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TMI Blog2020 (6) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... nt but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm s length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be justified and proper. See EKL APPLIANCES LTD [ 2012 (4) TMI 346 - DELHI HIGH COURT] and FRIGOGLAS INDIA PVT. LTD. VERSUS DCIT, CIRCLE-9 (2) , NEW DELHI [ 2016 (5) TMI 548 - ITAT DELHI] We note that the trade- marks for the two products viz. Mincream and Robinson Burley were registered and the said brands were owned by the AEs. The royalties are paid not only in respect of patent but for a basket of services. It is a common occurrence that a person using a brand name pays certain brand royalty to the owner of brand. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment made to transaction of Export of raw materials and finished products - HELD THAT:- DRP inadvertently did not give any directions vis-a-vis the said issue. However, vide rectified directions dated 18.02.2016 rejected the approach of the TPO of using external TNMM. The TPO is yet to give effect to the rectified DRP Directions. Therefore, Ld Counsel prayed the bench that ld TPO may be directed to give effect to the rectified DRP Directions. In the interest of justice and fair play, we direct the TPO to give effect to the rectified DRP Directions. For statistical purposes, the ground raised by the assessee are allowed. Apportionment of expenses between fiscal units, non-fiscal units and head office - HELD THAT:- As decided in own case [ 2018 (4) TMI 1129 - ITAT KOLKATA] allocation done by the assessee on the basis of number of employees who are directly linked with the factory operation is more logical. The residual cost is incurred at the head office and is not capable of being identified with any of the units which are running by the assessee. It is only because of this difficulty that the Assessing Officer and the assessee resorted to allocation of residual cost. When it come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the decisions of CHAMBAL FERTILIZERS AND CHEMICALS LTD., GADEPAN, DISTT. KOTA. [ 2018 (10) TMI 589 - RAJASTHAN HIGH COURT] and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. This additional ground raised by the assessee is allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 'Agency Cost' incurred by the assessee. This ground covers ground no.5 of assessee`s appeal in ITA No. 625/Kol/2016 for A.Y.2011-12 and ground No.7 of revenue`s appeal in ITA No. 518/Kol/2016 for A.Y.2011-12. 4.That on the facts and in the circumstances of the case, the DRP erred in not considering the specific objections raised by the appellant with respect to overall adjustment of ₹ 21,842,032/- made to transaction of "Export of raw materials and finished products". (This covers ground No.6 of assessee`s appeal in ITA No.625/Kol/2016, for A.Y. 2011-12) Grounds relating to Corporate Tax issue 1.Apportionment of expenses between fiscal units, non-fiscal units and head office of ₹ 261,160,962/-. This ground covers ground No.8 of revenue`s appeal in ITA No.529/Kol/2015 for A.Y. 2010-11 and ground nos. 1 and 2 of revenue`s appeal in ITA No.518/Kol/2016 for A.Y.2011-12. 2.Eligibility of income from sale of scraps whilst calculating deduction u/s 80IC of the Act of ₹ 20,723,924/-. This ground covers ground no. 9 raised by the revenue in ITA No. 529/Kol/2015 for A.Y. 2010-11 and Ground no. 3 raised by the revenue in ITA No. 518/Kol/2016 for A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails, noticed that the assessee has not provided details w.r.t certain products/brands which were in existence for many years before the acquisition of the assessee by the Benckiser Group. Accordingly, in the notice u/s 92CA(2) dated 06.01.2014, the assessee was asked as to why royalty was charged in such cases. The notice of the TPO is reproduced below: "9. Please refer to payments made towards royalty on products manufactured by you. Various details have been filed in this regard. It is also seen that the royalty agreements signed by you represent a bundle of intangibles. However, the details filed by you in the case of products as given in table below do not show any patents registered against them S.No. Product Brand Royalty 1 Robin 3,17,30,459/- 2 Teepol 26,26,458/- 3 Disprin 76,00,559/- 4 Fybogel 17,97,835/- 5 Robinson Barley 34,01,448/- 6 Silvo 2,55,883/- 7 Mincream 5,54,395/- 8 Brasso liquid 22,46,003/- 9 Cherry Blossom-Cherry liquid Polish and handy shine 1,12,91,673/- 10 Cherry Blossom-Cherry Wax Polish 2,81,77,923/- 11 Colin 2,66,06,148/- 12 Sweetex 14,29,947/- 13 Clearsils 20,68,889/- 14 Easy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shield and Work Gluv (ii) the polymer base (iii) all polymer based products develop by Jazor, (iv) any product superceding or replacing Viro Shield, Work Gluv or Jatex (V any other product developed by Jazor using the same or substantially similar polymer base as the Polymer base). Grant the right to assign to Manloe the trademarks all tradenames, trademarks and Other commercial symbols and related logos including the tradenames ViroShield, Jatex, and Work gluv Hence you are to show cause as to why not the payment for royalty be restricted to 1.5% of net sales. 