Income Tax Act, 1961 – Sections 40(a)(ia), 92CA(3) and 194J – Advertisement and marketing expenses – Transfer pricing adjustment – Appellant company is a joint venture between Hindustan Unilever Limited (HUL) and Kimberly Clark Corporation, engaged in business of manufacturing of Infant Care and Feminine Hygiene Care Products – Appellant filed its return of income for AY 2009-10 – Assessing Officer referred matter to Transfer Pricing Officer (TPO) for purpose of benchmarking international transactions reported by Appellant in Form No.3CEB – TPO proposed upward adjustment under Section 92CA(3) of the Act on account of Advertising & Marketing expenses and import of raw material – AO passed draft assessment order by making various additions/disallowances – Dispute Resolution Panel confirmed action of AO – Whether DRP has erred in confirming addition made by AO on account of Transfer Pricing adjustment proposed by TPO in respect of Advertisement and Marketing expenses incurred by Appellant – HELD – Main contention advanced by Appellant is that existence of international transaction cannot be inferred by TPO in absence of any actual transactions – There is no material referred to by lower authorities to show that assessee had incurred advertising and marketing expenses in order to promote brand value of foreign AE – In absence of agreement between Appellant and its foreign AE to incur advertising and marketing expenses to benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expenses on marketing and advertisement as compared to expenditure incurred by comparables – Presumption by lower authorities that benefit had endured to foreign AE is merely based on conjectures – Appeal partly allowed.

 

Issue 2: Import of raw materials – Determination of arm's length price – Whether AO/DRP have erred in making a transfer pricing adjustment with respect to international transaction of import of raw material – HELD – Appellant has imported raw materials from third party vendors under global sourcing arrangement across the world – It is settled position of law that comparison should be between tested party and controlled transaction – Controlled transaction has been defined to mean a transaction entered into between two associated enterprises – Lower authorities were justified in not giving any credence to certificates issued by deemed AEs – In light of additional evidence filed in form of price list obtained from third parties, matter remit back to file of AO/TPO with a direction to undertake exercise of benchmarking the transaction of import of raw material by taking cognizance of price list furnished by assessee and to restrict any TP adjustment only in respect of AE transactions.

 

Issue 3: Reimbursement of salary – Allowable deduction – Whether AO/DRP have erred in considering that reimbursement of actual salary cost of employees of HUL deputed to work under control and supervision of Appellant is in nature of managerial service warranting disallowance under Section 40(a)(ia) of the Act for non-deduction of tax at source under Section 194J of the Act – HELD – Payment was made by Appellant to HUL towards cost of reimbursement of salary of employees who are deputed to Appellant company – AO disallowed expenditure for non-deduction of tax at source by treating same as expenditure under provision of managerial service – There is no material on record to show that HUL had provided any services like technical or managerial in nature to Appellant – Mere reimbursement of salary of employees does not constitute provision of managerial services – When expenditure is a mere reimbursement of salary of employees deputed, question of deduction of tax at source does not arise, therefore, provisions of Section 194J of the Act have no application to subject payment – AO is not justified in invoking provisions of Section 40(a)(ia) of the Act while disallowing subject payment.

 

Issue 4: Disallowance of selling discount – Sustainability – Whether AO/DRP have erred in considering that selling discount extended by Appellant to HUL is in nature of commission payment to HUL for sale of Appellant's products in market warranting disallowance under Section 40(a)(ia) of the Act for non-deduction of tax at source under Section 194H of the Act – HELD – HUL is the distributor of products of Appellant and selling discount was given to HUL towards sale cost – HUL was not responsible for control and conduct of business of Appellant company and no services towards sales were rendered by HUL but merely acted as an independent distribution agent of products – Relationship between Appellant and distributor was that of principal to principal – No services were rendered by distributor to Appellant and what was offered to distributor was discount under sales promotion schemes, therefore, it cannot be said that discount is in nature of commission within meaning of Explanation 1 to Section 194H of the Act – Impugned expenditure does not fall within meaning of ‘commission’ thereby attracting provisions of Section 194H of the Act – AO is not justified in invoking provisions of Section 40(a)(ia) of the Act while disallowing selling discount.

