Income Tax Appellate Tribunal - Delhi
Pepsico India Holdings (P) Ltd., New ... vs Assessee on 22 December, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-2', NEW DELHI
Before Sh. N. K. Saini, AM And Smt. Beena Pillai, JM
ITA No. 834/Del/2010 : Asstt. Year : 2002-03
Pepsico India Housing Pvt. Ltd. Vs Addl. Commissioner of Income
L.G.F 54, World Trade Centre, Tax, Range-14, C.R Building,
Barakhamba Road, New Delhi
New Delhi-110001
(APPELLANT) (RESPONDENT)
PAN No. AAACP1272G
ITA No. 945/Del/2010 : Asstt. Year : 2002-03
Asstt. Commissioner of Income Vs Pepsico India Housing Pvt. Ltd.
Tax, Range-14(1), C.R 13th Floor, Mohan Dev Building,
Building, New Delhi 13, Tolstoy Marg,
New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AAACP1272G
Assessee by : Sh. Vishal Kalra, Adv. & Sh. Amit Bablani, CA
Sh. Yogesh Parwal, CA
Revenue by : Sh. Amit Jain, Sr. DR
Date of Hearing : 28.09.2015 Date of Pronouncement : 22.12.2015
ORDER
PER N.K. SAINI, A.M.
These cross appeals by the assessee and the department are directed against the order dated 23.12.2009 of ld. CIT(A)-XX, New Delhi.
2 ITA Nos.834 & 945/Del/2010Pepsico India Holdings (P) Ltd.
2. In these appeals some common issues are involved and the appeals were heard together so these are being disposed off by this consolidated order for the sake of convenience and brevity.
3. In the assessee's appeal following grounds have been raised:
"1. The Commissioner of Income Tax Appeals-XX, New Delhi (hereinafter referred to as "the Ld. CIT(A)") has erred on facts and circumstances of the case and in law, in upholding the ad-hoc disallowance of Rs.11,000,000 made by the Learned Assessing Officer (hereinafter referred to as "Ld. AO") out of total upfront fees expenditure amounting to Rs.20,100,000 alleging that the same relates to succeeding years.
2. The Ld. CIT(A) has erred on the facts and circumstances of the case and in law, in confirming the adjustment on account of provision for gratuity amounting to Rs.9,893,845 and provision for leave encashment amounting to Rs.20,066,428 while computing 'book profits' for the purposes of Section 115JB of the Act holding that the said provisions were unascertained, without appreciating the fact that the said provisions have been made on the basis of actuarial valuation.
3. The Ld. CIT(A) has erred on the facts and circumstances of the case and in law, in confirming the adjustment on account of provisions for bad 3 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
debts amounting to Rs.64,363,560 while computing 'book profits' for the purposes of Section 115JB of the Act.
4. The Ld. CIT(A) erred on the facts and in circumstances of the case and in law, in upholding the adjustment of Rs.12,07,218/- made by the Transfer Pricing Officer to the value of international transactions of export of guar gum and pet chips without appreciating the business rationale for undertaking the said transactions by the Appellant. As the loss incurred by the Appellant is only on account of fluctuation in foreign exchange rate, no benefit can be said to be derived by the associated enterprise in this regard.
The Appellant carves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable your Honour to decide this appeal according to law."
4. The grounds raised in the departmental appeal reads as under:
"1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the assessing officer to allow depreciation without reducing depreciation for the AYs 1995-96 to 1996-97.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the expense did not result in any enduring benefit 4 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
and the same was allowable expenditure u/s 37(1) of the Income Tax Act, 1961.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.8,02,000/- being 1/10 th of preliminary expenses by holding that expenses were covered by provisions of section 35D of the Income Tax Act, 1961.
4. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs.10,90,98,495/- by holding that the expenditure on neon sign and glow signs is of revenue nature.
