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TMI Blog2013 (4) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... ales promotion expenditure to the file of the Transfer Pricing Officer. - Decided in favour of assessee for statistical purposes. Expenditure relating to market research service - whether charges paid to selling agents and discount on sales are to be excluded from the alleged advertisement, marketing and sales promotion expenditure as being not relatable to advertisement and marketing expenditure? - Held that:- We find that the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013 (6) TMI 217 - ITAT DELHI] held that the expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totalling 5,500.86 lakhs as the same do not fall within the ambit of advertisement, marketing and sales promotion expenses and hence not to be considered for computing the cost/value of international transaction. In view of our decision in allowing the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit due to its employees, in terms of the scheme of employment and also in terms of the revised/ change in Accounting Standard-15 issued by ICAI which was to be followed during the year, is an allowable deduction in the hands of the assessee. The said claim being based on the valuation of the actuary is both scientific and one of the recognised method of accounting and quantifying the said post retiremental medical benefits. In such cases though actual and exact quantification may not be possible, however, the liability so recognised by the assessee could not be said to be unascertained and contingent. The assessee having followed the mercantile system of accounting was compulsorily required to account for the said post retirement medical benefits as the same was quantified and had accrued during the year. The claim of the assessee was thus allowable irrespective of the fact that the assessee had made a provision in the books of account but had claimed the said deduction in the computation of income. It is well settled proposition that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee had earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keting and sales promotion expenses incurred by the appellant for sale of its products to the dealers. 2.4 That the Assessing Officer erred on facts and in law in holding that advertisement, marketing and sales promotion expenses incurred by the appellant resulted in promotion of brand owned by the associated enterprise, thereby creating marketing intangibles whose ultimate benefit inured to the associated enterprise. 2.5 That the Assessing Officer erred on facts and in law in holding that the appellant has developed marketing intangible for the associated enterprise in India by performing all functions and by bearing all economic costs and risks. 2.6 That the Assessing Officer erred on facts and in law in not appreciating that advertisement and marketing expenses incurred by the appellant is not on behalf of or for the benefit of the associated enterprise, any benefit to the associated enterprise being only incidental. 2.7 That the Assessing Officer erred on facts and in law in not appreciating that the advertisement, marketing and sales promotion expenses incurred by the appellant, did not result in creation of any marketing intangibles ; much less on account of the assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisement, marketing and sales promotion expenditure of the appellant : S. No. Name of expenses Amount (Rs. in lakhs) 1. Market research 664.24 2. Service charges paid to selling agent 10.03 3. Discount sales 60.52 2.15 That the Assessing Officer erred on facts and in law in not appreciating that the associated enterprise was not under obligation to reimburse expenditure on development and scientific research amounting ; services charges paid to selling agent ; discount on sales incurred on trade discount given to the dealers and market research expenses incurred by the assessee for sale of its products to the dealers. 2.16 That the Assessing Officer erred on facts and in law in holding that advertisement and promotion expenses incurred by the assessee ought to be restricted to 0.95 per cent. of the sale as against 11.29 per cent incurred by the assessee. 2.17 That the Assessing Officer erred on facts and in law in considering the following companies as comparable companies for benchmarking advertisement and publicity expenses : a. National Cereals Products Ltd. b. Puja Foods Products Ltd. c. Shah Foods Ltd. 2.18 That the Assessing Officer erred on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting standard 15, relating to accounting of employee benefits, on the ground that same is an unascertained liability. 6. That the Assessing Officer erred on facts and in law in observing that the aforesaid provision made for post retirement medical benefits to employees has resulted in double deduction to employees in as much as deduction has also been claimed by the assessee in respect of medical insurance premium paid during the relevant year(s). 7. That the Assessing Officer erred on facts and in law in levying interest under section 234B and section 234C of the Act. 8. That the Assessing Officer erred on facts and in law in initiating penalty proceedings under section 271(1)(c) of the Act." 3. The additional grounds of appeal raised by the assessee being purely legal are admitted for adjudication and the same read as under : " 1. That the Transfer Pricing Officer erred on facts and in law in not appreciating that the power of the Transfer Pricing Officer is restricted to the determination of arm's length price of international transactions referred to him by the Assessing Officer. 2. That on the facts and circumstances of the case and in law the Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of advertisement, marketing and sales promotion expenses now stands covered by the majority view in the Special Bench of the Delhi Tribunal in L. G. Electronics India P. Ltd. v. Asst. CIT in ITA No. 5140/Del/2011 relating to the assessment year 2007-08, reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] in which the assessee was one of the intervener. 8. The learned authorised representative for the assessee has furnished on record tabulated details issue-wise being adjudicated by the Special Bench of the Tribunal vide several parts of the decision and we proceed to deal with the same in the paras hereinbelow. 9. The learned Departmental representative for the Revenue pointed out that the issue stands covered against the assessee by the decision of the Special Bench of the Delhi Tribunal in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB]. However, in view of the directions of the Special Bench the matter has to be referred back to the Transfer Pricing Officer for computation purposes. 