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TMI Blog2014 (4) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case and in Law, was the Ld. CIT(A) justified in treating 50% the expenses incurred on Architect & Interior Design amounting to Rs. 21.94 Lacs and expenses incurred on Supply & Installation of Electrical Items amounting to Rs. 14.44 Lacs as Revenue?" 3. The facts in brief are that the assessee is in the business of manufacture, distribution and marketing of malted food drinks, cocoa powder, chocolates, toffees, drinking chocolates and sugar confectionaries. The assessee, having its head office at Mumbai, is having its factories at Thane, Induri and Malanpur and marketing offices located at Delhi, Chennai, Kolkata and Mumbai. 4. The assessee is a subsidiary of M/s Cadbury Schewepps PLC, U.K. Cadbury group has presence in more then 200 countries and it enjoys the distinction of being world's third largest soft drinks company in sales volume and is among the fourth largest confectionary company in the world. 5. Cadbury India Ltd., the assessee entered into certain international transactions with its Associated Enterprises (AEs), which are as follows: S No. Name of the Associated Enterprise (AEs) Country of tax residence of AEs Nature of relationship Descrip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endently benchmarked. He further noted that companies identified by the assessee company i.e. DFM Foods Ltd., Bakeman Industries Ltd., Modern Food Industries (India) Ltd., Parrys Confectionary Ltd and Ravalgaon Sugar Farm Ltd., did not pay any technical fee/royalty. According to him, these companies could not be used in the analysis for benchmarking the royalty payments. Since the total sales of the company is at Rs. 645 crores and international transactions pertaining to this segment is only 14.50 crores, being only 2.24% would not effect the profitability, if the ALP is to be determined at TNMM at entity level. According to the TPO, the most appropriate method, therefore, would be CUP because all other comparables, as supplied by the assessee, either developed their own technology, or they had acquired the technology long back and are no more paying for the transfer of technology. This, in the case of the assessee is not the case, because, the assessee company, i.e. Cadbury India Ltd., is required to pay royalty to its parent AE, CSDL, for the continuous upgradation of technology. 10. The TPO, therefore, concluded that in the case of royalty on technical knowhow the ALP should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sia 2.50% Trade mark licence - Exclusive & non-transferable 7 Cadbury Kenya Limited Kenya, Uganda and Tanzania and any other territories 2.00% Trade mark licence 8 Cadbury Confectionery Malaysia SDN BHD East & West Malaysia & Brunei & such other territories 2.00% Royalty technical information and trade mark licence agreement - exclusive & non-transferable 9 Cadbury Nigeria plc Nigeria 2.00% Trade mark licence (1) (2) (3) (4) (5) 10 Cadbury Poland Sp zo.o Poland 2.5% Trademark licence-exclusive and non-transferable 11 Dlrol Cadbury LLC Russia plus named export territories 3% for confectionery ** Trade mark licence exclusive and non-transferable 12 Cadbury Dulciora SA Spain and such other countries 3.00% Trademark licence and non-transferable 13 Crystal Candy (PVT) Limited Zimbawe and such other territories 2.00% Trade mark licence exclusive & non-transferable 14 Cadbury Nigeria plc Nigeria 2.00% Technical Service Agreement 15. From the chart, the TPO inferred that royalty on trademarks usage is 2% but the assessee company is paying the royalty between 1 to 2.5% and the average on the above comes to 2.32%. The issue was put to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the Government for such payments considering the Exchange Control Policy, but such transaction satisfies the principles of Arm's Length or not is not the concern or within the jurisdiction of the Reserve Bank of India. This requires to be decided as per the provisions of Income Tax Act, 1961. The payment should satisfy the provisions of the Act, separately and independently, irrespective of the allowability of payment as per Exchange Control Policy. Similar is the view of Tax Administration of most of the countries. The Guidelines of Tax Administration of France, on the issue, refers to "please note, finally, that, although the authorization given by the Ministry of Industries or by any other technical department, with respect to the rate of a royalty or of the amount which may be transferred abroad, is not binding on the tax administration, the Inspector, nevertheless have regard to it (source IBFD Publications)' The company also cited CBDT Circular No.6-P, dated 06.07.1968 and the decision of Pune ITAT, in the case of Kinetic Honda MotorLtd. v. Jt. CIT [77 ITD 393], in support of Its contentions. The Board's Circular and the decision are gone through. The circular as well as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to