the OECD Guidelines (Para 1.29) wherein it has Page 22 of 47 23 been prescribed that no interest could be charged on delayed payment on commercial consideration for ensuring a long and healthy relationship.
5.4. Reliance is placed on the following case laws:
- Bombay High Court decision in the case of CIT vs. Indo American Jewellery Ltd. (ITA No. 1053 of 2012) [affirmed Mumbai ITAT decision of DCIT vs Indo American Jewellery Limited (2012) 50 SOT 528 (Mum)] is squarely applicable to the facts of the Appellant wherein the High Court held that "the specific findings of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and Non Associated Enterprises-
debtors and the delay in realization of the export proceeds in both the cases is same. In these circumstances the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceeds realised belatedly cannot be faulted."
- A similar view has been taken in Lintas India P. Ltd vs. ACIT [2013] 152 TTJ 706 (Mum).
- In the case of Mastek Ltd. vs. ACIT (ITA No.3120/Ahd/2010), the Tribunal in this behalf held as under:
"If the AEs are not recovering interests from third parties for late recoveries, then in the instant case it would be too much to expect the assessee to charge the interest from the AEs. There is no rationale to inflict upon the assessee, merely on presumption, that he ought to have charged the interest from it's AEs. We therefore hold that there was no justification to presume that there was a shift of profit to avoid tax in India."
5.5. With regards to the application of the CUP method by the TPO, it was submitted that as per the Act and the Rules, under the CUP method the procedure is to compare the price charged from AE with uncontrolled Page 23 of 47 24 transaction i.e. non-AE. If the price charged from non-AE is comparable with AE, then no addition can be made. In the present case, the Appellant has not charged any interest from non-AE debtors in respect of delayed realization. The TPO erred in applying the CUP method as similar transactions were not entered into by the Appellant with third parties and the Appellant is not avoiding any tax by intentionally not charging any interest from AEs but charging it from non-AEs. As the case of non-charging of interest in the controlled transaction is comparable with that of non-charging from uncontrolled transactions, no transfer pricing adjustment can be made.
5.6. It is further submitted that the notional interest due on payables amounted to INR 41,61,327 whereas the notional interest on receivables amounted to INR 3,12,643 (as computed by the TPO). Details of interest on receivables post netting off interest on payables has been provided at Pg. 39-51 of PB for AY 2009-10 wherein the difference is calculated at INR 38,48,685. Accordingly, based on the above the transfer pricing adjustment on notional interest due on receivables ought to be deleted.
5.7. It is demonstrated that the Appellant is a debt free company and that there was no interest burden on the Appellant. Therefore, it cannot be justifiable to presume that the borrowed funds have been utilized to pass on that facility to AEs. Consequently any notional charging of interest is arbitrary, contrary to TP adjustments and against the material available on record.
5.8. Without prejudice to the above, it is submitted that the Appellant has not agreed for any credit period for receipt of payments for export of finished goods transaction and such amounts are received within a reasonable period of time. However, the TPO has arbitrarily fixed a payment period of 30 days for the finished goods export transaction and 60 days for regional services rendered to Page 24 of 47 25 the AEs and held any payment received subsequently to be benchmarked. In the case of M/s. Logix Micro Systems Ltd. vs. ACIT (ITA No. 423/Bang/2009 and 524/Bang/2009), the Bangalore Tribunal held that a reasonable period may be provided as interest-free period and no interest be calculated for such interest- free period of 180 days. Interest is to be calculated for the period overflowing the interest-free period. In light of the above, it is submitted that the period of 30 days on exports and 60 days on regional supplies is too short and a period of 180 days considered reasonable by ITAT may be considered as interest-free period.
5.9. Without prejudice to the above, it is also submitted that the TPO has erroneously arrived at an interest rate of 15.77% by using PLR as the average lending rate of SBI plus 300 basis points. In the case of M/s. Logix Micro Systems Ltd. vs. ACIT (supra), it was held that it is not proper to rely on PLR of SBI because if the funds were brought in time and those funds were properly deployed, the assessee company may earn an income at the maximum rate applicable to deposits and not at the rate applicable to loans. Instead, the Tribunal adopted a reasonable rate that would be available to the assessee on short-term deposits and fixed the ALP interest rate at 5%.
