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TMI Blog2021 (4) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... inished goods for resale in India; (iii) Export of finished goods manufactured by the assessee; (iv) Royalty payments; and (v) Other reimbursement viz. bills and receipts. In so far as above international transactions, the only issue raised by the assessee in ground No. 1 of its appeal is regarding transfer pricing adjustment of Rs. 5,72,99,914/- on account of international marketing expenses. 3. Shri Niraj Sheth appearing on behalf of the assessee submitted that assessee had made payments to its Associated Enterprise (AE) in respect of marketing services. The payments were made in accordance with service agreements between the assessee and L'Oreal SA France. The Transfer Pricing Officer (TPO) made adjustment in respect of the aforesaid payment primarily for the following reasons: (i) The assessee paid royalty for bundle of service rights. The payments made under license/royalty agreement include payment for marketing and advertisement. (ii) There is an overlap of services/rights in various agreements with respect to advertisement and marketing. (iii) The alleged services rendered by way of international marketing services not only pertain to the services rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the agreements were executed in November 2005. Thus, the payments for marketing services were being made since Financial Year (FY) 2001-02 relevant to AY 2002-03 and for royalty from FY 2005-06 relevant to AY 2006-07. Therefore, the first year in which the payment for royalty under license agreements, as well as marketing expenses under service agreements were made was in assessment year 2006-07. The expenditure incurred by the assessee was allowed and no adjustment was made in AY 2006-07. To support his contentions, the ld. Authorized Representative of the assessee referred to the order of CIT(A-12, Mumbai dated 20/03/2012 for assessment year 2006-07 at pages 73-79 of the paper book. 3.4. The ld. Authorized Representative of the assessee, assailing the finding of lower authorities asserted that the TPO has no power to disallow expenditure or sit in judgment to examine, whether the expenditure was necessary for the business or not. The TPO has limited jurisdiction to determine the arm's length price of the transaction under transfer pricing provisions. To support his contentions, the ld. AR relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarking international transactions qua marketing service, raised question on the payments made under the agreements, alleging duplication of services. A perusal of section 92CA of the Income Tax Act, 1961 (in short 'the Act'), shows that reference is made to the TPO under provisions of sub-section (1) of section 92CA for the computation of arm's length price in respect of the international transactions. The TPO does not enjoy unfettered powers under transfer pricing mechanism, to disallow the expenditure or to check the necessity of the transaction. The jurisdiction of TPO is limited to ascertain whether the international transaction carried out by the assessee with its AE is at arm's length by applying most appropriate method as specified under section 92C(1) of the Act. The TPO can neither question commercial expediency of the transaction nor examine whether service was needed or is duplicate in nature. Further, the TPO cannot question the quantum of benefit derived by the assessee from the payment made for international transaction. The TPO has no authority to disallow the expenditure for any extraneous reasons. The jurisdiction of the TPO is only to examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained." 7. The Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. reported as 345 ITR 241, after referring to OECD guidelines para 1.36 to 1.41 observed: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO for making adjustment in international marketing expense and upheld by the CIT(A) are without any legal rational and thus, liable to be set aside. On merits, we observe that per se payment for the marketing services are not disputed by the Assessing Officer, however, the TPO has not carried out necessary exercise of benchmarking ALP of the international transaction in question, ergo, we deem it appropriate to restore this issue to the file of Assessing Officer/TPO for determination of arm's length price of the transactions, as per the provisions of section 92C of the Act. Needless to say that reasonable opportunity of hearing be afforded to the assessee, in accordance with law. The findings of the CIT(A) on the issue of transfer pricing adjustment of international marketing expenses are set aside and ground no. 1 of the appeal is allowed for statistical purpose. 9. In ground No. 2 of the appeal the assessee has assailed addition of Rs. 1,28,74,878/- under section 145A of the Act. The ld. Authorized Representative for the assessee submitted that the assessee is following exclusive method for accounting excise duty of purchases. The Assessing Officer and CIT(A) have failed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar reasons, in appeal by the assessee, the CIT(A) allowed relief. In appeal before the Tribunal by the Department, the Tribunal restored the issue back to the file of Assessing Officer with direction to verify the facts to ensure that the assessee does not get the benefit of double deduction on account of Modvat account. 11. Both sides heard, orders of authorities below examined. The Assessing Officer has made addition under the provisions of section 145A of the Act on account of alleged unutilized CENVAT credit. The assessee has followed exclusive method of accounting, whereas, the Assessing Officer insisted that inclusive method of accounting should have been followed. The contention of the assessee is, whether inclusive method or exclusive method of accounting is adopted, both would give same result. 12. In the case of Diamond Dye Chem Ltd. (supra), the Hon'ble Bombay High Court upheld the order of Tribunal, wherein the addition on account of Modvat credit was deleted. In the said case, the assessee therein had also adopted exclusive method of accounting. The relevant extract of the judgment reads as under:- "5. We have considered the submissions. It is not disputed that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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