8. In response to the notice the assessee submitted reply before TPO as follows:(to the extent useful for our discussion is reproduced below) "(a) It would be erroneous on your part and highly prejudicial and unnecessarily harsh on us, if you adopt the 'benefit test' and indulge into the question of benefits derived by the assessee from the use of brands specified in the notice. However, we appreciate that your goodself has expressed no doubt about the benefits derived by RBIL, it would be even more unreasonable to deny the otherwise accepted benefits only on the basis of non-availability of information with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p companies do not receive royalty from third parties in India; and There is no publicly available information on prices charged in independent transactions of similar or identical nature that reflects the characteristics of the royalty paid by RBIL. Therefore, there are no comparable prices available in order to apply CUP method. TNMM The applicability of TNMM depends on a related party's functions performed, resources employed, and risks assumed. This method evaluated whether the amount charged in a controlled transaction is arm's length based on objective measures of profitability derived from uncontrolled parties that engage in similar business activities under similar circumstances. Since comparable information was available and comparison at an operating margin level is a reasonable comparison, TNMM was selected as the most appropriate method. The TNMM examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction. It is a well accepted principle that net margins are less affected by transactional difference than are prices (as in the case of CUP) and gross margins (as in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness-economics/19545602.html) writes as follows: "As defined by Treas. Reg. [section]1.482-5(a), the Comparable Profit Method (CPM) evaluates an arm's length price by reference to the profitability of unrelated companies that engage in similar activities under similar circumstances. The earnings of the entity using the intellectual property (the so- called tested party) is compared to the earnings of companies engaged in similar activities but not owning such intellectual property. The excess earnings of the tested party is assumed to be the contribution of the intellectual property. The following example illustrates the application of the CPM. Uspharm, a U.S. product company is the developer of a drug, Nograine, that is useful in treating migraine headaches with minimal side effects. Uspharm is negotiating with a leading Japanese pharmaceutical company, Jpharm for the exclusive Japanese distribution rights to Nograine. What royalty rate should Jpharm pay? To answer this question, four companies were identified that are engaged in the manufacture and marketing of generic drugs. Their median return on sales (ROS) was 14 percent. Uspharm has been realizing a 34 percent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk-preference is a highly subjective process, so the pragmatic option is to split the bargaining space, in the example below, the bargaining space is split 50-50." This paper identifies that for the operation of TNNM method, the normal remuneration pertaining to routine activities, other than "intangible "related returns are required to be determined and then on the basis of the relative contribution to the FAR of the "intangible" related transaction, the benefit of the "intangible" related profit is to be shared. From perusal of the TNMM analysis carried out by the assessee, it can be seen that no such identification of remuneration related to routine functions was identified. As a matter of fact it was not even analyzed whether the comparables which have been selected are paving any intangible related royalty payments are not. Consequently, even if on a without prejudice basis it is considered that TNMM is the most appropriate method for benchmarking royalty payments, the analysis carried out by the assessee is absolutely incorrect, faulty and is not an indicator of the arms length nature of royalty payments. 