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TMI Blog2014 (10) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... up Support services. (iii) Corporate tax issues. 3. 2008- 09 6382/Del/2012 Appellant Transfer pricing - Adjustment on account of AMP expenditure (ii) (ii) Disallowance on account of intra-group Support services 4. 2009- 10 6580/Del/2013 Appellant Transfer pricing - Adjustment on account of AMP expenditure. (ii) Adjustment in relation notional interest on outstanding receivables. 2. A perusal of above reveals that one common issue in all the years pertains to adjustment on account of Advertising, Marketing and Promotion ("AMP") Expenditure incurred by the Appellant for AY 2006-07, 2007-08, 2008-09 & 2009-10. Brief Facts in this behalf are: 2.1. The Appellant is a wholly owned subsidiary of Bausch & Lomb South Asia Inc., USA, primarily engaged in the business of (i) manufacturing and distribution/trading of vision care products such as soft contact lenses, toric lenses, infra-ocular lenses, eye care solution and protein removing enzyme tablets ("vision care segment"). (ii) distribution/trading of surgical equipment such as excimer laser system, cataract machines and intra-ocular lenses ("surgical equipment segment"). 2.2. For each of these segments, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sen comparables. Post determination of ALP qua AMP, a transfer pricing adjustment was carried out on this account in these years holding that the Appellant should have been compensated by AE for the alleged brand promotion services alleged to be rendered by the assessee. Besides ld. TPO further added a mark-up on rendition of such services. 2.8. The TPO thus calculated the adjustments as under: Particulars AY 2006-07 (INR) AY 2007-08 (INR) AY 2008-09 (INR) AY 2009-10 (INR) AMP of appellant including trade discount/ commission 20,90,47,349 25,67,02,198 17,60,95,512 12,95,73,460 Less Arm's Length AMP expenditure (as computed by TPO) 3,08,74,221 (ALP=2.77%) 3,16,33,605 (ALP=3.61%) 5,84,81,920 (ALP=5.62%) 4,36,18,644 (ALP=3.71%) Expenditure 17,81,73,129 22,50,68,593 11,76,13,592 8,59,54,816 incurred for developing intangibles Add: Mark-up 1,78,17,312 (@10%) 3,36,02,740 (@14.93%) 1,76,42,039 (@15%) 1,31,25,300 (@15.27%) Adjustment on account of transfer pricing 19,59,90,441 25,86,71333 13,52,55,631 9,90,80,116 2.9. Against the proposed adjustments assessee approached the ld. Dispute Resolution Panel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, relevant grounds are raised in respective grounds of appeal as under: AY 2006-07 - Ground no. 11 & 12 AY 2007-08 - Ground no. 9 AY 2008-09 - Ground no. 8 & 8.1 AY 2009-10 - Ground no. 6 a) It is submitted that the Appellant provided certain channel discounts to its dealers depending on the sales volumes achieved. These discounts are essentially in the nature of trade discounts provided to incentivize dealers to increase the sales volume of the Appellant. The Appellant also incurred commission expenses which were in the nature of normal dealer commission paid to distributors/ channel partners depending upon approved commission percentage. In addition to the above, the Appellant also incurred expenses directly related to sales such as (i) point of sale related expenses like booking stalls, erecting stalls, dispensers, etc; (ii) conference related expenses like costs incurred for participation in various conferences organized by leading ophthalmic associations wherein various trends and technologies are discussed by leading doctors; (iii) Market research; (iv) free trial of contact lenses related expenses, (v) freebies provided to promote sales, etc. These expenses are purel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sely avoided going into the actual expenditure and the fact that they were sales related as against alleged brand building. g) It is submitted that following earlier pattern of accounts heading even if the appellant included trade/channel discount, commission, other selling expenses, etc under the nomenclature AMP and has claimed the same as revenue expenditure as against reducing the same directly from sales. The expenditure cannot be classified as AMP expenditure, merely on the basis of entries in the books of account. The entries in the books of accounts are not determinative of deductibility of an item of expenditure for the purposes of computation of taxable income under the provisions of the Act. Reliance, in this regard, is placed on Kedarnath Jute Mfg. Co. Ltd. vs CIT: 82 ITR 363 (SC). As such expenses go to reduce the cost of goods sold and have a live nexus to the sales made during the year(s). The Special Bench of the Tribunal appreciating the same, therefore, held that such expenditure should be excluded from the AMP before benchmarking. h) Thus applying principles enunciated in LG India Special Bench decision, expenses having direct correlation with sales cannot, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... threshold itself before even initiating the benchmarking exercise. 