Income Tax Appellate Tribunal - Jaipur
Gillete India Ltd. , Jaipur vs Assessee on 11 August, 2015
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM
vk;dj vihy la-@ITA No. 1087/JP/2011
fu/kZkj.k o"kZ@Assessment Year : 2007-08.
M/s. Gillette India Ltd., cuke Asstt. Commissioner of
SPA-65A, Industrial Area, Vs. Income Tax, Circle-2,
Bhiwadi. Alwar.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. AAACI 3924 J
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Dhanesh Bafna (C.A.) &
Shri P.C. Parwal (C.A.)
jktLo dh vksj ls@ Revenue by : Smt. Rolly Agarwal (CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 19.05.2015.
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 11/08/2015.
vkns'k@ ORDER
PER SHRI R.P. TOLANI, J.M.
This is an appeal filed by the assessee against the order of ld. DRP-I, New Delhi dated 10.08.2011 for the A.Y. 2007-08. The grounds raised are as under :-
Ground No. 1 & 1.1 Making an adjustment of Rs. 2,55,82,075/- u/s 92C(3) comprising of payment made in respect of business services received of Rs. 2,51,97,157/- and mark up of Rs. 3,84,918/- on reimbursement of advertisement expenses of Rs. 31,04,176/-. TP adjustment are further challenged on following counts:-2
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
i) TPO's proposed adjustments proposed in order u/s 92CA(3) dated 27.10.2010 has been relied without making any independent examination of facts by AO and section 92C(3) has been misapplied by summarily rejecting assessee's TP study.
ii) Ld. TPO grossly erred in holding that assessee has not proved any need for services outsourcing such services and actually services were received by assesse. Thereby re computing the ALP of the payments of service fees at Rs.
NIL resulting into adjustment of Rs. 2,51,97,157/-
iii) Erred in holding that payment of Rs. 31,04,176/- was not actual reimbursement of advertisement expenses & making ALP adjustment of the transaction by applying operating margin of Rs. 12.40% on the said amount resulting into adjustment of Rs. 3,84,918/-.
iv) The Ld. DRP has also erred on facts and in law in summarily holding that issue has been considered in detail by the TPO & even before DRP all old arguments have been reiterated without discussing the various objections raised & documentary evidences filed before it in respect of business service received by the assessee. It has further erred in directing the TPO to verify the nature of payment of Rs. 31.04 lacs instead of deciding the issue on the basis of evidences produced by the assessee which is not as per law in terms of section 144C(8)
2. Brief facts are -assessee is a public limited listed company and is engaged in the business of manufacturing and distribution of products for personal care and use including blades, razors, shaving preparations, oral care products, hair epilating devices, electric shavers and other appliances.75.90 percent shares of Gillette India Limited (GIL) are held by 3 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
The Procter & Gamble Company, USA ('P&G US') and its subsidiaries. Out of these 41.02 % shares are held by Procter & Gamble India Holding BV, Netherlands. The balance capital is held by institutional investors and the public.
2.1. Following international transaction were entered into by the assessee with its associate enterprises during the year u/s 92:
S. Description of the transactions Amount (In No. Rupees)
1. Import of raw material (stores and 100,850,733 spares)
2. Import of finished goods 717,410,147
3. Export of finished goods 116,415,863
4. Import of fixed assets 16,471,604
5. Business Services received 25,197,157
6. Reimbursements received / receivable 10,496,673
7. Reimbursements paid / payable 461,256 2.2. The AO referred the issue of determination of Arm's length price in respect of above international transaction to the TPO along with assessee's TP report.
Ld. TPO vide order dated 27 October 2010 accepted the ALP of all the other international transactions except the payment towards "Business Services"
received i.e. no 5 and reimbursement of advertisement expenses from the AE i.e. no. 7 above and proposed to make following adjustments:4
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
Sr. Nature of International Adjustment
No. Transaction Value (Rs.)
1 Receipt of Business Support Services 25,197,157
2 Reimbursement of Advertisement 384,918
Expenses
Total 25,582,075
2.3. Assessee filed its objections in this behalf u/s 144(C) to the Dispute Resolution Panel, assessee claims that DRP without considering the detail submission and independent examination of facts, summarily upheld the action of AO/TPO. Aggrieved assessee is in appeal before us on the final assessment order passed consequent to DRP directions u/s 144C. Ld. Counsel contends that:
i. Procter & Gamble, USA (P&G) acquired the Gillette Company, USA on 01.10.2005, as a result of which, assessee company was also acquired by them. As a result of this worldwide acquisition, assessee integrated its accounting and other systems w.e.f. 01.07.2006 and following such system integration, it adopted the global best practice of P&G including outsourcing of certain activities.
ii. The P&G group had set up a shared service centre known as Global Business Service Centre(GBS)to provide customized and expert services to affiliate recipients to enable them to carry out their business in a more efficient and focused manner. P& G Singapore operates as GBS Centre with its branch in Manila, Phillippines. The assessee company has entered into a "Business Services Agreement" with P&G, Singapore (Service Provider) effective from July 1, 2006 to obtain various support services as outlined in the said agreement.
iii. As per the terms of the agreement, P&G desired to conduct the respective business in an optimal and competitive way would involve unnecessary duplication of effort and costs and further due to 5 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
increasing standardization of the product and businesses in P&G's market. It was beneficial to P&G to have collective organization work together to improve their overall efficiency and business ability. Consequent to such business policy assessee entered into this agreement to secure these services from the centralized source to improve its overall efficiency and business ability.
iv. The payment for these business support services is made by the assessee to the service provider at cost plus 7% mark-up. The other associates of P&G also obtained these services from the service provider for which also the payment is made by them to service provider at cost plus 7% mark up. Broadly, the services rendered by GBS are summarised below:
• Accounting and Financial Reporting Services; • Employee Services;
• Customer Logistics Financial Services; • Purchases;
• Business Intelligence Services;
• Information Technology Business Solutions; • Workplace Services.
v. Based on the requests received and in accordance with the terms of the GBS Agreement, the GBS Centres rendered following services to assessee:
CATEGORY NATURE OF SERVICE PROVIDED
- A
s
Accounting and General Ledger Accounting
s SRAP Accounts Payable
Financial Reporting
e Banking
Services
s Affiliate Accounting
s SRAP Accounting
e SAP Data Manager
e Tax Compliance related services
l
6
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
Employee Services Local and Expatriates Payroll
Relocation and Expatriate
Services
Compensation Planning Services
Employee Benefits Administration
Employee Data Management
Travel Services
Customer Logistics Management of trade customer
Financial Services orders and receivables, credit
risk, promotion funds,
transportation and other logistics
and financial services
Purchases Suppliers relationship
management and strategy etc.
Business Intelligence Consumer, customer, competitor
Services research and general business
intelligence
Information Manufacturing execution,
Technology Business engineering, warehouse
Solutions management etc.
Workplace Services Workplace maintenance
Technology infrastructure
Other Services Rendering of any other services
In consideration of availing services from Global Business Services (GBS) Centre, the TPO made following unjustified adverse observation:
- The assessee has not given service wise details of payments made. However, each of the service mentioned in the service agreement.
- Neither the documentary evidence of cost incurred by the AE for rendering each type of service nor the basis of allocation of cost amongst various entities and the basis of choosing a particular allocation key had been furnished by the assessee.
- The basis on which billing is made is not provided and the rate at which such services has been rendered by AE for group companies has not been provided.7
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
- Assessee has not furnished individual service-wise calculation of reduction in cost. The cost benefit analysis is not proved simply from annual results. Assessee has not furnished information relating to Benchmarking of transaction by the AE.
- The assessee is not a startup company. It has established business expenditure. Hence, sudden dependence on the AE, as claimed by the assessee, even for routine services, is questionable. Apparently, this is for the benefit of the parent company for consolidation and not for the benefit of the assessee.
- The higher profit of the assessee during the year does not prove that the payment made to the AE was at arm's length.
- Assessee has incurred huge expenditure on manpower and other administrative expenses. Hence, it cannot be said that these services could not have been performed itself.
- AE has not provided any tangible or real services to the assessee. In fact AE is in no position to provide any support services to India, as the knowledge of local conditions lies with assessee and not the AE.
Based on these observations ld. TPO held that assessee has not been able to show that any service has actually passed to him. No independent party would have made a payment in uncontrolled circumstances. Therefore, by applying CUP method, the ALP of payment of service fee was determined at 'NIL' as against Rs. 2,51,97,157/- determined by the assessee. vi. DRP confirmed the action of TPO by mere observations that the details filed by the assessee were duly considered by TPO and were found to be inadequate. Ld.AO accordingly made transfer pricing adjustment of Rs. 2,51,97,157/-.8
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
(B) Reimbursement of Advertisement Expenses i. During the year the assessee received following reimbursement from its AE .