 

Issue 5: Advertisement charges – Disallowance for non-deduction of tax at source – Whether DRP has erred in confirming disallowance of payment made to Star India Pvt. Ltd. towards advertisement charges – HELD – AO disallowed expenditure on ground that no TDS was made on said payment – Merely because Appellant was under a bona-fide belief that TDS provisions was not applicable on payments made to Star India Pvt. Ltd. cannot be a valid reason not to make any disallowance under Section 40(a)(ia) of the Act, since there is no specific provisions not to make any disallowance under such circumstances – There is force in alternative submission made on behalf of Appellant that benefit of second proviso to Section 40(a)(ia) of the Act should be examined by AO after due verification of evidence in support of same – In these circumstances, this ground of appeal is remitted back to file of AO for limited purpose of examining applicability of second proviso to Section 40(a)(ia) of the Act.

 

Issue 6: Payment of dividend distribution taxes – Non granting of credit – Whether AO has erred in not granting credit for dividend distribution taxes paid by Appellant – HELD – Perusal of assessment order make it clear that AO had not granted credit for dividend distribution taxes paid by Appellant without assigning any reason – In these circumstances, this ground of appeal is also remitted back to file of AO with a direction to grant a credit for dividend distribution taxes paid by Appellant after due verification.

 

2023-VIL-911-ITAT-PNE

 

IN THE INCOME TAX APPELLATE TRIBUNAL

“C” BENCH, PUNE

 

ITA No.576/PUN/2014

Assessment Year: 2009-10

 

Date of Hearing: 22.10.2021

Date of Pronouncement: 01.11.2021

 

KIMBERLY-CLARK LEVER PRIVATE LIMITED

 

Vs

 

DCIT, CIRCLE-11(1), PUNE

 

Assessee by: Shri Percy Pardiwalla

Revenue by: Smt. Divya Bajpai

 

BENCH

SHRI INTURI RAMA RAO, AM

SHRI PARTHA SARATHI CHAUDHURY, JM

 

ORDER

 

PER INTURI RAMA RAO, AM

 

This is an appeal filed by the assessee directed against the final assessment order u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (‘the Act’ for short) of The Deputy Commissioner of Income Tax, Circle-11(1), Pune (‘the Assessing Officer’ for short) dated 22.01.2014 for the assessment year 2009-10.

 

2. The appellant raised the following grounds of appeal :-

 

Transfer Pricing matters

 

1. On the facts and in the circumstances of the case and in law, the learned AO/DRP have erred in confirming the upward adjustment of Rs. 21,17,81,020 to the income of the Appellant, in respect of advertisement and marketing ('A&M') expenses incurred by the Appellant. While doing so, the learned AO/ DRP have primarily erred in:

 

1.1Concluding that the A&M expenses incurred by the appellant are excessive, on the basis 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 market research expenses, product packaging design as a part of A&M expenses for benchmarking purposes.

 

1.6Not holding the fact that if at all A&M expenses have benefitted Associated Enterprise in strengthening the brand, the compensation to be received has to be restricted to quantum of royalty generated from the usage of such brand in India.

 

1.7Not treating the difference between royalty paid by the Appellant and arm’s length price of royalty as compensation to the A&M expenses.

 

2. On the facts and in the circumstances of the case and in law, the learned AO/DRP have erred in making a transfer pricing adjustment (on a without prejudice basis) of Rs. 15,42,54,297 with respect to the international transaction of import of raw material. While doing so, the learned AO/ DRP have primarily erred in:

 

2.1. Rejecting the benchmarking analyses submitted during the assessment proceedings in connection with the import of raw material from Associated Enterprises while selecting the most appropriate method/tested party for determining the arm’s length nature of this transaction.

 

2.2. Rejecting the pricing related details including certificates from third party vendors submitted during the assessment proceeding, in connection with the import of raw material from third party vendors (deemed international transactions) while selecting the most appropriate method/tested party for determining the arm’s length nature of this transaction.

 

2.3 Computing the transfer pricing adjustment to the total cost instead of computing the transfer pricing adjustment on import cost of raw material purchased from Associated Enterprises only.

 

2.4. Not excluding certain expenses disallowed during the assessment proceedings of AY 2009- 2010 while computing the operating margin of the Appellant for AY 2009-10 for application of Transactional Net Margin Method.

 

Corporate tax matters

 

On the facts and in the circumstances of the case and in law, the learned AO and Hon’ble DRP have:

 

Incorrect disallowance under section 40(a)(ia) of the Act of Rs. 8,37,15,151 to taxable income of the Appellant in respect of reimbursement of additional discount extended to Hindustan Unilever Limited ('HUL') as trade sends

 

3. erred in considering that the reimbursement of additional trade discount extended by the Appellant to HUL in order to promote sale of its products 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.

