2016 (5) TMI 1589 - AT - Income Tax

TP Adjsutment - Addition in respect of advertisement expenditure incurred by the assessee at overseas - HELD THAT - There is no agreement or documents produced by the assessee to show the assessee is liable to incur this expenditure - assessee is getting only mark-up on the cost of manufacture of the goods supplied to the AE and it is nowhere connected with the sales of the AEs. All the risks associated with the sales of AEs, is to be borne by AE only. In such circumstances, assessee is not required to incur any expenditure towards sales. More so, when there is no stipulation by way of any agreement between the assessee and the AE, it is to be borne in mind that if the assessee had sold similar goods to other non-AE, assessee would not have incurred such expenditure. The benefit derived from the impugned expenditure is not at all for the assessee and it goes directly to the AE only. In our opinion, services in connection with such advertisement cost which was incurred in abroad, benefit accrued to AE and the assessee cannot claim any of such expenditure as the AE is in different tax jurisdiction constituted distinct and independent entity subject to the law of the respective countries and the parent company cannot claim the benefits of their AE s business or may claim a beneficial ownership treating the AE as virtually non entities. This view is supported by the recent judgement of Supreme Court in the Vodafone International Holdings B. V. 2012 (1) TMI 52 - SUPREME COURT As held by Mumbai Bench in the case of Stream International Services Pvt. Ltd 2013 (9) TMI 339 - ITAT MUMBAI that investment of expenditure to AE is very much a transaction as per section 92F(v) and consequently it is a international transaction as per sec.92B requiring consideration u/s.92 - argument of the assessee is that TIML is under losses and hence no TP adjustment is necessary on transaction which is not tenable in view of the decision of the Bangalore Tribunal in the case of 24/7 Customer.com Pvt. Ltd. 2013 (1) TMI 45 - ITAT BANGALORE . Accordingly, this ground of the assessee is rejected. TP addition on account of interest in respect of interest free advertisement advances made by the assessee - HELD THAT - In this case, the assessee made interest free advances to the associate company, which includes the amounts spent for brand building, advertisement and related expenditures. As we discussed in the earlier para with reference to ALP of Advertisement expenses, the transaction between the assessee and the AE falls within the ambit of international transaction as per the provisions of the section 92B of the Act, then ALP with reference to the interest on such advances is to be computed. Accordingly, the TPO after considering the fact that assessee had adopted following rate of interest on its foreign currency loans to its AE in accordance with the bank rates prescribed by Reserve Bank of India. Thus, the TPO/AO applied the same rate to determine the ALP of the advances made by it to its AE, TIML had worked out ₹ 1,20,41,897/-. Since the assessee has invested its funds in AE, thereby assessee had taken a risk of employee its working capital with the AE and if the assessee had no relation with that entity, it would not have incurred such expenditure on behalf of the assessee or advanced money to such an entity. Thus, non-charging of interest to such outstanding attracts Transfer Pricing provisions and it is appropriate to charge interest at least LIBOR plus 2% rate as held by Mumbai Bench of the Tribunal in the case of M/s.Aurinpro Solutions Ltd. 2013 (11) TMI 806 - ITAT MUMBAI - Accordingly, we upheld the argument of the ld.D.R on this issue. If any difference in the rate of interest is charged by the TPO/AO as compared to LIBOR plus 2%, the same to be recomputed. Computation of deduction u/s.80HHC of the Act with reference to DEPB receipts - exclusion of 90% of export incentives from the business profits under Explanation (baa) to sec.80HHC - AO was of the opinion that these export incentives received by the assessee did not fall in clauses (iiia), (iiib) and (iiic) of sec.28 - HELD THAT - In our opinion, the issue is squarely covered by the decisions of the Supreme Court in the case of Topman Exports 2012 (2) TMI 100 - SUPREME COURT wherein held that when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB and not the entire sum received by him on such transfer; DEPB is chargeable as income under clause-(iiib) of section 28 in the year in which such person applies for DEPB credit against the exports whereas the profits on transfer of the DEPB by that person is chargeable as income under clause (iiid) of Sec.28 of the Act in his hands in the year in which he makes the transfer. Accordingly, we direct the AO to re-compute the deduction u/s.80HHC of the Act by applying Explanation(baa) of Sec.80HHC of the Act. Allocation of head office expenses and consultancy expenditure while computing eligible profit from jewellery division on the basis of turnover for the purpose of Sec.80-IB - HELD THAT - In our opinion, when expenses incurred at Head office cannot be identified with any single unit, apportioning the same on the basis of turnover is an appropriate method as held by the jurisdictional High Court in the case of M/S. TTK PHARMA LTD. 2011 (8) TMI 307 - MADRAS HIGH COURT . Accordingly, this ground of assessee is dismissed. The same principle is applicable in respect of allocation of professional fees paid to MCKENSEY. Accordingly, this ground of assessee is also dismissed. Non-granting of export incentives u/s.80-IB - HELD THAT - This issue is squarely covered by the judgement of Supreme Court in the case of Liberty India Vs. CIT 2009 (8) TMI 63 - SUPREME COURT wherein held that incentives which flow from the schemes formulated by Central Government or from Sec.75 of the Customs Act, 1962, hence, incentives profits are not profits derived from eligible business and therefore, such incentives do not form part of net profits of the industrial undertaking for the purpose of deduction u/s.80-IA/IB of the Income Tax Act,1961. Applying the above ratio, we reject the claim of assessee. Accordingly, this ground raised by assessee is dismissed. Exclusion of deduction claimed and allowed u/s.43B while computing deduction u/s.80-IB - claim of deduction u/s.43B in the jewellery division vis- -vis deduction u/s.80-IB - HELD THAT - In this case, the ld. Assessing Officer computed the income of assessee after allowing the annual payment of bonus and commission in terms of Sec.43B of the Act and grated deduction u/s.80-IB of the Act. Since the profit of assessee to be computed for the purpose of Sec.80-IB of the Act after taking into account all the expenses claimed under sections 30 to 43D of the Act and there is no infirmity in the order of the lower authorities, the same is confirmed on this issue. Hence, this ground raised by the assessee is rejected. Disallowance of claim of deduction u/s.80-IB in respect of profits of Euro Watch division - AO found that the assessee claimed deduction u/s.80-IB at the rate of 30% of profits - HELD THAT - Claim of deduction u/s.80-IB of the Act in respect of profits of Euro Watch Division cannot be denied on the ground that it is only notional profit, as assessee uses the products of Euro Watch Division for captive consumption of the assessee or for the reason that assessee has not earned actual profits. In our opinion, the profit from Euro Watch Division to be worked out on standalone basis by apportioning of necessary expenditure in proportionate to the turnover to this division and ascertained the true profit of the Euro Watch Division. The market value of product of the Euro Watch Division is to be determined on the average price to be paid, or paid by the assessee to the other parties in the open market, had it been purchased from the outsiders which would be in terms of Sec.80IA(8) r.w.sec.80-IB(13) of the Income Tax Act. Accordingly, the issue in dispute is remitted to the file of the AO for re-computation of the profit of Euro Watch Division and considered the claim of assessee for deduction u/s.80-IB in the light of order of Tribunal in the case of West Coast Paper Mills Ltd. 2006 (4) TMI 184 - ITAT BOMBAY-I - This issue is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of ?8,03,34,404/- in respect of advertisement expenditure incurred overseas.
2. Transfer Pricing addition on account of interest of ?1,20,41,897/- in respect of interest-free advertisement advances.
3. Computation of deduction u/s 80HHC with reference to DEPB receipts.
4. Allocation of head office expenses and consultancy expenditure while computing eligible profit from the jewellery division for the purpose of Sec. 80-IB.
5. Non-granting of export incentives u/s 80-IB.
6. Exclusion of deduction claimed and allowed u/s 43B while computing deduction u/s 80-IB.
7. Disallowance of claim of deduction u/s 80-IB in respect of profits of Euro Watch division.

