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TMI Blog2014 (1) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... or A.Y. 2002-03 - It is incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil, keeping in view the facts and circumstances of the case and the relevant details furnished by the assessee - The exercise of ascertaining ALPs has to be done by the TPO keeping in view the well laid down scheme in the relevant provisions of the Act – The issue was restored for fresh adjudication. TP adjustment in respect of sharing of cost advertising campaign – Held that:- The total cost of David Beckham advertising campaign was clearly stated by the assessee in its submissions made before the TPO as £ 25,00,000/- and its share in the said cost was stated to be USD 2 lakhs - The basis of this cost allocation has not been explained by the assessee by producing relevant documentary evidence either before the authorities below or before the Tribunal - The share was agreed after due negotiation considering the benefits of the campaign - The onus in this regard is on the assessee to produce the relevant documentary evidence to support and substantiate the said claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded against Revenue. - ITA No. 1292/Mum/2007, ITA No. 1299/Mum/2007, ITA No. 7208/Mum/2010, ITA No. 7433/Mum/2010 - - - Dated:- 20-12-2013 - Shri P. M. Jagtap, AM And Shri Amit Shukla, JM,JJ. For the Appellant : Shri Apurva Shah, Shri Dhanesh Bafna Shri Bipin Pawan For the Respondent : Shri Ravi Prakash ORDER Per P. M. Jagtap, AM :- These four appeals, two filed by the assessee and two filed by the Revenue, are cross appeals for A.Y. 2003-04 and 2004-05 and since some common issues are involved therein, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience. 2. First we shall take up the cross appeals for A.Y. 2003-04 being ITA No.1292/Mum/2007 (assessee's appeal) and 1299/Mum/2007 (Revenue's appeal), which are directed against the order of the ld. CIT(A)-8, Mumbai, dated 30.11.2006. 3. At the time of hearing before us, the ld. Counsel for the assessee has not pressed the following three grounds raised by the assessee in its appeal. 1. In not appreciating that the AO had not given full and complete opportunity to the appellant to represent its case before incorporating the order under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the agreement @ 3.5% of the net ex-factory sale price of Castorl India's products manufactured and sold in India. It was explained that the net ex-factory sale price means the invoice value of the products sold excluding excise duty, cost of the standard bought out components (but excluding raw materials and additives) but including Ocean freight insurance, customs duties, etc. It was also explained that the royalty was so payable net of Indian taxes and subject to maximum limit of 10% (7.5% up to June 30, 2002) of book profits of Castrol India as per the Profit and Loss Account prepared on the calendar year basis. The working of royalty was also furnished by the assessee before the TPO as under:- "Royalty @ 3.5% of eligible sales April-March 2003 (Rs. in lacs) Turnover (Net sales) Lubricating Oils, greases etc 110,903 Traded items 2,804,.47 Oil and used containers 52.39 113,760.23 Royalty payable on lubricating oils, greases etc. 110,903.37 Less: Tata BP sales 1,579,.84 Eligible sales on which royalty is payable 109,323.53 Less: Exports 87.60 109 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible limit. b) that not with standing the permissible limit the appellant has sought S.I.A. to pay royalty only upto 3.5% of its internal sales c) that further under the TCA, the appellant and CLUK had further restricted the royalty to 2% of the appellant's profits. d) that the SIA was cognizant that 10% of the appellant's profit will always be lower than 3.5 % of its internal sales and therefore the SIA had implicitly permitted the appellant to pay royalty at the rate of 10% of the appellant profits e) that nowhere does the approval mentions that the appellant cannot compute royalty at 10% of the profits. f) that the Government with its approval has prescribed the upper cap for the royalty payment and has left it to the appellant to remit any amount upto the prescribed cap. g) that the TCA should not be read like a statute and It Is important to consider the importance of the parties, the conduct of the parties and the circumstances of the case. h) that the payment of royalty @3.5 % of the Internal sales would be almost 1400 lacs more than what has been actually paid by the Company i) That without prejudice the A.O. has erred In computing the disallowance wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other various parameters including the limits or royalty payments limited to 5% for domestic sales and 8% for export. The appellant has further impute various consideration which according to the appellant, would have been taken into account by the Government for granting the approval. In this regard the Ld. Counsel states that the SIA was "Cognizant" of the profit percentage and in fact had "Implicitly Permitted" the