10. The learned authorised representative for the assessee, however, pointed out that in line with the ratio laid down by the Special Bench, the issue n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand by selecting companies whose advertising, marketing and distribution expenses as a percentage of sales is greater than 5 per cent. wherein the earlier years similar companies were rejected. The assessee was asked to resubmit its analysis and the reply of the assessee in respect of 18 comparables cases is reproduced under para 7.1 of the order of the Transfer Pricing Officer. Thereafter vide para 7.2 the Transfer Pricing Officer noted that the assessee had sales turnover of ₹ 1,26,413.57 lakhs and beside selling and distribution expenses of ₹ 826.17 lakhs, had debited the following expenses : Sl. Name of Amount 1. Discount sales 60.52 2. Market research 664.24 3. Sales promotion 3,939.90 4. Development and scientific research 94.40 5. Advertisement expenses 8,679.75 6. Service charges paid to selling agent 10.03 13. The Transfer Pricing Officer vide para 7.7 at page 6 of the order, considered the shareholding pattern of two companies and observed that GSK Asia P. Ltd. is subsidiary of S.B. Port Louis Ltd., Mauritius, an associated enterprise. Similarly Glaxo Group Ltd., U.K. (an associated enterprise) has 35.99 per cent. shareholding in GSK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was that the advertisement, marketing and sales promotion expenditure of ₹ 14,275.01 lakhs considered by the Transfer Pricing Officer includes certain expenses not in the nature of advertising and marketing expenses. The development and scientific research expenses of ₹ 94.40 lakhs had been incurred on product related research and were not in the nature of advertisement and marketing expenses. Further service charges paid to the selling agent of ₹ 10.03 lakhs and discount on sales of ₹ 60.52 lakhs were the selling expenses incurred for effecting the sales and were not in the nature of advertisement, marketing and sales promotion expenses. Further market research expenses of ₹ 664.24 lakhs were claimed to be incurred for taking customer feedback to validate the taste, colour or odour, etc., of the products and were in the nature of product development expenses and were not to be considered as part of advertisement, marketing and sales promotion expenditure. The selling and distribution expenses of ₹ 826.17 lakhs comprised of expenses incurred towards cost of freebies, distribution expenses in rural marketing and other marketing agency expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us expenses incurred were for the promotion of not only Horlicks but other brands, i.e., Viva, Maltova and Boost. The assessee elaborately explained the provision of the Act and also pointed out that the adjustment as proposed by the Transfer Pricing Officer were not correct. 17. The Transfer Pricing Officer held that in view of the terms and conditions of the agreement between the assessee and authorised associated enterprise, the payment of royalty by the assessee was held to be deemed international transaction as per section 92B(2) of the Income-tax Act. The tax auditors had reported expenditure of ₹ 5,028.43 lakhs by the assessee on payment of royalty to its associated enterprise, which was an international transaction, as per the Transfer Pricing Officer. However, the assessee had not determined the arm' s length price of the said transaction, as observed by the Transfer Pricing Officer. He was of the view that on one hand, the assessee was making royalty payment to its associated enterprise for the use of trademark and on the other hand, it had incurred expenditure of ₹ 142.75 crores on advertisement, marketing and sales promotion (excluding royalty). The Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... New Delhi, vide its order dated September 23, 2011. The Dispute Resolution Panel directed the Assessing Officer to allow expenditure of ₹ 94.40 lakhs spent on R & D as the same was not part of advertisement, marketing and sales promotion expenses and the same had to be excluded for computing advertisement, marketing and sales promotion adjustment. Consequently difference of ₹ 10,283.55 lakhs was added to the income of the assessee as part of the adjustments on account of international transactions. 19. The Assessing Officer during the assessment proceedings confronted the report of the Transfer Pricing Officer to the assessee. The Assessing Officer observed that a reference was made to the Transfer Pricing Officer under section 92CA of the Act for computation of arm' s length price of the international transactions of over ₹ 5 crores as per Form No. 3CEB filed by the assessee. In view of the order of the Transfer Pricing Officer and the Dispute Resolution Panel, the difference in the amount of arm' s length subsidy and the value of international transaction undertaken being more than 5 per cent., adjustment of ₹ 102,83,55,523 was made to the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Legislature also deems certain transactions as international transactions as per sub- section (2) of section 92B. Elaborating sub-section (2) of section 92B, it was put forth that a transaction with a third party is deemed an international transaction if there is a prior agreement in relation to the relevant transaction between the third person and the associated enterprise or the terms of the relevant transaction are determined in substance between such third person and the associated enterprise. It was stated that the case of the assessee cannot be brought even within the purview of sub-section (2) because there is no allegation by the Revenue that the third parties who were paid by the assessee for defraying advertisement expenses had any understanding with the foreign associated enterprise so as to determine the terms of their agreements for advertisement with the assessee. Once a transaction is not covered under sub-section (1) of section 92B, the learned authorised representative stated that the same can be deemed as an inter national transaction only when it falls under sub-section (2) of section 92B. If a transaction does not satisfy the prerequisites for inclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be seen into three parts. The first part is exhaustive as opening with : ' international transaction' means a transaction . . . in the nature of purchase, sale or lease of tangible or intangible property, or provision of services . . . The second part further advances the scope of the exhaustive character by roping in any other transaction having a bearing on the profits, income, losses or assets of such enterprises. The third part is inclusive which provides that it shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of . . . any cost or expense in connection with a benefit, service or facility pro vided or to be provided to any one or more of such enterprises. 