demonstrate their reliability. (ii) Related party comparable data provides the most reliable available data upon which to determine or estimate an Arm's Length outcome. (iii) In the FMCG Sector, most of the big companies in India, are part of Multi-National Enterprises, and their transactions would certainly be the controlled transactions. There would be very few companies, in the FMCG Sector other than MNCs, wherein, any royalty is paid by them to unrelated parties. The details regarding any such company could not be found on the website of SIA/RBI "www.siadipp.nic.in/publicat/newsltr" meaning thereby in FMCG sector, such royalty payments are not approved". Considering the above and as the information regarding payment of royalty by the Cadbury Group entities to CSOL is available, the same is used as a bench mark to decide the Arm's Length rate of royalty and the contention of the company is rejected". "The company, itself, vide letter dated 20.01.2005 submitted the meaning of the term "Trademark" in the commercial parlance, the same is reproduced below "a market place device by which consumers ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method, because, such a transaction does not in a big way affect the profitability of the company. In the present case, the data regarding comparable, though controlled transactions are available, and therefore, Comparable Uncontrolled Price method is the most appropriate method". "The total royalty worked out by the company is Rs.63,668,246/-. The company was asked to submit the working of royalty as per Press Note No.1 (2002 Series), issued by Secretariat for Industrial Assistance, Government of India. As per this Press Note, the formula for calculation of royalty for the use of trademark and brand name is: "Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents/dealers' commission, transport cost, including ocean freight, insurance, duties, taxes and other charges, and cost of raw materials, parts, components imports from the foreign I/censor or its subsidiary/affiliated company." The company submitted the working for the same in Annexure 4 of the letter dated 11.02.2005. The revised royalty payment works out to Rs.61,840,438/-Tax De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition to the tune of Rs. 2,46,61,370/- to the income of the assessee. 19. The assessee approached the CIT(A), before whom the assessee reiterated its submissions made before the TPO/AO. The CIT(A) on examining the submissions, made proposal for enhancement for disallowing the entire payment of royalty on trademark usage technical knowhow at 1.25%, as the same were not wholly and exclusively incurred for the purpose of the appellant's business. 20. On receipt of the show cause notice for enhancement, the assessee gave a detailed reply with regard to the genuineness and correctness of royalty payments on both counts. The CIT(A), on receipt of the detailed submission from the assessee held, "Based on the submissions filed on record, explanations provided from time to time, documents evidencing provision of technical know-how, I am satisfied that the Appellant has received several benefits on account of payment of technical know-how royalty and the same have been evidenced by supporting documents" 21. On observations with regard to brand ownership, the CIT(A) held, "5.7 The Appellant, has submitted that the Overseas AEs have m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further explained that economic and commercial value of, a 'brand' is typically driven by the income-stream it generates. However, the Appellant has merely contributed approximately 1% of the total sales of CSOL over the years from 2001-2008. This clearly indicates the Appellant has hardly contributed to the total group turnover and hence it cannot be termed as the economic owner of the 'Cadbury' brand. In fact, it is because of the global brand that it represents that the Appellant has been able to capture approximately 75% of the market share. It was also stated that while Cadbury has been in India from 1948, the brand per-se has been in existence since 1824 and it was a well developed brand even before it was introduced in India. 5.8 Advertisement expenses incurred by the Appellant With respect to the advertisement expenditure incurred by the Appellant, it was submitted that marketing expenditure in itself is insufficient for a claim to economic ownership over an asset. The Appellant has contended that it is in the business of manufacturing and distribution of chocolates, sugar confectionery and malted food ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Appellant that while the increased sales may have benefited the. Overseas AEs by way of increased royalty at 1% on the incremental sales, the same is insignificant as compared to the incremental quantum of profits earned by the Appellant on the increased sales and the taxes paid thereon to the Indian Government Treasury. The Appellant has contended that