(i) Relocation related expenses Rs. 9,68,246/-
(ii) Reimbursement of advertising expenses, Rs. 95,28,427/-
ii. The TPO in the proceedings observed that details of reimbursement of advertisements of Rs. 64.24 Lacs have been furnished, for remaining amount of Rs. 31.04 Lacs, instead of filing details it was claimed that these are of similar nature as that of Rs. 64.24 Lacs. Consequently it was inferred that the amount in question was not a cost reimbursement, but some sort of receipt for assumed 'intra group service'. For such assumed services ld. TPO held that TNMM with a cost plus profit margin (OP/TC) as PLI was the most appropriate method. Considering some comparables the ALP was computed as follows:
Cost borne by assessee Rs. 31,04,176/-
Arms Length Operating Margin @ 12.4% Rs. 3,84,918/-
Arm's Length Price Rs. 34,89,094/-
Accordingly, a transfer pricing adjustment of Rs. 3,84,918/- was proposed.
iii. The DRP directed the TPO to verify the nature of payment of Rs.
31.04 Lacs from the evidence produced by assessee. If it is reimbursement, then to treat it at par with Rs. 64.24 Lacs, otherwise the mark up will continue on Rs. 31.04 Lacs. The TPO vide its order dated 25.10.2011 again proposed the addition by holding that no supporting evidence has been filed by the assessee. Accordingly the AO/DRP confirmed the transfer pricing adjustment of Rs. 3,84,918/-. Ld. Counsel contends that business support services were received from P & G Asia PTE Ltd. i.e AE as per agreement dated 1.7.2006. AE rendered various 9 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
services to its assessee, which are narrated in form 35A and also finds mention TPO order page 5. These services are provided from following distant places:
Manila: Accounting and payroll services are carried out there, as this has low rate of man-hour cost.
Singapore: IT related and logistic services are based out here because of extremely good infrastructure.
• The nature of services rendered by P & G Asia PTE Ltd., Philliphines (Code LE 753) and Singapore (LE 606) to the assessee company (Code 973) and basis of charge is as under:
Category of Service Basis of Charge
Accounting and Financial No. of Postings (Accounting
Reporting Services Entries)
Purchases Net Outside Sales (NOS)
Employee Services No. of Employees managed
Customer Logistic Financial Net Outside Sales (NOS)
Services
Business Intelligent Services Net Outside Sales (NOS)
Work Place Service - Central Work Place Maintenance -
IT and AFRS Central IT No. Of Employees, Floor
Space
Technology Infrastructure -
No. Of Employees, System
ID No.
Based on audited accounts, P & G Singapore identify and finalise the cost and expenses incurred in providing the Business Support Services. This is allocated to each of the service recipients on the basis of charge as agreed in the agreement. Monthly payment is determined on the basis of annual budget of service provider. At the year end service provider would make allocation based on actual cost and expenses for first eleven months of the fiscal year and estimated cost and expenses for the last month of the said fiscal year. The differences in actual cost vis-a-vis the budgeted 10 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
cost would be charged / credited to the service recipient accordingly.
• Methodology of performance services at various places is narrated at Page31 - 32 of Form 35A. For these services AE was compensated at cost plus 7% margin and the Debit notes in this behalf are also on the record, which are not disputed. The summary of the invoices raised by AE for services rendered, tax withheld and remittance made is as under:
Amounts in USD Manila Philippines Nature of Billing Cost Mark Total TDS Net Services Month UP Paymen t Accounting 31.1.2007 263539.2 18447.7 281986.9 42298.11 239688.8 & Financial 5 4 9 8 Reporting(A FR) Services, Business Intelligent Services (BIS), Purchases AFR 31.1.2007 5717 400.19 6117.19 917.58 5199.61 Central IT & 31.1.2007 11325.77 792.80 12118.57 1817.78 10300.79 AFRS Central IT & 31.3.2007 2182.75 152.79 2335.54 350.30 1985.24 AFRS BIS, 31.3.2007 51164.61 3581.53 54746.13 8212.06 46534.22 Customer Logistics & Financial (CLFS), Purchases, CIT & AFRS AFR, BIS, 28.2.2007 33893.53 2372.55 36266.08 5262.46 31003.62 Purchases services.11
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
Singapore
AFRS, BIS, 31.1.2007 114014.56 7981.02 121995.58 18299.35 103696.2
Purchases 3
AFRS 31.1.2007 889.95 62.30 952.25 142.84 809.41
CIT, AFRS 31.1.2007 10943.91 766.07 11709.98 1756.50 9953.48
BIS, 31.1.2007 78.99 5.53 84.52 12.68 71.84
Purchases
Purchases 31.1.2007 25.81 1.81 27.62 4.14 23.48
CIT, AFRS 31.3.2007 22.49 1.57 24.06 3.61 20.45
BIS, CLFS, 28.2.2007 19810.09 1386.71 21196.80 3179.35 18017.45
Purchases
BIS, 28.2.2007 78.99 5.53 84.52 12.68 71.84
Purchases
AFR, BIS, 28.2.2007 17849.84 1249.49 19099.33 2640.97 16458.36
Purchases
BIS, 31.3.2007 81.84 5.73 87.57 12.83 74.74
Purchases
The mark up of 7% charged by AE is reasonable which is evident from the profit & loss statement of AE from the year ended 30th June 2007 which shows net profit before tax at $ 12035 (13249 - 1214) on revenue of $ 292553 (291971 + 582) giving net margin of 4.13%. This margin is less than the mark up charged from assessee which indicates that services are rendered by the AE on cost to cost basis. Besides the withholding tax is borne by AE.
• Evidence as to the services rendered by AE in shape of Electronic Vouchers prepared by the employee of AE along with his name and code with reference to Travelling Expenses, dividend payment, costing variance entries, capitalisation entry, depreciation, profit projection and tax payment as well as sample e-mail exchanged are on record. Requisite TDS on Service charges payments to AE, has been deducted @ 15%, which also is borne by AE and not by assessee. All these facts demonstrate that services were rendered by AE. It has not been disputed that P & G Asia, PTE ltd., Singapore was rendering these services in India to various other group companies and also filing the Income Tax return in India. Copy of the return for AY 2011-12 is enclosed from which also it is evident that tax has been paid by them on the income which has accrued to it on account of services given by it to various group Indian Companies. 12
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
• Besides ld. TPO in assessee's own case for AY 2011-12 has accepted the very same payments to AE and has not even proposed any ALP adjustment in this behalf. Revenue on the same facts cannot apply such variable treatment.
In view of above observation of TPO as to non furnishing of evidence of cost incurred by AE for rendering the various services or basis of allocation of cost to various entities or basis of billing is incorrect. Ld. Counsel counters the TPO's remarks on cost benefits by contending that by this arrangement other cost has reduced drastically and at the same time sales has increased significantly which amounts to demonstrative cost benefit. Following is submitted in this behalf:
(i) Payment to and provision for employees reduced to Rs. 33.71 Crores as against Rs. 42.47 Crores in the last year. The list of employees who were retrenched from the services during the year.
(ii) Purchased services cost has reduced to Rs. 2.57 Crores as against Rs. 9.58 Crores in the last year.
(iii) Other expenses (which generally comprises of professional expenses, misc administrative expenses) have also reduced significantly from Rs. 10.16 crores in last year to Rs. 6.70 crores during the period under consideration (refer schedule 15 of the audited accounts.
(iv) Cost benefit analysis of the services has been carried out by the assessee which shows that after the outsourcing of these activities, the overall staff cost and cost of purchased services (i.e local outsourcing) has reduced drastically even from the very first year in which services have been first received. The table showing reduction in cost is as under:13
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
AY 2009-10 AY 2008-09 AY 2007-08 A Y 2006-07
Particulars
F Y 2008-09 FY 2007-08 F Y 2006-07 F Y 2005-06
Gross Turnover 650.28 598.49 525.45 412.14
Expenses as %
of Gross
Turnover Percentage ( % )
Payment to and
Provisions for
Employees 6.66 6.58 6.42 10.30
Travelling,
Conveyance
and Vehicle
Expenses 0.53 0.70 1.08 2.41
Communication
Expenses 0.09 0.08 0.23 0.57
Purchase
Services 0.12 0.14 0.49 2.32
Other expenses 0.49 0.24 1.28 2.47
These figures demonstrate that the expenses on Employees cost has shown decrease from 10.30% in year 2005-06 (i.e. the year in which outsourcing was not done) to 6.42% in the year under consideration. Rather the % has been maintained right from first year of outsourcing, in the subsequent years. Also, the expense on Purchase services (which includes local outsourcing) has decreased from 2.32% in year 2005-06 to 0.49 % in the year under consideration. It is pertinent to note here that despite reduction in above costs, company's total turnover has increased 14 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
to 525.45 Crores as against 412.14 Crores giving a 27% growth in business. Further profit before taxation increased to Rs. 101.84 Crores (after considering restructuring expenses of Rs. 45.16 Crores) as against 67.34 Crores in the last year which is an increase of 51.23%.