76. The learned Departmental representative argued that the instant transaction can be viewed as ' international transaction' not on one but on three different counts. The first being, the earlier part of sub-section (1), which is in the nature of the exhaustive part of the definition referring to ' . . . in the nature of . . . provision of services' . It was stated that the authorities below have primarily viewed this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement between the assessee and its foreign associated enterprise under which only the assessee was to incur all advertising, marketing and promotion expenses in India in connection with a benefit, service or facility to be provided to itself as well as its foreign associated enterprise. He argued that the excess of the advertising, marketing and promotion expenses incurred by the Indian entity over what other comparable independent entities incur in similarly placed situation, means the exclusive benefit, service or facility to the foreign associated enterprise so as to constitute the value of international transaction of brand building for it. That is how he contended that the present trans action is an international transaction from three different angles. 79. The learned Departmental representative argued that the payment to third parties for advertising is not an international transaction. It has never been the case of the Revenue that the payment made to the third parties towards advertisement expenses be treated as an international transaction. He stated that rather the international transaction is restricted to the activity done by the Indian associated enterprise in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.' 83. After sub-section (1), there is sub-section (2) followed by the Explanation with two clauses, inserted by the Finance Act, 2012 with retrospective effect from April 1, 2002 starting with the expression : ' For the removal of doubts' . Clause (i) of the Explanation provides that ' the expression " international transaction" shall include-' . Then there are five sub-clauses from (a) to (e). Clause (ii) of the Explanation provides that ' the expressions " intangible property" shall include-' . Then there are twelve sub-clauses from (a) to (l). 84. Firstly, we shall evaluate the rival contentions about the definition of ' international transaction' under section 92B, being exhaustive or inclusive. It is noticed that such definition as per sub-section (1) uses both the words ' means' and ' inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction' given in sub-section (1) has been converted into an inclusive one. Clause (ii) of the Explanation also defines the expression ' intangible property' in an inclusive manner. Sub-clause (a) of clause (ii) embraces ' marketing related intangible assets' in the ambit of intangible property, which is again not exhaustive because of the use of the expression ' such as' before ' trademarks, trade names, brand names, logos' . From the above examination of section 92B in entirety, it can be easily noticed that the Legislature has given very extensive and inclusive meaning to the expressions ' international transaction' and ' intangible property' . 86. When we read section 92B(1) it comes to fore that in order to be characterised as an international transaction, the following salient features must be present : (1) There should be a " transaction" (2) Such ' transaction' should be between two or more associated enterprises and either or both of whom should be non-residents. (3) Such transaction should be of the nature as referred to in section 92B. 87. In the earlier part of this order, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services of advertisement and promotion of a brand to its customers. His contention was that in order to bring any transaction within the scope of ' provision of services', it is sine qua non that the main business activity of the Indian enterprise and the nature of service provided to the foreign associated enterprise must be same. As it is not so in the present case, the learned authorised representative contended that the transaction cannot be held as a ' provision of service' . 91. We do not find any force in this submission advanced on behalf of the assessee for the reason that the language of section 92B simply mandates the ' provision of services' by one associated enterprise to another. It is not qualified by any words to restrict its scope only to such services as are provided by the assessee in its regular course of business. What is significant in this regard is the factum of rendition of service, which is an international transaction. Source of service is inconsequential. It can be produced by the associated enterprise as primarily engaged in the business of rendering such service or it can be produced by the Indian associated enterprise otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated enterprise in so far as incurring of advertising, marketing and promotion expenses is concerned and further the assessee entered into transactions with the third parties who are advertising agencies and it is not the case of the Revenue that the terms of trans actions with such third parties were determined in substance by the foreign associated enterprise. In so far as the part of the contention of the learned authorised representative about the deemed international transaction under section 92B is concerned, we find that it is nobody' s case that the transaction in question is a deemed international trans action. In order to be covered under sub-section (2) of section 92B for making a transaction with a third party as deemed international transaction, it is essential that the associated enterprise of the asses see should have influence over the third party in terms of determining the terms and conditions of such transaction. It is only in such a situation that the transaction with such third party is deemed to be an international transaction. Further it is not the case of the Revenue that the transaction of payments of advertising, marketing and pro motion expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arm' s length price of the international transaction not referred to the Transfer Pricing Officer by the Assessing Officer and the consequent directions passed by him are also dismissed in view of the ratio laid down by the Special Bench of Delhi Tribunal in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB]. 24. The next issue raised by the assessee is vide grounds Nos. 2.8 to 2.13, i.e., application of the prescribed method for determining the advertisement, marketing and sales promotion of the international transaction. The Special Bench of the Tribunal vide its majority view in paras 135 to 166 of the decision held as under (page 88) : " 20.1. We have noticed above that the transfer pricing provisions require two variables. Having seen the first variable, being the cost/ value of international transaction above, now we shall find the second variable, being the arm's length price of the international transaction. Transactional net margin method applied on one transaction- Whether the arm's length price of other transactions permissible ? 