38. Further on the basis of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights owned by the said AEs. The TPO called for details of payments relating to various brands/products. The assessee was also asked as to why royalty was charged in respect of certain products/brands which were in existence years before acquisition of the assessee by Benckiser Group. The assessee gave detailed submission in respect of various products. After examining the same, the TPO was of the view that the assessee had not been able to show any evidence of receiving technical knowhow etc. for two products namely, Mincream and Robinson Burley which were continuing since 1940 onwards. He therefore determined arms length price in respect of royalty for the two products at nil. The AO has, accordingly, proposed addition of ₹ 35,05,809/- in the draft order. The assessee has given following submission in the matter:- "We submit that RBIL has entered into royalty agreements with its AEs [RCO & RBNV] for production, sales, distribution & marketing of products. Royalty payment is made by RBIL for the right to use the Intellectual Property Rights which includes Trademarks, Patents, Design and Model Rights, Know How and all current and future copyrights and rights to databases r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the patent whose rights have been transferred to the assessee. We submit that RBIL has received benefits/ substantial benefits from the use of intangible property licensed by the AEs and rights associated with such intangible property under the Licensing Agreement(s). It is submitted that the assessee gets its products manufactured on the basis of the technical know-how and technology specifications provided by the Licensors. The assessee derives significant benefit in the form of growing revenue and profitability from the use of the patented technology which is owned & developed by the AEs. Hence, we submit that RBIL have made the payment of royalty solely in connection with and in the course of its business. The expenditure of royalty has a direct nexus with the business of RBIL. It is not the case that such expenses are incurred in isolation or are not connected with RBIL's business. The expenditure incurred on payment of royalties are completely bona fide and have been in connection with the business of the assessee. We wish to place reliance on the judicial pronouncement of Delhi Tribunal in the case of Reebok India Co. vs. Addl CIT (ITA No.5857/Del/2012) wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious assessment years and that there has been no change in the business model of RBIL or in the nature, terms & conditions, functions performed, risk assumed and asset employed by RBIL in relation to its international transactions during FY 2009-10 as compared to preceding years, hence the assessee humbly submits that the action proposed by the TPO in taking a different stand is highly perverse and against established legal and equitable principles. In view of the above, we request the Honorable Panel to delete the disallowance of Royalty payment with respect to Min Cream and Robinson Barley." We have considered facts of the case. The assessee is a manufacturer and distributor of a large number of products/brands for which are owned by its AEs. The assessee has been paying royalty to its AEs for a number of years which has been allowed in the assessment of earlier years. Even in the year under consideration also, the TPO has allowed royalty in respect of all but two products manufactured and sold by the assessee. However, in respect of two products viz. Mincream and Robinson Burley, the TPO has held that no benefit was derived by the assessee from its AE. It is not deni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld DRP. The ld DRP relying on its own directions for assessment year 2010-11, had directed the TPO to delete the arm`s length price adjustment. 15. The ld TPO, vide his order dated 21.01.2016, as per the direction of the DRP deleted the adjustment made towards payment of royalty on "Mincream" and "Robinson Barely" however, confirmed the remainder adjustment as there was no finding on the method and no adjudication on the comparable chosen by the TPO. 16. We note that the assessee is a manufacturer and distributor of a large number of products/brands. These brands are owned by its AEs. The assessee has been paying royalty to its AEs for a number of years which has been allowed in the assessment of earlier years. This year there is no change in facts and law so far assessee company and its Associate Enterprises (AEs) are concerned. It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular view or proposition in the past, it is not open for the Revenue to take an entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd. It is not the case of the TPO, that the royalty paid in respect of these products was without any use of the said brand names. The assessee has in its TP study included payment of royalty and according to it the royalties are at arm's length. Considering these facts the proposed disallowance of royalty in respect of Mincream and Robinson Burley does not appear to be justified and proper. For that we rely on the following judgments: (i). CIT V EKL Appliances Ltd [2012] 345 ITR 241(Delhi-HC) "15. It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied the CUP method while examining the payment of brand fee/ royalty. The CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose. These