(v) The benefit derived by the company is in the form of overall increase in its turnover and reduction of expenses and increase in the profit margins as detailed in the above stated points. The overall increase in turnover of the company since the financial year 2005-06 has been approximately at the rate of 20% every year which itself is a practical and live example of the benefit derived by the assessee on account of outsourcing its activities and these figures justify that the economic and commercial value derived by the company over the years by concentrating on the core areas.
(vi) It is surprising to note from the order of TPO that due to non-providing of individual service wise calculations of reduction in cost, TPO has assumed that cost benefit analysis is not proved for annual results. The assessee company through its audited accounts and SAP extracts and detailed analysis of outsourcing expenses has proved beyond doubt the services availed by it from its associated enterprises. There can be no other means to justify the economic and commercial value received by the assessee. Financial accounting, administration are some of the activity to its AE which enhanced its growth and profits.
(i) Ld. TPO is grossly unjustified in taking this view as in the TP Study the arithmetic mean of the comparable service provider in India is computed at 12.40%. Further the AO himself has considered the margin of 12.40% as reasonable in respect of adjustment made by him for reimbursement of expenses. Therefore the mark up of 7% charged by the AE is at lower to mark up of 12.40% charged by benchmarked service providers.
(ii) As far as the benchmarking of the transaction by AE is concerned, AE (Service Provider) has the policy of charging a mark-up of 7% from all the service recipients on the total operating cost for the various services it provides. For determining the range of profitability for service mark ups that will be applied to intercompany charges for different services, Procter & Gamble Company (P&G) has got done the economic analysis which was duly submitted in the form of report dated 30th March 2001.This analysis 15 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
has been done in accordance with the applicable TP regulations and the Organization for Economic Cooperation and Development (OECD) Guidelines. As per this study, mark up of 7% is considered to be in consistent with the global, regional and segment results and meets the arm's length standard. This is how AE has benchmarked the international transaction.
Ld. Counsel further contends that detailed explanation is offered in Form 35A explaining the commercial rationale and expediency for availing these services and the details of actual receipt of services, which has not been controverted. The decision to outsource the service is a business decision of the assessee and it's prudence ought not be questioned by the revenue authorities. The nature of services availed and benefits received by the assessee have been substantiated. The cost have been allocated by the AEs using appropriate and logical allocation keys and the methodology of charging of cost is followed consistently while providing services to all group companies. Similar business services provided by P & G Asia PTE Ltd. to other associated companies in India have been accepted by the department. Copy of TPO Order alongwith transfer pricing audit report in case of Gillette Diversified Operations Pvt. Ltd. and Procter & Gamble Home Products Ltd. in this connection is also submitted. For this reliance is placed on the following cases;
S.A Builders Ltd. Vs. CIT 288 ITR 1 (SC)
- CIT Vs. EKL Appliances Ltd. 345 ITR 241 (Del.)(HC)
- Ericson India Pvt. Ltd. VS. DCIT 17 ITR (Trib) 79(Delhi)
- Dresser Rand India Pvt. Ltd. Vs.ACIT, 13 ITR (Trib.) 422
- Thyssen Krupp Inds India Pvt. Ltd. (2013) 55 SOT 497 (Mumbai)
- Castrol India Ltd55 SOT 521 (Mum. Trib.) It is contended that Hon'ble Delhi High Court in the case of CIT Vs. Cushman and Wakefield India Pvt. Ltd. (2014) 225 Taxman has laid down the following propositions for TP adjustments:
- The authority of TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO.16
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M/s. Gillette India Ltd.
- The TPO's report is subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by AO, rather than determining whether such services exists or benefits have accrued. That exercise of factual verification is retained by the AO u/s 37 in this case.
- Indeed, this is not to say that the TPO cannot after a consideration of the facts state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO.
- This is a slender yet crucial distinction that restricts the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the ALP was 'nil', since a comparable entity would pay 'nil' amount for these services it was noted that remarks concerning, and the final decision relating to, benefit arising from these services are properly reserved for the AO.
- In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this Court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee- activities for which, according to assessee's claim- interaction with IBM's regional offices in Singapore and United States was necessary. These services cannot as the ITAT correctly surmised be duplicated in India in so far as they require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee's exclusive domain, and cannot be second-guessed by the Revenue.
(iv) It is vehemently contended that the operating margin of the assessee is far better than other comparable cases as mentioned on page-4 of the TPO order. This has been accepted by the TPO. Once this is accepted it is incorrect to disturb one part of the cost to arrive at the operating profit and make the addition. Further the AO has not rejected the TP documentation rather he has relied on the same for charging mark up of 17 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
12.40 % in respect of the reimbursement of expenses. Thus once mark up of 12.40% in respect of the services rendered is accepted there is no reason not to accept the lower mark up of 7% paid by the assessee to its AE on cost of services rendered by it.
(v) Apropos the position of need of business support services and OECD guidelines it is contended that, ld. TPO in its order has observed that assessee has incurred huge expenditure on manpower and other administrative expenses. It is purely based on assumption that ithas much more experience of operating in India, most of its salesis in India and therefore AE is in no position to provide any support service to India or help it to develop the India market as the knowledge of local conditions lies with the assessee not the AE.
(vi) While making this assumption it has been totally ignored that due to globalization and specialization, the outsourcing of routine activates have become an established global business methodology due to number of business advantages flowing from such arrangements like:
Lower costs due to economies of scale (b) Ability to concentrate on core functions (c) Greater flexibility and ability to define the requisite service more readily (d)Specific supplier benefits. For example, better security, continuity, etc. (e) Higher quality service due to focus of the supplier.(f) Improved internal management disciplines resulting from the exercise.(g) Less dependency upon internal resources (h) Control of budget (i)Faster setup of the function or service. (j) Lower ongoing investment required in internal infrastructure.(k) Greater ability to control delivery dates (eg: via penalty clauses)(l) Lack of internal expertise(m)Increase flexibility to meet changing business conditions.(n) Purchase of industry best practice.
(o)Improve risk management.(p)Acquire innovative ideas. (q) Increase commitment and energy in non core areas. (r) Improve credibility and image by associating with superior providers. (s) Generate cash by transferring assets to the provider. (t)Turn fixed costs into variable costs.(u)Gain market access and business opportunities through the supplier's network etc...Keeping in view the above factors and also the 18 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
Group policy of outsourcing the routine natured jobs, the assessee company outsourced its activities.
(vii) Besides decision for outsourcing methodology of certain routine activities was taken after considering the global business trends and future goals which is the sole domain of assessee based on a very settled and widely accepted legal principle that business entities only best know, how to conduct their business keeping in view its needs, prudence and business acumen. Tax authorities or any other outside authorities cannot decide how business should be conducted and usurp the decision making authority of the company.
2.4. It has not been disputed that assessee did neither employ the requisite manpower nor incur expenditure for services which are outsourced from AE. TPO did not visualise that without such employment and expenditure how assessee's business can be operated. This itself proves that outsourced services were actually rendered and paid for. It is wrongly observed that AE was in no position to provide any support service to India, as the knowledge of local conditions can lie with assessee and not the AE. If this is theoretically believed, then BPO/KPO would not have found place in India or Philippines or anywhere else in the world. Even the tax department in India has outsourced number of its activities including PAN allocation to NSDL and UTI. Therefore, these observations made by TPO are untenable, hypothetical and irrelevant. 19
ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
2.5 The services availed are intra-group services in the nature of Accounting and Financial Reporting Services, Employee services etc. as explained above. These are routinely outsourced by no. of companies in India and other countries because of their economic and commercial needs and availing of Intra group services are recognized by global business practices and OECD guidelines. Thus assessee has provided all the information as referred by the TPO at para 21 of his order:
(i) Evidence is furnished that assessee has received the intra group services.
(ii) Economic and commercial benefit derived by the assessee from these services by way of reduction in cost as compared to the last year vis a vis the increase in sales is provided as above.
(iii) There is a mechanism in place to identify the cost incurred by the AE in providing the intra group services and basis of allocation of cost to various AE's as is evident from the documents placed at.
(iv) There is no material with the AO to hold that a comparable independent enterprise would not have paid for these services in comparable circumstances. In fact the similar services received by other group concern has been accepted by the TPO in those cases.
(v) In view of above the ALP of the business services determined by the AO on the basis of TPO report by applying CUP method at Rs. NIL is unjustified and uncalled for. Hence the addition made by AO be deleted.
B. REIMBURSEMENT OF ADVERTISING EXPENSES Rs. 3,84,918/-
3. Assessee received reimbursement of advertisement expenses of Rs.95,28,427/- Lacs comprising of an amount of Rs.64,24,251/- from Gillette, Boston in respect of GBU Television production commercial Film and 20 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
Rs.31,04,176/- also from Gillette Boston. In respect of the amount of Rs.64,24,251/-, assessee furnished the invoices and accordingly the same is accepted by AO/TPO as reimbursement of expenses.
