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TMI Blog2014 (4) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 80IB/80IC of the Act:- - Miscellaneous Expenses - Conveyance and Traveling Expenses - Rent, Rates and Taxes - Advertisement and publicity - Schemes and promotions" 3. The assessee in the present case is a company which is engaged in the business of manufacturing and marketing of household insecticides and air fresheners such as mats, coils, electronic mosquito destroyers under the brand name of Goodnight, Jet, Banish, Hit etc. The return of income for the year under consideration was filed by it on 19-10-2006 declaring total income of Rs. 12,29,90,492/- under the normal provisions of the Act and book profit of Rs. 58,52,58,709/- as per the provisions of section 115JB of the Act. All the manufacturing units of the assessee are situated in backward areas as specified in Eighth Schedule of the Income Tax Act which are eligible for deduction either at 100% or 30% of its profits u/s 80IB/80IC of the Act. The assessee was also having non 80IB units/segment representing its trading activity and the total turnover of this segment during the year under consideration was R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgets are not met, to meet sales targets, the Company procures similar products from vendors and sells them under own brand name as own products. Such expenses are related to selling the goods and will be incurred whether the goods are manufactured or purchased. Since the Brand belongs to Godrej Sara Lee, all expenses related to selling a product will have to be allocated to the goods sold and the source of procurement does not have any relation. Since A&P schemes and freight are related to selling & distributing products the same has been allocated to Non 80 IB units as well. 84% of advertisement, selling etc are allocated and reduced from eligible units only. Hence, as the expenses have been allocated on a reasonable basis and on sales basis, and we request you not to reallocate without any basis." 4. Based on the above submission made by the assessee, the A.O. proceeded to examine the basis of allocation of expenditure of Rs. 12.72 crores to non 80IB unit/segment in respect of each head of expenditure and recorded his findings/observations on such examination as under:- "Miscellaneous Expenses Rs.7275 5681/-. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company is a single entity and selling products on its own account and not for any other manufacturer and trading activity was only of same products as those manufactured by assessee. As per assessee, when production targets are not met, to meet sales targets, the Company procures similar products from vendors and sells them under own brand name as own products. Therefore, though some expenses on advertisement, publicity and have to be allowed, it cannot be a very large amount. I, therefore allow 50% as reasonable expenses under this head. Therefore an amount of Rs 2,11,88,415 is considered reasonable and allocated to non eligible business segment and Rs 2,11,88,415/- is allocated as pertaining to manufacturing units of the assessee. 4.9 Schemes and Promotions Rs. 83,09,430: The assessee has allocated Rs.83,09,430/- out of schemes and promotional expenses to trading unit. It is a well known practice that the manufacturers float different schemes for branded goods manufactured by them. These are all done to promote the particular brand in the market and boost the sales. The trader usually has nothing to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver basis and there was no reason for the A.O. to change the said basis and make the reallocation on adhoc basis. He explained the nature of expenditure incurred by the assessee on sales promotion, advertisement and various schemes and contended that the same was incurred to create and promote the brand image for the products manufactured and dealt with by the assessee company. He submitted that since the goods purchased from third parties were also being sold as a part of trading activity in the same brand name, the expenditure incurred on sales promotion, advertisement and schemes was for the purpose of sale of goods, whether manufactured or purchased. He submitted that similarly, the other expenditure incurred by the assessee were necessary for selling the finished goods which were manufactured as well as procured from third parties and the same therefore were rightly allocated by the assessee company between eligible segment and non-eligible segment in the ratio of turnover. He contended that this basis of allocation was adopted by the assessee company only in respect of common expenses and all the expenses which were directly attributable to the eligible units had been duly al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounting to Rs. 0.83 crores, miscellaneous expenses amounting to Rs. 0.72 crores, conveyance and traveling expenses amounting to Rs. 0.47 crores and rent, rate & taxes amounting to Rs. 0.48 crores. As explained by the ld. counsel for the assessee before us, the expenditure on advertisement & publicity and schemes and promotions was incurred mainly to create and promote the brand image for the company's product and this position was accepted even by the A.O. in his order. The, A.O., however, held that the trader normally would never incur expenditure on advertisement and brands of the manufacturer out of the trading profit. He, however, appears to have overlooked the fact that goods procured from the third party were sold by the assessee company as a part of trading activity under the same brand name and the benefit of the said expenditure thus was available equally to the trading segment. Incidentally, the A.O. also impliedly accepted this position while observing in his order that such expenses on advertisement & publicity and schemes have to be allocated to some extent to the non-eligible segment. He, however, held that such allocation could not be very large amount and according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delete the addition made by the A.O. by restricting the claim of the assessee for deduction u/s 80IB/80IC of the Act by re-allocating the common indirect expenses and allow ground No. 1 & 2 of the assessee's appeal. 10. During the course of appellate proceedings before the Tribunal, the assessee has sought to raise the following additional grounds:- "(1) The Assessing Officer/Transfer Pricing Officer erred in making a transfer pricing adjustment of Rs. 10,05,360/- in respect of guarantee given by the Appellant on behalf of its Associated Enterprises. (2) The Assessing Officer erred in including the rate of guarantee commission determined by the Transfer Pricing Officer while determining the average rate of guarantee commission to be charged to the Associated Enterprise and in not considering the direction of the Dispute Resolution Panel to re-work the rate of guarantee commission by considering the average rates of the financial and performance guarantee charged by ICICI Bank. (3) Without prejudice, and in any event, the Appellant submits that the transfer pricing adjustment made in respect of guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard, he made certain enquiries from Bank which revealed that the HSBC Ltd., Mumbai was charging the Bank Guarantee fee at the rates ranging between 0.15% to 3%. He also found from the Website of Allahabad Bank that the said bank was charging bank Guarantee fees @ 3% per annum. He, therefore, adopted the Arm's Length Rate of bank Guarantee at 3% of the guarantee amount and proposed the transfer pricing adjustment of Rs. 17,04,000/- being 3% of the bank Guarantee amount of Rs. 5.68 crores. 13. The assessee objected to the transfer pricing adjustment in respect of guarantee commission by filing its objection before the D.R.P. It was submitted on behalf of the assessee before the D.R.P., inter alia, that the Arm's Length Rate of guarantee commission taken by the T.P.O. at 3% was highly excessive because ICICI in assessee's own case was charging guarantee commission @ 1.5% per annum for financial guarantee and 0.8% for performance guarantee. Keeping in view this submission of the assessee, the D.R.P. directed the A.O. to work out the Arm's Length Rate of guarantee commission by including the rates of guarantee commission charged by ICICI Bank in assessee's own case. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra), we prefer to follow the decision rendered by the co-ordinate Bench of this Tribunal in the said case over the decision of French Court in the case of Societe Carrefour (supra). We, accordingly modify the impugned order of the ld. CIT(A) on this issue and direct the A.O. to recompute the commission for guarantee given by the assessee to its Associated Enterprises @ 0.5% being the arm's length price. Ground No. 1 of Revenue's appeal is thus partly allowed whereas ground No. 2 of assessee's appeal is dismissed." 16. A perusal of the relevant portion of the Tribunal's order reproduced above shows that the ALP of guarantee commission was determined by the TPO in the case of Nimbus Communications Ltd. (supra) by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as ALP. The ld. CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of guarantee fee as Arm's Length Price relying on the decision of French Court in the case of Societe Carrefour. The Tribunal, however, adopted the rate of guarantee commission at 0.5% as the ALP after taking into consideration the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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