appellant to pay royalty at the rate of 10% of the appellant's profits. I fail to understand how the Ld. Counsel for the appellant has gone behind the said approval and has argued that the SIA must take into account various parameters which had culminated in allowing the appellant royalty @ 10% of the appellant's profits. The entire case of the appellant is based on hypothesis and on such interpretation which has nowhere been indicated in the SIA approval. The facts are that the prescribed authority was approached by the appellant with all the necessary details as was applicable and the prescribed competent authority has categorically approved after taking into account the TCA between the appellant and CLUK to allow the royalty payment @ 3.5% of the internal sales. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n support of revenue's case on this issue. 11. We have considered the rival submissions and perused the relevant material on record. It is observed that the impugned royalty was paid by the assessee company to its AE namely Castrol Ltd. UK at 3.5 % of the net ex- factory sale price of products manufactured and sold in India as per the technical collaboration agreement. This international transaction involving payment of royalty to its AE was bench-marked by the assessee by following CUP method in its TP study report and since average rate of royalty of three comparables selected by it was higher at 4.67% than the rate at which royalty was paid by the assessee to its AE, the transaction involving payment of royalty was claimed to be at arm's length. A perusal of the order passed by the TPO u/s 92CA (3) of the Act shows that neither these comparables selected by the assessee in its TP study report were rejected by her nor any new comparables were selected by her by making a fresh search in order to show that the payment of royalty by the assessee to its AE was not at arm's length. She simply relied on the approval of SIA to hold that any royalty paid by the assessee on exports and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said group, receives information technology support from its associated enterprises. It also shares the related cost incurred by the said enterprises in providing such support. During the year under consideration, significant IT costs were incurred relating to a Common Operating Environment System (COE-3) deployed by the BP group worldwide. As claimed in the TP report, COE-3 offered significant benefits to the participating entities including the assessee- company resulting into efficient functioning of the business and reduction in operation cost. To implement the said project, various group entities incurred costs which were allocated to group companies participating in the system on the basis of number of COE-3 enabled computers installed at each entity. It was claimed that the assessee-company has also reimbursed certain cost to its associated enterprises at actual which constituted international transactions of the assessee-company with its associate enterprises within the meaning section 92B r.w.s. 92A. During the course of assessment proceedings a reference u/s 92CA(1) was made by the AO to the TPO for the computation of arm's length price, inter alia, in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'exploiting existing and emerging digital technology in order to sirnplfj5.', transform and add value to the Group's busness processes The cost. relating to DBO infrastructure have been allocated on the basis of number of COE3 seats.' The assessee has submitted details to show that Castrol India has been charged for 268 COE3 seats out of 291 COE3 seats for the entire India region in quarter I. A further clarification was provided that India region comprises of Castrol 1ndia IB India (Gas and Power) and Tata BP Solar India etc. As the assessee has submitted the details as required by this office, no adverse inference is being drawn. (ii) Quarter 2. 2002 DRO infrastructure charges C/SD 34.520 and USO 3.174 ('Rs. 1.809.185). The invoices of USD 34,520 and USD 3,174 dated June l8, 2002 read as follows: "Quarter .2, 2002 OBO Infrastructure Charges." That assessee furnished the following details: "The costs relating to DBO infrastructure have been allocated on the basis of number of COE3 seats. The assessee has submitted details to show that Castrol India has been charged for 280 COE3 seats out of 303 C0E3 seats for the entire India region in quarter 2." A further clarifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectively. The assessee submitted no further information. The assessee was required to how cause u/s 92C(3) of the IT Act 1961 vide letter dated November 23 2005 why the ALP of the said expense be not computed as NIL as the assessee had not submitted relevant documentation and details for calculation of the said expense. However no further clarification/details were submitted by the assessee. Accordingly, the Arm's Length Price of this transaction is computed at NIL and an amount of Rs.1,04,782/- will be added to the assessee's income 3.9 The assessee was also not able to submit any details in