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TMI Blog2019 (3) TMI 1636X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance u/s u/s 37(1) being 20% of the brand expenses - HELD THAT:- We find force in the arguments of the Ld. Counsel that the issue is squarely covered in favour of the assessee as there is a clear finding that such expenditure does not result in any enduring benefit. Hence, these grounds of the revenue are dismissed Disallowance of provision for transit breakages - HELD THAT:- Referring to case of SEAGRAM MANUFACTURING PRIVATE LTD. (NOW PEMOD RICHARD INDIA PVT. LTD.) [ 2016 (12) TMI 1284 - DELHI HIGH COURT] we are of the view that any reversals in the provision and the actual amount have to be allowed as a deduction. We, therefore, restore this issue to the file of the Assessing Officer/TPO with the direction to verify the reversals of provision and only the actual amount to be allowed as deduction. Disallowance u/s 40(a)(ia) - assessee has disbursed an amount on account of reimbursement of trade schemes through sales promoters to various retailers - HELD THAT:- Verification needs to be done in the case of the appellant. We, accordingly, set aside this issue to the file of the Assessing Officer/TPO with a direction to examine the documentary evidences to be file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined the details from correct perspective. In the interest of justice and fair play, we restore this issue to the file of the Assessing Officer. AO is directed to verify from the ledger account of Sky View and verify whether payments have been made by A/c payee cheques/RTGS and after satisfying himself, no addition need be made u/s 40A(3) Disallowance u/s 37(1) for want of verification /non-production in respect of payments made to certain parties - notice u/s 133(6) to parties - HELD THAT:- It can be seen that in respect of four parties, the assessee has done no transaction. Therefore, there is no point in issuing notice u/s 133(6) of the Act to these parties. In respect of other parties, since the assessee has furnished complete details in the form of invoice, agreement, CST registration certificates and copies of ledger account, the Assessing Officer should have pointed out specific errors/defects in these direct evidences. In our considered opinion, assessment has been framed without proper verification. We, therefore, restore this issue to the file of the Assessing Officer with the direction to examine the documentary evidences furnished by the assessee and if necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e summarised as under: S No. Nature of transaction Method Value of transaction 1 Import of raw material TNMM 17,79,44,109 2 Export of finished goods TNMM 13,85,42,150 3 Reimbursement of expenses by PRIPL TNMM 27,85,658 4 Import of finished goods TNMM 3,69,08,306 5 Provision of marketing support services TNMM 4,65,37,700 6 Reimbursement of expenses to PRIPL CUP 11,70,97,697 8. The assessee incurred the following AMP expenditure: Sl No Name of expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 211.93 5.10 2.41 Daurala Foods Beverages Pvt. Ltd. 26.11 3.45 13.21 G M Breweries Ltd 448 0.30 0.07 Globus Spirits Ltd. 116.67 1.76 1.51 Hindustan Spirits Ltd 6.28 0.03 0.48 Jagatjit Industries Ltd. 635.94 58.37 9.18 John Distiliehes Pvt. Ltd 429 15.24 3.55 Khemani Distiliehes Pvt. Ltd. 93.35 1.93 2.07 Khoday India Ltd 159.29 4.17 2.62 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on behalf of AE : ₹ 117,097,697/- Total AMP Expenditure : ₹ 1,316,362.697 Net Sales : ₹ 482,97,02,000/- AMP/Sales ratio of PRIPL : ₹ 27.25% 13. Accordingly, the ALP of this international transaction was proposed to be worked out as under: Total Sales : ₹ 482,97,02,000/- Arm s length level of AMP expense (3.97% of sales): ₹ 19,17,39,169/- AMP expense actually incurred ₹ 131,63,62,697/- AMP Expenditure which should have been reimbursed : ₹ 112,46,23,528/- 14. And after adding up the mark up, the ALP is determined as under: Amount spent on creation of marketing intangible which should have been reimbursed ₹ 12,46,23,528/- Add: M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reproduced below:- SI. No Company Name Revised AMP/Sales 1 Amber Distilleries Ltd. 0.24% 2 Bhagat Industrial Corpn. Ltd. 3.61 3 Jagatjit Industries Ltd. 9.85 4 John Distilleries Pvt. Ltd. 3.59 5 Globus Spirits Ltd. 0.46 6 Khoday India Ltd. 2.62 7 Mohan Rocky Spring water Breweries Ltd. 0.16 8 Radico Khaitan Ltd. 9.50 9 Shaw Wallace Co. Ltd. [Merged] 0 10 Southern Agrifurane Inds. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been negated, the subject addition deserves to be quashed. Reliance was also placed on the decision of the Tribunal in ITA No. 19.09.2018 in the case of M/s Sennheiser Electronics India Ltd. ITA No. 7574/DEL/2017. The ld. AR further placed reliance on the decision of the Hon'ble Jurisdictional High Court of Delhi in the case of Maruti Suzuki India Ltd 110/2014, Whirlpool of India Limited 228/2015, Honda Seil Power Products Ltd 346/2015. It is the say of the ld. AR that while making adjustment on this account, the Assessing Officer/TPO has only considered the assessee as a manufacturer. 19. Per contra, the ld. DR strongly supported the findings of the TPO. It is the say of the ld. DR that though the AMP expenditure has been treated as an independent international transaction, operating margin of the appellant should be considered excluding the AMP expense to which the ld. AR retorted that the same treatment should also be given to the comparables. 20. We have given a thoughtful consideration to the orders of the authorities below qua the issue. The co-ordinate bench in the case of L.G. Electronics India Pvt. Ltd ITA No. 6253/DEL/2012 has held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suzuki India Ltd 381 ITR 117. 