3.1. However in respect of the remaining amount of Rs.31,04,176/- which is also the reimbursement of cost of production film, as explained vide letter dated 08.10.2010 the copy of invoice could not be furnished as the same was misplaced but the copy of the ledger account was furnished where the amount of Rs.64,24,251/- is also debited to evidence that nature of the reimbursement of Rs.31.04 Lacs is the same as that of Rs.64.24 Lacs.
3.2. The DRP, considering this fact directed the TPO to verify the nature of this payment from the evidences produced by the assessee as if this is reimbursement then to treat it on par with Rs.64.24 Lacs. 3.3. The TPO, again held that no supporting evidence has been filed by the assessee. She tried to distinguish the nature of both the payments by stating that in the ledger account, the amount of Rs.31.04 Lacs has been shown as "SC" whereas the amount ofRs.64.24 Lacs is shown as "DI" in the ledger account and therefore both the transactions are not the same.
3.4. From the ledger account, it can be noted that both the transactions are recorded in the account of Gillette Co. Boston. Assessee in his reply dated 21 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
08.10.2010 has specifically stated that amount of Rs.31.04 lacs is in respect of production of films which the assessee paid initially and sought reimbursement from its AE later. The abbreviation SC and DI in the ledger account only refer to the documentation type and it nowhere indicate the nature of these two amounts are different. Otherwise also considering the materiality aspect the adjustment for mark up on such reimbursement, addition made is unjustified. 3.5. It may be noted that in proceedings before Hon'ble DRP, it has directed the TPO to verify the additional details by way of ledger account furnished by the assessee before it but as no reply is received, TPO was directed the nature of payment and if it is reimbursement then no addition for mark up is to be made. Such directions given by DRP is beyond its scope as section 144C(8) specifically provides that DRP may confirm, reduce, or enhance the variation proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub sec.(5) for further enquiry in passing the assessment order. Therefore having once accepted that the same ledger account shows both the amounts, the direction given to the TPO to verify the nature of payment is beyond the scope of section 144C and therefore also the addition made by AO/TPO is illegal and bad in law.
22
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M/s. Gillette India Ltd.
3.6. In view of above the addition of Rs.3,84,918/- made by AO/TPO is uncalled for and be deleted.
4. Ld. DR has filed written submissions and contends that OECD guidelines postulate that to allow AE transactions for rendering of intra group service following information should be made available:
(1) Whether the AE has received intra group services ?
(2) What are the economic and commercial benefits derived by the recipient of intra group services ?
(3) In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs.
(4) Whether a comparable independent enterprise would have paid for the services in comparable circumstances.
Reliance is placed on VVF LTD. (2010)-TIOL-55(MUM) holding that:
6. On a conceptual note, the purpose of making arms length adjustments, in prices at which transactions have been entered into with associated enterprises, is to nullify the impact of interrelationship between the associated enterprises. Unless the method on the basis of which such hypothetical prices are computed is such that costs are to be taken into account, these hypothetical prices have nothing to do with the actual costs. CUP method seeks to ascertain arms length price by taking into account prices at which similar transactions have been entered into by the assessee with unrelated parties (Internal CUP) or at which other unrelated 23 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
parties have entered into similar transactions inter se (External CUP). None of these inputs have anything to do with the costs; they only refer to prevailing prices in similar unrelated transactions instead of adopting the prices at which the transactions have been actually entered in such cases, the hypothetical arms length prices, at which these associated enterprises, but for their relationship, would have entered into the same transaction, are taken into account. Whether the funds are advanced out of interest bearing funds or out of funds on which 14% interest is being paid, or whether such interest free advances are commercially expedient for the assessee or not, is wholly irrelevant in this context. The transaction in the present case is of lending money, in foreign currencies, to its foreign subsidiaries. The comparable transaction therefore is of foreign currency lending by unrelated parties.
The ld. D/R further contends that -
(a) The tax payer's agreement with the associated enterprises related to intra group services is to be examined to see as to what kind of services were to be provided by the AE to the tax payer. As normally such agreements refer to a large number of services which could be rendered by the AE, the tax payer has to specify the services (s) which is actually received by it for which the payment is made.
(b) Whether the tax payer really needed such services or not. If so, what direct or tangible benefit it has derived. 24
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(c) Contemporaneous information on the basis of which rate or payment for the service is determined. This includes the cost benefit analysis done by the tax payer at the time of entering into agreement. Whether any bench marking analysis was done by the tax payer so as to compare the amount which he would have paid to an independent person under similar circumstances.
(d) Whether an independent person would have paid such amount in comparable circumstances.
(e) Whether the expected benefit is commensurate with the payment.
(f) Whether the tax payer has separately incurred any expenditure on similar services and if so the necessity of making further payment to the AE for the same activity or it is a duplicate payment.
(g) Whether the payment is in the nature of shareholder's activity or largely for the benefit of the AE.
(h) Whether the AE is rendering such services to other AEs or independent parties and if so the rate/amount charged from such persons.
(i) The cost incurred by the AE for providing such services and the basis of allocation key.
25
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(j) If the AE has charged any mark up on such payments the arm's length margin is also examined.
4.1. It is further pleaded that in following cases the ITAT has upheld determination of ALP of intra group services as NIL :-
Gemplus India Pvt. Ltd. Vs. ACIT, Bangalore in ITA No. 352/Bang/2009 (2010-TII-55-ITAT-BANG-TP).
Deloitte Consulting India Pvt. Ltd. Vs. DCIT in ITA Nos. 3910 & 3911(MUM) of 2009 & 579, 1272 & 1273 (MUM) 2011.
Nike India (P) Ltd in ITA Nos. 653 & 654 (BANG.) OF 2011. M/s. Knorr-Bremse India Pvt. Ltd in ITA No. 5097/Del/2011. M/s. Petro Araldite Pvt. Ltd in ITA No. 6217/Mum/2012.
For other grounds, the ld. D/R relied on the orders of TPO/AO/DRP.
5. We have heard the rival contentions and perused the material available on the record on this issue. It emerges from the record that assessee submitted following documents :-
(1) Business services agreement vide its submission dated 27 January 2010.
(2) Detailed break-up of services rendered by Singapore & Philippines.
(3) Balance Sheet and Profit & Loss Account of P & G Singapore.26
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(4) Similar services were provided by the AE to other Indian P & G affiliates.
(5) Ledger account of the AE (P&G Singapore) and all debit notes and other support evidences.
Besides, we find that the TPO has observed that -
(a) The assessee is a start up company which is not correct as it was already an established company came into new regime of P & G business consolidation. Similar services have provided by the AE not only to the assessee but to various other units on a uniform business policy.
(b) The authorities below have not controverted the fact that assessee has not claimed any other expenditure in respect of the services which are claimed to be received from AE. In our considered view, the business operation of the assessee cannot be carried on without these services, for which the expenditure is either to be borne by the assessee directly or the same is to be out sourced. In the absence of any self-incurring of expenditure, the assessee's claim that it is out sourcing the services finds credence. We find merit in the argument of the assessee that in A.Y. 2007-08 in the case of one of the other company of P & G Group viz. Gillette Diversified Operations Private Limited (GDOPL) similar kind of payment of services has been accepted and amount paid also have been held to be ALP. The order thereof is placed on record. 27
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5.1. Similarly in assessee's own case for AY 2011-12 ld. TPO/AO have unhesitatingly accepted these payments and no any ALP adjustments in this behalf are made.
5.2. Further in the case of Cushman and Wakefield India Pvt. Ltd. (supra) it has been held that commercial wisdom of the assessee cannot be called into question. Therefore, we are unable to subscribe the view adopted by authorities below that these services were not required by the assessee. Such commercial decisions are better left to the business acumen of the assessee and not decided by the AO. We have perused the evidence on record, revenue's own treatment of the same AE and services in associate concern for AY 2007-08 and assessee's own case for AY 2011-12. We are unable to uphold the finding of TPO and AO that details about rendering of services were not furnished and its benefit on the assessee's business could not be ascertained. The details of services provided are mentioned as cited above, besides assessee has not incurred any expenditure on its own in this behalf. It cannot be accepted that assessee will provide even the scratches of information about rendering of services which is otherwise discernible from the facts. The questioned judgement also takes in stride the fact that the quantum of benefit availed by the assessee in terms of its business yields cannot be questioned as in 28 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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cases it may so happen that the services though availed does not yield into any ostensible benefit. Whereas in this case assessee has been able to demonstrate that there are ostensible benefits. Thus this proposition also fails under the domain business acumen of the assessee. Considering all the facts as narrated above and the case laws, we may further add that there is no whisper by lower authorities that the ALP work provided by the assessee suffers from any infirmity. It is not proper to go for an ALP ascertainment without finding any fault with the assessee's working. The TP services provide that the AO himself first record its objections on the merits of the working of the assessee. Without doing so, the ALP determination becomes a questionable exercise. In the entirety of facts and circumstances we hold that the TP adjustment to the ALP as furnished by the assessee is without any justification. The same is deleted. 5.3. Apropos the issue about the reimbursement of business services, an amount of Rs. 31,01,476/- has been disallowed as the assessee could not produce any evidence except ledger account. We find no infirmity in the orders of the lower authorities. Since assessee has failed to provide any corroborative evidence in this behalf, the adjustment of Rs. 31,01,476/- made by the lower authorities cannot be found fault with. The same is upheld.