3.4. Category 2 - Key factors enumerated by Special Bench to be considered by TPO during benchmarking exercise 3.5. The Special Bench of the Tribunal (Para 17.4) has categorically suggested factors for determination of cost/ value of international transaction. The factors enumerated by Hon'ble Special Bench along with Appellant's facts have been reproduced below: Criteria's/ Factors Suggested by Special Bench (para 17.4) Appellant's facts FAR of the tax payer The TPO has grossly erred on fats of the business model of the appellant in assuming (i) the entire AMP expenditure was incurred for the distribution activity of (ii) the appellant is a limited risk distributor. In this regard it is submitted that the appellant is engaged in both distribution and manufacturing activities as mentioned in the TP Documentation and, accordingly, the appellant is a routine manufacturer and distributormarketer that utilizes routine assets and undertakes normal business and economic risks. Terms of The appellant entered into agreement with its AE for its arrangement/ agreements between tax payer and AE own man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench were restricted in the context of the facts of the principal applicant and did not consider the facts in the case of interveners. Therefore, a judgment cannot in our respectful submissions, be applied uniformly to the instant case de hors appreciation of the relevant facts involved herein. Further, it is submitted that the TPO himself had accepted that the AMP expenses are payments to unrelated entities and has not, anywhere, incurred in relation to the business of the entity. The same should be included as operating expense while computing the margin of Appellant under TNMM. Without prejudice, if such AMP is considered as an international transaction, then the benchmarking should have been aggregated with the principal transaction of appellant i.e. import of finished products for distribution. 3. Cost/ value of transaction Bright line considered as a tool to determine cost of international transaction. (paras 15.7 & 15.10) Section 92C of the Act provides that arm's length price in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method, having regard to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87-89 of PB for AY 2007-08. - For AY 2008-09 and 2009-10, the TPO applied mark-up of Prime Lending Rate ("PLR") plus an associated service charge and arrived at a mark-up of 15 percent (PLR of 12.5 percent plus 2.5 percent mark-up) and 15.27 percent (PLR of 12.77 percent plus 2.5 percent mark-up) respectively. It is respectfully submitted that the application of PLR to compute the mark-up is erroneous. The specific objections of the Appellant are placed at Pgs. 130-132 of PB for AY 2008-09 & Pgs. 158-159 of PB for AY 2009-10. d) Without prejudice to other contentions, it is submitted that the TPO/AO be directed to follow a consistent approach in light of the decision of the Hon'ble Special Bench. 4. Disallowance on account of payment made for availing Intra-group Support Services for AY 2007-08 & 2008-09 4.1. During AY 2007-08 & AY 2008-09, the Appellant entered into a support services agreement dated April 1, 2006 with B&L Hong Kong Ltd. ("B&L HK") (Pg 313 & 320 of PB for AY 2008-09). Thereafter, during AY 2008-09, the Appellant entered into similar agreements dated April 1, 2007 with B&L Incorporated, USA ("B&L Inc") (Pg 303 & 309 of PB for AY 2008-09) and Bausch & Lomb (Sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t savings, operational efficiency and sustainability. By incurring these expenses, the Appellant has access to network, expertise, skills, knowledge, information, etc., that is available within the B&L Group. Further, the Appellant has not procured / purchased similar services from unrelated parties during these years and the respective jurisdiction from where the Appellant's AEs are operating earn an arm's-length markup on its service activities. 4.6. It is submitted that the industry in which Bausch and Lomb operates i.e. the vision care industry has its inherent risks as the products closely relate with health and the high sensitivity of human eyes. Consequently the risk of quality event is naturally higher than other industries. Accordingly, support in terms of manufacturing support, advisory support, consulting etc. is essential for the Indian company. Besides, the Appellant provided economic justifications as well as a cost benefit analysis for the payment of support service fee to its AEs along with sample documentation to substantiate the same. The detailed submissions in this regard containing emails, agreements, cost allocation sheet, cost benefit analysis, TP docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing an adjustment per se which is not the intent of Chapter-X. Reliance is placed on the recent judgment of the Hon'ble Delhi of Bench of the Tribunal in the case of Hero MotoCorp Limited (2013)156 TTJ 139 (Del) wherein, the applicant had paid model development fee and the TPO applied CUP for determining the ALP to be Nil. The DRP arbitrarily used 25 percent as the CUP. The Tribunal rejected the approach of the DRP/ TPO stating that it is TPO's responsibility to compute the appropriate ALP and the same cannot be determined as NIL or a randomly assigned percentage. 