Detailed Analysis:

1. Addition of ?8,03,34,404/- in respect of advertisement expenditure incurred overseas:
The assessee claimed ?8,03,34,404/- as advertisement expenditure incurred by its subsidiary TIML, London. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of this expenditure as zero, arguing that the economic burden of advertisement should be borne by the Associate Enterprises (AEs) and not the assessee. The CIT(A) supported this view, stating that the benefits of these expenses accrued directly to the AEs, and the assessee's interest was indirect and inadequate. The Tribunal upheld the TPO's determination, noting that the expenditure did not benefit the assessee directly and was not its economic function.

2. Transfer Pricing addition on account of interest of ?1,20,41,897/- in respect of interest-free advertisement advances:
The assessee advanced interest-free funds to TIML for brand building and advertisement. The TPO computed ALP interest on these advances based on RBI-prescribed bank rates, resulting in an addition of ?1,20,41,897/-. The CIT(A) upheld this view, emphasizing that such transactions between AEs should be at arm's length. The Tribunal agreed, stating that the transaction should be tested as if it were with an unrelated third party, and upheld the application of LIBOR plus 2% as the appropriate rate.

3. Computation of deduction u/s 80HHC with reference to DEPB receipts:
The AO excluded 90% of export incentives from business profits under Explanation (baa) to Sec. 80HHC. The CIT(A) supported this exclusion. The Tribunal directed the AO to re-compute the deduction u/s 80HHC by applying the Supreme Court's decision in Topman Exports, which states that only the profit on transfer of DEPB should be considered, not the entire sum received.

4. Allocation of head office expenses and consultancy expenditure while computing eligible profit from the jewellery division for the purpose of Sec. 80-IB:
The AO allocated head office expenses based on turnover, reducing the profits of the jewellery division by ?5,45,29,000/-. The CIT(A) upheld this allocation method, stating it was more appropriate than the assessee's method. The Tribunal agreed, citing the jurisdictional High Court's decision in TTK Firm Ltd., and dismissed the assessee's ground.

5. Non-granting of export incentives u/s 80-IB:
The AO excluded export incentives from business profits for computing deduction u/s 80-IB, stating they were not derived from manufacturing activities. The CIT(A) upheld this exclusion, referencing various judicial decisions. The Tribunal agreed, applying the Supreme Court's decision in Liberty India, which held that such incentives are not profits derived from eligible business.

6. Exclusion of deduction claimed and allowed u/s 43B while computing deduction u/s 80-IB:
The AO excluded deductions claimed u/s 43B while computing eligible profits for Sec. 80-IB. The CIT(A) upheld this view. The Tribunal agreed, stating that profits for Sec. 80-IB should be computed after considering all expenses claimed under sections 30 to 43D, and dismissed the assessee's ground.

7. Disallowance of claim of deduction u/s 80-IB in respect of profits of Euro Watch division:
The AO denied the deduction u/s 80-IB for the Euro Watch division, stating the profits were notional and not actual. The CIT(A) supported this view. The Tribunal remitted the issue to the AO to re-compute the profits of the Euro Watch division on a standalone basis by apportioning necessary expenses proportionate to turnover and determining the market value of the products.

Conclusion:
The Tribunal upheld the TPO's and CIT(A)'s views on most issues, emphasizing the need for arm's length pricing in transactions with AEs and proper allocation of expenses. The Tribunal provided specific directions for re-computation in certain cases, ensuring compliance with judicial precedents and statutory provisions.