29
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Ground no. 2: Making an addition of Rs. 1,00,00,000/- on account of alleged suppressed sales of scrap & the Ld. DRP has erred in not giving direction to delete the addition proposed by the AO even though accepting that addition is made on estimated basis.
6. Brief facts are - during the year under consideration, the assessee has declared sale of scrap at Rs. 68,65,858/-. The A O observed that no record of Scrap generation in manufacturing process or during repair and maintenance of plant & machinery has been maintained. Month wise details of scrap generation and sale bills / vouchers of scrap sales has not been produced for verification and therefore the declared sale of scrap is not subject to verification. He accordingly, proposed to make lumpsum addition of Rs. 1,00,00,000/-.
6.1. The DRP observed that it cannot be said with surety that all scrap sales have been accounted for. In the draft assessment order, the A O has actually estimated the amount of suppressed sale of scrap. Admittedly, this is an estimate. The DRP, not being an appellate body, cannot on its own estimate any quantum of suppressed sales, if any. It therefore rejected the assessee's objection. Accordingly, the A O made addition of Rs. 1,00,00,000/-.
30
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6.2. Ld. Counsel contends that the scrap as generated is sold off at regular intervals, generally monthly. The scrap lying in the factory at the year end is of a very low amount; hence stock of scrap is not valued at the year end considering the materiality of amount involved. In support, the details of Scrap sale for the month of April 2007 amounting to Rs. 5.35 Lacs were provided. It was categorically submitted that there is no suppression of sale of scrap as assumed by the AO in questionnaire dated 15.12.2010. In course of assessment proceedings, the nature of scrap generated, records maintained and month wise details of scrap sold was filed. The assessee company vide letter dated 28.10.2010 submitted the following facts:
i. 99% of scrap sale at manufacturing location consist of process scrap which gets generated during the process of manufacturing. It also includes sale of waste generated during repair and maintenance of plant & machinery.
ii. The process scrap is in the form of aluminium scrap, stainless steel scrap burnt / slug, plastic scrap, platinum scrap, generated in production process.
iii. As and when scrap gets generated, it is sent to the scrap yard with intimation to warehouse.
iv. At warehouse data is maintained for opening balance of scrap, scrap generated during production, month wise. As and when scrap is sold through invoice, entry of dispatches is made. v. Month wise detail of scrap sale was furnished.31
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The details of scrap sold in earlier years, which is accepted by the A O was filed. The scrap sold during the year is comparable to the stock sold in earlier years. Stock of scrap at the year end is not valued considering the materiality of the amount involved which was demonstrated by providing the amount of scrap sold in April 2007 which is of Rs. 5.35 Lacs. Nothing adverse was found by the A O in the details furnished before him.
6.3. The AO in para 4.1 of the order has specifically stated that assessee has produced copies of various returns filed with Excise department and excise department carried out their audit with reference to stocks and have not observed anything adverse. Similarly VAT assessment has been completed by the sales tax department and they have also not observed anything adverse. Moreover AG audit is also carried and they too have not observed anything adverse. Entire sale of raw material / finished goods are fully vouched and R. G. Register and stock register are properly maintained.
Cost audit has been conducted and cost audit report is submitted. All these records were produced. Having accepted all these facts, there is no reason to make any addition for suppression of scrap sale. 6.4. The DRP has accepted that AO has estimated the amount of suppressed sale of scrap but it not being an appellate body cannot on its own suppress any quantum of suppressed sale, if any. These observations 32 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
are illogical in as much as once AO has accepted the records maintained by the assessee as mentioned in pars 3 above, never in the past nor in the subsequent year any such addition is made by the AO and the DRP being an high powered panel cannot shrink its responsibility by stating that it is not an appellate body to delete such arbitrary addition. Therefore addition made by AO is de-hors any material on record is unjustified and uncalled for. 6.5. Ld. D/R supported the orders of authorities below.
7. We have heard the rival contentions and perused the material available on record. In our considered view the approach adopted by DRP is unsustainable in as much as it has the power to issue necessary direction on the basis of material available on record. There is no gainsaying by shrugging off the decision on the pretext of not being an appellate authority. Adverting to AO's observation, assesses books are upheld, no evidence at all has been indicated to form even a suspicion that assessee indulged in any type of suppression of sales. Thus the finding is nothing but an assumed allegation. Never in past or future the assess's scrape sales have been question. The addition being presumptive and based on conjectures is deleted. This ground is allowed.
33
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Ground 3: Not allowing the claim of inventories written off at Rs. 91,83,353/- and the Ld. DRP has erred in not giving direction to delete the addition proposed by the AO in this regard. Both the authorities have also erred in making various observations which is not correct on facts & also not deleting the addition when it has been decided by Hon'ble ITAT in favour of assessee in earlier years.
8. Brief facts are - assessee company being in the fast moving consumer goods, the obsolescence and expiry of stock is quite normal. The company as a regular practice writes off its obsolete and expired stock. During the year under consideration the assessee company has written off inventories of Rs.91,83,353/-. Assessee vide letter dated 23.12.2010 explained the company procedure for write off and further explained that periodical and regular physical verification of inventory is carried out as per laid down procedure by company officials. After due diligence and necessary approvals, the identified items of inventories are written off from the books of account. For ready reference inventory write off sheet, duly approved by VC, Operations Manager, Director, FPM, FC and GM of the company giving complete item wise, material code wise, quantity and value sheet of inventories written of during the year was submitted as annexure 8 alongwith evidences of destruction in picture clips in CD as per annexure 9 of the said letter.
34
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8.1 The A.O. in the draft assessment has proposed to made addition by making following observations:
Assessee is claiming double deduction as the entire cost of production, manufacturing or purchase of traded goods has already been claimed in the trading account under "cost of goods sold" which is evident from the financial accounts of the assessee. Assessee at no point of time demonstrated that the said expenditure was not claimed in the cost.
8.2. The AR of the assessee has also not submitted that the inventories written off were included in the closing inventory. Since the closing inventory is the same which has been carried over to the next year as opening inventory, accepting the submission of the AR would mean that assessee is claiming deduction of the said amount in two years which is not permissible. The claim of inventory write off is not supported with itemwise details, circumstances in which it was damaged and the transportation of the same to the dumping yard. No supporting evidences, procedure supported with documents etc. and evidence of actual destruction was filed.
8.3 Before DRP it is pointed out that similar disallowance made in earlier years for AY 2003-04, 2004-05 and 2005-06 have been deleted by Hon'ble ITAT. The DRP observed that keeping in view the quantum involved in all the years, the Department may not have accepted the decision of the 35 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
Tribunal and has filed an appeal. As the matter has not reached finality, the DRP refrains from taking a position in the matter at present and therefore, up held the order of the AO, resulting in disallowance of Rs. 91,83,353/-. 8.4. Ld. Counsel contends that during the year under consideration the assessee company has written off inventory items to the extent of Rs. 91,83,353/-. The comparative position of write off inventories of earlier years is as under:-
A. Y. Inventory Sales Volume % to Sales
Written Off (Rs. Crore) Volume
(Rs. Crore)
2002-03 16.49 470.08 3.51
2003-04 12.58 432.82 2.91
2004-05 2.88 424.43 0.67
2005-06 3.70 453.56 0.81
2006-07 8.28 383.43 2.15
2007-08 0.92 493.57 0.19
The write off's have been fully allowed as deduction upto AY. 2001-02. In assessment year 2003-04 also the amount of inventory written off was allowed by CIT(A) vide their order dated 24.01.2007 but claim for obsolescence, stock shortage & sample was not allowed. Against the order of CIT (A) both assessee and the department preferred appeal before ITAT. Hon'ble ITAT in ITA No. 188/JP/07 dt. 09.08.2010 dismissed the appeal of 36 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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the department by allowing the claim of inventory written off. Again Hon'ble ITAT in ITA No. 1234/JP/2010 dated 11.2.2011 for A Y 2005-06 in para 11 of the order allowed the claim of inventory written off. 8.5. The assessee company is engaged in the business of manufacture and trading of FMCG items and any unserviceable, damaged and obsolete inventory items have to be taken off from the regular stock items. The market value of such stock becomes NIL on its getting damaged or unusable, therefore as per the Accounting policy of the company which in accordance with Accounting Standard - 2 issued by the Institute of Chartered Accountants of India, such expired / damaged / obsolete / unserviceable stock are written off / provided for in the accounts to arrive at the true financial position of the company at the end of the year. The inventories written off are identified items and are not resold and are completely destroyed.