5.10. The following judicial pronouncements support the arguments of the Appellant:
- Evonik Degussa India Private Limited vs ACIT [2013] 55 SOT 566 (Mum) "28. ...Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee.
Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment....Moreover, the TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest Page 25 of 47 26 relating to alleged delayed payment in collection of receivables from the AEs, is uncalled for on the facts of the present case and is, accordingly, deleted."
- M/s Nimbus Communications Ltd. vs ACIT [2013] 145 ITD 582 (Mum- Trib.) " ...Even assuming that the continuing debit balances of associated enterprises can be treated as 'international transactions' under section 92B, the right course of applying the CUP method, in the case of non-charging of interest on overdue balances, would have been by comparing this not charging of interest with other cases in which the assessee has charged interest on overdues with independent enterprises (internal CUP) or with the cases in which other enterprises have charged interest, in respect of overdues in respect of similar business transactions, with independent enterprises (external CUP). No such exercise has been carried out in this case..."
5.11. In light of the above, it is submitted that the aforementioned TP adjustments are neither factually nor legally sustainable.
6. Ground No 24 for AY 2007-08 on corporate issue pertaining to disallowance of advances written off. Brief Facts are, during this AY, the Appellant had written off advances amounting to INR 79,80,994 to its Profit and Loss account and claimed deduction of the same as business loss in computing the taxable income. On queries during the assessment proceedings, assessee furnished relevant details of advances and explanation for writing off. Without considering the merits of assesses submissions AO held that:
a. Appellant failed to prove that advances were given in the ordinary course of business and are revenue in nature.Page 26 of 47 27
b. On basis of the details filed by assessee, it was difficult to ascertain the nature of advances being capital or revenue as prima facie some items appears to be capital in nature.
c. Relying on the provisions of section 36, the AO held that conditions of section 36(2) read with section 36(1)(vii) of the Act were not satisfied in the case of the Appellant and hence deduction for advances written off should not be available.
6.1. Before the DRP, the assessee filed additional evidence being party wise details of all the advances amounting to INR 79,80,994 extended to individual parties along with a brief description of nature of expense and accordingly, the DRP remanded back the matter to AO for fresh consideration of additional evidence.
6.2. In remand assessee submitted before the AO, that advances given to various parties were in nature of expenses incurred towards marketing and sales promotion activities, sponsorship of events, conferences, travel hotel stay, employee salary advance etc. and were necessarily incurred in the ordinary course of business. Besides it also filed details of nature of expenses for which the advances were given to prove that the expenses were of revenue nature and were wholly and exclusively incurred in the ordinary course of business.
6.3. Ld AO filed the remand, reporting that, the Appellant had only submitted copies of vouchers, bills of advances given to various parties and no other details summarizing the nature of expenses were filed and did not provide any clarity as to whether the advances were given in ordinary course of business.
Without giving cogent reasons it was reported that they were advanced for the long term benefit of the Appellant and that the list provided did not clarify that Page 27 of 47 28 the expenditures were incurred in ordinary course of business. The expenditure having been incurred for protecting interest of customers was not the test for determination of revenue of capital expenditure. AO thus gave self contradictory and shifted from reasons to reason to arbitrarily hold it be not allowable.
6.4. Ld. DRP without considering the merits and offering cogent reasons summarily confirmed the AO's remand report holding that assessee has not been able to reasonably explain how these expenditure have been incurred in the ordinary course of business. Ld. DRP also went beyond even the observations of AO and held that it appeared that such expenditure was in the nature of capital expenditure or donations to various organizations for holding/sponsoring meetings. Thus DRP also did not consider the merits and gave no cogent reasons to dislodge the valid claim of the assessee.