13. In this case, the Hon'ble High Court held that existence of an international transaction needs to be established de hors the Bright Line Test. The relevant finding of the Hon ble High Court reads as under: 43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92B are described as 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 61. The submission of the Revenue in this regard is: The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the means part and the incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have acted in concert . XXX 37. The provisions under Chapter X do envisage a separate entity concept . In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said activity as a function performed by the respondent-assessee, who was engaged in marketing and distribution. Further, while segregating / debundling and treating advertisement and sales promotion as an independent and separate international transaction, the assessing officer did not apportion the operating profit/ income as declared and accepted in respect of the international transactions. 21. In our understanding of the facts and law, mere agreement or arrangement for allowing use of their brand name by the AE on products does not lead to an inference that there is an action in concert or the parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. Such inference would be in the realm of assumption/surmise. In our considered opinion, for assumption of jurisdiction u/s 92 of the Act, the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an agreement or arrangement for incurring such AMP expenses. 22. The aforesaid view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm s length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 21. In light of the aforementioned discussion, we find that the TPO has considered this at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables. The margin excluding AMP expenses only is 27.04% in the case of the appellant and 6.63% in the case of comparables. In the light of the decisions of the Hon'ble High Court discussed elsewhere and in the light of the factual matrix exhibited hereinabove, we are of the considered opinion that the impugned addition on account of AMP expenditure is uncalled for and deserves to be deleted. Ground Nos. 7 to 8.8, taken together, are allowed. 23. Ground Nos. 9 to 9.2 relates to disallowance of ₹ 8,21,29,536/- u/s u/s 37(1) of the Act being 20% of the brand expenses. 24. During the course of scrutiny assessment proceedings, the A.O observed that the assessee has debited brand expenses of ₹ 70,58,03,632/- under the head Advertisement and Sales Promotion . The Assessing Officer observed that in the preceding years, a portion of the same has been held to be capital in nature and has been disallowed by his predecessors. Past history of disallowance of brand expenses as considered by the Assessing Officer is as under: AY Brand expenses debited in P LA/c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether advertisement and promotion expenses incurred by the assessee have an enduring benefit to the assessee as it creates tangible asset being goodwill, reputation and credibility and if yes, whether it s be treated as capital expenditure. 29. The Hon'ble High Court answered as under: So far as Question No. 3 Advertising and Promotion Expenditure is concerned, the issue has been concluded in an identical case in the case in the matter of another group company in Principal CIT vs. M/s Seagram Distilleries Pvt Ltd ITA Nos. 224-225/2016 decided on 6.4.2016. Therefore, question No. 3 does not arise for consideration. 30. The Tribunal in assessee's own case for assessment year 2004-05 and 2005-06 in ITA No. 3525/DEL/2009 and 2770/DEL/2011 has held as under: 8.0 The last issue involved in the present batch of appeals raised by the revenue pertains to deletion of addition of ₹ 3,89,55,070/- in AY 2004-05 and ₹ 4,67,32,266/- being 10% of brand expenses made by the AO treating the same as being capital in nature. 8.1 The brief facts involved therein are that the assessee company had claimed brand expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee as there is a clear finding that such expenditure does not result in any enduring benefit. Hence, these grounds of the revenue are dismissed and the order of the Ld. CIT (A) is confirmed. 31. Respectfully following the findings of the Hon'ble High Court and the co-ordinate bench, we direct for deletion of addition of ₹ 8,21,29,536/-. 32. Ground No. 10 to 10.4 relates to disallowance of ₹ 1,12,16,288/- made on account of provision for transit breakages. 33. During the course of scrutiny assessment proceedings, the A.O found that the assessee has claimed deduction on account of provision for transit breakages amounting to ₹ 1,12,16,288/-. 34. At the very outset, the ld. counsel for the assessee fairly stated that such disallowance has been upheld by the Hon'ble High Court of Delhi vide order dated 23.10.2015 in ITA No. 237/2015 Seagram Distilleries Pvt Ltd in assessee's own case for assessment year 2001-02. The ld. counsel for the assessee further stated that the order passed by the jurisdictional High Court of Delhi has been confirmed by the Hon'ble Supreme Court vide order dated 11.07.2016. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the disallowance. 43. The assessee raised objections before the DRP but without any success. 