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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 ..... o 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. Addition u/s 145A on account of alleged unutilized CENVAT credit - assessee is following exclusive method for accounting excise duty of purchases - AO insisted that inclusive method of accounting should have been followed - whether inclusive method or exclusive method of accounting is adopted, both would give same result? - HELD THAT:- We find that the dispute with regard to CENVAT credit in the case of assessee is perennial since AY 2002-03. The assessee has been following exclusive method of accounting as against inclusive method as required under section 145A of the Act. Under excusive method the amount of CENVAT credit is not added to the sales and purchases, but is shown separately. The assessee has filed the copies of order passed by the CIT(A) from AY 2002-03 onwards (except for AY 2003-04 when no addition was made on account of unutilised CENVAT Credit) alongwith order giving effect. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 in India but they also represent what the assessee is already entitled to under the licence agreement. (iv) The brands for which advertisement and marketing expenses are incurred, are continue to be owned by overseas AE, hence, the real benefit is to the foreign AE in the form of brand building. 3.1. The ld. Authorized Representative of the assessee submitted that the CIT(A) in the impugned order has erred in upholding the adjustment made by the TPO. The ld. AR pointed that the CIT(A) has erred in holding that arm's length price of the said transaction is to be determined at nil following CUP as most appropriate method, as no third party would pay twice for same services, once in the shape of incremental royalty and again as payment towards services. The CIT(A) has failed to appreciate that the services/rights provide to the assessee by L'Oreal SA Franc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment 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. Lever India Exports Ltd., 292 CTR 393(Bom). 3.5. The ld. Authorized Representative of the assessee further referred to the observations of the CIT(A), wherein the First Appellate Authority has held that the ALP of the marketing services are nil if CUP is applied. The ld. Authorized Representative of the assessee placed reliance on the decision of Merck Ltd. vs. DCIT, reported as 179 TTJ 121 (Mum) to contend that were bundle of services are received under an agreement and the payments are made for such package and not for individual services, if the assessee does not use any particular services from such bundle of services it is not justified to hold that the payment is not warranted for that particular service that has not been utilised. The ld. Authorized Representative of the assessee further pointed that the decision of the Tribunal has been approved by H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 examine international transaction and make suitable adjustment after benchmarking the transaction in line with the provisions of section 92C of the Act. 6. The Hon'ble Bombay High Court in the case of CIT vs. Lever India Exports Ltd.(supra) has held that in transfer pricing proceedings the role of TPO is to examine whether or not method adopted to determine arm's length price is most appropriate and also whether comparables selected are appropriate or not. It is not part of TPO's jurisdiction to consider whether or not expenditure incurred by assessee has passed the test of section 37 of the Act. The relevant extract of observations made by the Hon'ble High Court are reproduced herein under:- 7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The Hon'ble Court after considering relevant provisions of the Act, OECD guidelines and catena of judgements held: 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal is allowed for statistical purpose. 9. In ground No. 2 of the appeal the assessee has assailed addition of ₹ 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 to appreciate the fact that under exclusive method of accounting no adjustment is warranted as there would be no impact after adjustment under section 145A of the Act. The ld. AR referred to the details of CENVAT/Service tax credit availed and utilised at page 2 of the paper book. The ld. Pointed that CENVAT credit utilised is debited to the Profit and Loss account as excise duty expenses and unutilised CENVAT is carried forward under the head 'Loans Advances' under Current Assets. The Assessing Officer has made addition with respect to unutilized CENVAT Credit of ₹ 1,28,74,878/- as on 31/03/2007 only for the reason that the assessee has followed exclusive method of accounting. In the opinion of Assessing Officer the assessee should have followed inclusive method of accounting only. The ld. Authorized Repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee was liable to excise duty. The assessee got credit in the excise duty already paid on the raw materials purchased by it and utilized in the manufacturing of excisable goods. The assessee was adopting the exclusive method i.e. valuing the raw-materials on the purchase price minus (-) the Modvat credit. The same would be permissible. The Apex Court in the case of Indo Nippon Chemicals Co. Ltd. (supra) while affirming the order of High Court, has observed that the income was not generated to the extent of Modvat credit or unconsumed raw-material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw-materials, that would not amount to income which was liable to be taxed under the Act. It is also held that whichever method of accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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