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TMI Blog2016 (5) TMI 1589X X X X Extracts X X X X X X X X Extracts X X X X ..... any of such expenditure as the AE is in different tax jurisdiction constituted distinct and independent entity subject to the law of the respective countries and the parent company cannot claim the benefits of their AE s business or may claim a beneficial ownership treating the AE as virtually non entities. This view is supported by the recent judgement of Supreme Court in the Vodafone International Holdings B. V. [ 2012 (1) TMI 52 - SUPREME COURT] As held by Mumbai Bench in the case of Stream International Services Pvt. Ltd [ 2013 (9) TMI 339 - ITAT MUMBAI] that investment of expenditure to AE is very much a transaction as per section 92F(v) and consequently it is a international transaction as per sec.92B requiring consideration u/s.92 - argument of the assessee is that TIML is under losses and hence no TP adjustment is necessary on transaction which is not tenable in view of the decision of the Bangalore Tribunal in the case of 24/7 Customer.com Pvt. Ltd.[ 2013 (1) TMI 45 - ITAT BANGALORE] . Accordingly, this ground of the assessee is rejected. TP addition on account of interest in respect of interest free advertisement advances made by the assessee - HELD THAT:- In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in which such person applies for DEPB credit against the exports whereas the profits on transfer of the DEPB by that person is chargeable as income under clause (iiid) of Sec.28 of the Act in his hands in the year in which he makes the transfer. Accordingly, we direct the AO to re-compute the deduction u/s.80HHC of the Act by applying Explanation(baa) of Sec.80HHC of the Act. Allocation of head office expenses and consultancy expenditure while computing eligible profit from jewellery division on the basis of turnover for the purpose of Sec.80-IB - HELD THAT:- In our opinion, when expenses incurred at Head office cannot be identified with any single unit, apportioning the same on the basis of turnover is an appropriate method as held by the jurisdictional High Court in the case of M/S. TTK PHARMA LTD. [ 2011 (8) TMI 307 - MADRAS HIGH COURT] . Accordingly, this ground of assessee is dismissed. The same principle is applicable in respect of allocation of professional fees paid to MCKENSEY. Accordingly, this ground of assessee is also dismissed. Non-granting of export incentives u/s.80-IB - HELD THAT:- This issue is squarely covered by the judgement of Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit of Euro Watch Division and considered the claim of assessee for deduction u/s.80-IB in the light of order of Tribunal in the case of West Coast Paper Mills Ltd. 2006 (4) TMI 184 - ITAT BOMBAY-I] - This issue is partly allowed for statistical purposes. - I.T.A. No. 1592/Mds./2007 - - - Dated:- 12-5-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER For the Appellant : Mr.K.Vasudevan, Advocate For the Respondent : Mr.Milind Madhukar Bhusari, CIT, D.R ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal is filed by the Assessee is directed against the order of the Learned Commissioner of Income Tax(A)-VIII, Chennai dated 30.03.2007 pertaining to the assessment year 2003-04. 2. The first ground in this appeal is with regard to confirming the addition of ₹ 8,03,34,404/- in respect of advertisement expenditure incurred by the assessee at overseas. 2.1. The brief facts of the issue are that M/s.Titan International Marketing Ltd.(TIML), United Kingdom has incurred advertisement expenditure aggregating to ₹ 854.08 lakhs for various international markets. Out of this, a sum of ₹ 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not of standard quality, then, TIL undertakes the risk of replacing those products to TIML. e) Foreign Risk: As the considerations for the sale of products are paid by TIML in foreign currency, TIML assumes the foreign exchange risk. The TPO was of the opinion that the economic burden of advertisement rightfully belongs to the AEs only. If the assessee had sold similar products to non-AEs, it should not have paid them for such advertisement expenses since it is not its economic function. Accordingly, the ALP for this international transaction determined as NIL by the TPO. Hence, the AO, based on the TPO s report, disallowed advertisement expenditure incurred by the assessee at overseas. Against this, the assessee carried this appeal before the Ld.CIT(A). 2.2.1 On appeal before the the Ld.CIT(A), the assessee stated that the TPO has failed to appreciate that the business of the assessee gets affected as the assessee has a direct interest in the sale of the products. Accordingly, it becomes necessary and pertinent for the assessee to spend on sales promotion expenses which in turn would lead to an increase in export sales and income of the company. From the analysis of fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. Therefore, it cannot be denied that the benefits flowing out of the sales promotion expenses incurred in overseas market are not inextricably linked with export sales made by assessee as the export of watches and other products by the assessee does result in advancement of assessee s business interests. From the facts available on record and the arguments made by the TPO, it is found that any income/profits