6.5. Ld. counsel for the assessee submitted that, as part of its business operations, the Appellant incurred business promotion expenditure and from time to time made advances to various parties for sponsorship of conferences, incentives for facilitating sales promotion. Many a times such advances become irrecoverable, which is a usual exigency of business in such transactions. The nature of expenses for which advances were paid is connected with routine operations of the Appellant and did not give rise to any enduring benefit of capital nature. Accordingly, such payments being made wholly and exclusively for assessee's business purposes on revenue account. They not be characterized as payments resulting in creation of capital asset. All the relevant details were filed before lower authorities. Such advances had a proximate and direct nexus with the regular business operations, they having become irrecoverable, were actually written off are squarely allowable bad debts written off as a deduction Page 28 of 47 29 for computing the taxable income under section 37(1) of the Act. Reliance is placed on following case laws in this behalf:
- Supreme Court in the case of Badridas Daga vs CIT [1958] 34 ITR 10 (SC), wherein it was observed as under:
"At the same time, it should be emphasised that the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee not as a person carrying on business but as- owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made under section 10(1) or not"
- Supreme Court in the case of CIT vs Mysore Sugar Co Ltd [1962] 46 ITR 649 (SC), wherein it was observed as under:
"To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses"Page 29 of 47 30
6.6. The afore-mentioned view has been reiterated by the Jammu and Kashmir High Court in the case of Chenab Forest Co vs CIT [1974] 96 ITR 568 (J&K), wherein, it has been held that advance given in the ordinary course of business for carrying out the business operations which subsequently becomes irrecoverable is liable for deduction under section 37(1) of the Act. The relevant extract of the decision has been reproduced below:
"On a consideration of all the facts, it is clear that the nature of the business, the system of working was such that it was necessary to carry on the business that advances may be made and without which the forest lessees may find it extremely impossible to carry on the business. The advances made in the ordinary course of business would have been adjusted and recouped if there had been a renewal of the leases but this could not be possible only because there was no renewal of the leases and as already mentioned above the circumstances show that the non-recoverability was a result of the circumstances. In view of all the facts already stated above, I am also of the view that the word "income" or "profit" should not be given an artificial meaning but should be given a meaning as would be given by a reasonable and prudent businessman. The assessee was therefore entitled to a deduction in respect of this advance as expenditure as contemplated by section 37 of the Income-tax Act of 1961 and the question referred by the Tribunal is, therefore, answered in the negative."
6.7. The afore-mentioned judicial principles has been relied by Delhi High Court in the decision of Mohan Meakin Limited vs CIT [2012] 348 ITR 109 (Delhi) wherein it was held as under:
"10. Applying the principles of law as regard interpretation of sections 28, 29, 36(1)(vii), 36(2) and section 37 of the Act as enunciated by the Division Bench of J&K High Court and the Apex Court in the afore-cited cases, we are of the considered view that it was in the totality of overall situation of the matter that the assessee decided to write off the advances made to M/s. Kanpur Boot House as bad debt. ...... It is known practice that usually manufacturer gives advances to the workers which are adjusted or carried forward Page 30 of 47 31 in the coming times against the works done by them. This was not an unusual practice which was liable to be outrightly rejected by the department. When the assessee had written off the dues recoverable from the Corporation and the same were accepted by the Department and it had also so written off, the advances made to M/s. Kanpur Boot House in its books of account, what else could be the proof with the assessee for its being unable to recover the same................... The CIT(A) rightly recorded that the debt had become bad and not recoverable and it would be a futile exercise to take any action against the legal heirs of the deceased. In view of the discussion as made by the Division Bench of J&K High Court and the Hon'ble Supreme Court, as quoted above, that the advances made by the assessee in the case were certainly of a type which would be within the contemplation of the words "laid out or expended wholly and exclusively for the purposes of the business".
As no portion of the said advances could be stated to be loss of capital expenditure, but it being a plain case of business loss, it would certainly be allowable to be deducted under the provisions of section 37 of the Act"
- Minda HUF vs JCIT [2006] (285 ITR 88) (Delhi)
- Jhalani and Company vs ACIT [2001] (77 ITD 44) (Delhi) 6.8. In view of these facts, circumstances and above judicial decisions, assesses impugned claim qua advances actually written off deserves be allowed as deduction under section 37(1) of the Act.
7. Ground No 27 to 28 pertaining to addition on account of provision for doubtful debts and advances to book profits under section 115JB of the Act is not pressed by the assessee hence dismissed accordingly.
8. Ground No 30 pertaining to levy of interest under section 234B of the Act, is pleaded to be consequential in nature.
9. Ld DR on the other hands contend that Non application of res judicata in matters of Taxation as facts of each period differ. Consistency without Page 31 of 47 32 reasoning shall not be detrimental to correct determination as per the T.P. provisions and Income Tax Act 1961.
