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TMI Blog2021 (11) TMI 1124X X X X Extracts X X X X X X X X Extracts X X X X ..... s of an incorrect set of comparable without following any of the methods prescribed in Section 92C(1) of the Act. 1.2Concluding that such A&M expenses incurred by the Appellant constitute a service to Associated Enterprise, and therefore is an international transaction, merely on the basis of an assumption that an arrangement exists between the Appellant and the Associated Enterprise for incurring such expenses, without demonstrating the same. 1.3Assuming that such A&M expenses automatically contribute to an enhancement of the brand value and creation of marketing intangibles without appreciating that such expenses were incurred by the Appellant on its own behalf and that these expenses were incurred due to the unique product category and competitive market conditions which also resulted in reactive marketing. 1.4Computing the arm's length price of such alleged international transaction in an arbitrary manner without following any of the methods prescribed in Section 92C(1) of the Act and by using an incorrect set of comparables. 1.5Including selling and distribution expenses such as trade discounts given to wholesaler/stockist, sampling activities, shelf space charges mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agerial service warranting a disallowance under Section 40(a)(ia) of the Act for non-withholding of tax at source under Section 194J of the Act. 4. erred in not appreciating the fact that expenditure on additional discount extended by Appellant to HUL amounting to Rs.8,37,15,151 is already subject to transfer pricing adjustment by TPO treating it as an AMP expense incurred for the benefit of AE and hence, the same cannot be again disallowed. Incorrect disallowance under section 40(a)(ia) of the Act of Rs 1,78,19,577 to taxable income of the Appellant in respect of reimbursement of salary cost of employees deputed to the Appellant by HUL 5. erred in considering that the reimbursement of actual salary cost of the employees of HUL deputed to work under the control and supervision of the Appellant is in the nature of managerial service warranting a disallowance under Section 40(a)(ia) of the Act for non-withholding of tax at source under Section 194J of the Act. Incorrect disallowance of Rs. 4,51,43,992 to taxable income of the Appellant in respect of selling discounts extended to HUL 6. erred in considering that the selling discount extended by the Appellant to HUL which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated under the provisions of the Companies Act, 1956. It is a joint venture between Hindustan Unilever Limited (HUL) and Kimberly Clark Corporation, a USA based company. It is engaged in the business of manufacturing of Infant Care and Feminine Hygiene Care Products. The return of income for the assessment year 2009-10 was filed on 23.10.2009 declaring total income of Rs.50,70,130/-. The appellant company also reported the following international transactions within the meaning of section 92B of the Income Tax Act, 1961 ('the Act' for short) :- Sr.No. Nature of Transactions Amount of Transactions Method Adopted 1. Purchase of materials spare parts & consumables 41,39,64,114 CPM 2. Purchase of finished goods 23,20,53,599 TNMM 3. Purchase of Machinery 3,18,34,424 - 4. Payment of Royalty 1,79,29,715 CUP 5. Payment of Global License Fees 38,14,243 - 6 Payment towards ITS Customer Service Support 8,82,700 - 7 Reimbursement of Managerial remuneration 3,25,28,799 CUP Total 73,30,07,594 4. The appellant company also submitted TP study report wherein it sought to benchmark the above international transactions. The appellant applied Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty vendors for supply of raw material to all the group entities including the Appellant at an agreed price. According to the appellant, the aforesaid arrangement with third parties results in standard quality of supply of raw material and reduced price of the raw material due to collective buying. The AEs of the Appellant also supply raw material to the Appellant only in exceptional circumstances when the third party vendors are not able to supply the same for some reason. During the year, the Appellant has imported raw materials from third party vendors under global sourcing arrangement and its AEs as under: Name of the parties Amount (in Rs.) Third party vendors under global sourcing arrangement 37,18,66,093 Yuhan-Kimberly Limited 2,38,39,095 Kimberly Clark Global Sales LLC 1,43,19,351 8. In the transfer pricing study report, the aforesaid transaction was benchmarked comparing the gross margin of the Appellant (57.54%) with the comparable companies (36.55%) under cost plus method. The Appellant's margin was far higher than the margin of the comparable companies and accordingly, the transactions was sought to be arms' length. However, on objection raised by the lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance on account of International Transaction - Rs.21,17,81,020/-. (b) Disallowance of payments to Hindustan Unilever Limited on account of Advertising and Marketing expenses - Rs.8,37,15,151/-. (c) Disallowances on account of Management Cost - Rs.1,78,19,577/-. (d) Disallowance on account of Selling Discount to HUL - Rs.4,51,43,992/- (e) Disallowance on account of Freight and Material Handling Charges - Rs.16,27,824/- (f) Disallowance on account of IT Support Expenses - Rs.48,08,167/- (g) Disallowance of payments to Star India Private Limited on account of Advertising and marketing Expenses - Rs.3,21,20,238/- (h) Disallowance on account of interest paid on TDS - Rs.15,826/- 12. Being aggrieved by the above disallowances proposed by the Assessing Officer in his draft assessment order dated 14.03.2013 passed u/s 143(3) of the Act, the appellant company filed objection before the Hon'ble Dispute Resolution Panel, Pune (DRP) contesting all the above proposed additions/disallowances. 13. It is contended, inter-alia, that the A&M expenses was incurred by the appellant company for its own business purposes and in order to promote the sale of the products manufactured by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inable and bad in law. 15. The Appellant also submits that the lower authorities have erred in rejecting the certificates and other evidence produced by the Appellant to substantiate the arm's length price of raw material purchased from the third party vendors on the footing that the third party vendors are deemed AEs of the Appellant. It is submitted that the transactions with the third party vendors are required to be benchmarked since they are considered as "deemed international transactions" under section 9213(2) of the Act as the price for such transactions is agreed by the AEs under the global pricing arrangement. However, by virtue of the provisions of section 926(2) of the Act, the third party vendors do not become AEs or deemed AEs of the Appellant under section 92A of the Act as neither the Appellant nor any of the group entities participate in the capital or management of the third party vendors from raw material has been purchased during the year. Therefore, it is submitted that the lower authorities erred in rejecting the evidence, furnished by the Appellant, on the basis that the third party vendors are deemed AEs of the Appellant. 16. It is further submitted that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to the competition faced from the rival companies, who reduced the price of the products to achieve higher market share which resulted in increase in the sales volume for the competitors of the Appellant however, the sales volume of the Appellant decreased for the year under consideration and, therefore, it was incorrect to compare the net operating margin of the Appellant with that of the comparable companies as the net operating margin of the Appellant was lower due to commercial reasons and, not on account of the raw material purchased from AE and third party vendors under the global sourcing agreement. 20. Since, the competition faced by the Appellant did not have any impact on the gross margin of the Appellant, the international transaction of purchase of raw material was benchmarked at the gross level applying cost plus method. The gross margin of the Appellant for the year was 57.54% which was more than the average margin of the comparable companies of 36.55% which clearly reflects that the price paid for purchase of raw material is at arm's length as the Appellant has earned huge margin of 57.54% by using the raw material in manufacturing of the product (Pg. 127 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts foreign AE. 25. Before us, ld. Sr. Counsel submitted that the TPO/DRP ought not to have recharacterized the A&M expenses by itself as international transaction. He further argued that the inference of benefit to its foreign AE is purely based on the surmises and conjectures 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign AE to incur any A&M expenses to the benefit of its foreign AE, the presumption of existence of international transaction is incorrect. An identical issue was considered by the Co-ordinate Bench of Tribunal in assessee's own case for immediately preceding A.Y. 2009-10 wherein the Co-ordinate Bench of the Tribunal after making reference to the decision of Hon'ble Delhi High Court in 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 placing reliance on the Co-ordinate Bench of Tribunal of Bangalore, ITAT in the case of Essilor India Pvt. Ltd. vs. DCIT (supra) held that in the absence of agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to the existence of international transaction on mere incurring excess expenses on the marketing and advertisement as compared to the expenditure incurred by the comparables. It was further held that in the absence of any machinery provisions to compute arm's length price provision, the provisions of Chapter X cannot be invoked and bright