5. The appellant craves to be allowed to add, delete or amend any ground of appeal mentioned above."
5. First ground of the assessee's appeal was not pressed so it is dismissed as not pressed.
6. Vide Ground No. 2, the grievance of the assessee relates to the adjustment on account of provision for gratuity and leave encashment while computing the book profits for the purpose of Section 115JB of the Income Tax Act, 1961 (hereinafter referred to as the Act). During the course of hearing the ld. Counsel for the assessee at the very outset stated that the issue relating to disallowance on 5 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
account of leave encashment has been allowed by the ITAT and the issue relating to disallowance for gratuity has been restored to the AO vide order dated 16.07.2009 in ITA Nos. 2303, 2836 & 4988/Del/2004 in assessee's own case for the assessment year 2000-01 and same view was taken for the assessment year 2001-02 in ITA Nos. 5722, 5663 & 4989/Del/2004 vide order dated 31.12.2009. A reference was made to page nos. 235 to 286 of the assessee's paper book. It was also stated that the issue relating to the disallowance of gratuity has been admitted by the Hon'ble Jurisdictional High Court vide order dated 02.07.2012 in ITA No. 739/2010.
7. The ld. DR in his rival submissions although supported the orders of the authorities below but could not controvert the aforesaid contention of the ld. Counsel for the assessee.
8. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the adjudication for the assessment year 2001-02 in assessee's own case in ITA No. 5722, 5663 & 4989/Del/2004 wherein relevant findings have 6 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
been given in paras 33 & 34 of the order dated 31.12.2009 which read as under:
"33. We have carefully considered the rival submissions in the light of material placed before us. It has been the contention of the assessee right from the beginning that a cumulative sum of Rs.97,84,178/- (Rs.68,23,350/- on account of gratuity and Rs.29,60,828/- on account of leave encashment) was debited to the Profit & Loss account. Out of the said sum assessee itself has added back the gratuity of Rs.68,23,350/- while computing the income under the normal provisions and thus, effectively the only amount remained to be debited to the P&L account was a sum of Rs.29,60,828/-. If the amount was not debited to P&L account during the year under consideration, then the same is not subject to adjustment made while computing book profit u/s 115JA. To that extent there could be any dispute. Therefore, it has to be held that to the extent the amount which was not debited during the year under consideration to the profit and loss account relating to schedule 10 in the balance sheet of the assessee, the addition cannot be made for computing book profit u/s 115JA. It is the case of the assessee that provision of gratuity of Rs.68,23,350/- was though debited to the P&L account but it was again added while computing the income under the normal provisions. Copy of computation of income has been filed by the assessee at pages 107 to 110 of the paper book. It is observed there from that while computing the income under the normal provisions the amount of Rs.68,23,350/- being provision made for gratuity u/s 40A(7) is added whereas no such addition has been made while computing the book profit u/s 7 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
115JA. It has not been shown that provision for payment of gratuity is calculated on the basis of actuarial valuation. It has also not been shown that provision on account of gratuity is an ascertain liability. Therefore, the addition to that extent while computing book profit u/s 115JA was required to be made. However, so as it relates to another component i.e. a sum of Rs.29,60,828/- the claim is made by the assessee on the basis of actuarial valuation. It has not been shown by the department that there was any defect in such valuation. It has not been shown by the department that there was any defect in such valuation made by the assessee. If it is so then this claim of the assessee has to be accepted in the light of decision of Hon'ble Supreme Court in the case of Bharat Earthmovers Vs CIT (supra) wherein it has been held that liability incurred by the assessee under the leave encashment scheme applicable to its employees proportionate to the entitlement earned by the employees subject to ceiling on accumulation not being a contingent liability, provision made thereof is deductible. Therefore, this claim of the assessee has to be accepted. The AO is directed to delete the addition made on account of provision for leave encashment amounting to Rs.29,60,888/-. To conclude our findings on this ground are that
(i) Opening balance standing to provision for staff benefits, if not debited to the P&L account of the year under consideration, could not be considered for addition while computing profit u/s 115JA.8 ITA Nos.834 & 945/Del/2010
Pepsico India Holdings (P) Ltd.
(ii) Provision for gratuity being not ascertained liability was to be added while computing book profit u/s 115JA.
(iii) Liability of Rs.29,60,828/- on account of provision for leave encashment being a liability based on actuarial valuation is to be considered ascertained liability hence deductible while computing book profit u/s 115JA.
This ground is partly allowed."
34. There is no disparity on facts. The contents of the learned counsel for the assessee is that actuarial report is on the record, therefore, the provisions should not be treated as unascertained liability. This report has not been relied upon by the revenue authorities below. There are specific defect in the report. Taking into consideration the findings of the ITAT in assessment year 2000-01, defects in the report and the claim of assessee that in assessment year 2000-01, a miscellaneous application has already been filed. We deem it appropriate to set aside this issue to the file of the Assessing Officer for re-adjudication. Assessee will submit the actuarial report afresh to the Assessing Officer. Assessing Officer shall consider the order of the ITAT in assessment year 2000-01 also. This ground of appeal is partly allowed."
