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TMI Blog2015 (12) TMI 514X X X X Extracts X X X X X X X X Extracts X X X X ..... ng mosquito repellent mat and liquid. These factual aspects have not been negated by the Revenue and, therefore, the decision of the DRP cannot be faulted with. Apart from the aforesaid, we have carefully perused the discussion made by the AO in the draft assessment order and find that no specific reason has been propounded to demonstrate that the profits declared in the Guwahati unit was otherwise untrue except by comparing it with the level of profit of the Pondicherry unit, which ostensibly was not manufacturing the same commodity. Under these circumstances, in our view, there is no merit in the ground raised by the Revenue challenging the direction of the DRP for allowing the claim for deduction under section 80-IC of the Act for Guwahati units in accordance with the claim made in the return of income. - Decided against revenue - ITA No. 1251/MUM/2014, ITA No.1356/MUM/2014 - - - Dated:- 18-11-2015 - G. S. Pannu, AM And Amit Shukla, JM For the Appellant : Shri F V Irani For the Respondent : Shri N K Chand ORDER Per G S Pannu, AM The captioned are cross-appeals by the assessee and the Revenue, directed against the order of the Assessing Officer dated 30/1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments while computing the book profits. Grounds of Revenue's appeal:- 1. On the facts and the circumstances of the case and in law, the Disputes Resolution Panel erred in reducing the Guarantee Commission charged to Associated Enterprise(AE) in Bangladesh to ₹ 6,27,920/- as against ₹ 14,82,960/- as computed by the Transfer Pricing Officer(TPO) in order u/s.92CA of the Income Tax Act and proposed by the Assessing Officer(AO) in Draft Assessment Order passed ujs.143(3) r.w.s.144C(1) of the Income Tax Act. 1.1 On the facts and the circumstances of the case and in law, the Disputes Resolution Panel erred in rejecting the average yield method adopted by the TPO to determine the credit rating of the AE for computing the Arms Length Price(ALP) of Guarantee Fee charged from the AE on providing the guarantee. 2. On the facts and the circumstances of the case and in law, the Disputes Resolution Panel erred in directing the AO to exclude Bank Charges and Other Financial Charges while computing the expenditure attributable to earning exempt income. 2.1 On the facts and the circumstances of the case and in law, the Disputes Resolution Panel erred in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses, which are not in the nature of interest, while computing the disallowance under rule 8D(2)(ii) of the Rules. Accordingly, in the final assessment order dated 30/12/2013, the disallowance was scaled down to ₹ 14,25,150/-. 4. In this back ground, the Ld. Representative for the assessee submitted that in the preceding assessment year of 2008-09, similar issue came up before the Tribunal and vide order dated 11/3/2015 in ITA No.598/Mum/2013, the matter has been restored back to the file of the Assessing Officer with following directions:- 4. We have considered the rival submissions as well as relevant material on record. The investment as on 31st March 2007 was ₹ 6.74 crores whereas the investment as on 31.03.2008 is ₹ 61.25 crores, therefore, there is an increase in the investment during the year to the extent of ₹ 54.51 crores. We note that this fresh investment of ₹ 54.51 crore is clearly in the two foreign subsidiaries of the assessee and dividend from the foreign company is taxable, therefore, to that extent the DRP has already directed the Assessing Officer to recomputed the disallowance. The issue before us is limited to the extent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Rules. The Revenue has challenged the aforesaid direction of the DRP. After considering the rival stands, we find no infirmity in the decision of the DRP, which is in conformity with the phraseology of Rule 8D(2)(ii) of the Rules. As a result, the Ground Nos. 2 2.1 raised by the Revenue are dismissed. 6. By way of Ground of appeal No. 3, assessee-company has assailed the action of the Assessing Officer in reworking the deductions u/s. 80IB/80IC of the Act by re-allocating certain administrative and selling marketing expenses of the non-eligible units to the eligible units. It was a common point between the parties that this dispute was a recurring issue and in the past years the issue had been decided by the Tribunal in favour of the assessee. In the lead case for assessment year 2006-07, the Tribunal vide order dated 22.11.2013 in ITA No. 7369/Mum/2010 held as under: 8. We have considered the rival submissions and also perused the relevant material available on record. It is observed that out of the total overheads of ₹ 154.63 crores incurred by the assessee during the year under consideration, overheads to the extent of ₹ 141.91 crores were directly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment was 12.92% and even after allocating advertisement, schemes and promotions expenses on the basis of turnover, the profit of trading segment was 6.59%. 9. Similarly, the other indirect expenses on conveyance and traveling, rate and taxes and miscellaneous were incurred by the assessee during the normal course of its business of selling the finished goods, whether manufactured or procured from third party and since the said expenses were incurred equally for the benefit of eligible business as well as non-eligible business of trading, we are of the view that the basis of turnover adopted by the assessee to allocate the said expenses was more scientific and reasonable. On the other hand, the reallocation of the said expenses made by the A.O. on adhoc basis was not supported or substantiated by him and the same, in our opinion, cannot be accepted as a reasonable basis. In the case of Consolidated Coffee Ltd. v. State of Karnataka (supra) cited by the ld. counsel for the assessee, it was held by the Hon'ble supreme Court that when a bifurcation of expenses is not possible, some reasonable test will have to be adopted and that adoption of the method of apportioning on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated enterprises. 