4.9. Reliance can also be placed on the Delhi Tribunal ruling in the case of Abhishek Auto Industries Ltd (ITA No. 1433/Del/2009) wherein the Tribunal has emphasized that legally binding agreements cannot be disregarded without assigning any cogent reasons. The above case is directly applicable to the case of the Appellant, wherein, there is an inter-company service agreement that stipulate that the Appellant will pay a portion of its AEs total costs in a given year. Since it is not possible to individually identify each of the services rendered by the Appellant's AEs and to directly establish the corresponding costs, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation (i)(c) to Section 92B retrospectively "receivables" have been included in the definition of international transactions. c) interest rate was arrived at 15.77% by using PLR as the average lending rate of SBI plus 300 basis points, to account for the various risks involved (namely financial risk, credit risk, business risk and structural risk) and the same was considered as the CUP for making an adjustment of INR 3,12,643. 5.2. Adverting to the TPO adjustment qua notional charging of interest on receivables from AE ld. Counsel contends that at the outset the interest on receivables beyond a stipulated credit period is not an international transaction from Indian transfer pricing perspective and, thus, does not warrant an imputed charge. Besides, Transfer Pricing adjustment cannot be made on hypothetical and notional basis unless there was some material on record that there had been under charging of such interest or real income. 5.3. The assessee as a policy, does not charge any interest on any delayed payment irrespective of whether the other party was an AE or not. Since, the Appellant did not charge any interest on delayed payments from its unrelated customers, not cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally not charging any interest from AEs but charging it from non-AEs. As the case of non-charging of interest in the controlled transaction is comparable with that of non-charging from uncontrolled transactions, no transfer pricing adjustment can be made. 5.6. It is further submitted that the notional interest due on payables amounted to INR 41,61,327 whereas the notional interest on receivables amounted to INR 3,12,643 (as computed by the TPO). Details of interest on receivables post netting off interest on payables has been provided at Pg. 39-51 of PB for AY 2009-10 wherein the difference is calculated at INR 38,48,685. Accordingly, based on the above the transfer pricing adjustment on notional interest due on receivables ought to be deleted. 5.7. It is demonstrated that the Appellant is a debt free company and that there was no interest burden on the Appellant. Therefore, it cannot be justifiable to presume that the borrowed funds have been utilized to pass on that facility to AEs. Consequently any notional charging of interest is arbitrary, contrary to TP adjustments and against the material available on record. 5.8. Without prejudice to the above, it is submitted that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, is uncalled for on the facts of the present case and is, accordingly, deleted." - M/s Nimbus Communications Ltd. vs ACIT [2013] 145 ITD 582 (Mum- Trib.) " ...Even assuming that the continuing debit balances of associated enterprises can be treated as 'international transactions' under section 92B, the right course of applying the CUP method, in the case of non-charging of interest on overdue balances, would have been by comparing this not charging of interest with other cases in which the assessee has charged interest on overdues with independent enterprises (internal CUP) or with the cases in which other enterprises have charged interest, in respect of overdues in respect of similar business transactions, with independent enterprises (external CUP). No such exercise has been carried out in this case..." 5.11. In light of the above, it is submitted that the aforementioned TP adjustments are neither factually nor legally sustainable. 6. Ground No 24 for AY 2007-08 on corporate issue pertaining to disallowance of advances written off. Brief Facts are, during this AY, the Appellant had written off advances amounting to INR 79,80,994 to its Profit and Loss account and cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted from reasons to reason to arbitrarily hold it be not allowable. 6.4. Ld. DRP without considering the merits and offering cogent reasons summarily confirmed the AO's remand report holding that assessee has not been able to reasonably explain how these expenditure have been incurred in the ordinary course of business. Ld. DRP also went beyond even the observations of AO and held that it appeared that such expenditure was in the nature of capital expenditure or donations to various organizations for holding/sponsoring meetings. Thus DRP also did not consider the merits and gave no cogent reasons to dislodge the valid claim of the assessee. 