2020 (6) TMI 474 - AT - Income Tax

Transfer Pricing adjustment in relation to payment of royalty -claim allowed for past years - HELD THAT - We note that the assessee has been paying royalty to its Associate Enterprises (AEs) for a number of years which has been allowed in the assessment of earlier years. Therefore, the TPO cannot take a contrary view and disturb the settled facts unless there is a change in law or facts. Therefore, the arm s length price adjustment made by TPO is not sustainable in law. We note that TPO has allowed royalty in respect of all except two products viz. Mincream and Robinson Burley, the TPO has held that no benefit was derived by the assessee from its AE. It is not denied that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be justified and proper. See EKL APPLIANCES LTD 2012 (4) TMI 346 - DELHI HIGH COURT and FRIGOGLAS INDIA PVT. LTD. VERSUS DCIT, CIRCLE-9 (2) , NEW DELHI 2016 (5) TMI 548 - ITAT DELHI We note that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be justified and proper. The ld DRP was right in deleting the disallowance of royalty.- Decided in favour of assessee. Transfer pricing adjustment in relation to advertisement, marketing and promotion expenses (AMP) - international tranaction or not? - HELD THAT - We note that the AMP transaction does not represent the international transaction between the assessee and its AE s as the revenue failed to bring on record any contract or arrangement between assessee and its AE for making AMP expenses for promotion of brand of its AE.In the assessee s case, the assessee company was not under any obligation to incur AMP expenses and also its parent company had no control over such decisions of RBIL. These are routine advertisement expenses. Therefore, in assessee s case the AMP cannot be regarded as international transaction as held in the case of Maruti Suzuki India Limited Vs. CIT 2015 (12) TMI 634 - DELHI HIGH COURT . Therefore, we allow the appeal of the assessee and dismiss the appeal of the revenue and delete the ALP adjustment made - Decided in favour of assessee Comparable companies arbitrarily chosen by the TPO for computation of mark up percentage of 22.34% over the alleged Agency Cost incurred by the assessee - HELD THAT - We have gone through the order of TPO/DRP and noticed that there is no adjudication by the TPO or DRP as to what serviceswere rendered. As per ld Counsel, the expenses in question were in respect of system upgrade of the Assessee which costs were reimbursed to the Assessee by the AE. Hence, there was no element of any service that the Assessee rendered to the AE. The assessee submitted, 3 volumes of documents before the TPO and DRP to establish that these were cost to cost reimbursements and therehas been no adjudication on the same. Therefore, in the interest of justice and fair play we think it fit and appropriate to remit this issue back to the file of the TPO to adjudicate the issue taking into account 3 volumes of documents already submitted by assessee. For statistical purposes, the ground raised by the assessee and revenue are allowed. DRP not considering the specific objections raised by the appellant with respect to overall adjustment made to transaction of Export of raw materials and finished products - HELD THAT - DRP inadvertently did not give any directions vis-a-vis the said issue. However, vide rectified directions dated 18.02.2016 rejected the approach of the TPO of using external TNMM. The TPO is yet to give effect to the rectified DRP Directions. Therefore, Ld Counsel prayed the bench that ld TPO may be directed to give effect to the rectified DRP Directions. In the interest of justice and fair play, we direct the TPO to give effect to the rectified DRP Directions. For statistical purposes, the ground raised by the assessee are allowed. Apportionment of expenses between fiscal units, non-fiscal units and head office - HELD THAT - As decided in own case 2018 (4) TMI 1129 - ITAT KOLKATA allocation done by the assessee on the basis of number of employees who are directly linked with the factory operation is more logical. The residual cost is incurred at the head office and is not capable of being identified with any of the units which are running by the assessee. It is only because of this difficulty that the Assessing Officer and the assessee resorted to allocation of residual cost. When it comes to allocation of residual cost, it cannot be done arbitrarily. The allocation should have due regard to the efforts put at the head office level to be eligible. That can be done only by allocation on the basis of number of employees linked to factory operation divided by total number of employees into corporate office into sales of the eligible units divided by total sales. This allocation of residual cost done by the assessee was logical and we find no infirmity in the action of the CIT(A) in accepting this basis of allocation. Eligibility of income from sale of scraps whilst calculating deduction u/s 80IC - HELD THAT - As decided in own case 2015 (2) TMI 506 - CALCUTTA HIGH COURT profits and gains from the sale of scrap materials is eligible to deduction in an amount equal to twenty per cent under section 80IC, inasmuch as such gains or profits are derived from the industrial undertaking and includible in, the gross total income of the assessee and the question relatable to the profit on the sale of scrap is thus answered in favour of the assessee. Excess disallowance of interest income allocated to eligible units - HELD THAT - As decided in own case . 2019 (3) TMI 626 - ITAT KOLKATA assessee has raised an additional ground regarding quantification on the impugned disallowance which requires verification of facts. We find force in Revenue s contention therefore and restore the instant additional issue raised at assessee s behest to the Assessing Officer for necessary factual verification of facts. This additional ground is taken as accepted for statistical purposes. Refund of dividend distribution tax (DDT) paid in respect of non-residence share holders - HELD THAT - We are of the view that this issue should be remitted back to the file of the ld AO for factual verification. The assessee is directed to file before AO, the amount of dividend paid, copy of agreement and other relevant documents, as required by AO.Therefore we direct the AO to examine relevant Double Taxation Avoidance Agreements between India UK with reference to payment of dividend to the shareholders and adjudicate the issue in accordance to law. For statistical purposes, the additional ground raised by the assessee is allowed. Deduction of education cess on income tax paid by the assessee as allowable expenditure - HELD THAT - We accept the submissions of the assessee concurring with the decisions of CHAMBAL FERTILIZERS AND CHEMICALS LTD., GADEPAN, DISTT. KOTA. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. This additional ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Transfer Pricing adjustment in relation to payment of royalty.
2. Transfer pricing adjustment in relation to advertisement, marketing, and promotion expenses (AMP).
3. Comparable companies arbitrarily chosen by the TPO for computation of markup percentage over the alleged ‘Agency Cost’ incurred by the assessee.
4. Overall adjustment made to the transaction of “Export of raw materials and finished products”.
5. Apportionment of expenses between fiscal units, non-fiscal units, and head office.
6. Eligibility of income from the sale of scraps whilst calculating deduction u/s 80IC.
7. Excess disallowance of interest income allocated to eligible units.
8. Refund of dividend distribution tax (DDT) paid in respect of non-resident shareholders.
9. Deduction of education cess on income tax paid by the assessee.