9. So, respectfully following the aforesaid referred to order the issue is restored back to the file of the AO to be 9 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
adjudicated in the same manner as has been directed vide order dated 31.12.2009 for the assessment year 2001-02.
10. Next issue vide Ground No. 3 relates to the confirmation of adjustment on account of provision for bad debts while computing book profits u/s 115JB of the Act. As regards to this issue the ld. Counsel for the assessee was fair enough to conceal that issue is against the assessee as per the explanation 1 to Section 115JB of the Act. Accordingly, this issue is decided against the assessee.
11. Last issue Ground No. 4 relates to the confirmation of addition amounting to Rs.12,07,218 made by the TPO on account of adjustment to the value of international transactions of export of guar gum and pet chips.
12. The facts related to this issue in brief are that the assessee during the year under consideration had exported goods falling under two categories namely export of rice, chili paste and peanut butter in respect of which the assessee performed all the functions and risks that of a normal trader and in a second category of export namely export of guar gum and pet chips, the assessee acted as mere facilitator and performed the function of a service provider.
10 ITA Nos.834 & 945/Del/2010Pepsico India Holdings (P) Ltd.
The assessee in its TP study had aggregated both the above transactions and benchmarked the same. All the transactions had been grouped together and analyzed under Transaction Net Margin Method (TNMM). A set of external comparables had been selected and the arithmetic mean of these comparables came to around 3.53%. The TPO was of the view that all the export of rice, chili paste and peanut butter were very different from those involved in export of pet chips and guar gum. According to the TPO the losses incurred by the assessee on sale of pet chips and guar gum were unjustified and in violation of the Arm's Length Standard. The TPO pointed out that the assessee had exported pet chips and guar gum to Pepsi World Trade (PWT) who in turn sold the goods to PWT at the same price at which PWT sold them to third party customers. The explanation of the assessee was that the vendors in India were identified by the end customers in the US and the price/other terms of the transactions were also negotiated by the end customers and the sellers without any intervention by either the assessee or PWT. It was further explained that as the customer wanted a US party interposed in between, PWT agreed to act as the importer. However, the TPO observed that the TP reports revealed that PWT had 11 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
incurred losses on these transaction as it had sold the goods at the purchase price. He also observed that it had not even recovered the cost incurred on storage, transportation and interest. He further observed that the assessee had acted as a facilitator and provided limited service of getting the documents prepared and performed related coordination with the sellers. The TPO observed that the exact nature and context of the transactions were not clear from the TP report and no reason had been offered to explain the purpose of incurring the losses by PWT and the assessee. He also observed that the sale of goods to assessee and subsequent resale to PWT were merely passed through transactions. The TPO pointed out that the assessee had used TNMM to justify the transfer price and had been chosen PWT as the tested party with operating profit margin on sales as the Profit Level Indicator (PLI) and that a set of 10 external comparables had been chosen for benchmarking from public database, the mean margin of those comparables had been computed at 3.51%. The TPO also pointed out that as per the OECD guidelines of Transfer Pricing two or more transactions can be aggregated only when they are closely interlinked or continuous or form one integral whole and cannot be analyzed separately. Otherwise, transactions are 12 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
ideally to be examined on standalone basis and that as per Transfer Pricing norms the less complex and simpler of the Associated Enterprises (AE) is selected as tested party, moreover, party which does not own intangibles is to be preferred over the party that owns intangibles but in this case it is not known whether PWT owns any intangibles or not. According to the TPO it was not proper to look at the profitability of PWT in respect of those transactions as the assessee had acted as service provider to PWT and not incurred any risks, therefore, the losses of PWT did not justify the loss incurred by the assessee. As regards to the determination of quantum of mark-up, the TPO observed that to locate the comparables following search process was launched in the database PROWESS (a database maintained by CMIE):
i) Companies engaged in business services, social and personal services, transport services, real estate services were identified;
ii) Companies having no financial data or having latest financial data up to March 2001 were excluded;
iii) Companies having trading sales and manufacturing sales more than 25% of the total turnover were excluded;13 ITA Nos.834 & 945/Del/2010
Pepsico India Holdings (P) Ltd.