arising out of said sale promotion and development expenditure directly accrued to the marketing associated enterprises i.e., TIML in UK and TAPL in Singapore. The income accrues to them directly which becomes liable to taxation in their jurisdictions Part of the income is also paid to TBHNV, Netherlands in the form of Royalty and it is also taxed there. The benefit that may accrue to TIL in India can be in the form of increase in size of the order for manufacturing goods. As TIL is paid only a fixed mark up of 9.73% on the watches manufactured and supplied, the benefit derived by TIL is very indirect and inadequate considering the quantum of expenditure said to have been incurred 2.2.4 Another argument taken by the learned TPO is that since the brand inta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nexus between the expenditure of Rs.8.03 crore and the assessee s business interest is very remote and indirect. Whereas, the direct benefit out of sales promotion and advertising expenses in foreign markets have flowed to the accounts of Associated Enterprises. 2.2.6 The CIT(A) observed that the Transfer pricing provision under the Act is an anti-avoidance measure introduced by the Indian Government to protect its tax base. This is evidenced by the CBDT Circular No.12 of 2001 dated 23.08.2001 regarding provisions governing Transfer Pricing in an International Transaction. The relevant part of the circular is reproduced below: The aforesaid provision have been enacted with a view to provide the statutory frame work which can lead to computation of reasonable, fair and equitable profit tax in India so that the profit chargeable to tax in India do not get diverted where by altering the prices charged and paid in intra group transaction to erosion of our tax revenues. As the anti-avoidance legislation is required to be interpreted on the rules of strict interpretation, the adjustment made is not called for and is misplaced. 2.2.7 The CIT(A) observed that the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountry and this principle is embodied in most domestic tax laws and both the OECD Model and UN Model Tax Treaties. 2.2.9 According to CIT(A), TIL, being the ultimate parent of all the enterprises in its group spread across the global may have interest in every activity happening in the entire group. But all the transactions happening between different enterprises within the group should be carried out at arm s length, so that contracting Nation do not lose their legitimate tax bases. Hence, mere satisfaction of the requirements u/s 37 of the Income-tax Act is not enough to allow the international transaction as an admissible expenditure. By taking on the sales and advertisement expenditure of Rs.8.03 Crores which is not its burden, the taxable income of TIL in India has come down to that extent. To this extent, the national tax base of India has been eroded. 2.2.10 Before CIT(A), the AR has relied on the decision of Hon ble Supreme Court in the case of S.A. Builders reported in 288 ITR 01 (SC) and held that the holding company has to watch the interests of the subsidiary company and in the present case the Titan (India) has, therefore, incurred the said expenditure so that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.40 Sponsorship 0.23 Other Advt. in Print Media, Newspapers Magazines, etc. 803.31 The above sales promotion and advertising expenses incurred by TIML London and reimbursed by TIL, India is claimed by TIL, India as its business expenditure. 2.3.2 The learned transfer pricing officer (TPO ) in his order has page 17 has mentioned that the position of Titan is that of a contract manufacturer and it should not have undertaken the marketing functions in the international market. The learned TPO has also quoted the level of risk undertaken by the associated enterprises visa-vis the appellant as regard the marketing function. The appellant submitted that the ld. TPO has not properly and fully quoted the paragraph which the assessee has stated in its TP documentation. The risks associated with the marketing and distribution of the product is assumed by associated enterprises as far as exports are concerned and also by TIL to the extent its business is affected. The ld.A.R submitted that the learned TPO has failed to appreciate that the business of the appellant gets affected as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition, Titan Industries is defacto the beneficial owner of the trade mark across the world on account of being the exclusive and sole manufacturer of watches sold under the brand name TITAN across the globe. A beneficial owner means the person, who is entitled to enjoy the economic rights stemming from the ownership, although the ownership has been registered in the name of someone else (the legal owner), who holds the object in his own name but on behalf of the beneficial owner. 2.3.6 The beneficial ownership signifies the level of ultimate control or entitlement as distinguished from mere signature authority or mere legal title. Since Titan Brand Holdings NV is a 100% subsidiary of Titan Industries, the effective control, management, use and benefits flowing out of the brand TITAN in actuality lies with Titan Industries. 