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2018 (11) TMI 1762 - AT - Income TaxTP Adjustment - determined the arm's length price of royalty payment on trademark to SCOL - TPO disallowed royalty payment on trademark at 1% while allowing royalty payment on technical knowhow at 1.25% of net sales - HELD THAT - Following the consistent view of the Tribunal on identical issue in assessee s own case 2016 (5) TMI 969 - ITAT MUMBAI , we hold that the royalty payment on trade mark to SCOL @ 1% of net sales is at arm's length, hence, no further adjustment is required. Accordingly, we delete the disallowance made by the Assessing Officer. Ground raised is allowed. Proportionate expenditure incurred on behalf of the A.E. towards advertisement, marketing and promotion (AMP) - HELD THAT - As could be seen from the material on record, in response to the show cause notice issued by the Transfer Pricing Officer the assessee had specifically submitted that there is no arrangement or agreement with the overseas A.E. for incurring AMP expenditure. It is also apparent the expenditure was wholly and exclusively incurred for marketing assessee s own products and the payment was made to third parties in India. Therefore, it is outside the purview of international transaction as defined under section 92B of the ACT. As could be seen, the Transfer Pricing Officer ignoring the submissions made by the assessee had assumed that a benefit has accrued to the overseas A.E. on account of AMP expenditure incurred by the assessee. Following decision of the Co ordinate Bench in assessee s own case 2016 (5) TMI 969 - ITAT MUMBAI we delete the addition made by the Assessing Officer towards transfer pricing adjustment on account of AMP expenditure. Ground raised is allowed. Disallowance towards royalty payable to Cadbury Adams, U.S.A. (CAUSA) - HELD THAT - as per the original agreement executed on 1st June 2006, effective from 1st January 2006, the parties to the agreement intended to transfer and avail technical knowhow / knowledge relating to the licensed product along with trademark. Considering the submissions of the learned Sr. Counsel for the assessee that in subsequent assessment years royalty paid by the assessee @ 2.7% of sales was accepted by the Transfer Pricing Officer, the letter dated 26th April 2016, sought to be produced by the assessee as additional evidence, in our view, is of much significance since it will have a crucial bearing in determining whether CAUSA has authorised the assessee to use technical knowhow along with trademark, hence, is admitted as additional evidence. Even, without taking cognizance of the aforesaid additional evidence, the original as well as amended agreement make it abundantly clear that assessee has also availed technical knowhow from CAUSA. Further, the Departmental Authorities don dispute the genuineness or authenticity of the amended agreement. What they are disputing is the the date from which the amended agreement is effective. If the departmental authorities in the subsequent assessment years have allowed payment of royalty both for trademark and technical knowhow, there is no reason why it should not be allowed in the impugned assessment year, since, it cannot be said that the assessee was manufacturing Halls brand products without obtaining the required technical knowhow. Accordingly, we hold that payment of royalty to CAUSA is at arm s length. Disallowance of royalty paid to M/s. Cadbury Schwepps Asia Specific TTE, Singapore (CSAPL) - Admission of additional evidence - HELD THAT - Assessee has submitted before us that various documentary evidences were furnished before the Transfer Pricing Officer as well as learned Commissioner (Appeals) to demonstrate that services were availed from the A.E. under the terms of the agreement. The learned Sr. Counsel, however, fairly submitted that the details of cost incurred by the A.E. were not furnished before the Assessing Officer, since, he never called for it. It is necessary to observe, in the course of hearing before us the learned Sr. Counsel has filed an affidavit obtained from CSAPL, the A.E., asserting that various services were rendered to the assessee on cost plus mark up basis. Admittedly, the aforesaid additional evidence was not before the Transfer Pricing Officer or the learned Commissioner (Appeals). Considering the fact that the affidavit produced before us may have a crucial bearing on deciding the issue one way or the other, though, we admit the additional evidence produced by the assessee, however, since the aforesaid additional evidences has not been examined either by the Transfer Pricing Officer or the learned Commissioner (Appeals), in our view, it would be fair and reasonable to allow an opportunity to the Assessing Officer to consider the additional evidence and decide the issue. Moreover, there is also allegation and counter allegation with regard to production of evidences. When as per assessee s claim in the subsequent assessment years the Transfer Pricing Officer himself has allowed a part of the service charges paid by the assessee to CSAPL, though, the quantum is in dispute. If in the subsequent assessment years the Transfer Pricing Officer has accepted the fact that the assessee has availed services from CSAPL under the very same agreement, there is no reason to dispute assessee s claim of availing services in the impugned assessment year if the assessee can demonstrate such fact by furnishing proper documentary evidences. In that event, the Transfer Pricing Officer certainly cannot determine the arm's length price at nil by applying the benefit test. Therefore, on overall consideration of facts and circumstances of the case, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due opportunity of being heard to the Assessing Officer. The Assessing Disallowance of depreciation on capitalization of marketing knowhow relating to non chocolate confectionary business of M/s. Warner Lambert (I) Pvt. Ltd. - HELD THAT - Respectfully following the consistent view of the Tribunal on this issue in assessee s own case in the preceding assessment years 2015 (6) TMI 247 - ITAT MUMBAI , we allow assessee s claim of depreciation. Disallowance of expenditure under section 14A - HELD THAT - As could be seen from the facts on record, while the assessee had worked the disallowance under section 14A of the Act on the basis of salary cost incurred in respect of two employees working in the treasury department, the Assessing Officer has quantified the disallowance on proportionate basis keeping in view the ratio between the net profit and exempt income earned by the assessee. While doing so, the Assessing Officer has completely ignored the submissions of the assessee that investments made were out of surplus funds and only the salary cost relating to two employees of the treasury department is attributable towards earning of exempt income. Notably, while deciding identical issue in assessee s own case for assessment year 2004 05 2015 (6) TMI 247 - ITAT MUMBAI restricted the disallowance under section 14A of the Act to 2% of the exempt income earned during the year. Respectfully following the consistent view of the Tribunal in assessee s own case as referred to above, we direct the Assessing Officer to restrict the disallowance under section 14A of the Act to 2% of the exempt income earned by the assessee during the year. This ground is partly allowed.