 

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 is an industry practice is in the nature of commission payment to HUL for sale of the Appellant's products in the market warranting a disallowance under Section 40(a)(ia) of the Act for non-withholding of tax at source under Section 194H/194J of the Act.

 

7. erred in not considering the credit notes issued by the Appellant which clearly substantiates that the discount extended to HUL is on a principal to principal basis on the total sales made to HUL

 

Non granting of relief on basis of submission of a Chartered Accountant’s certificate in Form 26A as per the Rule 31CAB of the Income Tax Rules, 1962 (‘Rules’)

 

8. erred in not considering the CA certificate in Form 26A submitted with the Hon’ble DRP confirming that the payments made to HUL in respect of additional discounts, reimbursement of salary cost and trade discounts has been included by HUL in the total income offered to income tax for AY 2009- 10 and hence the addition under section 40(a)(ia) of the Act on the Appellant is not warranted.

 

Non-consideration of the Hon'ble DRP's directions for granting relief in respect of provision for expenses

 

9. erred in not verifying whether the provision for expenses viz., IT support of Rs 48,08,167 and freight and handling charges of Rs.16,27,824 have been made on a scientific basis or on the basis of the previous years' trends

 

Incorrect disallowance of Rs 3,21,20,238 to taxable income of the Appellant in respect of payment made to Star India Private Limited

 

10. erred in concluding that the expenditure incurred by the Appellant is not for the purpose of the business of the Appellant.

 

Non-grant of credit for dividend distribution tax

 

11. erred in not granting credit for dividend distribution taxes paid by the Appellant.

 

Levy of interest under section 234B and section 234C of the Act

 

12. on the facts and in the circumstances of the case and in law, the learned AO based on directions of the Hon'ble DRP has erred in levying interest under section234B and section 234C of the Act.

 

Initiation of penalty proceedings under section 271(1)(c) of the Act

 

13. On the facts and in the circumstances of the case and in law, the learned AO based on directions of the Hon'ble DRP has erred in initiating penalty proceedings under section 271(1)(c) of the Act.

 

3. Briefly, the facts of the case are that the appellant company is incorporated 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): -

 

 

4. The appellant company also submitted TP study report wherein it sought to benchmark the above international transactions. The appellant applied Transactional Net Margin Method (TNMM) which was considered as most appropriate method for the purpose of benchmarking the international transactions of finished goods with its foreign AE i.e. Kimberly Clark Asia Pacific Pte Limited. As regards to the payment of royalty and license fee, the appellant company applied Comparable Uncontrolled Price (CUP) method as the most appropriate method for the purpose of benchmarking the international transactions with its foreign AE i.e. Kimberly Clark Corporation USA. It was further claimed that the appellant company’s operating profit margin was comparable with other companies which are engaged in the similar line of business.

 

5. Considering the above, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for the purpose of benchmarking the above international transactions reported by the appellant company in Form No.3CEB. The TPO vide order dated 23.01.2013 passed u/s 92CA(3) of the Act suggested the TP adjustments on account of Advertising & Marketing (A&M) expenses of Rs.21,17,81,620/-. While doing so, the TPO observed that the expenditure incurred on account of advertisement spend of Rs.31,83,31,859/- which works out to 19.99% of the sales. According to the TPO, the mean ratio of the routine advertisement expense of the comparables is only 6.69% of the sales. Accordingly, the TPO adopted the difference between both i.e. 19.99% minus 6.69% = 13.30% of the turnover to benchmark the international transactions on account of A&M expenses with its foreign AE. The TPO computed the A&M expenses in his order, the same reads as under: -

 

 

6. Accordingly, the TPO proposed upward adjustment of Rs.21,17,81,020/- u/s 92CA(3) of the Act on account of A&M expenses. As regards to transaction of import of Raw material.

 

7. The Appellant is a manufacturer of diapers and sanitary napkins. For qualitative supply of raw material at a lower price, the AE of the Appellant has entered into agreements with third party 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:

 

 

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 authorities, the Appellant submitted additional evidence to justify the arm’s length price of the raw material purchased from the AEs and third parties which 5 deemed as an international transaction under section 926(2) of the Act.

 

9. The Appellant submitted the following additional evidence before the lower authorities to justify the arm’s length price of the raw material purchased during the year.