21.1. Learned counsel for the appellant started his contention on this poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained that in that case the Revenue opined that the assessee should have transferred its goods at a higher price than that declared. Rejecting this contention, the hon'ble Supreme Court came to hold that once a transaction is bona fide, the profit cannot be computed by taking market price, ignoring the real price fetched. In the light of this judgment it was contended that the action of the Revenue in firstly benchmarking the net profit by applying transactional net margin method on the international transaction of imports and then making separate addition for advertising, marketing and promotion expenses is akin to the stand of the Revenue in that case, being the maximisation of profit in all possible ways, which cannot be sustained. With reference to certain material from the paper book, the learned authorised representative submitted that the assessee' s net profit rate was better than certain other comparable cases. Since the overall net profit of the assessee was relatively higher, it was pleaded that no addition was called for by separately processing any item of expense including the advertising, marketing and promotion under the transfer pricing provision. Simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the prescribed methods. If an Indian enterprise has made sale of similar goods to its foreign associated enterprise through several invoices and has also incurred some expenses or paid interest to it, it would mean that all the transactions of sales are closely linked and these can be processed as one unit. However the transactions of payment of interest or incurring of any other expense would be required to be separately scrutinised under Chapter X because these are of a different nature vis-a-vis the transactions of sales. 21.5. It is undisputed that under the transactional net margin method, it is always the operating profit from the concerned international transaction that is viewed in relation to the total cost, sales or capital employed, etc., of that international transaction. It is not as if the percentage of the margin is to be determined by considering the net profit of the entity in relation to the total sales of the entity. When we consider operating profit to total costs of an international transaction, all the items of non-operating expenses and non-operating income qua such international transaction are liable to be excluded. The correct approach under the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions, the application of transactional net margin method on entity level for examining one of such transactions, is itself an incorrect approach. Notwithstanding that, we deem it expedient to deal with the argument of the learned authorised representative that if rate of net profit of the asses see is better than other comparables, then no adjustment can be done under Chapter X. 21.7. On a specific query from the Bench, it was admitted by the learned authorised representative that no addition was made by the Transfer Pricing Officer on account of application of the transactional net margin method on the imports made by the assessee from its foreign associated enterprise. In our considered opinion, there is a noteworthy difference between two situations, viz., one where the transactional net margin method is wrongly applied on entity level and some addition is made to the overall net profit of the Indian associated enterprise while testing the international transaction of imports of raw material and also some further addition is made by applying the transfer pricing provision on advertising, marketing and promotion expenses ; and the situation in which no addition is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no further adjustment on account of advertising, marketing and promotion expenses should be made, then the asses see' s income would stand reduced to ₹ 120 as against the actual income of ₹ 140. We fail to appreciate as to how the judgment in the case of Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC) advances the case of the assessee. There cannot be any quarrel on the proposition that the assessee cannot be compelled to earn maximum profit. As it is the real profit which is to be taxed and the assessee cannot be expected to earn maximum profit, in the same way, the assessee cannot be allowed to reduce its real profit by including certain expenses which are for the benefit of the foreign associated enterprise. 21.9. It is pertinent to note that presently we are dealing with a case in which the majority of the assessee' s sales is to Indian customers. Naturally, the transfer pricing provisions cannot be applied in respect of sales to Indian customers because these are not international transactions. In such a case, there can be no benchmarking of the profits realised from such Indian customers so as to form a platform for con tending that the transactional ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be presumed that the foreign enterprise supplied goods at relatively low price to make up for the advertising, marketing and promotion expenses incurred in India towards brand promotion. In our considered opinion there are no roots for such a presumption. In order to take benefit of such a contention the assessee is required to directly prove the fact of cheap purchases de hors the overall higher net profit rate. This fact can be established by demonstrating that the foreign associated enterprise charged a specially low price from the assessee in comparison with that charged for the similar goods sup plied to other independent entities dealing with it in India or in case there is no other independent entity in India, then the price charged for similar goods from other foreign parties. It can also be proved by showing that goods with identical features are available in the Indian market at a higher price. The fact that the assessee has a better net profit rate in comparison with other comparable entities is not decisive in itself of the assessee having purchased the goods at a concessional rate from its foreign associated enterprise as a compensation for its incurring advertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is required to be subjected to the transfer pricing provisions distinctly. What is relevant to note on a conjoint reading of sub-section (1) and sub-section (3) of section 92 is that if there are two distinct international transactions and the determination of the arm' s length price in respect of the first transaction leads to an increase in total income as per sub-section (1) but no adjustment is called for in respect of the second transaction as per sub-section (3) because of the arm' s length price on the negative side, then the arm' s length price in respect of the first transaction shall be considered in computing the total income, but the arm' s length price