A. Bright line concept:
10. The concept of bright line test is for determining the cost relevant to the international transaction, which helps to arrive at correct ALP Hon'ble Delhi High Court laid down the following guidance in this behalf:
- If the AMP spends are at a level comparable to similar third party companies, then the foreign entity i.e. SMC would not be required to compensate MSIL.
- In case the AMP spends are significantly higher than third party companies, the use of SMC's logo is mandatory and the benefits derived by SMC are not incidental, then SMC would be required to compensate MSIL.
10.1. However, Hon'ble Supreme Court has remitted the matter with the direction to the TPO to examine the matter in accordance with law, without being influenced by the observations or directions given by the Delhi High Court.
10.2. The SB ruling in case of L.G. Electronics has not dealt with the issue invoking bright line concept directly, yet the methodologies/ concepts articulated by the OECD Guidelines and the United Nations TPM are implicitly endorsed in the factors identified by the SB for undertaking a comparability analysis.
B. AMP Issues:
11. Assessees allegation that the TPO has been inconsistent is factually incorrect which emerges from the fact that the TPO has excluded the selling expenses as indicated in LG Case. Assessee's request that whole of selling expenses as mentioned at page 212/PB for AY 2006-07, only be included as AMP expenses, may be considered by the bench. However the plea for Page 32 of 47 33 exclusion of selling expenses which are not part and parcel of normal selling expenses is not tenable as it represent innovative techniques employed to create and enhance marketing intangibles including brand build up. Further, the TPO has excluded the direct selling expenses as outlined in schedule 14 of the final accounts for the AY 2006-07.
C. Intra Group Services:
12. No evidence for rendering any services was furnished by assessee before lower authorities. Besides, TPO asked for a list of information which is not complied by assessee. The question that the set of alleged services is rendered by the AE or a group of AEs remains uncontroverted. It is to be seen that as to whom the assessee sells and through whom the distribution is done. Apropos stewardship services for controlling the entity by the parental group, the allowability of such expenses on the Indian entity to say the least, is to be considered. Further, TPO is within rights to determine ALP for the intra group services rendered per force to the assessee. The case laws cited by Ld AR are distinguishable on the facts as also on the underlying principles. Two such citations are reproduced below and the distinction is clear on both the facts as also the law:
(i) EKL Appliances ([2012] 24 Taxmann.com 199 Delhi/ 345 ITR 241 Delhi) by Hon'ble Delhi High Court:
The Hon'ble Court has rather upheld the authority of the TPO in para 22 of the order. Relevant quote is a s under:
22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are Page 33 of 47 34 irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.
23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full ustification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine.
24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions Page 34 of 47 35 of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs.
The TPO has not gone into the business allowability of Intra Group Services Expenses, only ALP of such item has been determined.
(ii) Dresser Rand India P Ltd ( 47 SOT 423 [Mumbai] 2012):
"10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. In the case before us, as evident from the cost contribution agreement, the costs have been shared at average of percentage of (i) head count to the total count and (ii) sales revenue to total revenue. The assessee's share of head count is 3.90% and of total revenue is 3.30%, and, accordingly, 3.50%, being average of these two parameters, is taken as the cost contribution ratio. We see no infirmity in this contribution being taken as an arm's length contribution to the costs. The TPO's objection to this arrangement was two fold - first, that the cost should be shared in the ratio of actual use of services; and - second, that the costs should be charged to the assessee as per Indian employee costs. None of these objections has any legally sustainable merits. There is no objective way in which use of services can be measured and as is the commercial practice even in market factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and number of employees. The question of charging as per domestic employee costs cannot be a basis of allocation the costs because such an allocation will deal with some hypothetical pricing whereas the allocations are to be done for the actual costs incurred. As it is an allocation of costs on the basis of actual costs and the fact of expenditure is not even in dispute, the dispute is confined to the basis on which cost allocations must take place, and since we find the basis of allocation of costs as reasonable, no interference is really called for. In any case, we have noted that the Page 35 of 47 36 assessee has adopted TNMM as most appropriate method, and the revenue authorities have neither made an effort to show as to how this method is not appropriate to the facts of this case, nor shown as to which other prescribed method of ascertaining arm's length price of services received under CCA will be more appropriate to these facts.