paragraphs are re-produced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's perspective. The Ld. AR further submitted that Frigoglass SAIC had hired an independent external consultant for reviewing the arm's length nature of 4% royalty applied by the Head Office for the licensing of the ICM technology and trademarks to related group entities and based on the terms and conditions of the License Agreement between Frigoglass SAIC and its affiliates and in view of the broadly comparable licensing agreements identified from the search of publicly available license agreements, it was concluded that a royalty rate of 4% on sale of products for the use of trademarks and ICM technology was considered to be an arm's length rate. It was also submitted that no independent third party will let any other entity use its Intellectual Property Rights (IPR) and allow to enjoy the benefits from the usage of such IPR without charging a fee. It was submitted that FIPL enjoys a lot of benefits in manufacturing and marketing from the use of the IPRs owned by Frigoglass SAIC. It was submitted that FIPL had started enjoying the benefits from the usage of the trademarks and ICM technology from very inception although a formal agreement was entered into in September 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning, observed as follows:- "16. The Organization for Economic Cooperation and Development ("OECD", for short) has laid down transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been stru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is nonetheless a proper deduction if wholly and exclusively made for the purposes of trade. It does not require t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on too and hence the Department's contention for applying the CUP method is erroneous. We draw support from the decision of the Mumbai Bench of the Tribunal in Cadbury India Ltd. vs ACIT in I.T.A. No. 7408/Mum/2010 and I.T.A. No. 7641/Mum/2010 wherein the Bench has upheld the use of TNMM for royalty by holding: "33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A (d) defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered, and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 625/Kol/2016, for A.Y. 2011-12, Ground no. 4 to 5 of revenue's appeal in ITA No. 518/Kol/2016, for A.Y. 2011-12. 21. Brief facts qua the issue are that Reckitt Benckiser (India) Limited (RBIL) is a subsidiary of Reckitt Benckiser Plc., UK. The RBIL is engaged in the business of manufacturing and trading of FMCG products. The RBIL manufactures and distributes various brands of household products, and over-the-counter pharmaceutical products. Some of the key products are Dettol Soap, Dispirin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortein insecticide, Colin, etc. The RBIL is registered in India under the Companies Act, 1956.TheRBIL has entered into a License Agreement with Reckitt Benckiser N.V. and Reckitt & Colman Limited for the transfer of Intellectual Property Rights for the production, sale, distribution and marketing of Reckitt Benckiser "products" domestically and internationally. These include all IPR(s) owned by the AEs such as trademarks, design and model rights, know-how', and all current and future copyrights and rights to databases relating to design, distribution, marketing and sale of licensed products in the licensed territory. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on advertisement was to publicize the 'product' and the same was not a 'brand' publicity exercise. Special Bench decision in M/s LG Electronics India Pvt. Ltd (supra) does not apply to the assessee under consideration. Therefore, there is no any transfer pricing adjustment is required. 22. However, ld TPO rejected the contention of the assessee and held that arm`s length price adjustment (ALP) of Advertisement, Marketing and Promotion(AMP) expenses has to be computed in the case of the assessee, as directed in the LG Electronics case(supra). With regard to determination of the arm's length price of the international transaction pertaining to brand promotion based on excessive AMP expenses, ld. ITAT (SB), Delhi (supra) have held in para 23.5 of their order that an arm's length margin needs to be added to the cost as determined by using the bright line test. Based on the assessee's own comparables, the cost part of the price of the international transaction pertaining to brand promotion is computed as under: Company AMP (Rs in lacs) Sales (Rs in lacs) AMP/ Sales Dabur India Limited 39003 285687 13.65% Godrej Consumer Products Ltd. 10168.9 126788.12 8.02% Jyothy Labo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se may not be identical to the facts of LG Electronics (supra), here also, the assessee was advertising the products, prominently displaying the brands were owned by foreign AE. In our opinion, ratio of the decision in the case of LG Electronics (supra) is applicable on the assessee's case. This ground is accordingly 