respect of the following, 1. Name of The A E Brief description of transaction Amount in Rs BP International Ltd, UK Global Down stream Licenses for Microsoft Professional 2000 435,876 BP Australia Allocation of' expenses relating to COE3 (DBO. Charges) 707,298 BP International Ltd, UK DBO group project, IRAS, Infrastructure Federal costs 58,54,422 BP Corporation NA Global Software licenses 318,652 BP Malaysia SDN BHD Allocation of expenses relating to COE3 (regional management expenses) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost borne by the assessee cannot be disallowed by taking the ALP at Nil keeping in view the facts and circumstances of the case and the relevant details furnished by the assessee. The learned counsel for the assessee in this regard has submitted that in the subsequent years i.e. assessment years 2005-06 and 2006-07, a similar issue was involved in the assessee's case and the learned CIT(Appeals) has allowed the expenses allocated to the extent of 50%. We have perused the orders of the learned CIT(Appeals) passed in the assessee's case for assessment years 2005-06 and 2006-07. It is noted that no convincing or sound basis has been given by the learned CIT(Appeals) therein in support of the 50% cost allocation accepted by him and such estimate has been made purely on adhoc basis. In our opinion, the exercise of ascertaining ALPs has to be done by the TPO keeping in view the well laid down scheme in the relevant provisions of the Act and addition, if any, on account of TP adjustment, has to be made only after doing such exercise. We, therefore, restore this issue to the file of the AO/TPO with a direction to do such exercise and make addition, if any, on this issue after completing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts created to exploit the endorsement with consumer and/or customers. Any material developed on an ongoing basis to support the endorsement. 19. It was also submitted that a consumer contest "Meet David Beckham" was organized in India as part of this agreement and accordingly the winner of this contest had an opportunity to meet David Beckham. The assessee also filed a copy of the relevant invoice in support of its claim on this issue. After furnishing these details and documents, the assessee was required by the TPO to show-cause as to why the ALP of this international transaction be not computed at nil as it did not submit relevant documentation and details for calculation of said expenses. Since no satisfactory reply was offered by the assessee and the assessee was also unable to submit the basis of allocation of the concerned expenditure, arm's length price of this transaction was taken by the TPO at nil and TP adjustment of Rs.95,12,000/- was made. On appeal, the ld. CIT(A) confirmed the TP adjustment made by the AO/TPO on this issue observing that no documents/details other than the copy of invoice and newspaper clipping were furnished by the assessee to show the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is claimed that the same was agreed after due negotiation considering the benefits of the campaign, the onus in this regard is on the assessee to produce the relevant documentary evidence to support and substantiate the said claim. It is also incumbent upon the TPO to work out the ALP of the relevant transactions following some specified method on the basis of details and documents available on record and the entire cost borne by the assessee cannot be disallowed by simply taking the ALP at NIL. In our opinion, the exercise of ascertaining ALP has to be done by the TPO keeping in view the well laid down scheme in the relevant provisions of the Act and addition, if any, on account of TP adjustment has to be made only after doing such exercise. We therefore, restore this issue to the file of the AO/TPO with a direction to do such exercise after giving the assessee a proper and sufficient opportunity of being heard and to make addition on account of TP adjustment if any, on this issue after completing such exercise in accordance with law. Ground no. 6 of the assessee's appeal is accordingly treated as allowed for statistical purposes. 23. Ground no. 7 involving the issue of additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the following items of other income : 1. Other Income directly linked to Silvassa Unit Rs. 41,67,815 2. Interest received (in ratio of sales volumes) Rs. 34,69,135 3. Miscellaneous Income (in ratio of sales volume) Rs. 23,61,499 4. Reversal of excess provision of Doubtful debts (ratio of sales volume) Rs.32,75,948 5. Insurance Claim (ratio of sales volume) Rs.54,02,609 We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by learned representatives of both the sides, this issue to the extent of assessee's claim for deduction u/s 80IB in respect of first four items is concerned, the same is covered against the assessee and in favour of the Revenue by the decision of Hon'ble Supreme Court in the case of Liberty India vs. CIT 317 ITR 217 (SC) wherein it was held that the provisions of section 80IB are code by themselves as they contain both substantive as well as