From the remaining companies those companies were excluded which:
(A) were engaged in completely different functions and were not comparable;
(B) were persistently loss making;
(C) had significant controlled party transactions;
13. The TPO found 11 comparable companies who had high degree of functional and risk similarity with the assessee's procurement support activity. Their names and profit margins were as under:
S.No. Companies Name 2002
1. I G E (India) Limited 28.93
2. Indiacom Limited 6.09
3. Interads Limited 2.18
4. International Travel House Limited 4.11
5. N I S Sparta Limited 9.32
6. Ujjwal Limited 2.24
7. Anusha Air Travels Ltd. 0.44
8. Hindustan Cargo Ltd. 22.40
9. Shanthi Sales Ltd. 1.72
10. M C S Ltd. 7.91
Arithmetic Mean 8.53
14. Accordingly, the arithmetic mean of the comparable companies worked out at 8.53% was considered as the arm's 14 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
length mark-up to be applied on the costs incurred on providing support services.
The assessee raised the following objections:
"1. PWT has not earned any profits from the transaction; so there is no intention to shift profits out of India; Circulars 12 and 14 of 2001 state that the true purpose of the transfer pricing laws is to check such shifting of profits;
2. The loss incurred by the assessee is only Rs.11 lakhs and this is on account of forex fluctuations; if the value of Indian Rupee had moved in the reverse direction the assessee would have earned a forex gain; and
3. The assessee was benefited by making such exports by getting star trading house status which is linked to the export turnover amounts."
15. The TPO did not find merit in the above objections of the assessee by observing as under:
"8.1 None of these arguments justify the assessee's incurring of losses on sale of pet chips and guar gums. PWT may have incurred losses but there is no justification for the assessee to incur losses and for not getting remunerated for the services provided. Since the level of information available with us about PWT is limited, one does not know the exact cost benefit matrix for PWT. The true intent of PWT can never be known in these circumstances, but for our 15 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
purposes, it appears rather strange that PWT has entered into this transaction knowing fully well that it would incur losses. The exact nature of relationship between PWT and end customers is not known, which could be a significant factor in the chain of transactions.
8.2 Shifting of profits need not only be done by making improper division of profits earned in a transaction by the efforts of two Associated Enterprises. By not remunerating an AE for a service also amounts to shifting of profits because, but for the controlled relationship, such remuneration would have been paid and would have been subject to tax in India. By pointing out that PWT did not earn profits from the transactions the assessee is impliedly using profit split method. Use of this method is not warranted in this case and the assessee itself has not employed it for analyzing the transaction.
8.3 The assessee has acted as a support service provider in respect of the transactions of export of guar gums and pet chips. These were pass through transactions not intending to bring a profit of even one Rupee for the assessee. If no profits were intended to be earned, why would the assessee undertake the forex risks on them. It is no consolation that if value of rupee had moved in the opposite direction, the assessee would have earned forex gain. The assessee while allowing the trading transaction to be passed through it was not speculating on forex fluctuations. To expose it to forex gain and loss would amount to viewing the assessee as a forex speculator. Such a 16 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
characterization is contrary to its true economic role in respect of these transactions.
8.4 As regards the benefit of getting star trading house status, it is observed that this fact does not find mention in the TP report. If this was the motivating factor for booking losses and entering into these transactions, then it should have been substantiated in the contemporaneous documentation maintained under Rule 10D. And in such a situation the cost benefit matrix would be entirely different. Moreover, the value of these transactions is a small part of the total exports made this year and even without these transactions it could have obtained the star trading house status."
16. The TPO worked out the Arm's Length Price adjustment to be added to the income of the assessee at Rs.12,07,218/- by observing as under:
"The assessee in its capacity as a service provider should be recovering the costs incurred in procuring the goods since this is only a pass through entity and a markup of 8.53% on the costs incurred in providing the services. The computation of Arm's Length Price is given as under:
Losses incurred on providing the ser vic e (A) Rs.1,111,397 (that portion of the price which was not reim bursed) Costs incurred in providing the servi ce (B) Rs.88,290 ( Value Add ed Exp enses) Arm's Le ngt h Price (A +108.53% of B) Rs.1,111,397 +Rs.95,821 = Rs.1,207,218 The Arm's Length Price in respect of the service provided by the assessee to PWT is therefore taken at 17 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
Rs.1,207,218. As this transaction has not been shown in Form 3CEB, notionally the declared value of this international transaction is taken at zero. The entire amount of Rs.1,207,218, therefore, is to be added to the total income of the assessee."