24. Aggrieved by the order of the DRP/TPO, the assessee is in appeal before us. 25.We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP and other materials brought on record. Learned Counsel for the assessee submitted before us that the facts of the case of the Special Bench ruling in LG Electronics (supra) is different from the facts of the present case of the assessee. Assessee Company is engaged in only product promotion and not brand promotion and hence benefit of AMP accrues to the assessee and not to its AE(s).The Bright Line Test ('BLT') is not one of the prescribed methods under the Act and hence cannot be applied in the assessee`s case under consideration. The various expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parent company had no control over such decisions of RBIL. The activities of brand promotion were a global marketing and sales promotion strategy of the parent called "Blue Ocean Strategy", which is not the fact in the case of RBIL. There is no transaction/undertaking/agreement between RBIL and its AE, as different from that which was existed in LG Electronics case(supra). Therefore, assessee company`s case cannot be compared with LG Electronics case(supra). 26. We note that incurrence of the AMP expenses, being a domestic transaction cannot be touted as an instance of profit-sharing exercise. We note that the TPO failed to appreciate that, though a 'transaction' under section 92F(v) includes arrangement or understanding; it per se involves a bilateral arrangement or contract between the parties. A unilateral action by one party in absence of any understanding or contract or binding obligation could not be termed as 'transaction'. In the assessee`s case, RBIL has incurred AMP expenditure in respect of its business operations in India and in order to boost its sales in India. Thus, no 'transaction ' could be said to exist in respect of such AMP expenditure incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sacs & Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC is engaged in AMP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. Absence of a machinery provision 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribunal in assessee's own case for the Asst Year 2011-12 supra wherein it was held :- "43. We have heard the rival submissions and perused the materials available on record. The preliminary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act, 1961. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE's therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited vs. CIT reported in 381 ITR 117 wherein it was held as under: "51. The result of the above discussion is that in the considered view of the court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 volumes it was observed that the assessee was supporting the A.E. in its project GSC and Project Bedrock by procuring material from India and Sending them to its A.E which is in the form of Market Support services. Hence wide letter dated 06.01.2105 the assesse was asked to explain the same and the assesse was also show caused to as why not the margin be in respect of support Services Company be calculated in this regard. 31. In response to that the assessee in its letter dated 16.01.2015 submitted before TPO as follows: "5.07 Chargeback of expenses by RBIL to AEs During the financial year 2010-11, RBIL has incurred certain expenses on behalf of RB group companies. The same has been cross-charged to RB group companies. We understand that these expenses have been charged-back based on actual cost incurred by RBIL on behalf of AEs. We further, understand that the expenses incurred by RBIL on behalf of RB group companies, the function performed by RBIL relates to mere facilitation of payment on behalf of group entities. In this regard, RBIL is a facilitator and it provides no additional service. Accordingly, the 'cost only' reimbursement by RB group companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 IDC (India) Limited (formerly cyber media) 10.60% 5 I C R A Management Consulting Services Ltd. 16.14% Average 22.34% In view the above the assesse would have 22.34% on such recoveries. The value is calculated as under 22.34% on transaction purported to be recoveries ie. 22.34% of ₹ 19,30,38,246/- =4,31,24,744/- Thus the income of the assesse is to be upwardly adjusted by ₹ 4,31,24,744/- on this count." 