13. Ld CIT(DR) further relies on the following cases:
(i) Knorr Bremse India P Limited (ITA no. 5097/Del/2011) Asstt. Yr:
2007-08 Following international transactions of the appellant:
i. Payment of management fee;
ii. Payment of professional fee; and iii. Payment of SAP implementation fee.
5.10. In the case of Deloitte Consulting India Pvt. Ltd. Vs. DCIT in ITA no. 579, 1272 & 1273/Mum/2011 & others dated 30-3-2012 the Mumbai Bench of the Tribunal has expressed its opinion in following terms"
"39. On the issue as to whether the TPO is empowered to determine the ALP at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India Pvt. Ltd. (supra), held that the assessee has to establish before the TPO that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the TPO is justified in making an adjustment under ALOP.
40. In the case in hand, the TPO ha determined the ALP at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the ALP. The burden is initially on the assessee to determine the ALP.
Thus, the argument of the assessee that the TPO has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The TPO has not Page 36 of 47 37 disallowed any expenditure. Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at "nil".
5.14. The assessee has also made a plea that the OECD Guidelines permit aggregation of all international transactions with the main activity. Such guidelines, however, are not binding but are merely elucidative. Moreover, Indian is not a member of OECD. The assessee has relied upon the order of the Hon'ble Delhi High court in the case of CIT Vs. EKL Appliances [ITA no. 1068/2011 & 1070/2011). The Hon'ble High Court has rendered its judgment in a specific situation only, where the TPO made wholesale disallowance of the expenditure for the reason that the assessee had suffered continuous losses. This case, therefore, is not applicable as disallowance has not been made in this case on account of expense and having been incurred inspite of continuous losses. This order of the Hon'ble Delhi High Court has been interpreted by the Delhi Bench of t4he Tribunal in the case of M/s Ericsson India Pvt. Ltd. Vs. DCIT (ITA no. 5141/Del/2011 dated 11-5-2012, by observing that reasonableness of an expenditure has not been excluded from determination in the aforesaid order by the Hon'ble Delhi High Court. The observations are contained at para 30 of the said Tribunal's order, reproduced as under:
"30. Keeping in view the aforementioned decision of Hon'ble Delhi High Court, we are of the opinion that it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee. At the same time it has also to be seen that whether the price paid by the assessee is at arm's length. The term 'arm's length price' has been defined in section 92F which means a price which is applied or proposed to be applied in the transactions between the persons other than Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that "the quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses". Earlier to this they have observed Page 37 of 47 38 that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of an expenditure has not been excluded from determination."
5.15. The principle stated in MC Ericsion Vs. ACIT (ITA no. 5871/Del/11 dated 8-6-2012) is on the issue of commercial expediency. Though it does not need any deliberation, the applicability of principle of arm's length test of international transactions has not been done away with. The expenditure incurred in an international transaction has necessarily to pass the test of ALP.
5.16. Further more, it has been contended that the expenditure which is the subject matter of adjustments by the TPO ought to have been allowed in the same manner as the expenditure is allowable u/s 37(1) of the Act. This plea of the assessee however cannot be allowed for the simple reason that the provisions of sec. 37(1) and proviso to sec. 92 operate in different field and thus the argument becomes devoid of any merit.
5.17. For this reference may be made at para 10 of the Tribunal's order in Dresser Rand India Pvt. Ltd. (ITA no. 8753/Mum/2010) dated 7-9-2011, the relevant portion is reproduced below:
"10. Once we come to the conclusion that the assessee has indeed received the services from the AI the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received as an independent enterprise would have assigned to the contribution in hypothetically similar situation."
5.18. In the case of Dresser Rand India Pvt. Ltd. (supra), the assessee had adopted TNMM as the most appropriate method.
Page 38 of 47 395.19. The revenue in this case has already demonstrated that TNMM method is not the most appropriate method in the assessee's case. Since the CUP method adopted by the TPO is the most appropriate method and the assessee has not been able to demonstrate that an independent party would have made such payments in similar circumstances, no interference is called for in the well reasoned decision of the TPO followed by the AO and approved by the DRP............