The AO concurred with the view of the TPO and made the addition of Rs.12,07,218/-.
17. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under:
"The learned Assessing Officer confirmed the addition made by the learned TPO without giving an opportunity to the appellant as required in terms of the Act/instructions of the CBDT.
The learned Assessing Officer has erred in confirming the addition made by the learned TPO disregarding the fact that none of the conditions set out in Section 92C(3) of the Act are satisfied in this case.
The AO has erred on facts and in law by making a reference to the TPO under section 92CA of the Act in a mechanical and routine manner without application of mind. Attention in this regard is drawn to the provisions of section 92CA(1) of the Act wherein, it has been specifically provided that an assessing officer shall make a reference to the TPO in respect of a particular case only if he considers it necessary or expedient to do so. Also, proviso to section 92C(3) of the Act makes it crystal clear that 18 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
the AO shall in the first instance, make all attempts to determine the arm's length price on the basis of the information available with him.
It is clear from the said section that it is incumbent upon the AO to clearly ascertain the necessity of such a reference to the TPO. However, in the instant case, since no recorded reasons were provided to the appellant before referring the matter to the TPO for the determination of arm's length price, such a reference is not tenable in law.
The Apex Court in a recent judgment in Mangalore Ganesh Beedi Works Vs CIT 273 ITR 56 provided that failure to give reasons on issues arising in the course of proceedings before the Revenue authorities would tantamount to denial of justice."
18. However, the ld. CIT(A) by following the decision of the ITAT Bangalore Special Bench in the case of M/s Aztec Software & Technology Services Ltd. Vs ACIT, Circle- 11(1), Bangalore in ITA Nos. 584, 585/Bangalore/2006 dated 12.06.2007, confirmed the addition made by the AO by observing as under:
"In the present case, the TPO after receiving a reference from the AO on the basis of his prima facie view, examined various documents and then came to form a considered view that the ALP in respect of the international transaction of the appellant needs to be recomputed. As a result of such a view, TP adjustments of Rs.12,07,218 was proposed by the 19 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
TPO. The AO also concurred with the findings of the TPO and came to hold the same considered view in respect of the international transactions. Therefore, I do not find any infirmity in the reference made by the AO to the TPO and subsequent determination of ALP by the TPO and its acceptance by the AO.
In view of the foregoing analysis, I am of the considered view that the AO did not commit an error either at the time of making a reference to the TPO or at the time of passing the assessment order concurring with the findings of the TPO."
19. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the AO/TPO were wrong in stating that the losses incurred by the assessee on export of guar gums and pet chips were unjustified and in violation of the arm's length standard and not appreciating the fact that no profit had been shifted out of India. It was further stated that the assessee enjoyed Star Export House status, hence in order to retain the said status it had to export goods out of India of a certain value and since the produce of assessee could not be exported in the required values, the assessee exported commodities which were purchased from independent third party in India and exported to the USA and by doing so, the assessee was able to retain and maintain its Star Export House status. It was stated that these exports were first made by the assessee to PWT, its 20 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
AE in the US, who in turn further sold them to the ultimate buyers in the USA and the commodities were sold to PWT at the same price at which the assessee purchased from the Indian market. Hence the structuring of the transaction was such that the assessee could never make any profit or incur any loss in this transaction to insure that the assessee retained the Star Export House status. It was contend that the loss had been incurred on account of exchange rate fluctuations which had been accounted for under the nomenclature of forex loss. The ld. Counsel for the assessee referred to page nos. 73 to 75 of the assessee's paper book and submitted that the similar gain of foreign exchange had been accepted in the succeeding years, therefore, the loss was also required to be accepted. It was further submitted that no ALP adjustment could have been made when the assessee had not earned profit or the AE had not paid to the assessee. The reliance was placed on the decision of the ITAT Delhi Bench 'I-2', New Delhi in the case of HCL Technologies BPO Services Ltd. Vs ACIT, CC-2, New Delhi in ITA No. 3547/Del/2010 for the assessment year 2003-04, order dated 10.07.2015 and DCIT Vs Global Vantedge Pvt. Ltd. in ITA Nos. 1432 & 2321/Del/2009 and 116/Del/2011, Copy of the said order was furnished which 21 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
is placed on the record. It was further stated that the said order in the case of DCIT Vs Global Vantedge Pvt. Ltd. (supra) has been affirmed by the Hon'ble Delhi High Court and the SLP has been dismissed by the Hon'ble Apex Court.
