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2019 (7) TMI 1992 - AT - Income TaxTP adjustment for payment of royalty - trademark royalty paid to Cadbury Schweppes Overseas Limited CSOL Assessee is a listed company engaged in manufacturing and marketing of malted food and drinks and chocolates - Cadbury India had entered into Technical Assistance and Royalty Agreement with AE M/s. CSOL for availing itself of the benefits of the said technical know-how developed by CSOL relating to the manufacturing processing distributing and marketing of products as well as the benefits of the continuing research and development undertaken by CSOL - HELD THAT - It transpires that this issue was earlier remitted by the Tribunal to the TPO. However learned Counsel of the assessee submitted that in the last year there was issue of fresh documents. He submitted that this year all documents are there. He submitted that the TPO has held that arm s length price should be nil without applying any material. Learned counsel claimed that the TPO has held that no benefit accrues to the assessee. Learned counsel referred to several case laws for the proposition that benefit test is not for TPO. As we note that this Tribunal in assessee s own case for A.Y. 2006-07 2018 (11) TMI 1762 - ITAT MUMBAI 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. We note that the AO as well as learned CIT(A) have also based their decision on their earlier orders. Since ITAT has considered those orders and remitted the issue to the file of the Assessing Officer we deem it appropriate to follow the precedent and set aside the issue to the file of the Assessing Officer. The Assessing Officer is directed to consider the issue afresh keeping in mind additional submissions being made by learned counsel. Disallowance of payment of royalty on technology paid to Cadbury Adams USA LLC. - HELD THAT - As decided in own case A.Y. 2006-07 2018 (11) TMI 1762 - ITAT MUMBAI assessee has also availed technical know-how from CAUSA. Further the Departmental Authorities don dispute the genuineness or authenticity of the amended agreement. What they are disputing is 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 know-how 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 know-how. Accordingly we hold that payment of royalty to CAUSA is at arm s length. The ground is allowed. Disallowance of service fees paid to Cadbury Schweppes Asia Pacific Pte. Limited. - HELD THAT - As on careful consideration we find that learned CIT(A) in this case has followed his earlier order of previous assessment year. It was this order of learned CIT(A) which was remitted by the ITAT to the file of the TPO for examination with direction. In these circumstances in our considered opinion the issue needs to be remitted to the TPO with the same directions as above. We order accordingly. Disallowance of depreciation on marketing know-how in pursuance of worldwide stock and asset purchase agreement between Pfizer US and Cadbury UK. - HELD THAT - Tribunal in assessee s own case for A.Y. 2006-07 2018 (11) TMI 1762 - ITAT MUMBAI has decided this issue and allowed the claim of the assessee following the consistent view of the Tribunal on this issue in assessee s own case in the preceding assessment years we allow assessee s claim of depreciation Determining profits eligible for deduction u/s 80-IC - Allocation of expenditure at Baddi unit - HELD THAT - We agree with the submissions of the learned counsel of the assessee as regards allocation of interest voluntary retirement scheme and decrease in stock. As agreed by learned counsel above the fact that no VRS expenditure pertains to the employees of Baddi unit may be checked by the Assessing Officer. As regards operation/establishment expenses we find considerable cogency in the allocation key used by the assessee for direct expenses direct marketing cost and selling and distribution expenditure royalty and technical fees. We approve the same subject to factual verification by the Assessing Officer. We find that the method of allocation of other overhead as mentioned above appears to be opaque. We remit the same to the Assessing Officer for verification.
Issues Involved:
1. Transfer pricing adjustments 2. Payment of royalty 3. Service fees to Cadbury Schweppes Asia Pacific Pte. Limited 4. Corporate tax additions/disallowances 5. Denial of depreciation on marketing know-how 6. Allocation of expenses in respect of Appellant's unit at Baddi Issue-Wise Detailed Analysis: 1. Transfer Pricing Adjustments: - The Transfer Pricing Officer (TPO) made an adjustment of Rs. 21,37,70,000 to the total income of the appellant under section 92CA(3) of the Income-tax Act, 1961, on account of adjustment in the arm's length price of international transactions. - The TPO noted that Cadbury India had entered into a Technical Assistance and Royalty Agreement with its associated enterprise (AE), M/s. CSOL, for availing technical know-how for manufacturing, processing, distributing, and marketing products. - The TPO observed that the royalty rate was approved at 1.25% of internal sales and exports. The appellant paid Rs. 9.18 crores in royalty, which was 0.82% of the total sales. - The TPO concluded that the royalty for technical know-how subsumes the royalty for the use of the trademark, based on a government clarification. - The TPO proposed to disallow Rs. 1.12 crores from the advertisement and marketing expenditure towards the cost allocable to CSOL, UK. 2. Payment of Royalty: - The appellant's economic analysis using the Transactional Net Margin Method (TNMM) for determining the arm's length price for royalty payments was not accepted. - The arm's length price for trademark royalty paid to Cadbury Schweppes Overseas Limited was determined at Rs. NIL vis-a-vis the actual payment of Rs. 10,74,54,000. - The agreements submitted as Comparable Uncontrolled Price (CUP) were not considered while determining the arm's length price. - The approvals received from the Secretariat of Industrial Assistance/Reserve Bank of India were not considered. - The payment of royalty to Cadbury Adams USA LLC was restricted to 1%, making an adjustment of Rs. 71,12,000. - The +/- 5% variation from the arm's length price permitted under the proviso to section 92C(2) was not considered. 3. Service Fees to Cadbury Schweppes Asia Pacific Pte. Limited: - The TPO concluded that the appellant failed to establish the basis for determining the consideration for services at the requisite amount. - The economic analysis using the TNMM method for determining the arm's length price for service fees was not accepted. - The value of services received from Cadbury Schweppes Asia Pacific Pte. Limited was determined at Rs. NIL vis-a-vis the actual payment of Rs. 9,92,04,000. - The +/- 5% variation from the arm's length price permitted under the proviso to section 92C(2) was not considered. 4. Corporate Tax Additions/Disallowances: - The adjustments made by the Additional Commissioner of Income-tax amounting to Rs. 12,26,61,755 to the total taxable income of the appellant on account of various additions/disallowances under the provisions of the Act were confirmed. 5. Denial of Depreciation on Marketing Know-How: - The disallowance of Rs. 17,06,629 made by the Assessing Officer with respect to depreciation on marketing know-how claimed under section 32 of the Act was upheld. 6. Allocation of Expenses in Respect of Appellant's Unit at Baddi: - The action of the Assessing Officer in arbitrarily allocating expenses incurred by the appellant to its unit at Baddi on the basis of sales turnover was upheld. - This allocation disregarded the appellant's scientific basis for determining profits eligible for deduction under section 80-IC, reducing the deduction claimed from Rs. 41,06,18,903 to Rs. 28,96,63,777. Conclusion: - The Tribunal set aside the issues related to transfer pricing adjustments for royalty payments and service fees to the Assessing Officer for fresh consideration. - The Tribunal upheld the appellant's claim of depreciation on marketing know-how based on consistent views in preceding assessment years. - The Tribunal remitted the issue of allocation of expenses at the Baddi unit to the Assessing Officer for verification, agreeing with the appellant's allocation key for direct expenses but finding the method of allocation of other overheads opaque.
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