9.2. After hearing the parties with reference to material on record, we find that the authorities below have not conclusively held that the assessee could not enter into such a transaction nor had they disallowed the same by holding that such an expenditure is not assessee's business expenditure. The DRP as well as the authorities below have merely elucidated that the payments are reimbursement in respect of Ms. Rita Ricken and other personnel's case to serve the interest of share holders. By saying so they have only described the circumstance under which the international transaction has been entered by the appellant, so as to test the benefit that can be said to have reached the assessee. It, therefore, cannot be said to have questioned the commercial expediency of such transactions entered by the appellant. The I.T. rules contain exhaustive detail regarding nature of information and documents which are required to be maintained by the assessee. Rule 10D(1) of the I.T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analysing the comparability of the international functions entered into by the assessee. It, therefore, is obligatory on part of the appellant to maintain such record and produce the same before the TPO to show that it has benchmarked the international transaction at ALP. This obligation, however, has not been discharged by the assessee. 9.3. The appellant in the present case is also not shown to be willing to pay any amount for such services, if it were, so provided by an independent enterprise or if the same would have been performed in house. The DRP is found to have considered these services as non-beneficial for the recipient and did not take it as chargeable services. The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided by the associate enterprise. In this view of the matter there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE. The TPO, therefore, has rightly adopted Nil value for benchmarking the arm's length price in respect of both these services.
Page 39 of 47 40We, therefore, do not find any reason to interfere with the well reasoned conclusion reached by the AO on this count. The grounds raised in appeal in this respect, therefore, stand rejected.
- LM Windpower (India) Ltd AY 2006-07 & 2008-09/ IT(TP)A Nos 1165/B/2010 & 1681/B/2012
- Delloitte Consulting India Pvt Ltd/ AY 2002-03/2003-04/ ITA 3910, 3911/M/2009
- Dentley Systems India Pvt. Ltd. AY: 2007-08/ ITA No.5730/Del/2011/
14. Treatment of outstanding receivables from AE for AY 2009-10:
The impugned amounts are outstandings for a period longer than the normal commercial credit periods. The delay in repayment thereof amount to international transaction as the deemed earning has been allowed to accrue to the AE. The intervening period is bound to attract the relevant provisions of section 92B; DRP has dealt with the entire issue. The definition of International transaction as laid down in SB order in case of LG Electronics shall be squarely applicable on the facts of this issue. The inordinate delay in realization of payment is benefit passed on to the AE. constitutes real income. The case law cited by assessee in this behalf are distinguishable.
14.1. Reliance is placed on orders the of lower authorities.
15. We have heard the rival contentions and perused the material on record and proceed to decide the grounds/ issues as under:-
T.P. Additions:
16. AMP adjustment (common in all asstt. Years): Bifurcation of AMP expenses to work out the expenses relatable to brand building and mark up thereon:
16.1. Ld. Counsel for the assessee has pleaded that keeping in view the Special Bench judgment from the AMP expenses, trade discount, commission, other Page 40 of 47 41 selling expenses relating to point of sale conferences, trial general, market research, freebies etc. should be excluded.
16.2. According to ld. counsel a detailed demarcation of these expenses and details thereof was provided before TPO and DRP. Thus assessee has provided enough details in this behalf and applying the L.G. Special Bench directions the total AMP expenses incurred by the assessee is tabulated at page 10, in sub para (j), above. These figures of AMP expenses as tabulated should be adopted and no further verification of the expenses should be directed to be carried by TPO in as much as it will amount to subjecting assessee again to rigorous exercise, without there being any fault attributable to it. In sum and substance, ld. Counsel contends that for working of adjustment attributable to brand building in terms of the Special Bench judgment is reflected by the figures mentioned in the above table. Thereafter suitable comparables may be taken and based on objective data the mark up may be applied and the adjustment should be worked out. Thus this exercise does not further verification of expenses.
16.3. Per contra, ld. CIT (DR) contends that the concept of "bright line test" is a recognized concept to determine the cost relevant to the international transactions. The Special Bench ruling in the case of L.G. Electronics though has not especially dealt with the issue of "bright line concept", how4ever, the methodologies as provided by ECD and UN Model guidelines are implicitly endorsed and factored in by the Special Bench for undertaking an appropriate comparability analysis.