the correct way of looking at royalty payment is to see the turnover achieved by the Appellant as a result of the license. It has been contended that the payment of Rs 635.68 lakhs to achieve a turnover of Rs 63,606.53 lakhs and to realize the net profit of Rs 8,892.88 lakhs is certainly reasonable and at arm's length. Further the Appellant has also highlighted that that the advertisement and marketing efforts undertaken by the Appellant, for promoting the sales of its products in India, does not benefit the Overseas AEs directly, as they are not involved in the business of manufacture/trading of such products in India either on its own or through any of its other subsidiaries. Hence, the entire advertisement and marketing expenses incurred are purely for its own, benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akes the stance that, if intangible property is contributing to an entity nature, the entity will earn profits in excess of what could be observed in the absence of such intangible property. Applied to the facts of this case, the appellants 13.28% margin vis a vis average margin of comparables at 2.17% clearly establishes that the intangible property (Trademark and Technical Know How) has contributed to its excess profits. The TPO has no objection to the selection of comparable companies for benchmarking but has taken the stand that since they (comparables) are not paying trademark royalty and technical know how fees, hence cannot be used for benchmarking this transaction lacks force. In fact what distinguishes the appellant (Cadbury) from its competitors in the chocolate & confectionary market is its valuable brand name backed by the high quality products and it is this crucial factor that gives it a tremendous competitive advantage translating into an operating margin of 13.28% despite huge turnover. In the absence of such intangible property the comparables average is languishing at 2.17% only. This huge gap justifies the 2.25% payment by the appellant to its AE. There is a dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l knowhow at the rate of 1.25%. This is being in accordance with the agreements signed on various dates. 27. He further submitted that the assessee started to pay royalty on use of trademark after taking approval of the Board of Directors on 26.04.2001 and consequential approval by the RBI. It was submitted that the assessee had been paying royalty from 12.02.2002 to its parent AE. 28. The DR, advancing the objection made by the TPO submitted that the agreements entered into by group companies in other parts of the world had been paying composite royalty, which came to 2%, whereas, the assessee had been paying royalty ranging between 1% to 1.25% and that the agreements entered into by the assessee company and its parent AE have overlapping clauses, pertaining to the payment of royalty on technical knowhow and trademark usage. 29. Besides this objection, the DR submitted that in the course of proceedings before TPO, the TPO raised the issue of payment of AMP, which had been left without any comments, in respect of computation of ALP. 30. The DR also submitted that CUP method would be most suitable method, as there are no segment wise data available. The DR further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payments made under both the types of royalties were at arms length and no adjustment addition needs to be made. 36. The DR in the rejoinder submitted that the in the interests of justice the issue needs to be restored to the file of the TPO. 37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38. From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the assessee was incorrect. According to the TPO, the best method to ascertain ALP in the interest case was CUP, as the transactions were controlled. This was reasonable, as no data was available from independent source to benchmark the transactions. 39. On going through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its parent AE right from 1993, as, other group companies are paying across ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Associates Plumbing/removing window frams/debris, etc. 30,160 Hitesh Shah & Associates Plumbing/removing window frams/debris, etc. 30,160 Hitesh Shah & Associates Fixing Ms Steel support/bamboo scaffolding 29,040 Roshan Electrical Contractor Supply & Installation of electrical items 14,44,694 Interscape Civil, Exterior and Plumbing works 1,60,63,652 S.R. Network UTP CAT 5 cable/connectors/cords/cabling work 10,45,103 Geeta Network Repairing with upholstery work Board rooms chairs 34,240 Geeta Network Repairing with upholstery work /Dir Chairs/Meeting room chairs/staff chairs 99,720 Neutron Electronics Reinstallation charges NEC-M-100 50,000 TOTAL 2,39,38,000 48. The assessee in its submissions before the AO claimed that in fact the repairs, renovation, refurbishing, plumbing expenses and architects fee was much higher and much more. The assessee had suo moto capitalized all the expenses, which were in the nature of capital. 