20. In his rival submissions the ld. DR strongly supported the orders of the authorities below and reiterated the observations made in the order of the TPO as well as the impugned order.
21. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the loss incurred by the assessee was only on account of foreign exchange fluctuation as the commodities were sold to the AE at the same rate at which these were purchased from the local market. On a similar issue the ITAT Delhi Bench in the case of DCIT Vs Global Vantedge P. Ltd. in ITA Nos. 1432 & 2321/Del/2009 and 116/Del/2011 (supra), held that adjustment on account of arm's length price of international transactions cannot exceed the amount received by the Associated Enterprises from the customer and the actual value of international transactions i.e. amount received by the assessee in respect of international transactions. The 22 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
said decision of the ITAT Delhi Bench has been affirmed by the Hon'ble Jurisdictional High Court vide order dated 14.03.2013 in ITA Nos. 1828 & 1829/2010 and 1254/2011 against the said order of the Hon'ble High Court. The Special Leave Petition (SLP) of the Revenue had been dismissed by the Hon'ble Supreme Court vide order dated 02.01.2014 in CC No. 22166 of 2013. The ITAT Delhi Bench, 'I-2', New Delhi in the case of HCL Technologies BPO Services Ltd. Vs ACIT, CC-2, New Delhi (supra) by following the aforesaid decision of the ITAT in the case of DCIT Vs Global Vantedge Pvt. Ltd. has dismissed the appeal of the Revenue. In the present case also the assessee had not gained, the AE had not paid anything and the commodities were sold to the AE at the same price at which those were purchased from the local market, just to retain the Star Export House status. The loss incurred by the assessee was only on account of foreign exchange fluctuation. The structure of the transaction was such for the assessee that it could not make any profit or incur any loss as the transactions were not being undertaken for the sake of any profit. We, therefore, are of the view that the addition made by the AO and sustained by the ld. CIT(A) on account of arm's length price was not justified because the 23 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
adjustment on account of arm's length price of international transactions In the present case, the assessee did not make any profit and sold the goods to the PWT at the same price at which it was purchased from the local market and the PWT in turn sold the commodities to the customers at the same price at which these were bought from the assessee. Therefore, the international transactions with PWT met the arm's length standard. Therefore, by keeping in view the totality of the facts as discussed herein above the addition sustained by the ld. CIT(A) is deleted.
Now we will deal with the Departmental appeal in ITA No. 945/Del/2010
22. First issue in this appeal relates to the re-computation of depreciation. The ld. Counsel for the assessee at the very outset stated that this issue has been decided in favour of the assessee by the Hon'ble Jurisdictional High Court in the preceding assessment years ranging from 1997 to 2001 and latest decision is dated 09.03.2011 in ITA No. 574/2007 (copy of which is placed at page nos. 138 to 146 of the assessee's paper book) wherein the relevant findings have been given in para 10 which read as under:
"10. The third issue pertains to the depreciation allowed by the CIT(A) as well as ITAT. The 24 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
contention of the Revenue is that explanation 5 to Section 32(i) of the Income Tax, which is inserted with effect from 01.04.2002 was clarificatory in nature and therefore the Assessing Officer has rightly disallowed the depreciation. Fact remains that in the previous years, i.e., in the year 1995-1996 and 1996-97, the Assessee had not claimed any depreciation. When the assessment order in question was in the assessment year 1997-1998, bringing down the value of the asset purchased by showing notional depreciation for the year 1995-96 and 1996- 97 and allowing the depreciation on the written down value in this manner would be clearly wrong when the depreciation in the previous year has not been claimed at all. Thus, the question raised by the Revenue clearly becomes academic and does not arise for consideration."
23. The aforesaid contention of the ld. Counsel for the assessee was not controverted by the ld. DR.
24. After considering the submissions of both the parties and the material available on the record, it is noticed that this issue has been decided by the Hon'ble Jurisdictional High court vide aforesaid order dated 09.03.2011. Therefore, in view of the ratio laid down by the Hon'ble Jurisdictional High Court in assessee's own case, we do not see any merit in this ground of the departmental appeal.
25 ITA Nos.834 & 945/Del/2010Pepsico India Holdings (P) Ltd.
25. Vide Ground No. 2, the grievance of the department relates to the allowability of the expenditure u/s 37(1) of the Act.