 

For third party vendors:

 

a. Invoices raised by the third party vendors on the Appellant and its AEs charging the same price.

 

b. Certificates from third parties confirming the discount given by them for supply of raw material.

 

c. Sourcing strategies prepared by the procurement team which substantiates the fact that these are independent third parties and Kimberly Group was not in a position to influence these vendors.

 

d. Certificate from KCC certifying that it has not derived any direct or indirect commercial benefits from the third party vendors in connection with the global sourcing arrangement.

 

e. Sales and purchase agreement of third party vendor i.e. Toyota Tsusho Corporation.

 

For the Associated Enterprises:

 

f. Confirmation from the AEs certifying the mark-up charged by them on supply of raw material.

 

g. Certificate issued by Auditor certifying the mark-up charged by the AEs to the Appellant on supply of raw material.

 

h. Benchmarking considering the AEs as a tested party taking foreign companies as a comparable;.

 

10. However, the Ld. TPO and DRP has rejected the benchmarking analysis submitted during the assessment proceedings and also rejected the pricing related details including certificates received from third party vendors and AEs by citing following reasons:

 

- That the certificates issued the third party vendors cannot be considered as they are deemed AEs of the Appellant and therefore serve no purpose.

 

- The Appellant has not provided the details i.e. Annual reports, RPT calculation and calculation of the margins of the foreign comparables.

 

- Up to last year the Transaction Net Margin Method (“TNMM”) was used to benchmark the transaction however, the method is changed in this year without there being any reason for the same.

 

11. Pursuant to the TPO’s order, a draft assessment order dated 14.03.2013 was passed by the Assessing Officer wherein the following disallowances were proposed by the Assessing Officer :-

 

(a) Disallowance 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 the appellant company, no benefit had approved on account of incurring such expenditure to its foreign AE. No inference as to existence of international transactions can be drawn without any actual transaction. Further, it is contended that in the absence of any prescribed method to compute the arm’s length price of the alleged transactions, no adjustment is permissible.

 

14. As regards to the addition of transfer pricing adjustment in respect of transaction of import of raw material of Rs.15,42,54,297/-, the objection raised before the DRP is that the TPO was not justified in using TNMM as most appropriate method for the purpose of benchmarking the transaction of import of raw materials as against CUP method used by the assessee. It was further submitted that for the purpose of determining the arm's length price of cost of import of raw materials the transactional level analysis submitted by the assessee should be considered as well as the profitability of AE’s and the appellant also filed additional evidence in the form of certificates from the deemed AE’s in an attempt to demonstrate the cost of raw materials imported is at arm's length price. It is submitted that the Appellant submits that the global sourcing arrangement with the third party has resulted in the Appellant purchasing the raw materials at a lower price. If the Company were to independently purchase the raw materials from the third party vendors, it would have incurred a higher cost. Under the global souring agreement, the third party vendors have supplied raw material to all the group entities at the same price (Pg. 489 to 498 of the paper book) and, due to the collective buying by all the group entities the cost of the raw material has reduced. In this regard, the Appellant relies on the certificates issued by the third party vendors wherein they have confirmed that discount of i0%-20% has been given to the Appellant on the raw material supplied during the year. The certificates also confirm that the price that they have charged to the Appellant is lower than the price it would have charged if the Appellant had not purchased the raw material under the global sourcing arrangement (Pg. 411 to 418 of the paper book). Therefore, it is submitted that the raw material has been purchased from third party vendors at arm’s length price and the adjustment made by lower authorities is unsustainable 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 it believes that the aforementioned pricing details should be considered sufficient documentary evidence to demonstrate the appropriateness of the pricing of the international transaction of import of raw materials from third party vendors, however, the Appellant further attended to substantiate the arms’ length price of the raw materials purchased from third party vendors with the help of Industry report and Annual report of supplier available in the public domain (refer page no. 840 to 1103 of the additional evidence paper book). The summary of the same is given below for ease of reference:

 

 

17. Thus, it is demonstrated that the average price charged to the Appellant by third party vendors was lower than the average price at which raw material is available in the open market. Thus, the Appellant submits that the transfer pricing adjustment made by the lower authorities of Rs. Rs. 15,42,54,297 is unsustainable and bad in law.