Detailed Analysis:

1. Transfer Pricing Adjustment in Relation to Payment of Royalty:
The Tribunal noted that the TPO had applied the CUP method and restricted the royalty to 1.5% of net sales. The DRP deleted the adjustment, observing that the royalties were paid for a basket of services and were at arm’s length. The Tribunal upheld the DRP's decision, emphasizing consistency with previous years and the lack of any change in facts or law. The Tribunal also relied on judicial precedents such as CIT v. EKL Appliances Ltd. and Frigoglass India Pvt Ltd v. DCIT, which supported the assessee's method of using TNMM for benchmarking royalty payments.

2. Transfer Pricing Adjustment in Relation to Advertisement, Marketing, and Promotion Expenses (AMP):
The TPO applied the Bright Line Test (BLT) and made an ALP adjustment, which the DRP confirmed. However, the Tribunal noted that the facts of the assessee’s case were different from the LG Electronics case and that the AMP expenses were not international transactions. The Tribunal relied on the Delhi High Court’s decision in Maruti Suzuki India Ltd v. CIT, which held that AMP expenses cannot be presumed to involve an international transaction. The Tribunal deleted the ALP adjustment made by the TPO.

3. Comparable Companies Arbitrarily Chosen by the TPO for Computation of Markup Percentage Over the Alleged ‘Agency Cost’:
The TPO applied a markup of 22.34% on the agency cost, which the DRP confirmed. The Tribunal found that there was no adjudication by the TPO or DRP on the nature of services rendered. The Tribunal remitted the issue back to the TPO for adjudication, emphasizing the need for factual verification.

4. Overall Adjustment Made to the Transaction of “Export of Raw Materials and Finished Products”:
The TPO rejected the external TNMM applied by the assessee and used internal TNMM instead. The DRP’s rectified directions rejected the TPO’s approach, but the TPO had yet to give effect to these directions. The Tribunal directed the TPO to give effect to the rectified DRP directions.

5. Apportionment of Expenses Between Fiscal Units, Non-Fiscal Units, and Head Office:
The Tribunal followed its previous decision in the assessee’s case for AY 2005-06, which accepted the assessee’s method of apportioning residual costs based on the number of employees directly involved in the management of eligible units. The Tribunal dismissed the Revenue’s appeal on this issue.

6. Eligibility of Income from the Sale of Scraps Whilst Calculating Deduction u/s 80IC:
The Tribunal followed the Calcutta High Court’s decision in the assessee’s case, which held that profits from the sale of scrap materials are eligible for deduction under section 80IC. The Tribunal dismissed the Revenue’s appeal on this issue.

7. Excess Disallowance of Interest Income Allocated to Eligible Units:
The Tribunal followed its previous decision in the assessee’s case for AY 2009-10, which remanded the issue back to the AO for factual verification. The Tribunal directed the AO to verify the facts and adjudicate the issue accordingly.

8. Refund of Dividend Distribution Tax (DDT) Paid in Respect of Non-Resident Shareholders:
The Tribunal remitted the issue back to the AO for factual verification and directed the AO to examine the relevant Double Taxation Avoidance Agreements between India and the respective countries.

9. Deduction of Education Cess on Income Tax Paid by the Assessee:
The Tribunal allowed the deduction of education cess, relying on the Rajasthan High Court’s decision in Chambal Fertilizers and Chemicals Ltd. v. JCIT and various decisions of the Kolkata Tribunal, which held that education cess is not a tax and is allowable as a deduction under section 37(1).

Conclusion:
The Tribunal provided a detailed analysis of each issue, emphasizing consistency with previous years, reliance on judicial precedents, and the need for factual verification where necessary. The Tribunal allowed the appeals of the assessee on several grounds, remanded some issues back to the AO/TPO for factual verification, and dismissed the appeals of the Revenue on other grounds.