8.6. With regard to procedure for write off, assessee has submitted vide its letter dated 23.12.2010 that physical verification of inventory items is carried out at regular periods as per the laid down procedure of the company and after due diligence and necessary approvals, the identified items of inventories are written off from the books of accounts. The item 37 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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code wise details of damaged goods were filed during the course of assessment proceedings. In support of the procedure assessee filed the item wise details of stock written off along with the reasons for write off as also the recommendation of concerned authorities and picture clips in CD. 8.7. The AO has not considered the reply of assessee through letter dated.23.12.2010, wherein the procedure for write off of inventory was described with evidence along with the complete policy of inventory valuation followed by the assessee company consistently over the years and related case laws and item wise details of all inventory items written off during the year were given. With the submission the assessee has also explained to AO the authorization levels, accounting policies, procedure carried out for physical verification etc. with the details of items wise damaged goods and obsolescence.
8.8. The A O has raised a new issue about the claim of double deduction. Such issue was never raised in earlier years nor any query was raised in assessment proceedings. In fact the A O has made these observations in the assessment order on the basis of arguments of ld. D/R in course of appellate proceedings for assessment year 2003-04 before the ITAT. Hon'ble ITAT in assessment year 2003-04 in ITA No. 188 & 265/JP/2007 38 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
dated 9.8.2010 after considering the said arguments of ld. D/R held that there is no case of double deduction and deleted the disallowance made in respect of the inventories written off. Copy of ITAT order is at.
1. Reliance is placed on following cases:
J. C. I. T. Vs. ITC Ltd. 299 ITR (AT) 341(SB)(Cal.):
CIT Vs. Alfa Leval (India) Ltd. 295 ITR 451 (SC):
8.9. In the present case, the assessee has actually written off the inventory of Rs. 91,83,353/- by identifying the damaged / obsolete items.
This is also the regular practice of the assessee. In any case since stock are valued at cost or market price whichever is lower and these inventory has no value, the same is to be allowed to the assessee in view of the accounting principles and the ratio laid down by Hon'ble Supreme Court. CIT Vs. Hotline Teletube and Components Ltd. 175 Taxman 216 (Del.): Provision for diminution in value of stock is allowable as business loss.
8.10. In view of above, it is contended that asessee's claim of inventory written off is fully allowable.
8.11. Ld. DR relied on the orders of authorities below.
9. We have heard the rival contentions and perused material on the record. ITAT in assesssee's own case has allowed the similar claim of inventory write off in AYs 2003-4 to 06-07. Besides considering the facts 39 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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and the judicial precedent cited above we see no justification in disallowing the claim of inventory write off. Consequently claim in this behalf is allowed, assessee succeeds on this ground.
Ground 4: Treating the revenue expenditure of Rs.
8,74,73,893/- on account of restructuring as one time expenditure for enduring benefit, hence capital in nature and thus disallowing the same & the Ld. DRP has erred in not giving direction to delete the disallowance proposed by the AO in this regard.
10. Brief facts are - Assessee Company restructured its business activities with a view to have better market penetration and improve its overall sales. The restructuring activities included moving of the assessee company's current distribution to a more efficient set up with deeper and wider consumer reach, being part of the bigger global scale to improve efficiencies and effectiveness, using of the best practices / processes and relocating of its General officer to a world class facility in Mumbai. In view of this, the assessee moved its corporate office from Gurgaon to Mumbai and also moved to better and efficient distribution system during the year 2006. 10.1. The additional expenses incurred for achieving the business efficiencies, as detailed above, were grouped under 'restructuring cost' and approval was sought from the Hon'ble High Court of Rajasthan for charging of these expenses against amalgamation reserves forming part of the capital reserves of the company in its books of account.
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10.2. Expenditure incurred during F Y 2006-07 (A Y 2007-08) were Rs. 45,16,19,901/-, out of which VRS Cost of Rs. 35,66,09,685/- and loss on sale of fixed assets of Rs. 75,36,323/- were added back in the statement of computation of total income. Balance Rs. 8,74,73,893/- includes expenditure under various heads which is claimed as business expenditure in the return of income as explained vide letter dated 23.12.2010. The broad nature of these expenses for the year is as under:
Nature of Expenses Amount
AY 2006-07 A Y 2007-08
Salary, Wages and Bonus 1,315,084 17,31,794
Contribution to PF and other
1,30,529 16,70,313
funds
Employees' Welfare 77,033 3,063
Rent 70,820 70,820
State Sales Tax 1,04,71,902 8,01,057
Insurance 82,641 Nil
Repair & Maintenance -
2,200 20,305
Others
Advertisement 2,73,060 Nil
Freight Transport 23,47,566 28,78,878
Travelling & Conveyance 28,65,137 30,98,315
Communication Expenses 35,950 66,174
Purchase services 51,83,184 8,73,738
Conference Expenses
Nil 43,43,282
Trade Incentives Nil 1,34,06,436
Employees' relocation Nil 53,48,962
House Support
Nil 2,10,66,873
Training / Travel Nil 66,41,842
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Nature of Expenses Amount
AY 2006-07 A Y 2007-08
Damaged Goods - Retail 6,93,20,528 60,18,094
Misc. Expenses 1,90,49,146 2,65,74,796
Others Nil 3,95,474
Total 11,12,24,780 9,50,10,216
Less: Loss on sale of
5,81,110 75,36,323
Asset
11,06,43,670 8,74,73,893
10.3. The AO proposed the disallowance of these expenditure by holding that these are one time expenditure for enduring benefit, hence, are capital in nature and cannot be regarded as revenue expenditure. 10.4. The DRP sustained the addition by giving following findings:
"It is seen that out of total amount of Rs. 57,45,57,652/-, (amount for the year is only Rs.45,16,19,901/-) a portion has been disallowed suo-moto by the assessee. Regarding the balance, although, the auditor has qualified the expenditure incurred being one-time expenditure in connection with restructuring, the assessee, nevertheless, has claimed the expenditure on revenue account. It is seen from the details of the expenditure filed that it includes substantial amounts in the nature of damaged goods, purchase services, sales etc. These expenditure have been, no doubt, incurred in connection with restructuring. The decision to move its corporate office from Gurgaon to Mumbai would no doubt have a permanent and enduring benefit to the assessee as Mumbai is the commercial capital of the country.
This being the case, the proposed action of the A O in holding Rs. 8,74,73,893/- as capital expenditure is sustained and the objection of the assessee on this account is rejected."42
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11. Ld. Counsel contends that these expenses pertaining to shifting of Corporate office from Gurgaon to Mumbai are revenue in nature incurred wholly and exclusively for its business. Besides Hon'ble High Court gave the permission for charging of these expenses against amalgamation reserves. In assessment year 2006-07, similar expenditure of Rs. 11,12,24,780/- were allowed by the AO in assessment framed u/s 143(3) after considering the details of such expenditure reflected in the notes to the accounts. 11.1. It is a settled law that treatment of expenditure in the books of account is not relevant for allowance of expenditure. Whether assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can existence or absence of entries in the books of account is decisive or conclusive in the matter as held by Supreme Court in Kedarnath Jute Mills (82 ITR 363) and Sutlej Cotton Mills (116 ITR 1).
11.2. Expenditure incurred on ground of commercial expediency to facilitate carrying on of the business is allowable as revenue expenditure. By incurring the above expenditure, the assessee has not derived any enduring benefit. Of course, these are one time expenditure for restructuring to be incurred over a period of 18 to 24 months, they do not result into creation of any asset, but only facilitate in the efficient working of the assessee. Hence such 43 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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expenditure are allowable as business expenditure u/s 37(1). Further reliance in this connection is placed on:
CIT vs Madura Coats Ltd [2003] 263 ITR 0241.(Madras).
Dalmia Jain & Co. Ltd. v. CIT [1971] 81 ITR 754 (SC) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) Alembic Chemical Works v. CIT [1989] 177 ITR 377 It is, therefore, contended that the disallowance being unjustified may be deleted.