16.4. Ld. DR contends that the assessee has provided the details only as per the heads of accounts maintained by it. There is no verification as to whether the posting of expenses is proper and whether they have not accounted for by the assessee in a proper manner. The assessee's table as mentioned above is only on the basis of prima facie heads of the accounts and not based on any verification Page 41 of 47 42 of the actual details. This situation arose because following other cases, the entire AMP expenses were considered by TPO for T.P. adjustment. The L.G. Special Bench judgment was not available at that time. Due to consideration of entire expenditure as AMP the AO and DRP did not verify the actual nature of expenses as it was not needed. Besides, the plea of the assessee that the expenses on conferences, market research, freebies etc. is to be excluded from AMP expenses deserves to be looked into before excluding them. It is the obligation of the ITAT to ensure that a fair and proper assessment is made. The TPO and DRP adopted the "bright line test" by treating entire AMP expenses by a uniform practice of department in all such cases, did not look into the intrinsic details of expenses. There is a significant change in the bright line adjustment. The Special Bench itself has directed that expenditure should be verified and categorized as per the directions contained in its order. This implicitly means that a proper exercise of identifying the includible and excludible expenses is to be carried out.
16.5. Ld. Dr pointed out certain defects in the posting of expenses and heads in the accounts as made by the assessee. It is thus pleaded that in order to arrive at a fair and proper AMP adjustment it will be desirable that the entire issue is set aside to the TPO to decide it de novo in the light of Special Bench directions in the case of LG Electronics (supra), de novo.
16.6. We find merit in the argument of ld. DR, in our view the nature and heading of expenses as made by the assessee needs to be verified. The approach of the TPO and DRP has been fundamentally changed by the Special Bench in the case of L.G. Electronics (supra). Since the approach earlier adopted by the lower authorities did not require verification of expenses and categorization of heads, in the changed scenario it will be desirable that relevant expenses are verified by the AO. In view thereof, we are inclined to set aside the grounds raised by the assessee in this behalf back to the file of TPO to decide the same Page 42 of 47 43 afresh after giving the assessee adequate opportunity of being heard. Assessee's ground on this issue for all the assessment years in question stands allowed for statistical purposes.
17. Disallowance of Intra Group Support Services ( A.Y. 2007-08 & 2008-
09):
17.1. Before TPO, assessee furnished a list of services claimed to be rendered by the group concerns for which the amount in question was paid as intra group services. The TPO has given a categorical finding that assessee has not provided any evidence to substantiate the claim of receiving any service. Assessee's objection is to the effect that the benefit test is not a method prescribed under the realm of T.P. proceedings. DRP in para 6.7.1 & 6.7.2 of its order for A.Y. 2007-08 has upheld the order of TPO on following lines:
(i) Services claimed to have been rendered were neither identified nor proved by any contemporaneous documentary evidence.
(ii) Details of tangible and direct benefit derived by the assessee has not been furnished.
(iii) No information has been provided as to whether the group AEs were rendering such services to other AEs or independent parties.
(iv) The applicability of benefit test has been held to be provided by OECD guidelines of 1979 providing for a benefit test from the prospective recipients.
17.2. Assessee's claim is to the effect that some evidence was produced before the lower authorities which has not been considered. For A.Y. 2007-08 no objections in this behalf seems to have been raised before DRP in ground no.
Page 43 of 47 441.1.6 & 1.1.7. A perusal of these grounds indicate that before DRP the allegation of the TPO that no evidence was furnished in respect of services has not been challenged. Be that as it may, in subsequent years such adjustment has not been made by department. In view of these facts we are inclined to set aside this issue back to the file of TPO. Looking at assessee claims that evidence was produced before TPO and subsequently it is allowed, it will be desirable that the issue of intra group service is decided de novo by the TPO after giving the assessee an opportunity of being heard and allowing to produce any contemporaneous evidence in this behalf. The case laws referred to by both the parties are not necessary to be addressed. Therefore, this ground in A.Y. 2007- 08 and 2008-09 is allowed for statistical purposes.