procedural provisions. The word 'derived from' is narrower in connotation as compared to the words 'attributable to'. By using the expression 'derived from' Parliament intended to cover sources not beyond the first degree. The assessee has claimed deduction u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the issue involved therein relating to the disallowance of assessee's claim for bad debts on the ground that the relevant debts had not actually become bad in the year under consideration, is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of TRF ltd. 323 ITR 397 (SC) as agreed by the ld. Representatives of both the sides. Respectfully following the said decision of the Hon'ble Supreme Court, we delete the disallowance made on account of assessee's claim for bad debts written off and allow ground no. 11 of the assessee's appeal. 32. Issue raised in ground no. 12 of the assessee's appeal relates to the disallowance made by the AO and confirmed by the ld. CIT(A) on account of travel expenses of spouse of employees. 33. The expenditure incurred on foreign trip of Ms S. Shetty alongwith her husband Daya Shetty, an employee of the company, was disallowed by the AO on the ground that the same was not incurred wholly and exclusively for the purpose of assessee's business. In this regard, he relied on the decision of the Gujarat High Court in the case of CIT vs Sahibag Enterprises Pvt. Ltd. 1995 Tax LR 133 (Guj.) and also or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of catalogue and a technical certificate for energy saving qualities from the competent authorities to prove the nature and utility of the product. The AO therefore allowed the depreciation on the said asset at normal rate of 25%. On appeal, the Ld. CIT(A) confirmed the action of the AO on this issue for the same reasons as given by the AO. 38. We have heard the arguments of both the sides on this issue and also perused the material on record. Although the ld. Counsel for the assessee has relied on the copy of certificate of the engineer of vendor placed at page no. 291 of his paper-book in support of the assessee's claim for higher deprecation at the rate of 80%, we agree with authorities below that the same is not sufficient to allow the claim of assessee at higher rate of 80%. The assessee has failed to furnish the product catalogue and certificate from the competent authorities to establish the nature and use of the asset to show that it is energy saving device eligible for depreciation at higher rate of 80%. The assessee has also not produced any evidence in support of its alternative contention raised before us claiming depreciation at the rate of 60% applicable to computer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Now we shall take up the cross appeals for A.Y. 2004-05 being ITA No. 7208/Mum/2010 (assessee's appeal) and 7433/Mum/2010 (Revenue's appeal) which are directed against the order of the ld. CIT(A)15, Mumbai, dated 04.08.2010. 43. The first issue raised by the Revenue in its appeal for A.Y. 2004-05 relating to deletion by the ld. CIT(A) of the addition made by the AO/TPO on account of TP adjustment in respect of royalty payment is similar to the one involved in ground no. 3 of the assessee's appeal for A.Y.2003-04 which has already been decided by us in foregoing portion of this order. Following our conclusion drawn in A.Y. 2003-04 on the similar issue, we uphold the impugned order of the ld. CIT(A) for A.Y. 2004-05 deleting the addition made by the AO/TPO on account of TP adjustment in respect of royalty payment and dismiss ground no. 1 of the Revenue's appeal. 44. Ground no. 2 of the Revenue's appeal and Ground no. 1 of the assessee's appeal involve a common issue relating to addition made by the AO/TPO and sustained partly by the ld. CIT(A) on account of TP adjustment made in respect of the cost sharing/reimbursement by the assessee of COE-3 expenses. 45. It is observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said orders of the Tribunal in assessee's own case for earlier years, we uphold the impugned order of the ld.CIT(A) giving relief to the assessee on this issue and dismiss ground no. 3 of the Revenue's appeal. 47. The issue raised in Ground no. 2 of the assessee's appeal for A.Y. 2004- 05 relates to the disallowance made by the AO and confirmed by the ld. CIT(A) on account of assessee's claim for deduction 80IB in respect of following items of other income. 1. Other Income directly linked to Silvassa Unit Rs. 1,34,031 2. Interest received (in ratio of sales Volumes) Rs.26,04,522 3. Reversal of excess provision of Doubtful debts (ratio of sales volume) Rs.12,62,111 4. Insurance Claim (ration of sales volume) Rs.22,40,181 Total Rs.62,40,845 48. After considering the rival submissions and perusing the relevant material on record, it is observed that this issue is also similar to the one involved in ground no. 9 of the assessee's appeal for A.Y.2003-04 which has been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y.2003-04, we confirm the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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