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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 ..... This sum of Rs. 803.31 lakhs is said to be the advertisement expenditure of the assessee company in international markets on watches as against the total watch exports of Rs. 1237.69 lakhs. It constitutes 65% of the export turnover. TIML,London is said to have incurred a total sum of Rs. 854.08 lakhs towards sales promotion and advertising expenses outside India and the break-up is given below:- Particulars of expenses Amount (Rs. In lakhs) Media TV 4.68 Production Press 10.73 Production TV 0.21 Hoarding 8.84 Merchandising VM 12.38 Promotions 3.30 Exhibitions/Trade Fairs 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. This being an International Transaction, the TPO had proceeded to compute the Arm's Length Price (ALP) and determined the same as zero. The TPO considered the risks assumed by the assessee company vis-a-vis the associate enterprise, as furnished by the assessee which is enumerated below:- Risks Assumed: a. Contract Risk: Al the contracts with the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The developed designs have also been patented in favour of TIHBV. The watches manufactured and supplied by TIL from India have been marketed under the Brand name 'TITAN' in the global markets. Outside India, the Brand 'TITAN' is owned globally by TBHNV, the tax resident of Netherlands. For registering / acquiring this brand name in various countries, considerable expenses have been incurred and they have been incurred by TBHNV. 2.2.2 According to CIT(A), for the manufacturing and supply of watches, TIL has been paid a markup of 9.73% on total costs incurred for the manufacturing. In view of the fact that the design intangibles and the brand intangibles are owned by non-resident enterprises and keeping in mind the FAR analysis for the associated enterprises, it becomes clear that TIL has performed the function of a contract manufacturer. Like in the case of any other contract manufacturer, the reward for the limited risk function performed by TIL is the mark up earned by it over the cost of manufacturing. The final sale prices of the products are determined by Associated Enterprises only. Any profit or loss arising out of that sale activity is to their credit only. Their income gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary of the assessee and the acquisition of the brand intangible was financed by the assessee. As such the role of TBHNV is that of a mere legal owner, the economic owner being the assessee. It is not disputed by the assessee that the cost of developing the designs and models for the foreign markets as well as for acquiring / registering the brand name in various countries have been incurred by the foreign Associated Enterprises. Thus, it is seen that the economic burden (economic costs and risks) of developing the intangibles have been borne by the Associated Enterprises only. TIL India might have invested capital in its Associated Enterprises incorporated abroad. But the key test for determining the economic ownership is the relative contribution of parties in a controlled group and benefits flowing from the intangibles in question. This is reiterated by the OECD guidelines also. According to CIT(A), the facts on record show that the whole of the expenditure incurred in the intangibles have been borne by the Associated Enterprises. The flowing out of those intangibles are also being enjoyed by the Associated Enterprises only. At the end, TIL becomes eligible for the returns on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be determined for all such international transactions. The arm's length price must be a price which is applied or proposed to be applied in a transaction between persons other than AEs, in uncontrolled conditions. Thus, it is statutorily enjoined upon the TPO to determine the arm's length price for the international transactions of the appellant. The appellant having not produced any uncontrolled transaction similar to the international transaction in which the sales and advertisement expenses have been borne by the contract manufacturer, the adjustment made by the TPO does not suffer from any legal infirmity. 2.2.8 The assessee submitted that the expenditure is incurred wholly and exclusively for the purpose of the appellant's business. The Ld. 