 

18. Insofar as the raw material purchased from the AEs is concerned, the appellant submits that the lower authorities failed to appreciate that the mark up of 9% charged by Yuhan Kimberly Ltd. and Kimberly Global sales LLC (Pg. 584 to 586 of the paper book) is lower than the margin earned by the foreign companies carrying out the similar activities. As per the fresh benchmarking submitted during the course of the proceeding the arm’s length margin comes to 10.62% and 10.18% respectively (Pg. 587to 599 of the paper book). Despite the fresh benchmarking submitted by the Appellant justifying the price charged by the AE for supply of raw material, the lower authorities made the adjustment without considering the evidence submitted by the Appellant.

 

19. The Appellant also submits that the rejection of gross margin under the cost plus method used by the Appellant in the transfer pricing report is also incorrect. The lower authorities failed to appreciate that the net operating margin of the Appellant during the year was under severe pressure 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 the paper book). Therefore, the lower authorities erred in rejecting the gross margin under the cost plus method used for the purpose of benchmarking the international transaction.

 

21. Similarly, as regards to the disallowance of management cost of Rs.1,78,19,577/-, it was submitted that the expenditure represents the reimbursement of management cost to the HUL towards the deputation of the Senior Managers to the appellant company. The salary and other benefits of these employees deputed to the appellant company were paid by the HUL and the same were reimbursed by the appellant company. Since it is only in the nature of the reimbursement of expenditure, the payment does not attract the provisions of section 194J of the Act.

 

22. As regards to the disallowance of selling discount of Rs.4,51,43,992/-, it is submitted that HUL is a distributor of the products of the appellant company and the discount was given to the HUL. It is further submitted that no remuneration was given to any HUL for rendering of any services and, therefore, the same does not partake of character of the commission/payment thereby attracting the provisions of section 194H of the Act. The appellant company also filed additional evidences showing that payments are in the nature of reimbursement of cost of advertisement and marketing expenses, management cost and selling discount. On due consideration of the said additional evidences as well as the submissions of the appellant company, the Hon’ble DRP had confirmed the findings of the Assessing Officer without assigning any independent reasoning.

 

23. Being aggrieved with the above actions of the Hon’ble DRP/TPO/Assessing Officer, the appellant is before us in the present appeal.

 

24. The GROUND OF APPEAL NO.1 challenges the addition of Rs.21,17,81,020/-on account of Transfer Pricing adjustment in respect of Advertisement and Marketing expenses incurred by the appellant. The TPO as well as the Hon’ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A&M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A&M expenses incurred by the AE. In the process, the TPO as well as the Hon’ble DRP presumed that the benefit of this expenditure had endured to its 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 provisions of Chapter X had held that in the absence of any explicit arrangement between the assessee and its foreign AE it cannot be said that the benefit of the expenditure incurred on A&M expenses would also enure to the foreign AE, so as to, infer the existence of an international transaction. The Hon’ble High Court further held that a Transfer Pricing adjustment cannot be made by deducing the difference between the excess A&M expenses incurred by the assessee and the A&M expenses incurred by comparable entities chosen by the TPO. Finally, the Hon’ble High Court referring to the judgement of the Hon’ble Apex Court in the case of CIT vs. B. C. Srinivasa Setty, 128 ITR 294 and PNB Finance Ltd. vs. CIT, 307 ITR 75 held that in the absence of any machinery provisions to compute the arm’s length price of transactions the provisions of Chapter X cannot be invoked for the purpose of making the TP adjustments.

 

26. On the other hand, the ld. CIT-DR submitted that the issue of computation of TP adjustments should be remanded back to the file of the Assessing Officer/TPO in the light of the decision of the Hon’ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra).

 

27. In the rejoinder, the ld. Sr. Counsel vehemently opposed the remand to the Assessing Officer/TPO placing reliance on the decision of Hon’ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra).

 

28. We heard the rival submissions and perused the material on record. By this ground of appeal no.1, the appellant challenges the TP adjustments made by the TPO/Assessing Officer as confirmed by the Hon’ble DRP on account of A&M expenses. The TPO inferred the existence of international transactions by deducing the difference between the expenditure incurred by the appellant company on account of A&M expenses and expenditure incurred by the comparables chosen by the TPO. The lower authorities had inferred that the benefit had enured its foreign AE on account of excesses expenditure incurred by the assessee on account of A&M. The main contention advanced by the appellant is that the existence of international transaction cannot be inferred by the TPO in the absence of any actual transactions and the presumption by the lower authorities that the benefit had enured to its foreign AE is merely based on the conjectures. In the absence of any agreement between the assessee and its foreign 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 test cannot be used either to determine the existing international transaction or its arm's length price and the relevant observations of the Tribunal are as under:

