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2021 (3) TMI 71 - AT - Income TaxTDS u/s 194J - A M expenses - Non deduction of TDS - whether the impugned expense falls within the meaning of managerial services thereby attracting the provisions of section 194J ? - HELD THAT - This expenditure was incurred on running of various trade promotion schemes which is designed and controlled by the appellant company. However, these schemes were administered through the selling and distribution network of the HUL. The claims made for selling and distribution network of sub-distributors was settled by HUL and reimbursed the same by the appellant company. It is vehemently contended that the expenses were wholly and exclusively incurred by the appellant company in order to promote the sales of products and the genuineness of the expenditure had not been doubted by the Assessing Officer. The very fact that the Assessing Officer had invoked the provisions of section 40(a)(2b) of the Act goes to suggest that the genuineness of business expenditure is beyond the doubt. Whether the subject payment was made for managerial services or not is of no relevance in view of the fact that the expenditure is only in the nature of reimbursement of cost to HUL. It had not resulted in any income to the HUL. Therefore, in the absence of income in the hands of the payee, the question of deduction of tax at source does not arise having regard to the ratio of the judgement in the case of CIT vs. Siemens Aktiongesellschaft 2008 (11) TMI 74 - BOMBAY HIGH COURT as held the reimbursement of expenses cannot be regarded as a revenue receipt and as the assessee received nothing in excess of the actual expenditure incurred. Therefore, the question of deduction of tax at source does not arise. Thus neither the impugned expenditure falls within the ambit of managerial services as defined in section 9(1)(vii) of the Act nor liable to deduct tax at source u/s 194J of the Act. Therefore, the Assessing Officer was not justified in invoking the provisions of section 40(a)(ia) of the Act to disallow the A M expenses. TDS u/s 194J - Addition on account of management cost - AO disallowed the expenditure for non-deduction of tax at source treating the same as expenditure under the provision of managerial services - HELD THAT - Mere reimbursement of salary of employees does not constitute provision of managerial services. When the expenditure is a mere reimbursement of salary of employees deputed, the question of deduction of tax at source does not arise. Therefore, we are of the considered opinion that the provisions of section 194J of the Act have no application to the subject payment. Accordingly, the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia). TDS u/s 194H - Disallowance on account of selling discount given to HUL - HELD THAT - The relationship between the appellant and the distributor was that of the principal to principal. No services were rendered by the distributor to the appellant company and what was offered to the distributor was discount under the sales promotion schemes and, therefore, it cannot be said that the discount is in the nature of commission within the meaning of Explanation 1 to section 194H of the Act as held by the Hon ble Jurisdictional High Court in the case of Intervet India Pvt. Ltd.. 2014 (4) TMI 353 - BOMBAY HIGH COURT and CIT vs. Piramal Healthcare 2015 (1) TMI 873 - BOMBAY HIGH COURT - thus we are of the considered opinion that the impugned expenditure does not fall within the meaning of commission thereby attracting the provisions of section 194H. Transfer Pricing adjustment in respect of A M expenses - international transaction - HELD THAT - The Revenue had failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE and apparently there is no material referred to by the lower authorities to show that the assessee had incurred the expenditure in advertising and marketing expenses in order to promote the brand value of the foreign AE. The reference made in clause 15 of the agreement is misplaced as rightly submitted by the ld. Sr. Counsel, the incurring of expenditure on advertising is only with regard to the protection of patent and trade mark of the AE and not to promote brand value of foreign AE. In the absence of existence of international transaction, the question of determination of arm s length price of the transactions does arise.
Issues Involved:
1. Disallowance of Advertising and Marketing (A&M) expenses. 2. Disallowance of management cost. 3. Disallowance of selling discount. 4. Disallowance under section 40(a)(ia) of the Act. 5. Transfer Pricing adjustment. 6. Incorrect adjustment on account of refund not received. 7. Incorrect levy of interest under section 234D of the Act. 8. Initiation of penalty proceedings under section 271(1)(c) of the Act. Detailed Analysis: 1. Disallowance of Advertising and Marketing (A&M) Expenses: The appellant challenged the disallowance of ?2,47,13,051/- on A&M expenses reimbursed to Hindustan Unilever Limited (HUL). The Assessing Officer (AO) and Dispute Resolution Panel (DRP) held that HUL was managing the advertisement network for the appellant, rendering managerial services, and thus, provisions of section 194J were applicable. The appellant contended that the expenses were controlled by them and merely administered through HUL’s network, making the reimbursement not subject to tax deduction at source. The Tribunal found that the expenses were indeed reimbursements and did not result in income for HUL, thus not attracting section 194J. Consequently, the Tribunal directed the AO to allow the A&M expenses. 2. Disallowance of Management Cost: The appellant contested the disallowance of ?1,54,77,351/- reimbursed to HUL for management costs, which the AO treated as managerial services under section 9(1)(vii) and subject to TDS under section 194J. The appellant argued that the payment was a reimbursement of salaries for deputed employees, not managerial services. The Tribunal agreed, noting the lack of evidence for managerial services and ruled that reimbursements do not attract TDS. The disallowance was thus overturned. 3. Disallowance of Selling Discount: The appellant challenged the disallowance of ?3,25,68,847/- given as selling discounts to HUL, which the AO treated as commission under section 194H. The appellant argued that the discounts were based on sales achievements and not for services rendered. The Tribunal found that the relationship between the appellant and HUL was principal to principal, not involving service rendering, and thus, the discounts did not qualify as commission under section 194H. The selling discount disallowance was therefore reversed. 4. Disallowance under Section 40(a)(ia) of the Act: The appellant argued that the disallowances under section 40(a)(ia) for A&M expenses, management costs, and selling discounts were incorrect as these were reimbursements and not income for HUL. The Tribunal, having ruled in favor of the appellant on the first three issues, found this ground infructuous. 5. Transfer Pricing Adjustment: The appellant contested the upward adjustment of ?32,63,66,267 for A&M expenses by the Transfer Pricing Officer (TPO), who assumed an international transaction based on excessive A&M expenses compared to comparables. The Tribunal noted that the TPO’s inference of an international transaction was based on conjectures without any explicit arrangement or agreement. Citing the Delhi High Court’s decision in Maruti Suzuki India Ltd., the Tribunal held that the existence of an international transaction cannot be presumed without concrete evidence and that the bright line test was not applicable. The adjustment was thus annulled. 6. Incorrect Adjustment on Account of Refund Not Received: The appellant argued against an adjustment of ?82,12,434/- for a refund shown as issued but not received. The Tribunal did not provide a detailed ruling on this specific issue in the summarized judgment. 7. Incorrect Levy of Interest under Section 234D of the Act: The appellant contested the levy of ?12,72,920/- interest under section 234D, arguing no refund was received. The Tribunal did not provide a detailed ruling on this specific issue in the summarized judgment. 8. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act: The appellant challenged the initiation of penalty proceedings, asserting no concealment of income or inaccurate particulars. The Tribunal did not provide a detailed ruling on this specific issue in the summarized judgment. Conclusion: The Tribunal allowed the appeal in favor of the appellant on the grounds of disallowance of A&M expenses, management costs, and selling discounts, and annulled the transfer pricing adjustment. The disallowance under section 40(a)(ia) became infructuous due to the favorable rulings on the primary issues. The Tribunal’s decision was pronounced on February 22, 2021.
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