11.3. Ld. D/R relied on authorities below.
12. We have heard the rival contentions and perused the material available on record. Hon'ble Supreme court in Empire Jute Mills has laid down the proposition that merely because expenditure results in some enduring benefit is not alone decisive of it's being capital in nature. If the same increases the revenue generating apparatus then it will fall in the category of revenue expenditure despite giving enduring benefit. Besides in Alembic it has been held that merely because once for all payment is made it doesn't ipso facto amount to capital expenditure.44
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12.1. Assessee incurred these expenses for shifting of Corporate office from Gurgaon to Mumbai wholly and exclusively for its business. Besides Hon'ble High Court gave the permission for charging of these expenses against amalgamation reserves. In assessment year 2006-07, similar expenditure of Rs. 11,12,24,780/- were allowed by the AO in assessment framed u/s 143(3) after considering the details of such expenditure reflected in the notes to the accounts. In view of the foregoing we are of the considered view that assessee's claim falls in the category of revenue expenses and deserve to be allowed. This ground succeeds.
Ground 5: Disallowance of Rs. 37,14,84,213/- u/s 40(a)(ia) assuming that following expenditure was liable for TDS:
i. Rs. 13,17,51,694/-(Amount wrongly taken as Rs.13,42,66,088/- in the grounds) on advertisement. ii. Rs. 23,97,32,519/- on trade incentive paid to distributor.
Ld. DRP erred in not deciding the deletion on merits and merely directing ld. AO to apply correct TDS provisions & rates. The Ld. AO has further erred in making the disallowance without complying with the said directions in correct perspective.
13. Brief fact are - assessee incurred expenditure of Rs. 57,43,78,947/- on account of advertisement. During the course of assessment proceedings it furnished party wise details of Rs. 43,33,61,849/- on which TDS of Rs. 45
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44,19,297/- was deducted. For remaining amount Rs. 14,10,17,098/- were furnished. For lower / non deduction of tax at source the assessee itself disallowed a sum of Rs. 5,28,52,048/- u/s 40(a)(ia) while filing the return of income. In addition assessee also claimed Trade Incentives expenses of Rs. 27,07,86,281/-, month wise details thereof were furnished vide submission dated October 28, 2010.Grouping of these expenses into three major categories is as under:
Incentive / Scheme reimbursement expenses Rs. 11,30,94,452/- Temporary price reduction Rs. 2,80,28,897/-
Damage concession Rs. 12,96,62,932/-
Total Rs. 27,07,86,281/-
13.1 The A O in the draft assessment order made following observations:
The assessee was required to deduct Rs. 43,55,175/- u/s 194C in respect of amount paid to M/s. Madison Communications Pvt. Ltd. (1.133% of Rs. 38,43,93,204/-). As against this tax deducted is only Rs. 37,45,205/-. Thus tax was short deducted by Rs. 6,09,970/-. This was converted into the amount of payment at Rs. 5,38,36,717/- (Rs. 6,09,970 * 100 / 1.133). Since assessee has already disallowed Rs. 5,13,22,323/- in respect of this party, disallowance of Rs. 25,14,394/- was further made u/s 40(a)(ia).
In respect of payment of Rs. 14,10,17,098/- under advertisement, TDS has been made on payment of Rs. 91,16,655/-. Further Rs. 1,48,749/- has been disallowed by the assessee himself u/s 40(a)(ia). Therefore further disallowance of Rs. 13,17,51,694/- is required to be made. He further observed that assessee has not 46 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
furnished partywise details and therefore on the entire amount, tax ought to have been deducted.
Assessee claimed expenditure under the head trade incentive of Rs. 27,07,86,281/- being incentive to distributor under the contractual obligation as per sales promotion scheme. By referring to various circulars of the Board, it was presumed that assessee was liable to deduct tax at source u/s 194C on the entire payment of Rs. 27,07,86,281/-. Assessee has deducted tax at source on the amount of Rs. 3,10,53,762/-. Hence Rs. 23,97,32,519/- was disallowed u/s 40(a)(ia).
13.2. Before DRP relevant material and explanation was submitted, however instead of deciding the issue, it merely gave following directions:
"It is seen that the disallowances have arisen on account of incorrect appreciation of TDS Sections and then, trying to reconvert them into income figures. The assessee has clearly indicated how TDS is not attracted on many of the expenditure or attracts lower rates of TDS. Therefore, the A O is directed by DRP to verify the applicability of the correct TDS provisions and the rates thereof and then, calculate disallowance u/s 40(a)(ia), if any. Therefore, the assessee's objection in this regard is partly accepted."
13.3. Ld. AO in the final assessment order accepted that disallowance u/s 40(a)(ia) for Rs.25,14,394/- in respect of payment made to M/s Madison Communication Pvt. Ltd. is not required. However in respect of the remaining amount, by reiterating draft assessment findings amount of Rs. 37,14,84,213/- was disallowed u/s 40(a)(ia).
47
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14. Ld. Counsel contends that assessee has incurred expenditure of Rs. 14,10,17,098/- on other payments under the head advertisement which is mainly on purchase of various items like Counter tops, display units, wall units, floor stands, posters, banners, etc. TDS was deducted on payment of Rs. 91,16,655/-. On some payment tax was not deducted for which suo motu, assessee disallowed Rs. 1,48,749/- in the computation. The remaining amount of Rs. 13,17,51,694/- represented purchases of articles like display units, wall units, floor stands, posters, banners etc., on which VAT was paid. Being article purchase there is liability of TDS thereon. Assessee made available complete record and random sample bills demonstrating that amount of Rs. 13,17,51,694/- represented purchase of material. Hence the disallowance made u/s 40(a)(ia) is unjustified and uncalled for. 14.1 Apropos trade incentive expenditure to distributors amounting to Rs. 27,07,86,281/-, these payments are categorized into the following heads:
Incentive / Scheme Reimbursement exp. 11,30,94,452/-
Temporary price red. 2,80,28,897/-
Damage Concession 12,96,62,936/-
Total 27,07,86,281/-
• The nature of expenditure debited under this head was duly
explained vide letter dated 20.12.2010 as under:
• Local Promotion expenses - representing expenses incurred on payment of endorsement charges to celebrities, promotional activities carried out in malls, stage events, display dummy packs, 48 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
display units, cost of art work etc. On these payments tax has been deducted at source.
• Temporary price reduction - represents amount reimbursed on account of price adjustment due to temporary reduction in price on scheme.
• Damage concession - represents the fixed amount of discount on sales invoice.
• Inventive gift to dealers - purchase of goods given to dealers as part of sales incentive.
• Ld. AO without appreciating the facts and explanation without applying mind, summarily held that assessee was liable to deduct tax at source u/s 194C and accordingly disallowed sum of Rs. 23,97,32,519/- u/s 40(a)(ia).
• In assessment proceedings assessee filed party wise detail of payment above Rs. 5 Lacs vide letter dated 20.12.2010 totalling an amount of Rs. 14,56,89,572/-. Tax has been deducted at source on payment of Rs. 3,10,53,762. On the balance amount tax is not deductible for the reason that the payment is made against supply of display units, price reduction, damage concession gifts given to dealers under policy of sales incentives etc. Most of the incentive is given to Government owned Canteen Stores Department amounting to Rs. 2,86,98,672/- on which tax is otherwise not required to be deducted. Thus from the above it can be noted that the disallowance made by AO u/s 40(a)(ia) out of the trade incentive expenses is uncalled for.
14.2. In A.Y 2008-09, ld. AO raised similar issues in respect of trade Inventive of Rs. 37,44,41,176/- and Distributor Coverage Expenses of Rs.
1,62,03,546/-. The assessee offered same explanation about the nature of these expenses, contending that TDS is not required to be deducted on these payments. The AO himself accepted the contention of the assessee and has not made any disallowance u/s 40(a)(ia). Since revenue itself has accepted that TDS is not required to be deducted on such trade incentive in 49 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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AY 2008-09, the disallowance made u/s 40(a) (ia) for the year under consideration is un justified. Reliance is placed on:
i. S.R.F. Finance Ltd. vs. CBDT (1995) 211 ITR 861 (Del) [SLP dismissed by Supreme Court (1995) 212 ITR 375 (SC) (Stat.)] see also All Gujarat Federation of Tax Consultants vs. CBDT (1995) 214 ITR 276 (Guj) The expression "any work" occurring in section 194C cannot include a contract for rendering of services.
ii. Wadilal Dairy International Ltd. vs. Asstt. CIT (2001) 70 TTJ (Pune) 77 [see also Dy. CIT vs. Reebok India Co. (2006) 100 TTJ (Delhi) 976; Bangalore District Co-op. Milk Producers Societies Union Ltd. vs. ITO (2007) 11 SOT 539 (Bang.); Dy.
CIT vs. Seagram Manufacturing (P.) Ltd. (2008) 19 SOT 139]; Andhra Pradesh State Road Transport Corporation vs. DCIT (2002) 74 TTJ (Hyd.) 531]; ITO Vs. Dr Willmar Schwabe 3 SOT 71.