 

“35. The Revenue had failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE and apparently there is no material referred to by the lower authorities to show that the assessee had incurred the expenditure in advertising and marketing expenses in order to promote the brand value of the foreign AE. The reference made in clause 15 of the agreement is misplaced as rightly submitted by the ld. Sr. Counsel, the incurring of expenditure on advertising is only with regard to the protection of patent and trade mark of the AE and not to promote brand value of foreign AE. In the absence of existence of international transaction, the question of determination of arm’s length price of the transactions does arise. Accordingly, this ground stands allowed.

 

36. As regards to the submissions of the ld. CIT-DR that the matter be remanded to the TPO for the purpose of undertaking fresh exercise of determining the ALP cannot be acceded to for the reason that the Revenue had failed to discharge its onus proving the existence of international transactions involving A&M expenses and no purpose would be served by the remand and the reliance in this regard can be made on the decision of the Hon’ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra).”

 

29. We do not find any reason as to why the decision of the Co-ordinate Bench in assessee’s own case for preceding year cannot be applied to the present year as the identical facts are involved in the present year also. Accordingly, we do not find any merit in this ground of appeal. Hence, ground of appeal No.1 filed by the Revenue is devoid of merit and stands dismissed.

 

30. The issue in GROUND OF APPEAL NO.2 pertains to the determination of arm's length price with regard to the transaction of import of raw materials.

 

31. During the financial year 2011-12 relevant to the assessment under consideration, the respondent assessee has imported raw materials costing Rs.37,18,66,093/- from the third party vendors under global sourcing arrangement across the world. The assessee sought to justify the transaction of import of raw materials is at arm's length price 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:

 

 

32. It is further submitted that if at all the transfer pricing adjustment is suggested, it can only be restricted in respect of international transactions and it is also further submitted that merely because the certificates were issued by deemed AEs u/s 92A, the certificates cannot be ipso facto rejected.

 

33. On the other hand, the ld. CIT-DR placed reliance on the orders of authorities below.

 

34. We have heard the rival submissions and perused the relevant material on record. It is settled position of law that comparison should be between the tested party and the controlled transaction. A controlled transaction has been defined to mean that a transaction entered into between two associated enterprises and therefore, we are of the considered opinion that the lower authorities were justified in not giving any credence to the certificates issued by deemed AEs. However, in the light of additional evidence filed before us in the form of price list obtained from the third parties, we remit the matter back to the file of AO / TPO with a direction to undertake the exercise of benchmarking the transaction of import of raw material taking cognizance of price list furnished by the assessee from the third party vendors and to restrict any TP adjustment only in respect of AE transactions, in view of the following decision of Jurisdictional High Court in the case of (i) CIT vs. Hindustan Unilever Ltd., 72 taxmann.com 325 (Bombay) and (ii) CIT vs. Ratilal Becharlal & Sons, 65 taxmann.com 155 (Bombay). Thus, this ground of appeal stands partly allowed.

 

35. The GROUND OF APPEAL NO.5 challenges the addition on account of management cost of Rs.1,78,19,577/-. This payment of Rs.1,78,19,577/- was made to HUL towards the cost of reimbursement of salary of the employees who are deputed to the appellant company. The Assessing Officer disallowed the expenditure for non-deduction of tax at source treating the same as expenditure under the provision of managerial services. It is undisputed fact that the Assessing Officer also recorded a finding that no adequate evidence in support of its case by the assessee to prove that the 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 the Act.

 

37. We heard the rival submissions and perused the material on record. There is no material on record to show that the HUL had provided any services like technical or managerial in nature to the appellant company. Mere reimbursement of salary of employees does not constitute provision of managerial services. When the expenditure is a mere reimbursement of salary of employees deputed, the question of deduction of tax at source does not arise in the light of the decisions of Jurisdictional High Court in the case of (i) CIT vs. Siemens Aktiongesellschaft, 310 ITR 320; (ii) CIT vs. Industrial Engineering Projects (P.) Ltd., 202 ITR 1014; and, (iii) CIT vs. Dunlop Rubber Co. Ltd., 142 ITR 493. Therefore, we are of the considered opinion that the provisions of section 194J of the Act have no application to the subject payment. Accordingly, the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the sum of Rs.1,54,77,351/- on account of management cost.