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 assessee to decide whether any 'expenditure should be incurred in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same is not the situation in the case of Assessee Company and its foreign associated concerns. In all domestic transactions, the tax base remains within the country. Whereas, the assessee 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 'Arm's length price' based on 'Separate Entity Approach', as per Sec 92 of the I.T Act. This is also the principle embodied in Tax Treaties, in the field of International Taxation, and supported so by both the OECD and UN model tax treaties. Keeping in view the above discussion, Ld.CIT(A) rejected all the contentions of the assessee on this issue. Hence, Ld.CIT(A) endorsed the view taken by the TPO to determine the ALP. Therefore, this ground of appeal is rejected. Against this, the assessee is in appeal before us. 2.3.1 Before us, ld.A.R submitted that addition of Rs. 8,03,34,404/- represents expenses incurred towards advertisements in international market. The expenses relate to advertisements in media, press, newspaper, magazines, exhibitions and trade far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd advertisements have been mainly done to boost the export sale in the short and medium run in the overseas market, the benefit of which will ultimately be consumed 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 appellant as the export of watches and other products by the appellant does result in advancement of appellant's business interests. 2.3.4 Another argument taken by the learned TPO is that since the brand intangibles except for India are held by Titan Brand Holdings NV (TBHNV), Netherlands (earlier held by Than International Holdings NV (TIHNV) and subsequently transferred to TBHNV, the economic rights of the intangibles belongs to TBHNV and not to the assessee. The ld. TPO further has held that the economic cost of creating the intangibles was borne by Titan International Holdings NV ('TIHNV') and thereafter it was transferred to TBHNV. The learned TPO has failed to appreciate TBHNV is a 100% subsidiary of the appellant and the acquisition of the brand intangible was financed by the appellant. As such the role of TBHNV is that of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturer of watches sold under the brand name 'TITAN' across the globe, the risk and reward associated with the trade name TITAN' ultimately flows back to Titan Industries either in terms of increase in sales or otherwise. In the instant case since the sales promotion expenditure was incurred with the object to promote exports of appellant from time to time, the same is motivated by appellant's own business interest and there is nexus between the expense incurred and appellant's business interest. 2.3.8 Notwithstanding the above arguments, the appellant submitted that the advertising expenses were reimbursed to the associated enterprise-Titan International Marketing Limited was at cost there being no mark-up. Further, ld.A.R submitted 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 dated23.08.2001 regarding provisions governing Transfer Pricing in an international Transaction. 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. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quoted with approval by the Supreme Court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 and CiT v. Chandulal Kesha vial and Co. [1960] 38 1TR 601; AIR 1960 SC 738. 2.3.10 In light of the above, the ld.A.R submitted that the sale promotion expenses incurred by it shall not be viewed in isolation of the facts and circumstances of the case. 2.3.11 In a nutshell, the ld. AR has contended that the expenditure under consideration is not in relation to brand promotion but it is in the nature of sale promotion expenses. The benefit from those advertisements is stated to flow back to the appellant company and not to Titan (Netherlands) who holds the ownership over the brand Titan. The Titan (India) i.e. the assessee-company is stated to be the economic owner of the brand Titan and therefore the commercial benefit of the said advertisements comes back to Titan (India). 2.3.12 The other contention of the Learned AR is that it is necessary to incur the said advertisement expenditure because without that, the assessee company will not be able to sell its products in foreign countries due to very high competition by other multinational companies. The ld. AR has relied on the OECD guideli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts are sold to AEs and other enterprises overseas, who in turn sell it to ultimate customers through distribution channels in their respective territories. * Risks associated with marketing and distribution of overseas sales is assumed by AE since contract with overseas distributors and dealers are entered into by AE. * Market risk and price risk are undertaken by AE as it finalizes the price at which its products could be sold in the European market. * As the contract with overseas distributors and dealers are entered into by AE, it undertakes credit risk. * Thus assessee's position is only that of a contract manufacturer and hence it can only claim reward for its manufacturing function ie. a mark-up on manufacturing costs'. It just performed the manufacturing function as per the exclusive designs for the foreign markets and sold them with a markup on cost (9.73%) to its AEs. Assessee did not adduce any evidence to show that the mark-up charged by it on its sales to AEs were much more than the other sales so as to take care of such brand building & promotion expenses. * Any threat from competition and external factors in overseas market is borne by AEs. Hence assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle was held by Hon'ble Supreme Court in Bacha F. Guzdar Vs CIT (27 ITR1) and recently reiterated by