Issues Involved:
1. Disallowance of ?8,88,97,000 out of the royalty paid to M/s. Cadbury Schweppes Overseas Ltd., U.K. (CSOL). 2. Disallowance of ?80,00,000 on account of proportionate expenditure incurred on behalf of the A.E. towards advertisement, marketing, and promotion (AMP). 3. Disallowance of ?20,41,065 towards royalty payable to Cadbury Adams, U.S.A. 4. Disallowance of ?13,02,22,800 to M/s. Cadbury Schweppes Asia Pacific TTE, Singapore. 5. Disallowance of depreciation of ?22,75,506 on capitalization of marketing knowhow. 6. Disallowance of expenditure under section 14A of the Act amounting to ?1,77,87,904. 7. Revenue’s appeal concerning deletion of part disallowance made under section 14A of the Act. 8. Revenue’s additional grounds concerning the AMP expenditure. Detailed Analysis: 1. Disallowance of ?8,88,97,000 out of the royalty paid to M/s. Cadbury Schweppes Overseas Ltd., U.K. (CSOL): The assessee, a subsidiary of CSOL, U.K., challenged the disallowance of ?8,88,97,000 out of the royalty paid to CSOL. The Transfer Pricing Officer (TPO) determined that the royalty payment for the use of the trademark should be subsumed within the royalty for technical knowhow, thus adjusting the arm's length price of the royalty payment to 1.25% of net sales. The Commissioner (Appeals) upheld this disallowance. However, the Tribunal, following its consistent view in the assessee's own case for preceding assessment years, held that the royalty payment on the trademark to CSOL at 1% of net sales is at arm's length, hence, no further adjustment is required. The disallowance made by the Assessing Officer was deleted. 2. Disallowance of ?80,00,000 on account of proportionate expenditure incurred on behalf of the A.E. towards advertisement, marketing, and promotion (AMP): The TPO noticed that the assessee's AMP expenditure was significantly higher than the industry average. He concluded that a benefit had accrued to the A.E. on account of such expenditure and quantified the benefit at ?1.70 crore, restricting the adjustment to ?80 lakh. The Commissioner (Appeals) upheld the addition. The Tribunal, following its decision in the assessee's own case for assessment year 2005-06, held that the transaction was not an international transaction and deleted the addition made by the Assessing Officer. 3. Disallowance of ?20,41,065 towards royalty payable to Cadbury Adams, U.S.A.: The TPO determined that the royalty payment to Cadbury Adams, U.S.A. (CAUSA) at 2.7% of sales was not at arm's length and restricted it to 1%. The Commissioner (Appeals) upheld this view. The Tribunal, after examining the agreements and additional evidence, held that the payment of royalty to CAUSA was at arm's length and deleted the disallowance. 4. Disallowance of ?13,02,22,800 to M/s. Cadbury Schweppes Asia Pacific TTE, Singapore: The TPO determined the arm's length price of the payment made to M/s. Cadbury Schweppes Asia Pacific TTE (CSAPL) at nil, as the assessee failed to furnish necessary evidence. The Commissioner (Appeals) upheld the addition. The Tribunal admitted additional evidence and remanded the matter back to the Assessing Officer for de novo adjudication, directing a speaking and well-reasoned order. 5. Disallowance of depreciation of ?22,75,506 on capitalization of marketing knowhow: The Assessing Officer disallowed the depreciation claim following the assessment order for 2003-04. The Tribunal, following its consistent view in the assessee's own case for preceding assessment years, allowed the claim of depreciation. 6. Disallowance of expenditure under section 14A of the Act amounting to ?1,77,87,904: The Assessing Officer disallowed the expenditure under section 14A by applying a proportionate basis. The Tribunal, following its decision in the assessee's own case for assessment year 2004-05 and 2005-06, restricted the disallowance to 2% of the exempt income earned during the year. 7. Revenue’s appeal concerning deletion of part disallowance made under section 14A of the Act: In view of the Tribunal's decision in ground no.6 of the assessee's appeal, this ground became redundant and was dismissed. 8. Revenue’s additional grounds concerning the AMP expenditure: In view of the Tribunal's decision in ground no.2 of the assessee's appeal, these grounds became redundant and were dismissed. Conclusion: The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal provided detailed reasoning for each issue, ensuring that the legal principles and facts were thoroughly examined.
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