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Facts
The assessee, Carlsberg India Private Limited, filed its return declaring a loss. The TPO made an adjustment of Rs.32.32 Crs. on account of AMP expenses, and the AO made an addition of Rs.43.05 Cr. The assessee filed an appeal before the CIT(A), which was partly allowed. Both the assessee and the revenue are in appeal before the tribunal.
Held
The tribunal held that no disallowance u/s 36(1)(iii) can be made as the assessee had sufficient own funds. Regarding Section 14A, the tribunal directed the AO to verify if there was any exempt income and not to make any disallowance if there was none. For AMP expenses, the tribunal directed the AO to re-compute the adjustment following the APA methodology.
Key Issues
Whether disallowance under Section 36(1)(iii) is warranted when the assessee has sufficient own funds; applicability of Section 14A when no exempt income is earned; and the correct method for computing AMP expenses.
Sections Cited
36(1)(iii), 14A, Rule 8D
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Income Tax Appellate Tribunal, DELHI BENCH ‘H’: NEW DELHI
Before: SHRI PRAKASH CHAND YADAV & SHRI MANISH AGARWAL
PER PRAKASH CHAND YADAV, JM: These cross appeals filed by the assessee and Revenue are arising out from the order of Ld. Commissioner of Income Tax (Appeals)-42, New Delhi dated 22nd January, 2019 in Appeal No.100/2015-16/CIT(A)-42 relates to Assessment Year 2010-11.
& 3190 /Del/2019 Carlsberg India Pvt. Ltd. vs. DCIT 2. Brief facts of the case as coming out from the orders of authorities below are that the assessee is a company incorporated in India on 3rd Mary, 2006. Initially the name of the company was “M/s South Asia Breweries Private Limited”. Thereafter, the name of the company has been changed to “Carlsberg India Private Limited” w.e.f. 23rd February, 2009. The assessee company is engaged in the business of manufacturing and sale of alcoholic beer with manufacturing facility at Paonta Sahib, Alwar, Aurangabad, and Kolkata for the impugned assessment year. The assessee has filed his return of income on 30th September, 2010 declaring loss of Rs.1,072,882,035/-. The return of income filed by the assessee was processed u/s 143(1) of the Income Tax Act, and, thereafter, selected for scrutiny. Since, international transactions were involved in this case. The matter was referred to the TPO for computing Arm’s Length Price (ALP) of the transactions entered by the appellant. The TPO vide its order dated 10th July, 2014 passed the transfer pricing order after making adjustment of Rs.32.32 Crs. on account of AMP expenses incurred by the assessee. Thereafter, the Assessing Officer passed the draft assessment order making an addition of Rs.43.05 Cr. and, thereafter, the Assessing Officer passed the final assessment order and assessed the loss of the company to the tune of 64,23,45,205/-.
Aggrieved with the order of Ld. AO, the assessee filed appeal before the Ld. CIT(A) and assailed the order of Ld. CIT(A) vide its order dated 22nd January, 2019, after referring to the observations made by APA authorities partly allowed the appeal of the assessee.
Against the order, the Ld. CIT(A), both assessee as well as Revenue are in appeal before us. The assessee has raised three grounds of appeal subdivided into sub-grounds.
5. Ground No.1 is related to the disallowance of Rs.33,75,000/- u/s 36(1)(iii) of the Act.
6. Ground No.2 is related to the disallowance u/s 14A r.w. Rule 8D.
7. Ground No.3 is related to the brand marketing expenses, which the assessee has not proved.
Ground No.3 is dismissed as not pressed.
So far as Ground No.1 is concern, main contention of the assessee counsel is that the assessee has advanced fund to its subsidiary on account of commercial expediency. It is the submissions of the counsel for the assessee that in Assessment Year 2008-09, the assessee has charged annual interest on 11.5% from its subsidiary and in Assessment Year 2009-10, the assessee has charged interest of 12% from its subsidiary. Ld. Counsel for the assessee pointed out that for the impugned assessment year, the AO has applied the rate of 15% on outstanding loan of Rs.2.25 lac and made addition of Rs.33,75,000/- ignoring the submissions of the assessee that the loans were advanced on account of commercial expediency. The next submissions of the Counsel are that the own funds of the assessee are much higher than the amount advanced by the assessee to its subsidiary and hence, it is settled positon of law that the no proportionate disallowance u/s 36(1)(iii) can be made.
Ld. DR relied upon the orders of authorities below and relied upon the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. [2006] (286 ITR 1) (P&H).
In rejoinder, the Ld. Counsel for the assessee pointed out that the judgment of Abhishek Industries (supra) has been overruled by Hon’ble Supreme Court in the case of MunjalSales Corporation vs. CIT [2008] (168 taxman.com 43).