of the second transaction shall be ignored. There is no provision which permits set off of negative adjustment with the positive adjustment to the income on account of different international transactions. The outcome of both the transactions has to be given effect distinctly. It, therefore, divulges that two or more international transactions are required to be separately processed under the transfer pricing provisions. The contention that if transactional net margin method has been applied on one i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied for determining the arm' s length price of an international transaction, then the processing of the other international transactions is permissible. The irrationality of the contention can be measured from this factor alone. As all the five methods are aimed towards one end, being the determination of the arm' s length price of an international transaction, it is but natural that the consequences of application of each such method qua the other international transactions cannot be varying. It is not possible to hold that if one method is employed for determining the arm' s length price of an international transaction then it is open to the Transfer Pricing Officer to process other international transactions through the transfer pricing provisions, but if some other method is so used, then all other international transactions are immune from such processing. The learned authorised representative could not draw our attention towards any such provision in the Act. At best, the application of any method including transactional net margin method shows that the said transaction is at the arm' s length price. In our considered opinion, the requirement of benchmarking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y payment as shown by the assessee on the ground that some of the sales did not materialise for various reasons and the same were written off by the assessee in the same financial year. It was opined that there was no question of paying royalty on such sales merely on the basis of raising invoices. The Tribunal rejected the Departmental stand by holding that the arm' s length price was not determined by the Transfer Pricing Officer as per any of the methods prescribed in rule 10B. To this extent the action of the Transfer Pricing Officer was set aside. The said order passed by the Tribunal has been upheld by the hon' ble Bombay High Court in the case of CIT v. CA Computer Associates India P. Ltd. [2013] 351 ITR 69 (Bom), vide its judgment dated July 3, 2012. In view of this legal position, the learned authorised representative contended that since the bright-line method adopted by the authorities below is not a recognised method, the determination so made should be set aside and the matter need not be restored for a fresh determination. It was also contended that the Revenue cannot be allowed to have second innings for its own fault. The learned authorised representative fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methods. He invited our attention towards an order passed by the Bangalore Bench of the Tribunal in which it has been held that excess earning method (EEM) should be applied for determination of the arm' s length price which is nothing but enlargement of the comparable uncontrolled price method. He also referred to another order passed by the Bangalore Bench of the Tribunal in which scope of the comparable uncontrolled price method has been enlarged. In this case the Tribunal directed the determination of the arm' s length price by computing written down value of the asset as against the value as per the Registered Valuer' s report, which was adopted by the Transfer Pricing Officer. The learned Departmental representative contended that the main thrust of the transfer pricing provision is on the determination of the arm' s length price and methods are only means to achieve this end result. He argued that if there is an international transaction and the arm' s length price cannot be determined by any of the prescribed methods, then there can be no fetters on the powers of the Transfer Pricing Officer to adopt any other method for deter mining the arm' s lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed methods or it can even be a combination thereof and further if an inappropriate method is applied by the authorities below then what are the consequences. 22.9. Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to the arm' s length price. Computation of arm' s length price has been set out in section 92C. Sub-section (1) provides that the arm' s length price of an international transaction shall be determined by any of the following methods, being the most appropriate method. Five methods are distinctly prescribed under section 92C(1) and then there is clause (f) which talks of any other method as may be prescribed. Since the sixth method has been prescribed under rule 10AB through the Income-tax (Sixth Amendment) Rules, 2012 which has been made applicable from the assessment year 2012-13, the same cannot apply to the assessment year under consideration in view of the judgment of the hon'ble jurisdictional High Court in Maxopp Investment Ltd. [2012] 347 ITR 272 (Delhi). Rule 10B provides the modus operandi for the computation of the arm' s length price under these five methods. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abundantly clear that it can be any of the methods given in sub-rule (1), that, in turn, draws strength from section 92C(1), which refers to the five methods. In our considered opinion the general and a non case specific argument advanced by the learned Departmental representative that there can also be a combination of the one or more of the five methods for determining the arm' s length price, is not correct. 22.10. As regards the contention that methods are tools for deter mining the arm' s length price, we find that there is no dispute that the main purpose of Chapter X is to determine the arm' s length price of an international transaction, but such determination can be done only by way of the methods specified by the statute. When the Legislature has specifically enshrined a provision under section 92C requiring the computation of the arm' s length price by any of the prescribed methods, it does not fall in the realm of the Transfer Pricing Officer or for that matter any other authority to breach such mandate and apply or direct to apply any other method. Going by the dictate of the pro vision as subsists under sub-section (1) of section 92C, there can be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market ; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ; (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise ;' 23.3. Going by the cost plus method as per rule 10B(1)(c), we find that the first step is to determine the cost of services provided by an enterprise to its associated enterprise. We have noticed above that the authorities below have computed the cost/value