2019 (10) TMI 994 - AT - Income Tax

Transfer Pricing Adjustment - Trademark Royalty paid to Cadbury Schweppes Overseas Limited, London, UK (CSOL) - HELD THAT - There being no difference in factual position in the impugned assessment year, respectfully following the consistent view of the Tribunal on identical issue in assessee s own case as referred to above, 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. Technology Royalty paid to Cadbury Adams USA LLC (CAUSA) - HELD THAT - 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. Departmental Authorities dont 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 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. The ground is allowed. Technology Royalty paid to Cadbury Enterprises Pte Limited (CEPT) - HELD THAT - Since facts as well as reasoning of lower authorities are quite similar as in the case of royalty payment made by assessee to CAUSA, applying the same analogy, we delete the impugned addition. One more reason to delete the adjustment is that the assessee has entered into two separate agreement for payment of Trademark Royalty Technical royalty and therefore, the matter would stand on a better footing. Transfer Pricing (TP) adjustment on account of service fees paid to another AE viz. CSAPL - HELD THAT - 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 Officer / Transfer Pricing Officer must pass a speaking and well reasoned order dealing with all the submissions of the assessee. Accordingly, this ground is allowed for statistical purposes. Depreciation on Marketing Know-how - HELD THAT - We find that Tribunal, in AY 2003-04, at para-17 allowed depreciation claim applying the ratio of decision of Hon ble Supreme Court rendered in M/s Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT Similar view has been taken in subsequent years. Therefore, respectfully following the consistent view of the Tribunal on this issue in assessee s own case, we allow assessee s claim of depreciation. Disallowance u/s 14A - HELD THAT - Upon perusal of financial statements, we find that own funds in the shape of share capital free reserves at year end stood at ₹ 46266.97 Lacs as against investment of ₹ 31228.98 Lacs. Nothing has been brought on record by Ld. AO to establish the nexus of investments with borrowed funds. In fact, opening investments stood at ₹ 26663.91 Lacs and the assessee earned profit after tax for ₹ 15094.68 Lacs during the year under consideration which is more than incremental investments. Therefore, applying the ratio of cited decisions, we hold that no interest disallowance would be justified on the facts and circumstances. So far as the disallowance of direct / indirect expenses is concerned, we are of the view that since Rule 8D was applicable to this AY, the findings given in earlier orders of Tribunal would not apply to this year and the disallowance has to be worked out in terms of the Rule 8D. AO, in draft assessment order, at para 6.4, has noted that the submissions made by assessee in defense of suo-moto disallowance could not be accepted as against the submissions of the Ld. Sr. Counsel that the requisite satisfaction was not recorded by Ld. AO before proceeding to apply Rule 8D - there was no particular method of recording satisfaction in the quantum assessment order and therefore, unable to accept this specific plea of Ld. Sr. Counsel - restore the matter of direct / indirect expense disallowance to the file of Ld. AO for re-adjudication in the light of suo-moto disallowance offered by the assessee. As held earlier, no interest disallowance would be justified, keeping in view the assessee s financial parameters. Ground No. 14 stand partly allowed. Reduction in deduction u/s 80-IC by reallocating expenditure of 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. Matter has been restored back to the file of Ld. AO with certain observations. Since the matter is identical, we direct Ld. AO to adopt the same methodology as finally adopted for AY 2007-08 to apportion the expenditure pursuant to the directions of the Tribunal. Therefore, without delving much deeper into the issue, we restore the matter back to the file of Ld. AO on similar lines.

Summary

Issues Involved:
1. Transfer pricing adjustment
2. Royalty payment
3. Service fees to Cadbury Schweppes Asia Pacific Pte Limited
4. Service fees to Cadbury Holdings Limited
5. Corporate tax adjustment
6. Depreciation on marketing know-how
7. Disallowance under section 14A of the Act
8. Allocation of expenses in respect of the unit of the Appellant in Baddi

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested the adjustment of ?281,052,937 made to the total income under Section 92CA(3) on account of the arm's length price of international transactions. The Tribunal noted that the issues were covered by previous orders in the assessee’s own case for various years, and there was no change in material facts. Consequently, similar views were taken.

2. Royalty Payment:
Trademark Royalty to Cadbury Schweppes Overseas Limited:
The Tribunal found that the issue was covered in favor of the assessee by previous decisions, where it was held that the royalty payment on the trademark at 1% was at arm's length and allowable. The adjustment of ?1300.22 Lacs was deleted.

Technology Royalty to Cadbury Adams USA LLC:
The Tribunal referred to the previous year's decision, which allowed the royalty payment at 2.7% for both trademark and technical know-how. The adjustment of ?87.61 Lacs was deleted.

Technology Royalty to Cadbury Enterprises Pte Limited:
Following similar reasoning as in the case of Cadbury Adams USA LLC, the Tribunal deleted the adjustment of ?142.51 Lacs.

3. Service Fees to Cadbury Schweppes Asia Pacific Pte Limited (CSAPL):
The assessee contested the adjustment of ?1073.14 Lacs. The Tribunal noted that the initial onus was on the assessee to furnish requisite details and that the matter required re-adjudication. The issue was restored to the file of the Ld. TPO / Ld. AO for de novo adjudication.

4. Service Fees to Cadbury Holdings Limited (CHL):
Similar to the issue with CSAPL, the adjustment of ?207.02 Lacs was contested. The Tribunal restored the matter back to the file of the Ld. TPO / Ld. AO for re-adjudication.

5. Corporate Tax Adjustments:
The Tribunal addressed several corporate tax adjustments, including the disallowance of depreciation on marketing know-how, disallowance under section 14A, and the reduction of deduction claimed under section 80-IC.

6. Depreciation on Marketing Know-how:
The Tribunal allowed the depreciation claim of ?12.79 Lacs, following the consistent view taken in previous years and applying the ratio of the Supreme Court decision in M/s Smifs Securities Ltd.

7. Disallowance under Section 14A of the Act:
The Tribunal found that the assessee had sufficient own funds to make the investments and thus, no interest disallowance was justified. The matter of direct/indirect expense disallowance was restored to the file of the Ld. AO for re-adjudication in light of the suo-moto disallowance offered by the assessee.

8. Allocation of Expenses in Respect of the Unit of the Appellant in Baddi:
The Tribunal noted that the issue of expense allocation was similar to the previous year and directed the Ld. AO to adopt the same methodology as finally adopted for AY 2007-08. The matter was restored to the file of the Ld. AO for re-adjudication.

Conclusion:
The appeal was partly allowed, with several adjustments deleted and some matters restored for re-adjudication. The Tribunal's decisions were consistent with previous rulings in the assessee’s own case, ensuring a fair and transparent determination of the issues.