33. Aggrieved by the addition made by the ld TPO, the assessee filed objections before the ld DRP. The ld DRP confirmed the order of TPO, observing as follows: "DRP Directions: The assessee has rendered services to its AE. The assessee was procuring material from the third parties for its AE for its usage and consumption. The assessee has recovered costs from the AE for such services. The contention in respect of the recovery of only costs as third parties were involved is not tenable if the assessee was the channel for such procurement services so as to ensure proper delivery of such services. This being a critical function and involving costs for the assessee should definitely entail a cost plus markup model to ensure arm's length compensation f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicate the agency cost. We have gone through the order of TPO/DRP and noticed that there is no adjudication by the TPO or DRP as to what serviceswere rendered. As per ld Counsel, the expenses in question were in respect of system upgrade of the Assessee which costs were reimbursed to the Assessee by the AE. Hence, there was no element of any service that the Assessee rendered to the AE. The assessee submitted, 3 volumes of documents before the TPO and DRP to establish that these were cost to cost reimbursements and therehas been no adjudication on the same. Therefore, in the interest of justice and fair play we think it fit and appropriate to remit this issue back to the file of the TPO to adjudicate the issue taking into account 3 volumes of documents already submitted by assessee. For statistical purposes, the ground raised by the assessee and revenue are allowed. 36.Summarized ground No. 4 reads as follows: "4.That on the facts and in the circumstances of the case, the DRP erred in not considering the specific objections raised by the appellant with respect to overall adjustment of ₹ 21,842,032/- made to transaction of "Export of raw materials and finished product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Page 145 of the Paper Book. The details of bad debts written off, as given in Page 145 of the P.B is as follows: The deduction claimed by the assessee was in respect of Unit 1,2,3 & 4. The Unit 1 commercial operation commenced only on 02.02.2004 which is evidenced by the audit report in Form 10CCB which is placed at Page 90 of the assessee's Paper Book. The Unit No.2 commenced commercial operation only w.e.f. 03.04.2004 which is evidenced by Form No.10CCB, placed at Page 79 of the assessee's Paper Book. The Unit No.3 commenced commercial operation only on 08.12.2004 as it is evidenced by the Form No.10CCB, copy of the Page 101 of the assessee's Paper Book. The Unit No.4 commenced commercial operation w.e.f, 02.02.2005 which is evidence by Form No.10CCB from placed at Paper Book page 68. It can thus perusal of the bad debts written off would show that all the debts pertained to assessment year 2002-03 and earlier Financial Years. The units for which deduction u/s 80-IB and 80-IC were claimed by the assessee, came into existence only in F.Y. 2004-05. Thus, it is clear that the bad debts written off which was claimed as deduction did not pertain to any of the units for which the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. (emphasis supplied)". As per Section 80IA(5) r/w Section 80IB(13) and 80IC(7), for the purposes of computing the quantum of allowable deduction u/s 80IB, the profits and gains of the eligible unit of the assessee has to be computed as if such eligible business were the only source of income of the assessee during the year. The above expenses, even though booked centrally in the head office books, have been incurred for all the units of the assessee company. Hence; in order to arrive at the true and correct value of the profits & gains derived from the eligible units, these expenses are required to be allocated to all the units in the proper manner. The best way to divide these expenses would be to allocate among eligible and non-eligible units in the ratio of workers of eligible undertakings to the total num ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the appellant's argument that the residual costs pertain to those cost which could not be allocated or identified with single function or unit due to the general utility to all the functions and units of the company. The basis of allocation of this cost is the number of executive. These costs include the residuary costs of all the support functions which have not been allocated to the Cost of Goods Sold. As per the appellant, at corporate office level there were 101 persons during the FY 2004-05 out of which, persons were working in supply function which is directly linked to factory operation. This worked out to 21.78%. The ratio of sale of fiscal units to overall sales was 26.10%. The effective percentage of residual cost thus worked out to 5.68% (21.78% * 26.10%), which the appellant applied for allocating the residual cost to the eligible units. For allocation expenses, the appellant has taken into consideration number of person as well as sales of the eligible units. The AO has allocated the residual costs of the corporate office on the basis of the number of workers. Hence, I find more logic on the basis of allocation of expenses adopted by the appellant as the appellant h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 9 raised by the revenue in ITA No. 529/Kol/2015 for A.Y. 2010-11 and Ground no. 3 raised by the revenue in ITA No. 518/Kol/2016 for A.Y. 2011-12." 