18. Adjustment in relation to notional interest in respect of outstandings:
(A.Y. 2008-09 & 2009-10):
18.1. We find that ld. DR has claimed that inordinate delay in receiving the outstanding amounts to passing a benefit to AE and it constitutes real income.
Apropos assessee has been able to demonstrate that assessee as a policy does not charge any interest on any delayed payment irrespective of the party being AE or non AE, as it was a consistent business policy. Reliance is placed by assessee on OECD guidelines at para 1.9 prescribing that no interest could be charged on delayed payment on commercial consideration for ensuring a long and healthy relationship as persuasive value.
Page 44 of 47 4518.2. In the case of Indo American Jewellery Ltd. (supra), Hon'ble Bombay High Court while affirming the ITAT decision has held that there being uniformity in assessee's act in not charging interest both from AE and non AE and delay in realization in both the cases is same, , notional interest cannot be considered with ALP on delayed realization. This has been further followed by the ITAT in the case of Lintas India P. Ltd. (supra) & Mastek Ltd. (supra).
18.3. In view of above facts, respectfully following these judicial precedents we are of the view that the adjustment in relation to notional interest on outstanding receivables cannot be made in the case of the assessee. This ground of the assessee is allowed.
19. Corporate addition (A.Y. 2007-08):
19.1. The sole issue relates to disallowance of advances written off, which was disallowed by AO holding that they were given in the ordinary course of business and were revenue in nature, besides conditions of Sec. 36(2) read with sec. 36(1)(vii) were not satisfied. Before DRP assessee filed additional evidence also on which a remand report was called from AO. In the remand proceedings assessee submitted before the AO, that advances given to various parties were in nature of expenses incurred towards marketing and sales promotion activities, sponsorship of events, conferences, travel hotel stay, employee salary advance etc. and were necessarily incurred in the ordinary course of business. Besides it also filed details of nature of expenses for which the advances were given to prove that the expenses were of revenue nature and were wholly and exclusively Page 45 of 47 46 incurred in the ordinary course of business. AO, however, submitted remand report for not allowing the claim on the following objections:
(i) Assessee has only submitted copies of vouchers, bills and no other details summarizing the nature of expenses were filed.
(ii) Assessee did not provide any clarification as to whether the advances were given in ordinary course of business.
(iii) No cogent reasons are given that they were not for long term benefit to the assessee.
19.2. According to assessee, AO thus gave self contradictory observations from reason to reason and filed the remand report, which is vague and ld. DRP without considering the merit of the explanation and evidence filed by the assessee summarily confirmed the remand report and disallowed the expenditure.
19.3. In our view from the above facts, it emerges that in remand proceedings the evidence was filed by the assessee. The objections given by AO are vague in as much as though vouchers and bills were produced still there is objection that there assessee did not clarify and it does not appear whether the expenditure was in the ordinary course of business. Similarly, there is a vague finding that it is not clear whether any long term benefit was derived by the assessee.
19.4. In our considered view, the nature of expenditure is demonstrated by the assessee in terms, as reproduced above. Besides, the explanation has not been controverted either by the TPO or DRP in objective terms. In view thereof, we see no cogency or justification in the reasons applied by DRP to sustain the disallowance. In our considered view the expenditure incurred was wholly and exclusively for the business purpose on revenue account. The advances have a proximate and direct nexus with assessee's regular business operations which is explicit from the nature of expenditure remanded by the AO himself.
Page 46 of 47 47Advances having become irrecoverable and actually written off are allowable as bad debt written off, as well as business loss/ expenditure u/s 37(1). Our view is supported by Hon'ble Supreme Court judgment in the case of Badridas Daga (supra) and Mysore Sugar Co. Ltd. (supra). Besides, similar view has been adopted by Hon'ble Delhi High Court in the case of Mohan Meikens (supra). In view thereof, we delete this addition. Ground is allowed.
20. In the result, assessee's appeals for A.Y. 2006-07 and 2008-09 are allowed for statistical purposes and appeals for A.Y. 2007-08 & 2009-10 are partly allowed for statistical purposes.
Order pronounced in open court on 23-05-2014.
Sd/- Sd/-
( B.C. MEENA) ( R.P. TOLANI )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 23-05-2014.
MP
Copy to :
1. Assessee
2. AO
3. CIT
4. CIT(A)
5. DR
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