49. The AO disallowed the entire expenditure, claimed as revenue by the assessee. The AO observed in the assessment order that "the whole exercise has resulted into the additional utilizable space and long term increase in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax, Range 5(1), Mumbai ("the AO") of disallowing Rs. 1,07,891/-, being expenditure incurred on rural development in villages near the Appellant's factory, on the alleged ground that the said expenditure has no nexus with the business carried out by the Appellant without considering the fact that such expenditure incurred out of commercial expediency, it enhances the corporate image of the Appellant Company and also promote its business. GROUND NO. 2: 8OHHC - Miscellaneous Income and Trade Discount Rs. 9944,920/-and Rs. 5,13,72,467/- On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO of treating miscellaneous income and trade discount as part of the total turnover for the purpose of computing deduction u/s. 8OHHC of the Act. GROND NO. 3 : 8OHHC - Interest Rs. 6,47,94,044/- On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO of reducing 90% of the gross interest received while computing deduction u/s. 8OHHC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irla Nuvo Ltd. (supra) and allow the expense, if the assessee has incurred expenditure for upliftment of local village community, as a good corporate citizen. 64. Issues raised in Grounds No. 2 to 4 are dealt with and are covered by the various orders of the coordinate Benches of the ITAT, in the case of the assessee. Since the grounds are covered on identical issues, we for the sake of brevity are not deviating from the inferences drawn by the coordinate Benches. 65. Ground no. 2 pertains to Miscellaneous income and trade discounts amounting to Rs. 99,44,920/- and Rs. 5,13,72,467/-. 66. At the time of hearing, the AR pointed out that the issue is covered by the order of the coordinate Bench in ITA No. 957/Mum/2005 in assessment year 2001-02 in assessee's own case, wherein in para 6.1, it has been held, "6.1 After hearing both parties, we find that this issue is covered by the decision of the Tribunal in assessee's own case in assessment year 1995-96 in ITA No.1641/M/2003 dated 8.10.2010. The Tribunal in the said year noted that the miscellaneous income which included trade discounts, miscellaneous sales, sales tax, excise duty etc. had to be included i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the order in ITA No. 975/Mum/2005 in paras no. 7 and 7.1, which reads as under 7. The sixth dispute is regarding reduction of 90% of interest from profit of business as per Explanation (baa) while computing deduction under section 80 HHC. Assessee had received interest on FDRs, ICDs and others aggregating to Rs.5,21,04,545/-. The AO excluded 90% of the same from the profit of the business while computing deduction under section 80 HHC which in appeal was confirmed by CIT(A). Assessee has disputed the decision of authorities below to exclude 90% of the gross interest and not net interest income. 7.1 We have heard both the parties, perused the records and considered the matter carefully. Earlier the Hon'ble High Court of Bombay in case of CIT v. Asian Star Co. Ltd. [2010] 326 ITR 56 had held that 90% of gross interest has to be reduced from the profit of business as per Explanation (baa). However the said decision of the Hon'ble High Court has not been up held by the Hon'ble Supreme Court who in the case of ACG Associated Capsules Ltd. v. CIT [2012] 343 ITR 89, have recently held that 90% of net receipts have to be reduced a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f normal price worked out from the prices charged by the assessee company to their wholesale dealers. The said third party manufacturers/converters disputed the basis adopted by the Excise authorities for levy of excise duty and the said dispute became the subject matter of appeal before the Excise Duty Appellate Authorities. Although the primary liability to pay the excise duty was that of the third party manufacturers/converters, the said excise duty liability was to be paid by the assessee company as per the agreements as and when was payable. Since the said dispute was not settled in the year under consideration, the assessee company retained the liability in respect of the disputed amount to the extent of Rs.61,44,628/- in view of its contractual obligations towards the third party manufacturers/ converters by reducing its sales to that extent and crediting the accounts of the third party manufacturers/converters. In the result, the sales were shown less to that extent in the Profit & Loss Account and in effect, deduction was claimed on account of provision for liability towards contractual obligation to the third party manufacturers/ converters in computing the total income w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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