of the service provided to the foreign associated enterprise at ₹ 161.21 crores. It is this amount which constitutes the first step under the cost plus method. The second step is to determine the amount of normal gross profit mark-up to such costs arising from the provision of similar service by an unrelated enterprise in an uncontrolled comparable transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion between persons other than associated enterprises, in uncontrolled conditions' . Rule 10A of the Income-tax Rules, 1962, gives meaning to ' uncontrolled transaction' under clause (a) as ' a transaction between enterprises other than associated enterprises, whether resident or non-resident' . It is this expression ' uncontrolled transaction' which has been used in rule 10B(1), inter alia, in clause (c), i.e., ' cost plus method' . A reading of section 92F(ii) with rules 10A(a) and 10B(1)(c) in unison clearly points out that the arm' s length price is a price which is applied in a transaction between non-associated enterprises in uncontrolled conditions. Steps 2 and 3 of rule 10B(1)(c) contemplate the determination of normal gross profit mark-up of a comparable uncontrolled trans action, which would mean a transaction between non-associated enterprises. One has to necessarily pass through these steps for deter mining the arm' s length price under the cost plus method. When these steps unequivocally provide for determining normal gross profit mark-up from the provision of similar services by an unrelated enterprise in a comparable uncont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adequately meet if the process of deter mining normal profit mark-up as per steps 2 and 3 of rule 10B(1)(c) as against 13 per cent. applied by the Dispute Resolution Panel/Assessing Officer, is also restored to the file of the Assessing Officer/Transfer Pricing Officer so that he may determine the cost/value of international transaction in the first instance and then the arm' s length price of this international transaction. 24.1. We do not find any substance in the contention of the learned authorised representative that since the authorities below did not apply any of the recognised methods, their orders be declared as void ab initio without requiring any restoration for fresh determination. The obvious reason is that, even if it is presumed that the contention of the learned authorised representative is correct, which is otherwise not because of the application of the essence of the cost plus method by the Dispute Resolution Panel/Assessing Officer in the present case, it would at the most be a case of defect in application of the procedural provision in the sense that the arm' s length price has not been computed strictly as per the force of the prescribed methods. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh. Consequently, ground Nos. 2.8 to 2.13 are allowed for statistical purposes. 26. The next set of grounds of appeal are grounds Nos. 2.14 to 2.16 wherein the assessee has raised the issue that the expenditure relating to market research service charges paid to selling agents and discount on sales are to be excluded from the alleged advertisement, marketing and sales promotion expenditure as being not relatable to advertisement and marketing expenditure. The claim of the learned authorised representative for the assessee is that the said issue is also covered by the decision of the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] vide paras 132 and 133 of the decision. The relevant paras are as under (page 87) : " 18.5. We do not find any force in the contention of the learned Departmental representative made in this regard. The logic in the exercise of finding out the advertising, marketing and promotion expenses towards creation of marketing intangibles for the foreign associated enterprise starts with the expenses which are otherwise in the nature of advertisement, marketing and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] held that the expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totalling ₹ 5,500.86 lakhs as the same do not fall within the ambit of advertisement, marketing and sales promotion expenses and hence not to be considered for computing the cost/value of international transaction. The assessee, vide ground No. 4 had raised the issue against disallowance of consumer market research expenses of ₹ 567.49 lakhs. In view of our decision in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus allowed. Grounds Nos. 2.14 to 2.16 and ground No. 4 are thus allowed. 30. The assessee, vide grounds Nos. 2.17 and 2.18 had raised the issue of taking into consideration the comparable companies for benchmarking the advertisement and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he file of Transfer Pricing Officer for redetermining the arm' s length price of international transaction after considering the comparables companies, we direct the Transfer Pricing Officer to consider the aspect raised by the assessee in this regard and redetermine the value of arm' s length price in relation to the advertisement, marketing and sales promotion expenditure incurred by the assessee for the brand promotion of the foreign brand and also following the directions given by the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] in this regard. Grounds Nos. 2.17 and 2.18 are thus allowed for statistical purposes. 32. The issue in ground No. 2.19 is without prejudice to the above ground alleging that no adjustment is required to be made in respect of the advertisement expenses attributed to the promotion of domestic brand owned by the assessee. In view of the Special Bench of the Tribunal (majority view) in L. G. Electronics India P. Ltd. v. Asst. CIT reported in [2013] 22 ITR (Trib) 1 (Delhi) [SB] and also in view of the facts and circumstances of the case, no adjustment is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axo Smithkline Consumer Healthcare Ltd. [2008] 299 ITR (AT) 1 (Chandigarh) [SB] for the claim of the said deduction under section 43B of the Act. The Assessing Officer disallowed the claim of the assessee in view of various decisions referred to in the assessment order and also because of the fact that the appeal had been filed before the hon'ble Punjab and Haryana High Court against the order of the Chandigarh Bench of the Tribunal in the assessee' s own case. Consequently the addition of ₹ 36,87,481 was made by the Assessing Officer. 