6.5. Ld. counsel for the assessee submitted that, as part of its business operations, the Appellant incurred business promotion expenditure and from time to time made advances to various parties for sponsorship of conferences, incentives for facilitating sales promotion. Many a times such advances become irrecoverable, which is a usual exigency of business in such transactions. The nature of expenses for which advances were paid is connected with routine operations of the Appellant and did not give rise to any enduring benefit of capital natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses" 6.6. The afore-mentioned view has been reiterated by the Jammu and Kashmir High Court in the case of Chenab Forest Co vs CIT [1974] 96 ITR 568 (J&K), wherein, it has been held that advance given in the ordinary course of business for carrying out the business operations which subsequently becomes irrecoverable is liable for deduction under section 37(1) of the Act. The relevant extract of the decision has been reproduced below: "On a consideration of all the facts, it is clear that the nature of the business, the system of working was such that it was necessary to carry on the business that advances may be made and without which the forest lessees may find it extremely impossible to carry on the business. The advances made in the ordinary course of business would have been adjusted and recouped if there had been a renewal of the leases but this could not be possible only because there was no renewal of the leases and as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess loss, it would certainly be allowable to be deducted under the provisions of section 37 of the Act" - Minda HUF vs JCIT [2006] (285 ITR 88) (Delhi) - Jhalani and Company vs ACIT [2001] (77 ITD 44) (Delhi) 6.8. In view of these facts, circumstances and above judicial decisions, assesses impugned claim qua advances actually written off deserves be allowed as deduction under section 37(1) of the Act. 7. Ground No 27 to 28 pertaining to addition on account of provision for doubtful debts and advances to book profits under section 115JB of the Act is not pressed by the assessee hence dismissed accordingly. 8. Ground No 30 pertaining to levy of interest under section 234B of the Act, is pleaded to be consequential in nature. 9. Ld DR on the other hands contend that Non application of res judicata in matters of Taxation as facts of each period differ. Consistency without reasoning shall not be detrimental to correct determination as per the T.P. provisions and Income Tax Act 1961. A. Bright line concept: 10. The concept of bright line test is for determining the cost relevant to the international transaction, which helps to arrive at correct ALP Hon'ble Delhi High Court laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are distinguishable on the facts as also on the underlying principles. Two such citations are reproduced below and the distinction is clear on both the facts as also the law: (i) EKL Appliances ([2012] 24 Taxmann.com 199 Delhi/ 345 ITR 241 Delhi) by Hon'ble Delhi High Court: The Hon'ble Court has rather upheld the authority of the TPO in para 22 of the order. Relevant quote is a s under: 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not gone into the business allowability of Intra Group Services Expenses, only ALP of such item has been determined. (ii) Dresser Rand India P Ltd ( 47 SOT 423 [Mumbai] 2012): "10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. In the case before us, as evident from the cost contribution agreement, the costs have been shared at average of percentage of (i) head count to the total count and (ii) sales revenue to total revenue. The assessee's share of head count is 3.90% and of total revenue is 3.30%, and, accordingly, 3.50%, being average of these two parameters, is taken as the cost contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osts are comparable. When commensurate benefit against the payment of services is not derived, then the TPO is justified in making an adjustment under ALOP. 40. In the case in hand, the TPO ha determined the ALP at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the ALP. The burden is initially on the assessee to determine the ALP. Thus, the argument of the assessee that the TPO has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The TPO has not disallowed any expenditure. Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at "nil". 5.14. The assessee has also made a plea that the OECD Guidelines permit aggregation of all international transactions with the main activity. Such guidelines, however, are not binding but are merely elucidative. Moreover, Indian is not a member of OECD. The assessee has relied upon the order of the Hon'ble Delhi High court in the case of CIT Vs. EKL Appliances [ITA no. 1068/2011 & 1070/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's length test of international transactions has not been done away with. The expenditure incurred in an international transaction has necessarily to pass the test of ALP. 5.16. Further more, it has been contended that the expenditure which is the subject matter of adjustments by the TPO ought to have been allowed in the same manner as the expenditure is allowable u/s 37(1) of the Act. This plea of the assessee however cannot be allowed for the simple reason that the provisions of sec. 37(1) and proviso to sec. 92 operate in different field and thus the argument becomes devoid of any merit. 