44. Before us, the ld. counsel for the assessee stated that in assessee s sister concern Seagram Distilleries [supra] for assessment year 2005-06 to 2009-10, the first appellate authority has allowed the ground on principle basis that withholding tax obligations do not arise in the case of pure reimbursements and the matter was set aside to the Assessing Officer to verify whether the payments made by the assessee were in the nature of reimbursements and while giving effect to the order of the first appellate authority and after verification, the Assessing Officer was convinced that the impugned disbursement were in the nature of reimbursements and allowed the entire amount claimed by the assessee. 45. In our considered opinion, verification needs to be done in the case of the appellant. We, accordingly, set aside this issue to the file of the Assessing Officer/TPO with a direction to examine the documentary evidences to be filed by the assessee and verify whether the impugned disbursements are reimbursement and if found so, the same be allowed as deduction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ₹ 14,70,300/- made u/s 14A, addition of ₹ 1,31,54,527/- on account of disallowance of Brand Registration Expenses u/s 37(1) and addition of ₹ 2,83,63,949/- on account of disallowance of reimbursement of Trade Scheme to Promoters are not based on any incriminating material found during the course of search. So far as addition of ₹ 10,80,000/- on account of Payment to ITA Nos.3847 3848/Del/2017 Officials is concerned, the same was made by the Assessing Officer on the ground that the expenses of ₹ 15,000/- per month were paid to Excise Officials for getting the licence and fee of ₹ 75,000/- per month needed to be paid. It is the submission of the ld. counsel for the assessee that the sheet of paper which were recovered during the course of search conducted on 15.02.2011 pertained to assessment year 2002-03 and, therefore, the same is outside the purview of section 153A proceedings for the impugned assessment years. It is also his submission that the observations made by the Assessing Officer were based on isolated reading of all the pages instead of reading of altogether. We find merit in the above argument of the ld. counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMOUNT IN RS. ' 1 Delivery Charges 12.00 14.60 2 Unloading charges 0.50 0.70 3 EXCISE EXPENSES Inspection 23300.00 30000.00 Guard 6000.00 10000.00 Office 10000.00 10000.00 Miscellaneous 10000-00 10000.00 Four departments 10000.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 61. The assessee filed a detailed reply with necessary documentary evidences claiming that the payments have not been made in cash. The detailed reply of the assessee did not find any favour with the Assessing Officer and the Assessing Officer proceeded by making addition of ₹ 40.61 lakhs u/s 40A(3) of the Act. 62. Objection was raised before the DRP but the same was dismissed. 63. Before us, the ld. counsel for the assessee drew our attention to the chart exhibited at page 16 of the paper book and pointed out that the payments have been made in terms of the consulting agreement in respect of variable component payment by way of account payee cheques/RTGS. It is the say of the ld. counsel for the assessee that on such payment, tax has been deducted at source at applicable rates. It is the say of the ld. counsel for the assessee that the Assessing Officer has been carried away by nomenclature given to the file being cash.xls. Reliance was placed on the judgment of the Hon'ble High Court of Delhi in the case of Anand Swarup Khandelval 177 Taxman 450. 64. Per contra, the ld. DR strongly supported the findings of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, the Assessing Officer issued notice u/s 133(6) of the Act to the respective parties separately to furnish relevant details. Notices sent to M/s Monarch Enterprises, M/s Ramp Edge, M/s BTB Marketing and M/s Paras Enterprises returned back unserved. Some other parties requested for more time to respond and thereafter, some of the parties filed their responses, which, according to the Assessing Officer, were not complete. The Assessing Officer further observed that the assessee has failed to produce the parties and, accordingly, made disallowance of ₹ 7,16,79,359/- which was confirmed by the DRP. 70. Before us, the ld. counsel for the assessee submitted the details of payments made to 16 parties and the nature of payment and the same read as under: M/s Classic Alcobev Pvt. Ltd NIL M/s Classic Distributor Company. a) Commission - ₹ 54,475 b) Non-Trade Scheme reimbursements , Other M/s Jaiswal Traders a) Commission - ₹ 9,30,117 b) Non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished additional documents being agreement entered into with the parties, details of transaction entered into with these parties, copies of ledger account, invoices and CST registration certificates. The ld. counsel for the assessee concluded by saying that in spite of the direct evidences, the Assessing Officer has made additions, which is uncalled for. 72. Per contra, the ld. DR strongly supported the findings of the lower authorities. 73. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. As per details in the chart furnished by the ld. counsel for the assessee, it can be seen that in respect of four parties, the assessee has done no transaction. Therefore, there is no point in issuing notice u/s 133(6) of the Act to these parties. 74. In respect of other parties, since the assessee has furnished complete details in the form of invoice, agreement, CST registration certificates and copies of ledger account, the Assessing Officer should have pointed out specific errors/defects in these direct evidences. In our considered opinion, assessment has been framed without proper verification. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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