line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice by using CUP method. However, the TPO while using TNMM has benchmarked the transaction and determined the margins of comparables at 7.49% as against the margins of appellant at (-) 6.68% and thereby suggested TP adjustment of Rs.15,42,54,297/-. In the process, the TPO also rejected the contention of assessee company that the profitability of AE as well as the margins of external comparable companies for import from group companies should be considered. Even the certificates given by the vendors, which according to the TPO are deemed AEs were rejected as self-serving documents. Even DRP also confirmed the findings of TPO. Before us, the assessee filed additional evidence in the form of price list from the information obtained from the public domain for import of certain raw materials from the following third party vendors: Sr.No Name of the third party vendor Material purchase Amount (in Rs.) % to total imports Source of price level information Appellant's price Comparable price 1 Weyerhaeuser (Asia) Limited Fluff 3,33,95,465 32.63% Annual Report of third-party vendor i.e. Weyerhaeuser $0.78 $0.80 2 GP Cellulose Asia Marketing (HK) Limited 8,79,48,402 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he employee and employer relationship. The ld. Sr. Counsel reiterated the very same submission which are made before the Hon'ble DRP, that the payment is towards reimbursement of salary of employee and no independent services were rendered by the HUL to the appellant company. It is nature of reimbursement of the expenditure to the HUL and the HUL in turn had not made any profit and gain and thus it was submitted that the expenditure had not incurred towards provisions of receipt of any managerial services from HUL. Without prejudice to this argument, it is contended that since the expenditure is only a reimbursement in the hands of the HUL, no TDS is required to be made. Finally, he submitted that since the payee has already paid tax on said sum, the benefit of second proviso to section 40(a)(ia) of the Act should be granted. He relied upon the case laws cited (supra) in respect of the ground of appeal no.1. 36. On the other hand, the ld. CIT-DR submitted that the payment was made towards receipt of the managerial services and, therefore, this is liable to the TDS u/s 194J of the Act and justified the action of the Assessing Officer invoking the provisions of section 40(a)(ia) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) Intervet India Pvt. Ltd., 364 ITR 238. 40. On the other hand, ld. CIT-DR submitted that the selling discount was given to the group companies and the HUL was directly or indirectly responsible for the promotion of sales and, therefore, it is nothing but consideration paid towards rendering of services towards the sales attracting the provisions of section 194H of the Act. 41. We heard the rival submissions and perused the material on record. The expenditure in question was incurred towards the selling discount given to the distributor stockists. The relationship between the appellant and the distributor was that of the principal to principal. No services were rendered by the distributor to the appellant company and what was offered to the distributor was discount under the sales promotion schemes and, therefore, it cannot be said that the discount is in the nature of commission within the meaning of Explanation 1 to section 194H of the Act as held by the Hon'ble Jurisdictional High Court in the case of Intervet India Pvt. Ltd., 364 ITR 238 and CIT vs. Piramal Healthcare, 230 Taxman 505. For ready reference, the relevant para 8 of the decision of the Hon'ble Jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t made to Star India Pvt. Ltd. towards advertisement charges. The Assessing Officer disallowed the expenditure on the ground that no TDS was made on said payment. It was submitted before us that it was under bona-fide belief that no TDS was required to be made as in the earlier years, as the Star India Pvt. Ltd. had obtained 0% certificate under the provisions of section 197 of the Act authorising the appellant not to deduct any TDS in the earlier years. Without prejudice to the above, it is submitted that the Star India Pvt. Ltd. had offered the said money to tax in the return of income and, therefore, the benefit of proviso to section 40(a)(ia) of the Act be granted. 44. After hearing the rival submissions, we are of the considered opinion that merely because the appellant was under a bona-fide belief that TDS provisions was not applicable on the payments made to Star India Pvt. Ltd. cannot be a valid reason not to make any disallowance u/s 40(a)(ia) of the Act since there is no specific provisions not to make any disallowance under such circumstances. However, we find force in the alternative submission made on behalf of the appellant that the benefit of second proviso to sect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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