& 3190 /Del/2019 Carlsberg India Pvt. Ltd. vs. DCIT :-Finding of the Bench:- 12. We have heard the rival submissions and perused the materials available on record. Perusal of the synopsis filed by the Ld. Counsel would show that the assessee has received share application money in Assessment Year 2009-10 to the tune of Rs.98,54,11,936/- besides this the assessee was also having reserves and surplus. We further note that the outstanding loan (which were given by assessee in previous years) with the subsidiary was to the tune of Rs.2.25 crore only. This factual aspect has not been disturbed by the Ld DR. Therefore, it is a case where the assessee was having own sufficient funds, more than the sum advanced by the assessee to its subsidiary. Further no material has been brought on record by the AO to show that the loans were not advanced on account of commercial expediency. Therefore, we are of the view that no disallowance u/s 36(1)(iii) can be made in this case. Further our view is fortified by the judgment of Hon’ble Supreme Court in the case of CIT vs. Reliance Industries reported I [2019] 102 taxman.com 52 wherein the Hon’ble Supreme Court has held that where the assessee is having sufficient interest free funds then it can be presumed that investments were made from interest free funds available with the assessee. So far as the reliance on the order of Abhishek Industires (supra), we observe that Hon’ble Apex Court in the case of Munjal Sales (supra) has already reversed this judgment, and hence the contention of the Ld. DR is of no use.
Coming to the next issue of disallowance of 14A, at the outset, Ld. Counsel for the assessee pointed out that the assessee was not having any exempt income during the year under consideration and, hence, no disallowance can be made by invoking the provisions of section 14A r.w. Rule 8D.
Ld. DR relied upon the orders of Ld. AO and CIT(A).
After considering the rival submissions, we observe that the issue whether 14A provisions can be invoked in a case where there is no exempt & 3190 /Del/2019 Carlsberg India Pvt. Ltd. vs. DCIT income has already been discussed in detailed by the jurisdictional High Court in the case of Cheminvest Limited vs. CIT [2015] 61 taxmann.com 118 (High Court of Delhi. Further Hon’ble Supreme Court in the case of PCIT vs. GVK Project and Technical Services Ltd. [2019] 106 taxmann.com 181 (SC) has held that 14A provisions cannot beapplied in those case where there is no exempt income. Therefore, we direct the AO to decide this issue after verifying this fact as to whether there is any exempt income earned by the assessee in this year. We direct the AO not to make any disallowance u/s 14A in case the assessee is not having any exempt income. With these observations, this ground of appeal
is allowed.
16. Now coming to the appeal of the Revenue, the solitary issue involved in this appeal is the deletion of addition made by the AO on account of AMP expenses incurred by the assessee. In this regard, the Ld. DR relied upon the order of authorities below and Ld. Counsel for the assessee reiterated the submissions made before the lower authorities.
17. Ld. Counsel for the assessee further pointed out that the CIT(A) has not approved the method of Bright Line Test as adopted by TPO for computing the adjustments qua AMP expenses. It has further been submitted that the Ld. CIT(A) has relied upon the orders of Hon’ble Delhi High Court in the case of SoniEricssion Mobile Communication India (P) Ltd. vs. vs. CIT reported in [2015] 374 ITR 118 (Del-HC). Lastly it is pointed out that the Ld. CIT(A) has further observed that the assessee has entered into Advance Pricing Agreement with CBDT and carried out a role back of four years from Assessment Year 2011-12 to 2014-15. After applying a rate of 3.5% of the gross sales and 4.5% of the gross sales where the gross sales do not increase 500 Crore rupees. The Ld. CIT(A) has applied the similar rate of interest vis-à-visAMP expenses pertaining to the impugned year. The observations of the Ld. CIT(A) are reproduced hereunder for the sake of convenience:
& 3190 /Del/2019 Carlsberg India Pvt. Ltd. vs. DCIT “9.33 The appellant submitted vide reply dated 18.09.2017 that if the method, as agreed in the APA for determination of arm's length price of the AMP expenditure incurred by the Appellant, is applied to the subject years under appeal, the results shall be as under: Years Value of adjustment made by AMP expenditure Reduction in TPO on account of AMP issue disallowed if APA adjustment (A) approach is followed if APA (B) approach is followed (C=A-B) AY 2009- 211,686,242 64,142,018 147,544,224 10 AY 2010- 323,268,801 103,164,622 220,104,179 11 9.34 Further, the Appellant contended vide reply dated 18.09.2017 that the methodology for determination of arm's length price of AMP expenditure incurred by the Appellant, as agreed in the APA should be followed/ applied in the years under appeal. It was submitted that the approach of applying the APA methodology over non APA years (when facts and transactions are similar) has