the Apex court in the case of Vodafone International Holdings BV Vs Union of India & Anr. reported in 341 ITR 01 and also Panasonic Sales & Services India Pvt. Ltd. Vs ACIT (ITAT, Chennai) 143 lTD 733 Tribunal held the following advertisement expenses towards brand building expenses viz. Media advertisement, Exhibition / Trade fair, Billboard /Hoarding/ Signage, Banner Catalogues/ Newsletter/ Calendar/Magazine, Dealer Meet expenses, etc. If we analyze the expenses incurred by TIML during the year, the break-up of which is given in para 4 of the order of Ld.CIT(A), majority of expenses were incurred towards brand building and hence needs to be considered for determining the ALP. Reimbursement of expenses to AE is very much a 'transaction' as per sec.92F(v) and consequently, it is an international transaction as per sec.92B requiring consideration u/s.92 as held in Stream International Services (P) Ltd., Vs. ADIT (ITAT, Mum) 141 ITD 492. Argument that TIML is under losses and hence no TP adjustment is necessary on transactions with it, is not tenable in view of the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 803.31 lakhs on advertisement expenditure, which is seen from the Table at page-3 of this order. There is no agreement or documents produced by the assessee to show the assessee is liable to incur this expenditure. In other words, the assessee is getting only mark-up on the cost of manufacture of the goods supplied to the AE and it is nowhere connected with the sales of the AEs. All the risks associated with the sales of AEs, is to be borne by AE only. In such circumstances, assessee is not required to incur any expenditure towards sales. More so, when there is no stipulation by way of any agreement between the assessee and the AE, it is to be borne in mind that if the assessee had sold similar goods to other non-AE, assessee would not have incurred such expenditure. The benefit derived from the impugned expenditure is not at all for the assessee and it goes directly to the AE only. In our opinion, services in connection with such advertisement cost which was incurred in abroad, benefit accrued to AE and the assessee cannot claim any of such expenditure as the AE is in different tax jurisdiction constituted distinct and independent entity subject to the law of the respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This computation of interest at RBI rates resulted in addition of Arm's Length Interest of Rs. 1,20,49,897/-. Against this TPO observation, the assessee went in appeal before the Ld.CIT(A). 3.2. Ld.CIT(A) observed that as already held by him under the head 'Sales Promotion and Advertising Expenditure', in Para 4, the advertising and brand building are not the economic burden of the appellant company. Hence, the TPO was right in proceeding to compute the arm's length price for the International Transaction with reference to interest cost. TIML, London is the subsidiary of assessee looking after the marketing in European countries. The said subsidiary by the assessee to have no independent sources of income exception paid by the holding company only. But the facts are not so. The subsidiary just gets the watches made from the parent company and the entire business is carried on by it on an independent basis as seen from the nature of risks and rewards assumed. Ld.CIT(A) further observed that this ALP interest computation would not result in a hypothetical income for TIL. Instead, if such an Arm's Length Interest is not calculated on the advances extended to the AEs, it would result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated enterprises and has applied the same to impute interest on advertising advances. The ld.A.R submits that advertising advances are inherently different from loans. A loan is a sum of money borrowed from a lender for a specified period of time that must be repaid, usually with interest whereas an advance is an amount paid before it is earned or expensed or to pay money before it becomes due. A loan is a type of debt. Like all debt installments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. 3.3.1 Ld.A.R submitted that according to the Black's Law Dictionary 'Loan' means a lending with absolute promise to repay, a borrowing with a promise to repay delivery of money by one party and receipt by another on agreement, express or implied, to repay; or a deposit. The four elements of a loan are: 1) an amount, a sum which may be in the shape of money or kind; 2) placing of it with another, called borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it would result in a hypothetical income and not real income. He relied on Supreme Court judgment in the case of Commissioner of Income Tax Vs. Bokaro Steel Ltd. 236 ITR 315 1999 SC wherein held that only real Income can be brought to tax and not hypothetical income. From the facts stated above, it is evident that no income has in hands of the assessee company and as such interest income and taxing it in the hand of the assessee would be against the basic principles of taxation theory. 