44. When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 23.12.2014, passed by the Hon'ble Calcutta High Court in assessee's own case in GA No. 1420 of 2014, ITAT No. 41 of 2014, whereby the issue of eligibility of income from sale of scraps have been discussed and adjudicated in favour of the assessee. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the, Hon'ble Calcutta High Court, a copy of which is also placed before the Bench. 45. The ld. DR relied upon the orders of the authorities below. 46. We see no reason to take any other view of the matter then the view so taken by the decision of Hon'ble Calcutta High Court in assessee's own case vide order dated 23.12.2014. In this order, the Hon'ble Calcutta High Court has inter alia observed as under: "On the question raised by the revenue in its appeal,- we 2 decision thereon by the High. Court of Madras in Fenner (India) Ltd. (supra) relied on by- th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the assessee invited our attention to the order dated 14.09.2018, passed by the Tribunal in assessee's own case in ITA No.2113,2150,2114&2151/Kol/2013 & ITA No. 760&762/Kol/2014 for A.Y. 2006-07, 2008-09, 2009-10, whereby the issue of excess disallowance of interest income allocated to eligible unitshave been discussed and remanded the matter back to the AO for factual verification. The ld. Counsel for the assessee submitted that the present issue is squarely covered by the above said order of the Tribunal, a copy of which is also placed before the Bench. 50. The ld. DR relied upon the orders of the authorities below. 51. We see no reason to take any other view of the matter then the view so taken by the co-ordinate Bench of ITAT Kolkata in assessee's own case vide order dated 14.09.2018. In this order, the Tribunal has inter alia observed as under: "Assessment year 2009-10 assessee's and Revenue's cross appeals in I.T.A. No 760 & 762/Kol/2014.The assessee's first substantive ground seeks to reverse both the lower authorities' action disallowing its section 80IB/80IC deduction claim to the tune of ₹ 16,02,07,000/- pertaining to interest income. Mr. Khaitan concedes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to the shareholders namely Reckitt Benckiser Pic., UK and Lancaster Square Holdings, Spain. The AO also failed to appreciate that in terms of section 90(2), dividends being the income in the hands of the non-resident could not be subjected to tax by applying DDT at a rate in excess of the rate prescribed under the DTAA and hence, erred in subjecting the Appellant to additional income tax in terms of section 115-0 of the Act and the AO also erred in not granting refund of the excess Dividend Distribution Tax paid by the Appellant. We are of the view that this issue should be remitted back to the file of the ld AO for factual verification. The assessee is directed to file before AO, the amount of dividend paid, copy of agreement and other relevant documents, as required by AO.Therefore we direct the AO to examine relevant Double Taxation Avoidance Agreements between India - UK with reference to payment of dividend to the shareholders and adjudicate the issue in accordance to law. For statistical purposes, the additional ground raised by the assessee is allowed. 55. The second additional ground raised by the assessee reads as follows: "2.Deduction of education cess on income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee." 58. We note that Coordinate Benches of this Tribunal in the following cases held that education cess should be allowed as an expense. The relevant judgments are given below: (i) M/s ITC Limited -vs.-ACIT (ITA No. 685/Kol/2014) - "The assessee's additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to ₹ 423618317 u/s 37 of the Act. We note that hon'ble Rajasthan high court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue's contentions supporting the impugned disallowance. The assessee's instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order in ITC Limited V/s. ACIT( ITA No. 685/Kol/2014 dated 27- 112018 hold that such a claim of education cess is very much allowable in computing total income under the provisions of the Act." 59. The Ld Departmental Representative relied on the earlier decision of ITAT dated 27- 02-2019, wherein this Tribunal had disallowed the claim on the basis of two contentions: (i) Education cess is an additional surcharge and hence forms of income tax and (ii) Decision of Kalimati Investment Company Ltd. -vs.- ITO (ITA No.2706,4508/M/2010,2552,2553/M/2011) and Sesa Goa Ltd. -vs.- JCIT (ITA No. 72/PNJ/2012) squarely applicable against the assessee. 60. We accept the submissions of the assessee concurring with the decisions of Rajasthan High Court and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. This additional ground raised by the assessee is allowed. 61.Before parting, it is noted that the order is being pronounced after 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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