14.3. It is contended that though the DRP has observed that assessee has explained how TDS is not attracted on many of the expenditure or attracts lower rate of TDS. Instead of deleting the disallowance it merely directed AO to again verify the applicability of correct TDS provisions, thus putting the assessee to disadvantageous condition which is explicit from the fact that AO repeated the additions. Legally sec. 144C(8) specifically provides that DRP may confirm, reduce, or enhance the variation proposed in the draft order, which clearly implies that it shall not set aside any proposed variation or issue any direction under sub. sec.5 for further enquiry while 50 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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passing the final assessment order. It denies the assessee a lawful opportunity of agitating his grievance again before DRP, which is in violation of principle of natural justice. More so when there is no allegation for want of availability of record from the side of the assessee. Consequently the DRP direction to AO to verify the applicability of TDS provisions again is beyond the scope of section 144C. On this count also the disallowance made by AO u/s 40(a)(ia) is illegal and bad in law.
14.4. Ld. Dr relied on the orders of authorities below.
15. We have heard the rival contentions and perused the material available on record. It shall be pertinent to observe that ld AO in A.Y 2008- 09, raised similar issues in respect of Trade Inventive of Rs. 37,44,41,176/- and Distributor Coverage Expenses of Rs. 1,62,03,546/-. The AO himself accepted the same contentions of the assessee and made no disallowance qua these payments u/s 40(a)(ia). Since revenue itself has accepted no TDS liability on such trade incentive in AY 2008-09, the disallowance made u/s 40(a) (ia) for the year is unjustified.
15.1. Adverting to advertisement issue the remaining amount of Rs. 13,17,51,694/- represents purchases of articles like display units, wall units, floor stands, posters, banners etc., on which VAT was paid. The transactions being of purchase simpliciter and VAT being charged thereon, there is no 51 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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justification in holding it as advertisement contract. Consequently the question of TDS liability thereon does not arise. Hence the impugned disallowance made u/s 40(a)(ia) is deleted. Assessee's ground is allowed.
Ground 6 - Making disallowance of advertisement payment made to Group M Media Pvt. Ltd. for Rs.
23,44,747/- by holding that the liability of deduction of tax at source arises u/s 195 and therefore it attracts provisions of sec.40(a)(i) & the Ld. DRP has erred in not giving direction to delete the disallowance proposed by the AO in this regard.
16. Brief facts are assessee made payment of Rs. 23,44,747/- to Group M Media Pvt. Ltd. for advertisement in various TV channels, TDS thereon was deducted u/s 194C, vide letter dated 23.12.2010, copy of invoice was filed. AO however proposed that TDS was deductible at higher rate u/s 195. It was clarified that Group M Media Pvt. Ltd. is an Indian company, the payment made to it is not remitted out of India and therefore provisions of section 195 is not applicable. Ld. AO based on his findings for AY 2006-07 held that agreement between Gillette, Singapore, subsidiary of Gillette, USA and Mindshare, Singapore indicates that assessee is receiving services other than included services in term of DTA between India and USA. Gillette, USA has a PE in India as the administrative office of the assessee is shifted to Mumbai in the premises of Proctor and Gamble and the overhead expenses 52 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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are shared by the assessee. Therefore income of the Gillette, USA to the extent it is attributable to the operations carried out in India is taxable in India.
16.1 The assessee has not obtained certificate u/s 195 for no deduction of tax at source before making payment to Mindshare or Gillette, USA or any other associate enterprise which could represent any income accruing or arising to those entities. Mindshare, Singapore is supervising the entire media arrangement for which the agreement has been entered into by one of the affiliate of the assessee. The assessee does not have any agreement with Group M Media Pvt. Ltd. The payment of Rs. 23,44,747/- made to Group M Media Pvt. Ltd. are on behalf of Mindshare, Singapore. Therefore the payment is covered u/s 195. Disallowance was proposed u/s 40(a)(ia). 16.2 The DRP has given the following findings:
"It is seen that in the last year also such disallowance was proposed and the DRP upheld the action of the AO. As the matter has not reached conclusion, DRP cannot take the final decision in the matter and therefore, confirms the action of the A O and the objection of the assessee this point is not accepted."
Accordingly the A O made the disallowance of Rs. 23,44,747/- in final order. 53
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16.3. Ld. Counsel contends that Group M Media India Pvt. Ltd. was a media advertising agency, the system in which this arrangement worked was to the effect that the scope of services were mutually agreed with no third party interference for advertisement in various Indian TV Channels i.e. Maa TV, Surya Channel, E TV, Star, SUN, etc. for advertising the Indian Product of the company.
16.4. The agreement between M/s. Mindshare, Singapore and Gillette, Singapore, for rendering certain services of AOR was for limited period between 1.1.2006 to 30.6.2006. This agreement has no effect on the assessee. The assessee has independent arrangement with Group M Media India (P) Ltd. even prior to 1.1.2006. In course of assessment proceedings for AY 2006-07, the assessee vide letter dated 21.12.2009 has also requested the A O to obtain the information directly from Group M Media India Pvt. Ltd. but this was not done to ascertain the nature of payment. 16.5. Group M-Media Ltd. is a Company incorporated under the Companies Act, 1956. Incorporation certificate is placed on record. It is an Indian company as defined u/s 10(26). It is a company resident in India u/s 6(3). Hence, in respect of payment made to Group M Media India (P) Ltd., assessee has rightly deducted TDS u/s 194C. Section 195 applies when 54 ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
payment is made to a Non resident or to a foreign company. In present case payment is made to Group M Media India (P) Ltd. which is an Indian Company. It is neither a non resident, nor a foreign company and therefore section 195 is not applicable.
16.6. The observation of the A O that payment to Group M Media (India) Pvt. Ltd. is on behalf of Mindshare, Singapore in view of the AOR Service Contract between Mindshare Singapore and Gillette Company, Singapore is without any basis. This is evident from the fact that payment to Group M Media India Pvt. Ltd. has been made even prior to first day of January 2006 and it is for the advertisement services on the various Indian TV Channels for advertising the product of the assessee company. Simply because there is no written agreement with M/s. Group M Media (India) Pvt. Ltd, the expenditure incurred by the assessee cannot be disallowed u/s 37 when the factum of services rendered and payment made to it is not in dispute. 16.7. The DRP has simply confirmed the disallowance by observing that in the last year, similar disallowance made by the assessee is upheld by DRP. The DRP has not considered the arguments of the assessee that M/s. Group M Media (India) Pvt. Ltd. is a resident company and not non-resident or foreign company.
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16.8. Ld. DR relied on the authorities below.
17. We have heard the rival contentions and perused the material available on record. After DRP order and during the pendency of this appeal ITAT passed order for AY 2006-07 vide order dated 28-02-2014 holding advertisement payment to Group M Media as covered by sec. 194C and not u/s 195 by following observations :-
" 6.3. After considering the rival submission, we find that Group M Media India Pvt. Ltd. Is an Indian co. as is evident from the company master details placed at Paper Book Page 17. From the same, it is noted that this company is incorporated on 29.11.2001 having registered office at Mumbai. Therefore, it is an Indian Co. as defined u/s 2(26) and is a company resident in India u/s 6(3). All payment made to this company towards advertisement charges is in Indian currency. Tax is deducted at source on such payment u/s 194C. Sec. 195 is applicable when payment is made to a non resident. Admittedly, payment to Group M Media India Pvt. Ltd. Is a payment to resident and not a non resident. Therefore, section 195 is not attracted. The AO has not disputed the genuineness of the payment and therefore only because there is no agreement for the advertisement work with this company cannot be viewed adversely. Therefore, the disallowance of Rs. 36,70,04,056/- made by the AO is incorrect, against law and the same is deleted. So far as expenses 56 ITA NO. 1087/JP/2011 A.Y. 2007-08.
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on trade incentive is concerned, we find that similar incentives given as per various schemes in earlier years has been allowed. The AO at page 2 of the order has admitted that bills and vouchers of expenses, as desired, were produced for verification which was test checked. The observation of AO that services has been received by the assessee against these payment and therefore he should have deducted tax at source on the value of the gift is ill founded in as much as the payment is not against the services but against the sale of goods to the distributors and therefore TDS provisions are not applicable. Therefore, the disallowance of Rs. 16,17,24,303/- made by the AO on this account is deleted."
Since the assessee has deducted TDS u/s 194C, it cannot be disallowed u/s 40(a)(ia). Consequently this ground of the assessee is also allowed.
18. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 11.08.2015.
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ITA NO. 1087/JP/2011 A.Y. 2007-08.
M/s. Gillette India Ltd.
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Sl. No. Date Initial
1 Date of dictation
2 Date on which the typed draft is placed before the
Dictating Member ............
Other Member............
3 Date on which the approved draft comes to the
Sr.P.S./P.S
4 Date on which the fair order is placed before the
Dictating Member for pronouncement
5 Date on which the fair order comes back to the
Sr.P.S./P.S.
6 Date on which the file goes to the Bench Clerk
7 Date on which the file goes to the Head Clerk
8 The date on which the file goes to the Assistant
Registrar for signature on the order
9 Date of Dispatch of the Order