 

38. Since we held in earlier paragraphs of this order that the provisions of section 194J have no application to the subject payment, it is not necessary for us to deal with contention, regarding benefit of second proviso section 40(a)(ia) of the Act. Thus, the ground of appeal no.2 stands allowed in favour of the assessee.

 

39. The GROUNDS OF APPEAL NO.3, 4, 6 and 7 challenge the disallowance on account of selling discount of Rs.8,37,15,151/- and Rs.1,78,19,577/- given to HUL. It is submitted that the HUL is the distributor of products of the appellant company and selling discount was given to the HUL towards the sale cost. It is submitted that the HUL was not responsible for the control and conduct of the business of the appellant company and no services towards sales were rendered by the HUL but merely acted as an independent distribution agent of products. Therefore, the discount offer does not fall within the definition of commission and the question of attracting the provisions of section 194H of the Act does not arise. He placed reliance on the following decisions :-

 

(i) Pearl Bottling (P) Ltd., (ITA No.271/Vizag/2010) (Vish. ITAT);

 

(ii) Jai Drinks Pvt. Ltd., (ITA No.399/2010) (Delhi HC);

 

(iii) Piramal vs. DCIT, 53 SOT 253 (Mum ITAT) (approved in CIT vs. Piramal Healthcare, 230 Taxman 505 by Hon’ble Bombay High Court);

 

(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 Jurisdictional High Court in the case of Piramal Healthcare (supra) is extracted hereunder :-

 

“8. The submission on behalf of the Revenue that this a mere device to evade the obligation to deduct tax at source is a mere conjecture as it is not supported by any evidence and/or facts on record. Once it is accepted/admitted position that there is sale of drugs by the respondent to M/s.Zivon and no amount is paid by the respondent to M/s.Zivon, there can be no occasion to apply Section 194J of the Act. There has admittedly been no credit of any sum to the account of M/s.Zivon in its books of accounts nor any payment made by the respondent either in cash or cheque or draft or any other mode. Where the sales of any goods are covered under the M.R.P. system, the M.R.P. is fixed and the seller is entitled to sell the goods to a stockist at a price lesser that the M.R.P. as mutually agreed between the parties. In such a case, what should be the sale price or what should be the margin available to the stockist is entirely at the discretion of the parties. In the present case, the assessee has received the sale price at the rate fixed under the agreement. In such a case, where the assessee has received the amount of sale price, the question of the assessee deducting tax at source under Section 194-J of the Act does not arise, because the assessee is not making any payment to the stockist. Therefore, whatever be the margin made available to the stockist, so long as the assessee is not making any payment to the stockist, the question of invoking Section 194-J against the assessee does not arise. Hence, we see no reason to entertain question (b) raised by the Revenue.”

 

42. In the light of the above decisions, we are of the considered opinion that the impugned expenditure does not fall within the meaning of commission thereby attracting the provisions of section 194H of the Act. Therefore, we are of the considered opinion that the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the selling discount of Rs.8,37,15,151/-. In the immediate preceding assessment year, similar addition was deleted by this Tribunal and on the parity of same reasoning, the grounds of appeal no.3, 4, 6 and 7 stands allowed in favour of the assessee.

 

43. The GROUND OF APPEAL NO.10 challenges the disallowance of Rs.3,21,20,238/- being the payment 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 section 40(a)(ia) of the Act be examined by the Assessing Officer after due verification of the evidence in support of the same. In the circumstances, we remit this ground of appeal back to the file of the Assessing Officer for limited purpose of examining the applicability of second proviso to section 40(a)(ia) of the Act. Thus, the ground of appeal no.10 stands partly allowed for statistical purposes.

 

45. The GROUND OF APPEAL NO.11 challenges the action of the Assessing Officer for not giving credit for dividend distribution taxes paid by the appellant. On perusal of the assessment order, we find that the Assessing Officer had not granted credit for dividend distribution taxes paid by the appellant without assigning any reason. In these circumstances, this ground of appeal is also remitted back to the file of the Assessing Officer with a direction to grant a credit for dividend distribution taxes paid by the appellant after due verification.

 

46. The other grounds of appeal are consequential in nature, therefore, the same are dismissed as not pressed.

 

47. In the result, the appeal of the assessee is partly allowed for statistical purposes.

 

Order pronounced in open Court on this 01^st day of November, 2021.

 

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