5.17. For this reference may be made at para 10 of the Tribunal's order in Dresser Rand India Pvt. Ltd. (ITA no. 8753/Mum/2010) dated 7-9-2011, the relevant portion is reproduced below: "10. Once we come to the conclusion that the assessee has indeed received the services from the AI the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndependent enterprise or if the same would have been performed in house. The DRP is found to have considered these services as non-beneficial for the recipient and did not take it as chargeable services. The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided by the associate enterprise. In this view of the matter there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE. The TPO, therefore, has rightly adopted Nil value for benchmarking the arm's length price in respect of both these services. We, therefore, do not find any reason to interfere with the well reasoned conclusion reached by the AO on this count. The grounds raised in appeal in this respect, therefore, stand rejected. - LM Windpower (India) Ltd AY 2006-07 & 2008-09/ IT(TP)A Nos 1165/B/2010 & 1681/B/2012 - Delloitte Consulting India Pvt Ltd/ AY 2002-03/2003-04/ ITA 3910, 3911/M/2009 - Dentley Systems India Pvt. Ltd. AY: 2007-08/ ITA No.5730/Del/2011/ 14. Treatment of outstanding receivables from AE for AY 2009-10: The impugned amounts are outstandings for a period longer than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transactions. The Special Bench ruling in the case of L.G. Electronics though has not especially dealt with the issue of "bright line concept", how4ever, the methodologies as provided by ECD and UN Model guidelines are implicitly endorsed and factored in by the Special Bench for undertaking an appropriate comparability analysis. 16.4. Ld. DR contends that the assessee has provided the details only as per the heads of accounts maintained by it. There is no verification as to whether the posting of expenses is proper and whether they have not accounted for by the assessee in a proper manner. The assessee's table as mentioned above is only on the basis of prima facie heads of the accounts and not based on any verification of the actual details. This situation arose because following other cases, the entire AMP expenses were considered by TPO for T.P. adjustment. The L.G. Special Bench judgment was not available at that time. Due to consideration of entire expenditure as AMP the AO and DRP did not verify the actual nature of expenses as it was not needed. Besides, the plea of the assessee that the expenses on conferences, market research, freebies etc. is to be excluded from AMP ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s upheld the order of TPO on following lines: (i) Services claimed to have been rendered were neither identified nor proved by any contemporaneous documentary evidence. (ii) Details of tangible and direct benefit derived by the assessee has not been furnished. (iii) No information has been provided as to whether the group AEs were rendering such services to other AEs or independent parties. (iv) The applicability of benefit test has been held to be provided by OECD guidelines of 1979 providing for a benefit test from the prospective recipients. 17.2. Assessee's claim is to the effect that some evidence was produced before the lower authorities which has not been considered. For A.Y. 2007-08 no objections in this behalf seems to have been raised before DRP in ground no. 1.1.6 & 1.1.7. A perusal of these grounds indicate that before DRP the allegation of the TPO that no evidence was furnished in respect of services has not been challenged. Be that as it may, in subsequent years such adjustment has not been made by department. In view of these facts we are inclined to set aside this issue back to the file of TPO. Looking at assessee claims that evidence was produced before TPO an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otion activities, sponsorship of events, conferences, travel hotel stay, employee salary advance etc. and were necessarily incurred in the ordinary course of business. Besides it also filed details of nature of expenses for which the advances were given to prove that the expenses were of revenue nature and were wholly and exclusively incurred in the ordinary course of business. AO, however, submitted remand report for not allowing the claim on the following objections: (i) Assessee has only submitted copies of vouchers, bills and no other details summarizing the nature of expenses were filed. (ii) Assessee did not provide any clarification as to whether the advances were given in ordinary course of business. (iii) No cogent reasons are given that they were not for long term benefit to the assessee. 19.2. According to assessee, AO thus gave self contradictory observations from reason to reason and filed the remand report, which is vague and ld. DRP without considering the merit of the explanation and evidence filed by the assessee summarily confirmed the remand report and disallowed the expenditure. 19.3. In our view from the above facts, it emerges that in remand proceedings t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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