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TMI Blog2021 (3) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... bject payment was made for managerial services or not is of no relevance in view of the fact that the expenditure is only in the nature of reimbursement of cost to HUL. It had not resulted in any income to the HUL. Therefore, in the absence of income in the hands of the payee, the question of deduction of tax at source does not arise having regard to the ratio of the judgement in the case of CIT vs. Siemens Aktiongesellschaft [ 2008 (11) TMI 74 - BOMBAY HIGH COURT] as held the reimbursement of expenses cannot be regarded as a revenue receipt and as the assessee received nothing in excess of the actual expenditure incurred. Therefore, the question of deduction of tax at source does not arise. Thus neither the impugned expenditure falls within the ambit of managerial services as defined in section 9(1)(vii) of the Act nor liable to deduct tax at source u/s 194J of the Act. Therefore, the Assessing Officer was not justified in invoking the provisions of section 40(a)(ia) of the Act to disallow the A M expenses. TDS u/s 194J - Addition on account of management cost - AO disallowed the expenditure for non-deduction of tax at source treating the same as expenditure under the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RDER PER INTURI RAMA RAO, AM: This is an appeal filed by the assessee directed against the final assessment order u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 ('the Act' for short) of the Asstt. Commissioner of Income Tax, Circle-11(1), Pune ('the Assessing Officer' for short) dated 29.10.2012 for the assessment year 2008-09. 2. The appellant raised the following grounds of appeal :- "The appellant objects to the order dated 29 October 2012 passed under section 143(3) r.w.s. 144(C) of the Income-tax Act, 1961 ('the Act') by the Assistant Commissioner of Income Tax, Circle 11(1), Pune ['ACIT' or 'AO'] following the directions issued by the Dispute Resolution Panel ('DRP') in respect of the aforesaid assessment year on the following among other grounds: 1. Disallowance of Advertising and Marketing ('A&M') expenses a. The learned ACIT erred in disallowing A&M expenses of ₹ 2,47,13,051/- reimbursed to Hindustan Unilever Limited ('HUL'). The learned DRP erred in confirming the same. b. The learned ACIT / DRP erred in holding that HUL was managing directly or indirectly the advertisement network for the appellant thereby rendering managerial services to the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP erred in not appreciating that the selling discount given to HUL was based on the sales achieved by HUL being the appellant's largest customer and not for any services rendered by HUL. f. The learned ACIT / DRP erred in not considering the submissions of the appellant / documentary evidence filed by the appellant in the correct perspective. 4. Disallowance incorrectly made under section 40(a)(ia) of the Act a. Without prejudice to the above grounds of appeal, the learned ACIT erred in disallowing the A&M expenses / management cost reimbursed to HUL and selling discount given to HUL under section 40(a)(ia) of the Act. The learned DRP erred in confirming the same. b. The learned ACIT/DRP erred in not appreciating that: i. the above reimbursement made /discount given to HUL were duly taken into account by HUL in computing its total income in the return of income furnished under section 139 of the Act and tax due on the income declared in the return of income filed had also been paid by HUL; ii. in terms of the amendment to section 40(a)(ia) of the Act made by the Finance Act, 2012, it would be deemed that tax on the aforesaid reimbursements made / discount given to HUL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arm's length price of any such alleged international transaction. 6. Incorrect adjustment on account of refund not received a. The learned ACIT erred in making an adjustment of ₹ 82,12,434/-, on account of refund shown as issued to the appellant pursuant to the intimation dated 18 March 2010 issued under section 143(1) of the Act, while computing the demand payable by the appellant. b. The learned ACIT erred in not appreciating that the appellant had not received either the aforesaid intimation or refund and hence the question of making an adjustment on account of the same while computing the demand payable by the appellant did not arise. 7. Incorrect levy of interest under section 234D of the Act a. The learned ACIT erred in levying interest of ₹ 12,72,920/- under section 234D of the Act. b. The learned ACIT erred in not appreciating that as no refund had been received by the appellant for the aforesaid assessment year, no interest could be charged under section 234D of the Act. 8. Initiation of penalty proceedings under section 271(1)(c) of the Act. a. The learned ACIT erred in initiating penalty proceedings under section 271(1)(c) of the Act. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for the purpose of benchmarking the above international transactions reported by the appellant company in Form No.3CEB. The TPO vide order dated 28.10.2011 passed u/s 92CA(3) of the Act suggested the TP adjustments on account of Advertising & Marketing (A&M) expenses of ₹ 32,63,66,267/-. While doing so, the TPO observed that the expenditure incurred on account of advertisement spend of ₹ 38,62,38,410/- which works out to 26.44% of the sales. According to the TPO, the mean ratio of the routine advertisement expense of the comparables is only 4.10% of the sales. Accordingly, the TPO adopted the difference between both i.e. 26.44% minus 4.10% = 22.34% of the turnover to benchmark the international transactions on account of A&M expenses with its foreign AE. The TPO computed the A&M expenses in his order, the same reads as under :- Sales of the assessee for the A.Y. 2008-09 = ₹ 146,09,05,405 The advertisement spent in the case of the assessee (A) = ₹ 38,62,38,410 Ratio of advertisement expenses to sales (B) = 26.44% The mean ratio of routine advertisement expense of the Comparables ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible benefits derived by the AE while arriving at the aforesaid conclusion. In this regard reliance is placed on the order of Hon'ble ITAT Delhi Bench in the case of Nestle India Limited 111 TTJ 498. * that the assessee is also paying royalty for the use of trademark. Thus, any entity which is paying consideration for use of trademark would use the trademark on the products else why would it pay the consideration for use of the trademark. * That if any, comparison is to be made, and then it should be between A&M expenses to sales ratio of the assessee with its competitor/ competitors. In the infant care segment, the only closest competitor of KCLL is Procter & Gamble Home Products Limited ('P&G'). KCLL and P&G, together contributed about 85% and 89% of the total market share in the Infant Care industry for the calendar years 2006-07 and 2007-08 respectively. In this regard reliance is placed on Hon'ble High court's order in case of Maruti Suzuki India Ltd. versus Additional Commissioner of Income Tax Transfer Pricing officer New Delhi W.P.(C) 6876 / 2008. * That the assessee pays royalty on the incremental sales attributable to the increased marketing spend. Thus, the adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e products of the appellant company and the discount was given to the HUL. It is further submitted that no remuneration was given to any HUL for rendering of any services and, therefore, the same does not partake of character of the commission/payment thereby attracting the provisions of section 194H of the Act. The appellant company also filed additional evidences showing that payments are in the nature of reimbursement of cost of advertisement and marketing expenses, management cost and selling discount. On due consideration of the said additional evidences as well as the submissions of the appellant company, the Hon'ble DRP had confirmed the findings of the Assessing Officer without assigning any independent reasoning. 13. Being aggrieved with the above actions of the Hon'ble DRP/TPO/Assessing Officer, the appellant is before us in the present appeal. 14. The ground of appeal no.1 challenges the disallowance of advertising and marketing expenses of ₹ 2,47,13,051/-. The ld. SR. Counsel submitted that these expenses represent the amounts spent on various trade promotion schemes which are run by the appellant company to promote the sales of its products. The ld. Sr. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were administered through the selling and distribution network of the HUL. The claims made for selling and distribution network of sub-distributors was settled by HUL and reimbursed the same by the appellant company. It is vehemently contended that the expenses were wholly and exclusively incurred by the appellant company in order to promote the sales of products and the genuineness of the expenditure had not been doubted by the Assessing Officer. The very fact that the Assessing Officer had invoked the provisions of section 40(a)(2b) of the Act goes to suggest that the genuineness of business expenditure is beyond the doubt. Now, the question that arises herein as to whether the impugned expense falls within the meaning of managerial services thereby attracting the provisions of section 194J of the Act. The contention of the appellant company is that the HUL has acted meant as the facilitator and had not rendered any independent services to the appellant company, remains uncontroverted by the assessing authority. 