36. The learned authorised representative for the assessee pointed out that the issue stands covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the assessee' s own case relating to the assessment year 2001-02, reported in Deputy CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2008] 299 ITR (AT) 1 (Chandigarh) [SB]. The learned authorised representative for the assessee pointed out that the Tribunal in the assessment years 1998-99 to 2000-01 and 2002-03 to 2006-07 had followed the order of the Special Bench of the Tribunal and allowed the relief to the assessee. Further reliance was placed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed in the case of the assessee i.e. in the preceding years 1998-99 to 2000-01 and thereafter in the assessment years 2002-03 to 2006-07. The Tribunal in ITA No. 1238/Chd/2010 relating to the assessment year 2006-07-order dated January 25, 2012 vide para 49 allowed the claim of the assessee in turn following the ratio laid down by the hon'ble Punjab and Haryana High Court in CIT v. Raj and San Deeps Ltd. [2007] 293 ITR 12 (P&H) observing as under : " 49. The present issue is covered by the decision of the Special Bench in the case of the assessee itself. Further the jurisdictional High Court in Raj and San Deeps Ltd. [2007] 293 ITR 12 (P&H) has held that where the assessee had deposited the excise duty payable in advance in account-current, after the goods were manufactured, such amount was deductible. Following the same, we direct the Assessing Officer to allow the claim of the assessee in respect of incremental balance amounting to ₹ 25,23,710 lying in PLA Account, under section 43B of the Act. The ground No. 4 is allowed." 39. The hon'ble Punjab and Haryana High Court in CIT v. Raj and San Deeps Ltd. [2007] 293 ITR 12 (P&H) held as under (headnote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which liability is incurred. The term ' liability to pay such sum was incurred by the assessee' together with the words ' a sum for which the assessee incurred liability' in Explanation 2 underline that payment must relate to the incurred liability to be called ' any sum payable' . In the present case, the assessee had no option, but to keep the account, in respect of each excisable product (evident from the mandate in rule 173G that it ' shall keep an account current' ). The latter part of the main rule makes it clear beyond any doubt that the assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit. The Revenue's contention that the amounts in credit also relate to goods not manufactured, and therefore, not relatable to any ' liability incurred' is without any basis. The arrangement prescribed by the rule is both a collection mechanism-dictated by convenience, as well ' as mandatory' . It is convenient, for the reason, that if the assessee were to be asked to pay the exact amount, through some other method, by deposit, as a precondition for clearanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 44. The assessee, vide grounds Nos. 5 and 6 has raised the issue against the disallowance of ₹ 11,09,89,913 claimed in respect of the provisions made for post retirement medical benefits to the employees. 45. The brief facts relating to the issue are that during the year under consideration the assessee had claimed expenditure on account of medical reimbursement liability for ex-employees amounting to ₹ 11.09 crores. The claim of the assessee before the Assessing Officer was that the said amount represents the provision made in view of the revised Accounting Standard-15 in respect of the liability for expenditure for medical reimbursement to the employees post retirement. The said provision as per the assessee was made on the basis of actuarial valuation in respect of the services already rendered by the employees. The said claim was made under section 37 of the Act in view of the ratio laid down by the hon'ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC). The assessee also explained that in the earlier years it had claimed deduction in respect of premium paid on the medical insurance policy taken for the benefit of the employees. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee' s previous accounting policy should be adjusted against the opening balance of reserves and surplus. This liability is not at all allowable as per the provisions of the Income-tax Act. Compliance with the accounting standards may be good in the accounting parlance, but it cannot override the provisions of the Income-tax Act. In fact the reliance of the assessee in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) is not correct as the same deals with provision for liability towards encashment of earned leave. The liability toward earned leave encashment can be quantified on the basis of numbers of years of service put in by the employees. The liability in case of medical assistance can never be ascertained as nobody can say with even one per cent. confidence that he will get sick or he will not get sick during a particular financial year/period. Therefore, liability on account of medical assistance will be totally unascertained liability and cannot be allowed against the taxable profits of the company. In view of discussion made above an amount of ₹ 11,09,89,913 claimed by the assessee on account of provision for retirement medical assistance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture for accrued liability as it was meeting conditions of service. Reliance was placed on Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) for the proposition that if the person goes on leave then correspondently no earned leave is to be credited to the account of the said person. Our attention was drawn to the actuarial valuation submitted by the assessee which estimates the expenses taking into consideration different factors. As per the learned authorised representative for the assessee consistent method of accounting was being followed by the assessee from year to year and any abbreviation in the years to come is accounted for. He further submitted that in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the hon' ble Supreme Court had allowed expenditure of gratuity even in cases where the liability had not accrued. He further stressed that the income of the assessee had to be computed as per the method of accounting regularly followed by the assessee which is provided under section 145(1) of the Act. Under section 145(2) of the Act, certain accounting procedures are notified. However, it was fairly admitted by the learned authorised representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Standard and being regularly followed in the succeeding year, the provision made thereof was duly allowable as an expenditure. The learned authorised representative placed reliance on Bokaro Power Supply Co. P. Ltd. v. Deputy CIT in ITA No. 149/Del/2012 order dated January 24, 2013, where identical issue was allowed by the Delhi Bench of the Tribunal. 49. The learned Departmental representative for the Revenue referred to the observation of the Assessing Officer at page 26 of the assessment order and pointed out that the assessee had claimed expenditure by way of deducting amount in the computation of income. It was further pointed out by the learned Departmental representative for the Revenue that the basis for working out actuarial valuation was the mortality rate for which assumptions were made by the valuer. The second objection of the learned Departmental representative for the Revenue was that the company was paying premium for the said retirial medical benefit and the same was being allowed in the hands of the assessee. The said insurance premium paid by the assessee covers future medical expenses of the employees and once the assessee had paid premium the insurance com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respected. The learned authorised representative for the assessee concluded by stating that where Act makes contrary provision then the provision of Act would overwrite any other provision. 