been upheld by various Tribunals including the jurisdictional Delhi Tribunal. Ranbaxy Laboratories Ltd v ACIT Range -15 New Delhi [ITA No. 196/Del/2013), 3i India Pvt. Ltd. v DCIT, Circle-8(3)(1), Mumbai [ITA No.581/Mum/2015] Warburg Pincus India Pvt. Ltd v Asstt. Commissioner of Income Tax Circle-3(3), Mumbai [ITA no. 6981/Mum./2012) Tieto IT Services India Private Limited v Dy. Commissioner of Income Tax, Circle - 7, Pune [ITA No.1398/PUN/2015] AXA Technologies Shared Services Pvt. Ltd. v Dy. Commissioner of Income Tax, Circle 11(1), Bangalore [I.T. (T.P)A. No.659/Bang/2012] 9.35 I find that the courts while deciding the above issue of applying APA methodology even for non-APA years, took note of the fact that there has been no change in the FAR analysis of assessee and the AEs in this assessment year vis-à-vis the year approved in the APA, therefore, the same shall have persuasive value. Further, it is also observed that CBDT has principally approved the concept of overseas AES adopted as the tested party in the Appellant's own case, the same treatment shall be given to the International transactions, which are also same in this year. 9.36 I find that in the present case, the agreement clearly provides a direction by the AE to appellant company to spend the higher of USD 500,000- such amount to be indexed in accordance with the procedure stipulated below and five (5) per cent of the net ex Brewery sale turnover. The appellant company has incurred AMP to the tune of Rs.31,33,68,052/ out of which AMP expenditure to the tune of Rs. 9,68,82,166/- (5% of sales Rs. 1,93,76,43,332/-) is driven by the agreement with the ΑΕ. 9.37 Since the agreement is the basis to arrive at the satisfaction that there is an arrangement between international AE and the appellant company, therefore, it is important that such quantum of directed AMP must be compensated. Keeping the above discussion in view, I find that the by extending the APA methodology even for the year under consideration, the AMP adjustment does completely cover the AMP expenditure thrust upon on the appellant company through agreement. In other words, the adjustment applied as per APA methodology would compensate the appellant company to the specific scale of expenditure as embedded in the agreement. As per the appellant, the arm length determination as per APA methodology provides for AMP adjustment after applying mark & 3190 /Del/2019 Carlsberg India Pvt. Ltd. vs. DCIT up of 15% which is over and above the minimum AMP expenditure of Rs. 9,68,82,166/- for the subject year. The AO/TPO is directed to re-compute the AMP adjustment (with a mark up of 15%) after following the APA methodology. It is reiterated that the Hon'ble tribunals have endorsed the approach of extending APA methodology even for non APA years particularly where there are no change of facts of the case over the years (refer para 10.34). The AO has not brought out any specific facts in this case which are different from the APA roll over years. Therefore, the above decision is in line with the position as decided by Hon'ble Tribunals as discussed above. 9.38 In view of the above discussion, the ground of appeal is partly allowed.”
18. Perusal of the above findings of the Ld. CIT(A) would show that the CIT(A) has followed the observations of APA authority and then adopted a mid-way path. It is not a case where no addition has been sustained by the CIT(A) qua AMP expenses rather a case where the disallowance has been restricted to such figure which is arrived after applying the methodology propounded by APA authorities In this back drop we do not find any infirmity in the approach of the Ld. CIT(A) and, hence, this ground of the Revenue’s appeal is decided against the Revenue.
19. In Ground No.3, the Revenue has challenged the deletion of addition of an amount of Rs.13,35,868/- made by the AO, alleging that the assessee has paid excess remuneration to the Directors of the company.
Ld. Counsel for the assessee at the outset pointed out that the remuneration has been paid in terms of the approval granted by the Central Govt. and hence, cannot be alleged to have been in excess.
Ld. DR appearing on behalf of the Revenue contended that the approval of Central Govt. was not there at the initial stage of the assessment year.
We have heard the rival submissions and perused the materials available on record. We observe that in this case, the Directors have been remunerated on the basis of approval granted by the Government of India, Ministry of Corporate Affairs vide its letter dated 16th March, 2010, this much before the culmination of the financial year, therefore, we do not find any reason to interfere with the findings of the CIT(A). We are of the view that the Ld. CIT(A)
& 3190 /Del/2019 Carlsberg India Pvt. Ltd. vs. DCIT is correct in deleting the addition of Rs.13,35,000/-. Hence there is no merit in this ground raised by revenue.
23. In the result, the appeal filed by the assessee is allowed and appeal filed by the Revenue stands dismissed. Order pronounced in the open court on 31/07/2025.