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2017 (4) TMI 1521 - AT - Income TaxInternational transaction as contemplated u/s 92B - royalty chargeable from two Associated Enterprises (AEs) as contemplated u/s 92A - TPO was of the view that the AEs had used the trade name/brand name owned by the assessee without any compensation, therefore, the transaction of receipt of royalty was not at arm s length - CIT(A) held that royalty @ 2% of FOB sales would be at arm s length price - HELD THAT - Brand name of the assessee was used by the AE and in the earlier years the assessee provided the R D support, know-how technologies etc. which helped the AE for the year under consideration also to some extent. It is also noticed that the assessee received the royalty @ 1% in the preceding year. TPO also while working out the royalty rate for the year under consideration was of the view that the royalty @ 1% was chargeable on the products manufactured without the aid and support of assessee company but marketed by using Dabur name, however, no basis has been given for the same. In our opinion the estimate made by the TPO for the rate of royalty was highly excessive. CIT(A) was not justified in directing the AO to charge the royalty from Dabur International UAE @ 2%. Particularly when, the assessee was not using the technical know-how or R D support from the assessee, in our opinion it will be fair and reasonable to charge the royalty @ 0.75% by considering this fact that in the year under consideration the assessee had incurred huge expenses on marketing, advertisement brand building etc. and that in the preceding year the royalty was although charged @ 1% on the products manufactured without R D support and technical know-how from the assessee but the aforesaid expenses were comparability less. Royalty charged from M/s Dabur Nepal Ltd. - contention of the assessee that 80% of the products manufactured by M/s Dabur Nepal Pvt. Ltd. were purchased by the assessee has not been rebutted. It is also not in dispute that the royalty was payable earlier on the sales, therefore, it is unbelievable that the assessee charged the royalty on the purchases made by it from M/s Dabur Nepal Pvt. Ltd. to increase the cost of purchases. In the present case, it is an admitted fact that there was no agreement in existence between the assessee and the AE i.e. M/s Dabur Nepal Pvt. Ltd. and nothing is brought on record to substantiate that the assessee incurred any expenditure which benefited M/s Dabur Nepal Pvt. Ltd. in any manner. Therefore, no royalty was payable to the assessee by M/s Dabur Nepal Pvt. Ltd. By considering the totality of the facts as discussed here in above, we are of the view that the royalty @ 2% directed to be charged by the ld. CIT(A) was not justified, therefore, the addition made on the said basis is deleted. Sale of shareholdings in M/s Dabur Overseas Ltd. and M/s Dabur Nepal Pvt. Ltd. - TPO pointed out that the assessee was holding 79.96% of the shares of M/s Dabur Nepal Pvt. Ltd. which were sold to M/s Dabur International Ltd. for an amount of ₹ 17.16 crores and as a consequence to these transactions, the assessee ceased to be the holding company and M/s Dabur International Ltd. became 97.46% owner of M/s Dabur Nepal Ltd - HELD THAT - CIT(A) categorically stated that two independent parties namely, M/s Bibhuti Pvt. Ltd. and M/s Lunar Trading Co. also sold shares of M/s Dabur Nepal Ltd. to M/s Dabur International Ltd. about three months before the sale of shares by the assessee and the sale price in case of sale transaction by those independent parties was comparable, so there was no reason to discard the sale transaction by third parties as CUP (comparable uncontrolled price), particularly when the sale transaction by those independent parties and that of the assessee were broadly comparable, the only difference was in the quantity of the shares sold which was lesser in the case of two independent parties. Those parties were in a better position to have a better bargain than the assessee. We, therefore, considering the totality of the facts are of the confirmed view that the ld. CIT(A) was fully justified in holding that arm s length value of shares as determined by the independent valuer in the case of M/s Dabur Nepal Pvt. Ltd. need not be disturbed. We do not see any valid ground to interfere with the findings given by the ld. CIT(A). Valuation of the shares of M/s Dabur Overseas Ltd . - CIT(A) although directed the AO to adopt average of growth figure available for three years which came to 25% but ignored the growth rate based on actual figures for the future years. In the instant case, it is not pointed out as to how and in what manner the average growth figure taken by the assessee at 19% for succeeding years, on the basis of valuation report of an independent valuer was wrong. Therefore, we are of the view that the ld. CIT(A) was not justified in adopting the figure of average growth at 25% instead of 19% adopted by the assessee. Accordingly, we modify the order of the ld. CIT(A) to this extent that the AO for the valuation of shares of M/s Dabur Overseas Ltd., shall adopt the figure of projected growth by taking average of growth figure at 19% instead of 25% directed by the ld. CIT(A). Accordingly, this issue is decided in favour of the assessee and against the department. Addition u/s 43B r.w.s 36(1)(va) - staff welfare expenses by observing that deposits to the statutory fund was beyond the due date - HELD THAT - In the present case, the ld. CIT(A) categorically stated that all the payment had been made by the assessee before due date of filing the return of income u/s 139(1) of the Act. Therefore, such payments could not be disallowed as per the provisions contained in first proviso to Section 43B of the Act. The view taken by the ld. CIT(A) was inconsonance with the ratio laid down by the Hon ble Supreme Court in the case of CIT Vs Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT . We, therefore, do