51. We have heard the rival contentions and perused the record. The assessee was providing benefit of medical assistance/reimbursement of medical expenses to the employees post retirement. The said benefit was being allowed by the assessee in terms of the employment agreed upon between the company and the employees at the time of their appointment. In order to meet the said liability of providing medical benefits/assistance to its employees post retirement, the assessee was contributing towards the insurance policy taken for the said purpose. The assessee prior to the year under consideration had claimed and was allowed deduction in respect of the premium paid for keeping afloat the medical insurance policy taken for the benefit of employees from year to year. Such medi-claim insurance policies were taken by the assessee in order to provide medical assistance post retirement to the employees. However, during the year under consideration the Institute of Chartered Accountants revised the Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefits include : (a) Retirement benefits, e.g., gratuity and pension ; and (b) Other benefits, e.g., post-employment life insurance and post employment medical care. Arrangements whereby an enterprises provides post-employment benefits are post-employment benefit plans. An enterprises applies this Standard to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits. 54. Under clause 73 of revised AS-15 it has been laid down that actuarial assumptions are to be worked out and should be more than unbiased and mutually compatible. Further the method of working actuarial benefits is to be laid down under Accounting Standard-15. Further in respect of termination benefits, as per clause 133 it is provided that the termination benefits are to be treated separately from other employee benefits as the event which gave rise to the obligation is the termination rather than employee service. Under clause 134, it is laid down that an enterprise should recognise termination benefits as a liability and an expense when, and only when : (a) The enterprise has a present obligation as a result of a past event ; (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note No.6 had reported as under : 6.(a) The company has during the year adopted Accounting Standard 15 (Revised 2005) " employees benefits" . Accordingly, the transitional adjustment aggregating to ₹ 1,137.19 lakhs (net of deferred tax asset Rs. nil) has been charged against the opening general reserves. The details of the transitional adjustment is as follows : Post employment medical assistance scheme ₹ 1,109.90 lakhs Leave encashment/compensated Absences for workers (earned/sick leave) (Also refer scheme 2) ₹ 27.29 lakhs 58. The assessee accordingly made a provision of ₹ 1,636.20 lakhs on account of employees benefits which included the provisions for post retirement medical benefits to employees at ₹ 11.09 crores. The above said amount was booked as an expenditure for computation of income in compliance to the mandatory revised Accounting Standard-15. The claim of the assessee in respect of the abovesaid expenditure was as under : (a) The said deduction has been claimed for the first time during the relevant assessment year, in view of compliance of mandatory revised Accounting Standard-15. (b) Since the provision was made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liability in view of the revised Accounting Standard-15 which is a notified accounting standard by the ICAI is to be recognised while computing the income of the assessee in line with the method of accounting regularly followed by the assessee. The second aspect of the issue is whether such expenditure is to be allowed as a deduction though the liability has been recognised in the year under consideration but the same has to be incurred in the succeeding year. 60. Their lordships of the hon' ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) held that the provision made for meeting liability of leave encashment scheme is to be allowed as deduction, observing as under (page 431) : " The law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one ; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the abovesaid settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. The appeal is allowed. The judgment under ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the authorities below. The assessee-company of was liable to pay for medical expenses of its retired employees in accordance with the terms of employment. Prior to this year, the assessee was claiming these expenses in the year of expenditure. Due to the change in the Accounting Standard in respect of the accounting of post retirement benefits, the assessee got done the actuarial valuation of these liabilities and started claiming the same on that basis. It is claimed in view of the Accounting Standard, AS-15. This claim was based on the valuation of liability on actuarial and scientific basis. In such cases, the actual and exact quantification may not be possible, however, liability cannot be said to be a contingent one. Since the provision has been made on scientific basis and the assessee is following mercantile system of accounting, therefore, in our considered view, the Commissioner of Income-tax (Appeals) was justified in deleting the addition while deciding ITA No. 149/Del/2012. A liability which has already accrued though discharged on a future date would be entitled for deduction. While working out the profit and gain of the business the accrued receipts are b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work out the quantum of taxes thereon at rates applicable during the year to the income, profits and gains of the employer and, after deducting the amount of taxes so worked out, arrive at the available surplus. This will be consistent with the rule laid down by courts and Tribunals before the Act was enacted, that the bonus amount should be calculated after pro vision for tax was made and not before, from which Parliament does not appear to have made a departure.' The hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) has held as under : 'Held, reversing the decision of the High Court, that the provisions made by the assessee-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability.' The hon'ble Delhi High Court in the case of CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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