26. The facts related to this issue in brief are that the assessee incurred certain expenditure on the lease hold assets and claimed the same as deductible u/s 37(1) of the Act. The AO considered the said expenditure of Rs.2,61,000/- as capital in nature but allowed the depreciation @ 10%. When the assessee preferred an appeal to the ld. CIT(A), he directed the AO to allow the expenditure u/s 37(1) of the Act because it did not result in any enduring benefit. The ld. CIT(A) followed the earlier decision of the ITAT in assessee's own case.
27. Now the department is in appeal. During the course of hearing the ld. Counsel for the assessee at the very outset stated that this issue had been allowed in favour of the assessee by the Hon'ble Jurisdictional High Court in assessee's own case for the assessment year 2000-01 vide order dated 10.03.2011 in ITA No. 157/2008 (copy of which is placed at page nos. 147 & 148 of the assessee's paper book). The aforesaid contention of the ld. Counsel for the assessee was not controverted by the ld. DR.
26 ITA Nos.834 & 945/Del/2010Pepsico India Holdings (P) Ltd.
28. After considering the submissions of both the parties and the material available on the record. It is noticed that following substantial question of law was proposed in ITA No. 157/2008 before the Hon'ble Delhi High Court:
"Whether the Ld. ITAT erred in law and on merits in holding that the expenditure incurred on lease improvements did not result in any capital assets and thus the same was deductible as business expenses under Section 37(1) of the Act?"
29. While deciding the aforesaid issue their lordships observed as under:
"We have heard learned counsel for the parties at length on proposed question No. (D). The dispute is as to whether the expenditure of Rs.24,88,705/- on the improvement of lease hold premises in Maharashtra office of the respondent/assessee was entitled 100% depreciation under Section 32 of the Act. The assessing Officer had allowed depreciation only @ 10% on the ground that the expenditure was capital in nature with a purpose of securing benefit of enduring nature. This was confirmed by the CIT(A), however, the ITAT has reversed the aforesaid finding holding the expenditure to be Revenue in nature. The finding of fact is a direction that improvement were made in the lease premises by erecting temporary wooden portion and structure, and therefore, the same were revenue in nature and 27 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
even eligible for deduction under Section 37(i) of the Act.
We have examined the nature of expenditure incurred by the assessee in the said premises and agree with the view of ITAT that the expenditure incurred was for erecting temporary wooden structure etc. Such an expenditure would be revenue in nature even if the depreciation thereupon is to be allowed, as per Appendix-I to the Income Tax Rules.
We may note herewith that the ITAT has stated that expenditure incurred on lease hold premises was in respect of construction of walls, partition and plastering of walls? It was a specific case put forward by the assessee that these structures were temporary in nature and in fact they were wooden structure. Even if, there is no dispute as to whether construction of wall was wooden or brick wall, it is not in dispute that the same was purely temporary erection, and thus, would qualify for 100% depreciation as per Appendix-I. These are pure findings on facts and no interference therein is called for."
30. In view of the above, we do not see any merit in this ground of the departmental appeal.
31. The next issue vide Ground No. 3 relates to the deletion of addition of Rs.8,02,000/- being 1/10 th of preliminary expenses.
28 ITA Nos.834 & 945/Del/2010Pepsico India Holdings (P) Ltd.
32. The facts related to this issue in brief are that during the course of assessment proceedings the AO noticed that the assessee had paid an amount of Rs.80,19,475/- in the financial years 1993-94 and 1994-95 (i.e. prior to commencement of business) to the Registrar of Companies (ROC Delhi and Haryana) for incorporation and registration of company. The assessee claimed 1/10 th of the expenditure i.e. Rs.8,02,000/- as per the provisions of Section 35D of the Act in 10 assessment years beginning with the assessment year 1995-96. The AO disallowed the said expenditure stating that the payments were made to the ROC for increase in authorized share capital and does not fall within the ambit of Section 35D of the Act. The AO held that the same was capital expenditure. The reliance was placed on the following decisions of the Hon'ble Supreme Court:
Ø P.S.I.D.C. Ltd. Vs CIT 225 ITR 792 (SC) Ø Brooke Bond India Ltd. Vs CIT 225 ITR 798 (SC)
33. Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted the addition by following the decision of the ITAT in ITA No. 1226/Del/2003 for the assessment year 1999-2000, order dated 28.03.2005.