not see merit in the appeal of the department on this issue. Addition on account of club expenditure - AO disallowed the impugned amount on the ground of personal expenses - HELD THAT - CIT(A) allowed the claim of the assessee by following the earlier order of the then ld. CIT(A) for the assessment year 1995-96 which was not challenged by the department. Therefore, on the principle of consistency also the ld. CIT(A) was justified in deleting the impugned amount, particularly when nothing was brought on record to substantiate that the personal element was actually involved. The expenses were incurred by the assessee on account of entrance fee and subscription for various club partnership in order to promote the business interest which was neither personal nor resulted in any benefit in the capital filed to the assessee. We, therefore, do not see any merit in this ground of the departmental appeal. Deduction u/s 80IB 80IC on the disallowance u/s 40(a)(ia) of the Act which comprises of sale of scrap, rental income and misc. income - HELD THAT - In the present case, it is noticed that the ld. CIT(A) allowed the claim of the assessee by following the reasoning given by his predecessor for the assessment year 2005-06. It is not brought on record that the said reasoning given by the ld. CIT(A) for the preceding assessment year had been reversed by the higher firm. We, therefore, by keeping in view the principal of consistency, do not see any merit in this appeal of the department on this issue, particularly when the facts for the year under consideration and preceding year are identical. ESOP expenses allowance - admission of additional grounds - HELD THAT - Keeping in view the ratio laid down by the Hon ble Supreme Court in case of NTPC ltd. 1996 (12) TMI 7 - SUPREME COURT admit the additional ground raised by the assessee. However, it is an admitted fact that this issue has been raised by the assessee first time and the authorities below had no occasion to deal with this issue. We, therefore, deem it appropriate to remand this issue to the file of the AO/TPO to be decided in accordance with law after providing due and reasonable opportunity of being heard to the assessee
Issues Involved:
1. Chargeability of royalty from two Associated Enterprises (AEs). 2. Determination of arm’s length price (ALP) for royalty transactions. 3. Valuation of shares for international transactions. 4. Disallowance under Section 43B read with Section 36(1)(va) of the Income-tax Act. 5. Disallowance of club expenditure. 6. Deduction under Section 80IB & 80IC on various incomes. Analysis: 1. Chargeability of Royalty from Two Associated Enterprises (AEs): The assessee contended that no royalty was chargeable from its AEs, Dabur International Ltd. UAE and Dabur Nepal Pvt. Ltd., due to the absence of any contractual agreement and the substantial expenses incurred by the AEs on brand promotion. The TPO rejected this claim, stating that the royalty agreements were still in effect and that the AEs had used the Dabur brand, which necessitated royalty payments. 2. Determination of Arm’s Length Price (ALP) for Royalty Transactions: The TPO calculated the royalty at 4% of FOB sales for Dabur International Ltd. UAE and 7.5% for Dabur Nepal Pvt. Ltd. The CIT(A) reduced these rates to 2%, considering the substantial marketing expenses incurred by the AEs. The Tribunal further reduced the royalty rate for Dabur International Ltd. to 0.75%, considering the geographical conditions and the fact that the products were manufactured without the technical support of the assessee. For Dabur Nepal Pvt. Ltd., the Tribunal deleted the royalty addition, noting the absence of any agreement and the fact that the assessee had not incurred any marketing expenses. 3. Valuation of Shares for International Transactions: The TPO rejected the valuation reports prepared by the assessee’s independent valuer, which had used a projected growth rate of (-)5% for Dabur Nepal Pvt. Ltd. and 19% for Dabur Egypt Ltd., and instead used a growth rate of 5% and 89% respectively. The CIT(A) accepted the assessee’s valuation for Dabur Nepal Pvt. Ltd., citing political instability and comparable uncontrolled prices (CUP) from other shareholders’ transactions. For Dabur Overseas Ltd., the CIT(A) directed the AO to use a 25% projected growth rate instead of 19%. The Tribunal modified this to 19%, aligning with the assessee’s valuation. 4. Disallowance under Section 43B read with Section 36(1)(va) of the Income-tax Act: The AO disallowed ?2,10,674/- for delayed deposits to statutory funds. The CIT(A) deleted this disallowance, noting that payments were made before the due date of filing the return, in line with the Supreme Court’s decision in CIT Vs Alom Extrusions Ltd. 5. Disallowance of Club Expenditure: The AO disallowed ?3,05,088/- on account of club expenditure as personal expenses. The CIT(A) deleted the disallowance, following the principle of consistency from previous years where similar expenses were allowed. 6. Deduction under Section 80IB & 80IC on Various Incomes: The AO excluded certain incomes (disallowance u/s 40(a)(ia), scrap sales, rental income) from the computation of deduction u/s 80IB/80IC. The CIT(A) included these incomes, following the reasoning from the previous year’s order. The Tribunal upheld this decision, emphasizing the principle of consistency. Additional Ground: The assessee raised an additional ground regarding the allowance of ESOP expenses of ?6,85,99,352/-. The Tribunal admitted this ground, citing the Supreme Court’s decision in National Thermal Power Company Ltd. Vs CIT, and remanded the issue to the AO/TPO for fresh consideration. Conclusion: The Tribunal provided a detailed issue-wise analysis, addressing the contentions of both the assessee and the department, and made modifications where necessary to ensure a fair assessment in accordance with the law and established judicial principles.
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