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TMI Blog2016 (7) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... ) renders otiose or superfluous. Now, it is well settled canon interpretation of statutes that while interpreting the taxing statute, construction shall not be adopted which renders particular provision otiose. When interpreting a provision in a taxing statute, a construction, which would preserve the purpose of the provision, must be adopted. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to the one which would render it otiose or sterile. In that view of the matter, courts should not adopt construction which would upset or even impair the purpose in introducing a particular provision in the statute. Therefore, following this principle, we hold that it is since the parameters laid down in sub-section (1) are not fulfilled, there is no relationship of AE between assessee-company and JII and therefore, the provisions of chapter X of the Act have no application. In the result, the transfer pricing adjustment made by the TPO is not valid in law. - Decided in favour of assessee. Addition u/s 14A - Held that:- Now, law is fairly settled that no disallowance under clause (iii) of sub-rule (2) of rule 8D can be made wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer [AO] found that the assessee-company returned the following international transactions in Form 3CEB: Name of the Associated Enterprise Nature of International Transaction Paid/payable Jockey International Inc. Kenosha, USA Royalty@ 5% of entire sales 1,67,829,024 During the previous year relevant to assessment year under consideration, the assessee-company paid royalty of ₹ 6,78,29,024/- to JII towards royalty. The assessee-company sought to justify the consideration paid for international transactions entered with JII to be at arm s length. The assessee-company submitted transfer pricing study and the rate of royalty is 5% which is within the prescribed limit as prescribed by the RBI. 3. The AO referred the matter to the Transfer Pricing Officer [TPO]. The TPO by order dated 30/01/2014 passed under section 92CA(3) of the Act computed transfer pricing adjustment of ₹ 20,20,07,861/-. While doing so, the TPO has treated expenditure incurred on advertisement and marketing and product promotion is an international transaction and attempte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt nor it has compensated the Taxpayer Company towards the advertisement expenditure incurred at the instance of the AE, out of international transactions towards royalty and advertisement amount 202007,861 is considered as excessive and proposed to be added to the total income of the Taxpayer Company. 8.0 Therefore, the Arm's Length Price in accordance with the provisions of Section 92CA(3) of the Act is determined at ₹ 142,183,477/-. And the resultant adjustment u/s 92CA(3) of the IT Act is ₹ 20,20,07,861/-. 4. Pursuant to the TPO s order, draft assessment order was passed by the AO wherein the following disallowances were proposed: i. Adjustment on account of transfer pricing ₹ 20,20,07,861/- ii. Disallowance under section 14A read with rule 8D(2)(iii) of ₹ 20,51,175/- iii. Disallowance of ₹ 74,08,961/- under the provisions of sec.80JJAA of the Act. 5. Being aggrieved by the draft assessment order, the assessee-company filed objections before the Dispute Resolution Panel [DRP] contesting all the additions. It was contended by the assessee-company before the DRP inter alia that the said transactions do not constitute inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO has used the bright 1111C method to determine the arm's length price of advertisement, marketing and promotion expense. Having determined the ALP using the Bright, line method, the TPO has used the CUP method to analyse and compare the cost of the AMP expenditure of the taxpayer with that of the comparables selected by the taxpayer, itself. This method of analysis has been upheld by the Chennai bench of ITAT in the case of Asendas and by the Bangalore bench in the case of Tally Solutions. In these cases, the Hon Benches of Tribunal had occasion to conclude that the TPO was correct in determining the price or the value of the international t r ans act ion usin g a st and ard and accept abl e method and then sel ect ing the most appropriate method prescribed under the Act for the purpose of comparison of such ALPs. We therefore find no infirmity in the methodology followed by the TPO. The submission of the taxpayer that the TPO has used cost plus method is examined and found that it is only a typographical error. Ground No 4: Clubbing of royalty with the advertising and marketing expenditure. The next objection of the taxpayer is the clubbing of royalty with the adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... License agreement has stipulated a minimum of 40% on this kind of expense. In page 29 in para 18(b), the Licensee agrees to expend within each license year for advertising and promotion, not less than the Minimum Advertising Expenditure. Licensee shall regard such expenditure as part of the normal cost of doing business not deductible from any money owning to Jockey. It is also mentioned in paragraph 18 (c), the Licensee acknowledges that brand and image advertisement programs may be developed by or for Jockey. Upon request from Jockey, and upon mutual agreement by both parties, Licensee agrees to pay an amount equal to 40 percent of the Minimum Advertisement Expenditure directly to Jockey to support such brand and image advertising, marketing and promotional activity. Such payments shall be paid by the licensee to Jockey within 30 days after the end of each license quarter. Said amount shall be credited against Licensee's Minimum Advertising Expenditures. In para 18(e) it is mentioned that all artwork and designs involving the Jockey Mark or any reproduction thereof shall, not withstanding their creation or use by the Licensee be and remain the property of Jockey and Jockey sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble companies engaged in similar businesses have spent during the year. The TPO has used the same comparables that the assessee has used to arrive at the same. Since royalty is part of the brand building expenditure, we find no infirmity In the TPO clubbing the royalty paid with the AMP expenditure for the purposes of benchmarking. The TPO has taken the support of Tribunal decision of Chennai Bench of ITAT rendered in the case of Ascendas (India) Private Limited, to support the adoption of the Bright Line method for arriving at the value of the AMP expense reasonably expected to be spent by comparable companies. In the case of Ascendas, the Hon Tribunal has upheld the use of a method (the discounted cash flow method) not prescribed in the Act but widely followed internationally to ascertain the value of an asset. The methodology used to arrive at the market value of the asset is different from the methodology used for benchmarking the international transaction prescribed in section 92C(1) of the Act. 7.6 Having arrived at the Arm's length margin or the allowable AMP expenditure vis-a-vis the comparables, the TPO has used the CUP method as the most appropriate method for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quashed. b) without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable; c) making transfer pricing adjustment of ₹ 20,20,07,881/-; d) making an adjustment to the returned income without issuing any show cause notice or giving any opportunity of filing objections thereby violating of principles of natural justice; and e) at the fag end of the limitation period. 2. The assessing officers has erred in: a) making a reference for the determination of the Arm's Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so; and b) making reference to the TPO without disposing the jurisdictional issue as to whether there exists an associated enterprises ( AE ) relationship between the Appellant and Jockey International Inc.( Jockey Inc. ) 3. The lower authorities have erred in: a) not appreciating that there is no amendment to the definition of income and the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense on royalty. Grounds relating to selection of most appropriate method 8. The learned TPO has erred in mentioning CUP Method as well as Cost Plus Method as the most appropriate method at different places in the order. The Honourable DRP has erred in concluding that CUP Method is most appropriate method on the ground that mentioning of Cost Plus Method by the TPO is only a typographical error, without seeking any clarification from the TPO.In either case, it has not been justified how CUP Method is the most appropriate method in the facts and circumstances of the case. Grounds relating to computation of ALP 9. Assuming without admittingthat CUP method is the most appropriate method, the lower authorities has erred in: a) passing the order bereft of proper understanding of the industry, business, economic and commercial realities in the case of the Appellant; b) unilaterally adopting comparables selected by the Appellant under TNMM as comparable under CUP Method without demonstrating how they remain comparable under the CUP Method also; c) not appreciating that during the year under consideration the Appellant incurred additional A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears; b) not appreciating that the Appellant had complied with all the conditions to be eligible to deduction under section 80JJAA; and c) disallowing the deduction u/s 80JJA without appreciating that the conclusions reached are contrary to the provision of the Act and the binding precedents, especially in the Appellants own case. Addition made by AO 15 The learned AO has erred in: a) adding interest of ₹ 295,531 on delayed payment of dividend distribution tax ( DDT ) to the tax payable in the Order passed without appreciating that the proceeding under section 143(3) is for assessing total income and tax thereon and not for determining shortfall, if any in payment of dividend distribution tax. b) not detailing the basis of determining shortfall in payment of dividend distribution tax. c) Levying a sum of ₹ 295,531 as interest for delayed payment of DDT. On the facts and circumstances of the case, interest under section 115P is not leviable. The appellant denies its liability to pay interest under section 115P. Even otherwise, the interest levied is excessive. d) Levying a sum of ₹ 4,49,95,680/- as interest under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 employees. There is no participation of JII in the capital and management of the assessee-company. In the light of these facts, we have to examine whether both the entities can be termed as AE within the meaning of provisions of sec.92A(1) and 92A(2) of the Act. The relevant provisions of these sections are reproduced hereunder: Meaning of associated enterprise . 92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise , in relation to another enterprise, means an enterprise- (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed. 11. It is the case of the AO that the assessee-company and JII are AEs as they fall within the parameters of clause (g) of subsec.( 2) of sec.92A of the Act. It is not the case of the AO that the present case falls within parameters of sub-section (1) of sec.92A of the Act. In this background, we are called upon to adjudicate whether both the entities are AEs within the meaning of sec.92A of the Act. The definition of the term AE is divided into two subsections (1) and (2). Sub-sec.(1) contains(means) definition of AE is .para meters of management control or capital of that enterprise. Sub-sec.(2) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing adjustment made by the TPO is not valid in law. 12. Now, we shall deal with grounds of appeal relating to corporate issues. 12.1 Ground No.13 relates to disallowance of an amount of ₹ 20,15,175/- u/s 14A read with rule 8D of the IT Rules. During the course of assessment proceedings, the AO noticed that the assessee-company earned dividend income of ₹ 6,86,839/- from shares and mutual funds which is exempt under the provisions of sec.10(34) of the Act. It is the claim of the assessee-company that there was no expenditure which is incurred to earn the dividend income. The AO held that no dividend can be earned without incurring any expenditure. He, accordingly, applying rule 8D(2)(iii) made addition of ₹ 20,51,175/-. 12.2 It is the contention of the assessee-company that no addition u/s 14A can be made without rendering a finding as to how the claim of the assessee-company that no expenditure was incurred, was incorrect. 12.3 We heard the rival submissions and perused material on record. Now, law is fairly settled that no disallowance under clause (iii) of sub-rule (2) of rule 8D can be made without rendering a finding as to how the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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