8.1 It was a common point between the parties that similar issue had come up before the Tribunal for assessment year 2008-09 (supra), and the stand of the assessee was upheld in following words: 25. We have considered the rival submissions as well as relevant material on record. The assessee bench marked its selling price using comparable uncontrolled price (CUP ) method. The TPO found that the assessee has aggregated all the exports made to a particular country for the purpose of bench marking against the comparable transactions with unrelated parties in those countries. The TPO held that such bench marking is required to be done for each transaction and for each particular product. Accordingly, the TPO has made the addition of ₹ 14,61,781/- on this account. There is no dispute regarding the most appropriate method applied by the assessee as internal CUP. The only controversy before us is whether the various insecticides products sold by the assessee to its AEs in various countries should be clubbed together for the purpose of bench marking all the transactions being at arm's length and compared with the uncontrolled price. It is pertinent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. It can be vice-versa when the earlier transaction has been entered into between parties by keeping in mind that a continuous transaction of similar nature will be entered into between the parties thereafter. Therefore, when the transactions are influenced by each other and particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions. The OECD guidelines has referred a portfolio approach as business strategy consisting of tax payers bundling certain transaction for the purpose of earning an appropriate return across portfolio rather than single product. For instance some products may be marketed by the tax payer with a low profit or even at loss because they create a demand for other products or related services of the same tax payer that are then sold or provide high profit. Some of the examples given in the OECD guidelines for transfer pricing are the equipment and captive after market consumables such as vendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise separately and not by clubbing the transactions with all associate enterprises. 26. There is no dispute that if the number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply or services the transactions can be classified as closely linked transactions for the purpose of transfer pricing and in terms of Rule 10A(d) of the income Tax Rules. The Aggregation and clubbing of the closely linked transaction are permitted under the Rules and it is also supported by OECD transfer pricing guidelines. Thus the concept of clubbing and aggregating the transaction is based on the premise that such transactions influenced by each other and particularly in determining the price and profit involved in the transactions then such transactions can safely be regarded as closely linked transactions. The OECD guidelines has referred a portfolio approach as business strategy consisting of tax payers bundling certain transaction for the purpose of earning an appropriate return across portfolio rather than single product. The assessee is selling various insecticide products used in the household at various strata of the society and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred wholly and exclusively for the purpose of business and thus, it was disallowable under section 37(1) of the Act also. On the basis of the aforesaid reasons, the Assessing Officer has made an addition of ₹ 20,00,000/- in the final assessment order dated 30/12/2013(supra). 9.1 Before us, Ld. Representative for the assessee contended that the impugned sum has been unjustly disallowed. Explaining the factual aspect, it was pointed out that 'Sara Lee' is a world leader in the household and body care business and markets products under various global brands. It was asserted that the group incurs costs globally to develop and market the said brands, and also provides marketing assistance and support concerning the products under the 'Sara Lee' brand. The assessee-company paid ₹ 20,00,000/- to Koninklinjke Douwe Egberts, Netherlands as reimbursement on cost to cost basis, and no mark-up was charged. 9.2 Further, it was explained that the expenses incurred by the assessee-company in India for the benefit of the 'Sara Lee' Group was also recovered from the associated enterprise as per actual costs and in this connection assessee-company had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 In this context, brief facts are that assessee had given guarantee to banks on behalf of its subsidiary in Bangladesh. The subsidiary had raised loans from the bank for which guarantee had been given by the assessee to the constituent branches of the bank in India. The TPO considered such transaction as an international transaction within the meaning of section 92B of the Act. In the computation of income filed, assessee had declared the income from guarantee commission @3%. Accordingly, it was asserted before the TPO that since guarantee commission rate charged by various banks was around 1 to 1.5%, the adjustment made by the assessee @3% on account of guarantee commission was justified and no further transfer pricing adjustment was called for. It was also explained that the financial guarantee was advanced by the assessee for strategic reasons in furtherance of its business prospects. The TPO, however, differed with the assessee who compared the guarantee commission rate in two different geographical locations, namely, in India and Bangladesh and the difference between the two rates was treated as the benefit to the associated enterprise. Accordingly, the TPO made an addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of Ground of appeal No.8, the assessee company has assailed the action of the AO in not following the directions of the DRP in respect of ₹ 1,24,81,000/- representing Provision of diminution in the value of investment, while computing the book profits under section 115JB of the Act. 11.1 In this context, the brief facts are that before the DRP assessee pointed out that the Assessing Officer erred in not granting deduction of ₹ 1,24,81,000/- in respect of the Provision for diminution in value of investment written back while computing the book profit under section 115JB of the Act. The assessee explained before the DRP that the aforesaid provisions has been accounted and claimed in the year of its creation, being assessment year 2005-06. In the assessment year 2005- 06 assessee was in receipt of a notice under section 154 of the Act from the Assessing Officer proposing adding back of such Provision in view of retrospective amendment to the Act. The assessee explained before the DRP that it had made a written communication to Assessing Officer dated 18/02/2010 giving no objection to such adjustment, but the same was pending disposal with the AO. In the aforesaid ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 8,36,17,721/- as against the claim of ₹ 61,15,40,758/- made by the assessee, thereby resulting in the disallowance of the claim under section 80-IC of the Act to the extent of ₹ 52,79,23,037/-. 12.2 Before the DRP, the assessee pointed out that the action of the AO was misplaced in as much as the Assessing Officer mistakenly assumed that Guwahati unit was manufacturing mosquito repellent coils, whereas the Guwahati unit was manufacturing mosquito repellent mats and liquid, which was not comparable with the financial results of Pondicherry unit, which was manufacturing mosquito repellent coils. The assessee also pointed out before the DRP that the adjustment was proposed by the Assessing Officer without appreciating the submissions made and by merely following the stand in the assessment year 2008-09. The DRP found that the aforesaid dispute was similar to the assessment year 2008-09 and it upheld the stand of the assessee. As per DRP, on facts, such an addition was not merited. Accordingly, in the final assessment order no such disallowance has been made but Revenue is in appeal against such direction of the DRP. 12.3 After considering the rival stands, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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