2.3.7 The ld.A.R drew our attention to para 6.36 - 6.39 of transfer pricing guidelines for multinational enterprises issued by OECD which essentially deals with two main ways to determine ownership of marketing intangibles - legal and economic ownership and Issues arising where marketing activities are undertaken by the Company who does not own t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer cannot act based on surmises/suspicions and conjectures. Further, ld.A.R drew attention to the general principles laid down under section 37 of the Act for allowability of expenditures: The ld.A.R submitted that the expenditure is incurred wholly and exclusively for the purpose of the appellant s business. The learned assessing officer should have considered the six golden rules for allowing expenses under the said section. It may be noted that more often than not, the necessity or the compulsion or legality is considered as a benchmark to decide whether any expenditure should have been incurred in the course of its or his business. It may be noted that ordinarily, it is for the appellant to decide whether any expenditure should be incurred in the course of its or his business. 2.3.9 Ld.A.R submitted that the expression wholly and exclusively does not denote necessarily the word Wholly refers to quantum of expenditure. The word exclusively refers to motive, objective or purpose with which the particular expense has been incurred. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of it or his business. Such expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d exclusively for the purpose of business of the appellant company. The AR has relied on the decision of Hon bie Supreme Court in of S.A. Builders cited supra wherein held that the holding company has to watch the of the subsidiary company and in the present case the Titan(India) has, incurred the said expenditure so that the subsidiary company does not incur further losses. 2.4.1 On the other hand, the ld.D.R submitted that TIML London incurred advertising expenses ₹ 854.0 lakhs during the year. According to the assessee, such expenses were incurred for various international markets where the Titan products are sold. Out of this, sum of ₹ 803.31 lakhs was claimed by assessee. Total watch exports by the assessee is only ₹ 1237.69 lakhs for which it had to incur ₹ 803.31 lakhs as advertisement expenditure (65% of turnover). For local sale of Titan products, assessee is incurring advertisement expenditure locally for which there is no dispute. Total advertisement expenditure claimed during the year is ₹ 4744 lakhs and selling distribution expenses ₹ 1496 Iakhs out of which amount reimbursed to AE le. 803.31 lakhs alone is in dispute. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HNV as royalty. If the assessee had sold similar products to non-AEs, it would not have paid them for such advertisement expenses since it is not its economic function. Titan brand in India was valued at over Rs. 350 crores [page 6 of the Annual Report, 2002-03] which was created over a period of time by various promotion activities in India. Similarly, all the advertisement, marketing and promotional activities undertaken overseas is creating brand value of Titan in overseas market. This benefit directly accrues to the AEs of Netherlands owning the brands. TIML, its AE at London acknowledged the fact that assessee continues to make investments of a Iong-term nature for building and consolidating the Titan brand [page 2 of Directors Report of TIML]. In the past, costs associated with brand-building trademarks and design and development were charged to TIHBV by the affiliated companies [Item 1b on page 79, Notes to the Annual Accounts of TIHBV, Annual Report, 2002-03]. Now assessee stopped claiming such expenses from the AE which resulted in operational loss to the assessee company [but for the other income received, assessee incurred loss during the year]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TD 41 (ITAT)(SB)[DEL]) and Co-ordinate Bench of this Tribunal in Panasonic Sales Services India (P.) Ltd. Vs. ACIT in [2013] 143 ITD 733 (ITAT)[CHEN]. 2.4.6 We have heard both the parties and perused the material on record. In this case, Titan International Marketing Ltd., (TIML), London incurred ₹ 854.08 lakhs towards advertisement expenditure during the year. The assessee has taken a plea that it was incurred for marketing TITAN products at abroad. Out of this, a sum of ₹ 803.31 lakhs is claimed by the parent/assessee company M/s.Titan Industried Ltd.( TIL) as its own expenditure. This sum of ₹ 803.31 lakhs was reimbursed to TIML as expenditure by assessee. The total exports in the year was ₹ 1237.69 lakhs against which the advertisement expenses of ₹ 803.31 lakhs was 65%.Furhter, the design for watches developed by another AE Titan International Holdings BV (TIHBV), which is a design office in Paris, being a tax resident of Netherlands have patented the development designs in favour of it and the outside India, the brand TITAN is owned globally by Titan Brand Holdings NV of Netherlands (TBHNV), which is 100% subsidy of TIHBV. All the design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the recent judgement of Supreme Court in the Vodafone International Holdings B. V. Vs. UOI reported in [2012] 341 ITR 01. 2.4.7 Further, as held by Mumbai Bench in the case of Steam International Services Pvt. Ltd Vs. ACIT reported in 141 ITD 492 that investment of expenditure to AE is very much a transaction as per section 92F(v) and consequently it is a international transaction as per sec.92B of the Act requiring consideration u/s.92 of the Act. Further, the argument of the assessee is that TIML is under losses and hence no TP adjustment is necessary on transaction which is not tenable in view of the decision of the Bangalore Tribunal in the case of 24/7 Customer.com Pvt. Ltd., in 140 ITD 344 (Bangalore). Accordingly, this ground of the assessee is rejected. 3. The next ground is with regard to Transfer Pricing addition on account of interest of ₹ 1,20,41,897/- in respect of interest free advertisement advances made by the assessee. 3.1. The brief facts of the case are that the assessee (TIL) had made the following interest free advances to its associate Company TIML, specifically to be utilized for brand building, advertisement and related expenses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advances extended to the AEs, it would result in reduction of taxable income for TIL in India. To that extent, the taxable income taxable in India gets shifted to foreign tax jurisdictions. The very purpose of Transfer Pricing Regulations is to restrain such shifts of taxable income out of India. What is being brought to tax is only the real income earned by TIL in India. Hence, the ratio of the S.A. Builders relied by the Learned AR would not be applicable in this case. The assessee had relied on the Apex Court judgement in the case of S.A.Builders. According to him, the ratio of the said decision is not applicable on the facts of this case. The S.A Builders case dealt with domestic transactions happening within the country. In all domestic transactions, the tax base remains within the country. Whereas the appellant company had made International transactions with its Associated Enterprises in foreign tax jurisdictions. When there is a transaction between two Associated Enterprises located in different tax jurisdictions, the transaction should be at Arms length price based on Separate Entity Approach , as per Sec 92 of the IT Act. This is also the principle embodied in Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f money or kind; 2) placing of it with another, called borrower; 3) an agreement to repay; and 4) a recognition of liability on the part of the borrower, to return it with or without interest. Ld.A.R drew our attention to section 372A of the Companies Act, wherein certain restrictions are placed before a company can lend a sum of money to another body corporate The expression Loan has been defined in explanation (a) to section 372A. It says that loan includes debentures or any deposit of money made by one company with another company, not being a banking company. Thus it can be seen that under the Companies Act an advance is distinguished from a loan or a deposit as it has expressly not been included within the definition of loan. Further, in a Company law case between Fredie Ardeshir Mehta Vs. Union of India. 70 Com 210 (Born) it has been held that a financial transaction which is not in substance a loan cannot be converted into a loan. 3.3.2 Ld.A.R further submitted that definition of External commercial borrowings ( ECB ) under the exchange control regulations. ECB has been defined to include commercial bank loans, buyers credit, suppliers credit, securitized instrument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the financial impact of the international transaction as held in Logix Micro Systems Ltd. Vs ACIT (ITAT, Bang) 8 ITR (Trib) 159. In such circumstances, the transaction has to be tested with a situation had the assessee invested or advanced or deposited the said amount with an unrelated third party and thereby the income which would have been earned by the assessee is expected to have been earned from the transaction with AE. Fixed Deposit Interest rates given by bank is an appropriate and good comparable or at least LIBOR plus 2% rate can be adopted as ALP as held in Aurinpro Solutions Ltd. Vs Addl. CIT (ITAT, Mum) 27 ITR (Trib) 276. 3.5. We have heard both the parties and perused the material on record. In this case, the assessee made interest free advances to the associate company, which includes the amounts spent for brand building, advertisement and related expenditures. As we discussed in the earlier para with reference to ALP of Advertisement expenses, the transaction between the assessee and the AE falls within the ambit of international transaction as per the provisions of the section 92B of the Act, then ALP with reference to the interest on such advances is to be com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d clause (iiib) refers to cash assistance (by whatever name called) the same are receivable by any person against the export under any scheme of Government of India. Further, Ld.CIT(A) observed that the advance licence benefits are claearly covered by clause (iiia) as well as clause (iiib) of sec.28 of the Act. Clause (iiia) refers to the profits on sale of licence granted under the Imports and Exports (Control) Act. Similarly clause (iiib) refers to the cash assistance received or receivable by any person against exports under any scheme of the Government. Therefore, Ld.CIT(A) supported the view taken by the ld. Assessing Officer as legally correct to exclude 90% of advance licence benefits from the business profits under