17. Therefore, it cannot be said that the payment is made for managerial services as defined under the provisions of section 194J of the Act. However, in our considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable to tax ?" On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilised by the subsidiaries as well as the head office organisation would not be income which would be assessable to tax. A similar view was taken in CIT v. Stewards and Lloyds of India Ltd. [1987] 165 ITR 416. We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts." 18. To the same effect decisions of various Hon'ble High Courts in the following cases :- (i) DIT(IT) vs. Abbey Business Services India (P.) Ltd., 122 taxman 174 (Karnataka High Court); (ii) CIT vs. Siemens Aktiongesellschaft, 310 ITR 320; (iii) DIT(IT) vs. M/s. Marks & Spencer Reliance India Pvt. Ltd. (ITA No.893 of 2014); (iv) Karnataka Power Transmission Corporation Ltd. vs. DCIT, 383 ITR 59; and, (v) CIT vs. Kalyani Steels Ltd., 91 taxman 359. 19. In the light of this legal position, we are of the considered opinion that neither the impugned expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices like technical or managerial in nature to the appellant company. Mere reimbursement of salary of employees does not constitute provision of managerial services. When the expenditure is a mere reimbursement of salary of employees deputed, the question of deduction of tax at source does not arise in the light of the decisions referred (supra) in relation to the ground of appeal no.1. Therefore, we are of the considered opinion that the provisions of section 194J of the Act have no application to the subject payment. Accordingly, the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the sum of ₹ 1,54,77,351/- on account of management cost. 23. Since we held in earlier paragraphs of this order that the provisions of section 194J have no application to the subject payment, it is not necessary for us to deal with contention, regarding benefit of second proviso section 40(a)(ia) of the Act. Thus, the ground of appeal no.2 stands allowed in favour of the assessee. 24. The ground no.3 challenges the disallowance on account of selling discount of ₹ 3,25,68,847/- given to HUL. It is submitted that the HUL is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to M/s.Zivon and no amount is paid by the respondent to M/s.Zivon, there can be no occasion to apply Section 194J of the Act. There has admittedly been no credit of any sum to the account of M/s.Zivon in its books of accounts nor any payment made by the respondent either in cash or cheque or draft or any other mode. Where the sales of any goods are covered under the M.R.P. system, the M.R.P. is fixed and the seller is entitled to sell the goods to a stockist at a price lesser that the M.R.P. as mutually agreed between the parties. In such a case, what should be the sale price or what should be the margin available to the stockist is entirely at the discretion of the parties. In the present case, the assessee has received the sale price at the rate fixed under the agreement. In such a case, where the assessee has received the amount of sale price, the question of the assessee deducting tax at source under Section 194-J of the Act does not arise, because the assessee is not making any payment to the stockist. Therefore, whatever be the margin made available to the stockist, so long as the assessee is not making any payment to the stockist, the question of invoking Section 194-J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures and there is no explicit of arrangement or agreement between the assessee and its foreign AE to incur the A&M expenditure for the benefit of its foreign AE. The sum and substance of the argument of the ld. Sr. Counsel as to whether there is an international transaction is that the very existence of international transactions cannot be presumed by deducing the difference of expenditure incurred by the assessee and comparable chosen by the TPO. The next submission made on behalf of the appellant is that even for argument sake that there is an international transaction in the absence of any machinery provision to compute the ALP of such transactions, the provisions of Chapter X cannot be invoked in order to make a TP adjustment, he took us extensively through the decision in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 wherein the Hon'ble Delhi High Court after undertaking the analysis of the provisions of Chapter X had held that in the absence of any explicit arrangement between the assessee and its foreign AE it cannot be said that the benefit of the expenditure incurred on A&M expenses would also enure to the foreign AE, so as to, infer the existence of an intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . vs. DCIT (supra) which is authored by one us i.e. Accountant Member wherein the Co-ordinate Bench of the Tribunal after referring to the decision of the Special Bench of the Tribunal in the case of L.G. Electronics India Pvt. Ltd. vs. ACIT, 22 ITR 1 and the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra) and in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 and held as under :- "19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional 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 reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........... 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. There ..... X X X X Extracts X X X X X X X X Extracts X X X X
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