3.4. On the other hand, ld.D.R submitted that Assessee made interest-free advances to TIML, London specifically to be utilized for brand building, advertisement and related expenses. Since economic function of advertising and incurring of such expenses overseas is not the burden of assessee, cost of such advances was determined at ALP. In the case of Perot Systems T5I (India) Ltd. Vs DCIT (5 ITR (Trib) 106) ITAT Delhi Bench held that grant of interest-free loans to overseas AEs comes within the ambit of International transactions. Similar view was held in. In such cases potential loss to the assessee to be considered while evaluating, the financial impact of the international transaction as held i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h reference to DEPB receipts. 4.1. The facts of the issue are related to the exclusion of 90% of export incentives of Rs. 7,35,10,997/- from the business profits under Explanation (baa) to sec.80HHC of the Act. The details of export entitlements claimed by assessee are as under:- Particulars Amount(Rs.) Duty Entitlement Pass book scheme 2,11,17,744 Advance license benefit 4,28,19,991 Duty free replenishment certificate 95,73,262 Total 7,35,10,997 The ld. Assessing Officer was of the opinion that these export incentives received by the assessee did not fall in clauses (iiia), (iiib) and (iiic) of sec.28 of the Act. Aggrieved, the assessee was in appeal before the Ld.CIT(A). Ld.CIT(A) observed that the above items of income clearly fall in clause (iiib) of section 28 of the Act. The said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the contentions of the Learned AR regarding the allocation based on number of divisions are too theoretical based on surmises. If the basis of calculation made by the AO is stated to be unscientific, then the basis adopted by the appellant can also not be stated to be having any scientific basis or logic or acceptable reasoning. First of all, it was not correct on the part of the assessee not to allocate the head office expenses against various units for the purpose of computing correct eligible profits of each unit. It becomes more important if the assessee is claiming special deduction on account of profits on jewellery divisions without debiting all the direct and indirect expenses for the purpose of earning of the said income. Ld.CIT(A) observed that there can be no 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 befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t interest income earned from bank deposits made for obtaining Letters of Credit does not have any direct nexus with industrial activity for the purpose of availing deduction u/s 8OHH and 801. In this case the Hon'ble Court has explained the meaning of words 'derived from'. For coming to the conclusion the Hon'ble Court has referred to the decision in the case of CIT v. Sterling Foods, 237 ITR 579 (SC). In the case of Pandian Chemicals Ltd. v. CIT, 262 ITR 278 (SC), the Hon'ble Apex Court had also elaborately explained the annotation of the words 'derived from' and 'attributable to' while deciding the allowability of deduction u/s 8OHH on the interest earned on security deposits. It was held that such interest income been derived from the said industrial activity' 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 fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... current year on the basis of actual payment and on the other hand the assessee wants that this deduction should be ignored while computing eligible profits. The AO was of the opinion that this contention of the assessee are not based on any legal principles or supported by any provisions of the Act. Eligible profits for the purpose of sec.80-IB are required to be computed under the head business income after taking into account all the expenses and deduction claimed u/s.30 to 43D of the Act as prescribed u/s.29 of the Act. Hence, the AO excluded the same for the purpose of deduction u/s.80-IB of the Act. On appeal, the Ld.CIT(A) confirmed the action of the ld. Assessing Officer. 7.2. The ld.A.R submitted that the deduction u/s.43B claimed by the assessee, which was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases and bracelets unit will have only negative profits, if all such expenses are allocated to all the divisions on the basis of the turnover. Since there is a loss in the time project division, the same shall be allocated to Euro Watch case plant resulting in its negative income. There shall be no deduction u/s.80-IB of the Act available for the said unit. Against this, the assessee carried the appeal to the CIT(A). 8.2 The learned Commissioner of Income Tax (Appeals) observed that the watches to be sold in Europe are being produced by various other units of the assessee company. However, for such watches, the assessee is manufacturing special cases and bracelets which are supplied to various other manufacturing units for the purpose of packing 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 Rs. 8.44 crores on the sale of such cases and bracelets although no such sale had actually taken place directly. The assessee has a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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