Explanation (baa) to section 80HHC of the Act. Against this, the assessee is in appeal before us. 4.2. We have heard both the parties and perused the material on record. In our opinion, the issue is squarely covered by the decisions of the Supreme Court in the case of Topman Exports V. CIT reported in (2012) 342 ITR 49 (2012) wherein held that when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o better method than to allocate the head office expenses to various units on the basis of their turnover because the ultimate aim of any business enterprise is to earn more revenues rather than to count the number of pieces of manufactured items sold by it. The allocation of head office expenses made by the AO on the basis of turnover is sustained by the Ld.CIT(A). Against this, the assessee is in appeal before us. 5.3. We have heard both the parties and perused the material on record. In our opinion, when expenses incurred at Head office cannot be identified with any single unit, apportioning the same on the basis of turnover is an appropriate method as held by the jurisdictional High Court in the case of TTK Firm Ltd. reported in 2011-TIOL 620 HC Madras. Accordingly, this ground of assessee is dismissed. The same principle is applicable in respect of allocation of professional fees paid to MCKENSEY. Accordingly, this ground of assessee is also dismissed. 6. The next ground is with regard to non-granting of export incentives u/s.80-IB of the Act. 6.1. The facts of the issue are pertaining to the exclusion of export incentives from the business profits of the industrial u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity and hence special deduction was not allowable to the assessee. Similar views were expressed in the case of Kripa Chemicals P Ltd v DCIT, 88 lTD 200 (Pune) (TM). Deduction u/s 80-I and 80HH are available to an assessee if it derives profits from the manufacture or production of specified articles or things. It is very important to mention here that an identical issue has been decided by the jurisdictional High court in favour of the Revenue in the case of CIT v. J meel Leathers Uppers, 246 ITR 97(Mad). In the said case, it has been held that the amounts received by the assessee as cash assistance, duty drawback and import license nomination entitlements from the Government of India are not eligible for deduction u/s 8OHH since the said amounts are not profits derived from industrial undertaking. A similar decision has been given by the jurisdictional Court in the case of CIT v. Vishwanathan and Co., 261 ITR 737 in which it was held that cash assistance, duty drawback and air subsidy are not incomes derived from industrial undertaking for the purpose of computing deduction u/s 8OHH. In the present case, the income/receipts under consideration cannot be termed as income derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as added back earlier inadvertently, should not be excluded while computing deduction u/s.80-IB of the Act. Further, ld.A.R submitted that the addition in this regard had been made in assessment year 2002-03 and the said claim is allowable in the current year but the same should not be excluded for the purpose of deduction u/s.80-IB of the Act. 7.3. On the other hand, ld.D.R submitted that bonus and commission payable to employees relating to assessment year 200203 was not paid by assessee in that year and it was added back to the profits in such assessment year. During the current assessment year, assessee made the aforesaid payments pertaining to earlier assessment year (amounting to ₹ 567.21 lakhs) and claimed deduction u/s.43B. AO allowed the claim and consequently profits from business during the year got reduced and AO computed deduction u/s.90-IB on such reduced profits. In the process, profits got reduced by sum of ₹ 80.58 lakhs being bonus and commission payments relating to this unit. Since eligible profits for the purpose of deduction u/s.80-IB are to be calculated after taking into account all the expenses claimed under sections 30 to 43D, action of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the said Euro watches. There is no direct sale of the said cases and bracelets to the customers. The assessee has indirectly worked out the sales pertaining to the cases and bracelets on the basis of the total sales of Euro watches. The contention of the assessee is that the assessee has earned net profits of ₹ 8.44 crores on the sale of such cases and bracelets although no such sale had actually taken place directly. The assessee has arrived at the above figure of profits of ₹ 8.44 crores by estimating sales of this unit to be ₹ 29.40 crores. The contention of the assessee is that the total sale of Euro watches was ₹ 452.77 crores. The said figure is stated to include the sale value of bracelets and cases amounting to ₹ 29.40 crores. The assessee has contended that the above calculations are based on the ratio of cost of production of cases and bracelets vis- vis the cost of production of Euro watches. 8.3 The AO was of the opinion that since the assessee cannot sell the cases and bracelets independently, the theoretical profits arrived at by them are not eligible for any deduction u/s.80-IB of the Act. The AO was further of the view that the to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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