29 ITA Nos.834 & 945/Del/2010Pepsico India Holdings (P) Ltd.
34. Now the department is in appeal. The ld. DR strongly supported the orders of the authorities below while the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that this issue has been decided by the Hon'ble Jurisdictional High Court in favour of the assessee in ITA No. 574/2007 for the assessment year 1998-99 vide order dated 09.03.2011. A reference was made to page nos. 138 to 146 of the assessee's paper book which is the copy of the aforesaid referred to order.
35. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of adjudication in the departmental appeal for the assessment year 1998-99 in ITA No. 574/2007 before the Hon'ble Jurisdictional High Court wherein vide order dated 09.03.2011, their lordships in paras 2 & 3 observed as under:
"2. In so far as first is concerned, the Assessing Officer disallowed the amortization of the expenses of Rs.8,02,000/- under Section 35D of the Income-tax Act. The Assessing Officer wrongly presumed that the expenses incurred were the fee payable on account of increase in share capital. It is a matter of record 30 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
arrived at by the Income Tax Appellate Tribunal as well that the expenses incurred were on the registration of the company and thus incurred before the commencement of business operation. On this basis they were amortized for a period of ten years and 1/10 th of the expenditure reached Rs.8,02,000/- was claimed in this year. We also find that in the subsequent assessment year, the expense was allowed by the ITAT against which no appeal was preferred.
3. In these circumstances, there is no reason to disallow the same as it is clear that the Revenue had accepted to amortize the aforesaid expense over a period of ten years and, therefore, for all these ten years, the expenditure is eligible for deduction under Section 35D of the Act. No question of law arises."
36. Since this issue has been settled by the Hon'ble Jurisdictional High Court, we, therefore, do not see any merit on this issue in the appeal of the department because the year under consideration falls in the period of 10 years for which the amortization of the preliminary expenses has been allowed u/s 35D of the Act.
37. Last issue vide Ground No. 4 relates to the deletion of disallowance of advertisements expenses related to glow signs and neon sign.
38. The facts related to this issue in brief are that during the year under consideration the assessee incurred 31 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
advertisements and marketing expenses amounting to Rs.38.83 crores which inter alia included Rs.10,90,98,495/- on account of glow signs and neon sign etc. The AO disallowed the said expenses incurred on glow signs and neon signs alleging the same to be capital in nature as the same were semi-permanent fixture on numerous retail out lets, which were selling the products of the assessee and providing enduring benefit of the assessee. The AO accordingly treated the expenditure as capital in nature but allowed depreciation thereon.
39. Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted the disallowance by following the order of the ITAT for the assessment year 1999-2000 is assessee's own case.
40. Being aggrieved the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observations made in the assessment order dated 30.03.2005.
41. In his rival submissions the ld. Counsel for the assessee strongly supported the impugned order and further submitted that this issue has been settled by the Hon'ble 32 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
Jurisdictional High Court in ITA No. 319/2010 for the assessment year 1999-2000 order dated 30.03.2011. A reference was made to page nos. 120 to 137 of the assessee's paper book.
42. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts has been decided in favour of the assessee and against the revenue by the Hon'ble Jurisdictional High Court in ITA No. 319/2010 order dated 30.03.2011 wherein the relevant findings while confirming the order of the ITAT dated 30.03.2009 in ITA No. 1549/Del/2003 for the assessment year 1999-2000 has been given in paras 12 & 13 which read as under:
"12. No doubt in that case the Court has also observed that the glow signs boards have a short life, they decay with the effect of weather, and require frequent replacement. These observations may not be entirely correct having regard to the literature qua neo sign board produced by the learned counsel for the Revenue. However, this fact would not alter the ultimate decision as it is still obvious that no asset of permanent nature is brought into existence.
13. Here, by putting the neon signs and glow signs, no asset of permanent nature is created. Simply 33 ITA Nos.834 & 945/Del/2010 Pepsico India Holdings (P) Ltd.
because self-life of such neon signs is more, may not be of any significance once we keep in mind the important aspect on which the expenditure is incurred i.e. on advertising and marketing."
43. In the result, appeal of the assessee is partly allowed and that of the department is dismissed.
(Order Pronounced in the Court on 22/12/2015) Sd/- Sd/-
(Beena Pillai) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 22/12/2015
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR