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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI ANIKESH BANERJEE
This appeal of the assessee is directed against the final assessment order of the Learned Assessment Unit, Income-tax Department (hence forth the Ld.AO) passed under section 143(3) read with section 144C(13) read with section 144B of the 2 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2020-21, date of order 12/07/2024. The said order was originated by the recommendation of the Learned CIT-(Dispute Resolution Panel-2), Mumbai-3 (in short, ‘Ld.DRP’) passed under section 144C (5) of the Act, date of order 12/06/2024.
The following are the grounds raised
by the assessee:- Grounds of Appeal “1. That on the facts and circumstances of the case, and in law, the impugned Assessment Order dated
12. July, 2024 passed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax Income Tax Officer. National Faceless Assessment centre, Mumbai or the Learned Assessing Officer ('Ld. AO'), under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ('the Act) is erroneous and bad in law.
2 That the final assessment order dated 12 July 2024 passed under section 143(3) read with section 144C(13) of the Act by Ld. AO is not in conformity with the directions of the Hon'ble Dispute Resolution Panel-2, Mumbai ('Ld. DRP") and is liable to be quashed being in gross violation of the strict mandate of section 144C(13) of the Act.
3. On the facts and circumstances of the case, and in law, the Deputy/Assistant Commissioner of Income Tax, Transfer Pricing-Circle 3(3)(1), Mumbai ('Ld. TPO')/Ld. AO and the Hon'ble DRP have erred in not appreciating the contentions raised by the Appellant.
4 On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in enhancing/confirming the additions/disallowances proposed in the draft assessment order passed by the Ld. AO without judiciously considering the factual and legal objections and submissions of the Appellant.
On the facts and circumstances of the case, and in law, the Ld. AO/Ld. TPO/Hon'ble DRP erred in enhancing the income of the Appellant by INR 24,46,91,342 by holding that the international related party transaction pertaining to payment of Franchisee Fee by the Appellant to its Associated Enterprises ('AEs') namely Royal Canin SAS, France ('RC SAS') does not satisfy the arm's length principles envisaged under the Act and in doing so, have grossly erred in:
3 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd 5.1 not following the mandatory statutory procedure as laid down under Rule 108(1)(a) and Rule 10C of the Income Tax Rules, 1962 (the Rules') to identify the appropriate method ('MAM') end application of the same, merely based on presumptions that the arm's length price value of the transactions is Nil without furnishing details of the price charged in any comparable uncontrolled transaction; 5.2 disregarding the judicial pronouncement of the Hon'ble ITAT in Appellant's own case for AY 2016-17 wherein the contentions of the Appellant have been accepted with respect to the same facts on the issue of disallowance of payment of Franchisee fees; 5.3 not acknowledging the Appellant's inability to legally operate as a franchisee in India, de hors in the franchise agreement and incorrectly naming 'Bundle of rights granted by the AE to the Appellant as a "colourable aggressive term", without appreciating the benefits received by the Appellant from such rights, which also includes marketing rights, trademarks and services as well.
5.4 alleging that the right to sell the products purchased from RC SAS is embedded in the supply agreement and that payment of franchisee fee would lead to double payment, without appreciating the fact that the purchase price paid by the Appellant is only towards the cost price of goods imported, not including any payment on account of any other rights; 5.5 failing to recognise Appellant's separate benchmarking analysis carried out in the TP Documentation with respect to payment of franchisee fee, as well as not appreciating that the arm's length nature of the franchise fee paid has also been corroborated by the benchmarking analysis for purchase of finished goods wherein all the transactions (including payment of franchisee fee) have been aggregated and tested at net level,
6. On the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Hon'ble DRP have erred in enhancing the income of the Appellant by INR 9,65,65,885 by arbitrarily disallowing the payment for intra group services. In doing so, the Ld. AO/TPO have grossly erred in:
6.1. not following the mandatory statutory procedure as laid down under Rule 10B(1)(a) and Rule 10C of the Rules to identify the MAM end application of the same, merely based on presumptions that the arm's length price value of the transactions is 'Nil' without furnishing details of the price charged in any comparable uncontrolled transaction;
4 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd 6.2. disregarding the documentary evidences furnished and the service agreements entered into by the Appellant for availing the services from overseas AEs:
6.3. not appreciating the fact that the need for services is a commercial/business decision made by the Appellant as part of its business operations, thereby disregarding sound transfer pricing principles and relevant judicial pronouncements in India when undertaking the said adjustment.
6.4. holding that the Appellant could have availed the intra group service from third-party service providers at a lower cost which were availed from the AEs without providing any cogent basis: and 6.5. not appreciating the fact that the arm's length nature of the payment of intra group charges has also been corroborated by the benchmarking analysis for purchase of finished goods wherein all the transactions (including payment of intra-group charges) have been aggregated at net level.
7. The Hon'ble DRP has erred in increasing the adjustment of intra-group charges from 50% to 100% by misinterpreting the Ld. TPO's order and incorrectly concluding that the Need Benefit Test was entirely failed, disregarding the fact that the Ld. TPO had accepted some of the evidence submitted by the Appellant during the course of TP assessment proceedings.
8. Without prejudice to the above grounds, the Ld. DRP has erred in proposing an alternate disallowance of the sums paid in respect of franchisee fee and intra- group service charges by the Appellant to its Associated Enterprise(s), as being ineligible for deduction under Section 37(1) of the Act. Corporate Tax Grounds 9 That on the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP have erred in enhancing the income of the Appellant by INR 962,917 by disallowing the eligible amount of donation claimed as deduction under section 80G of the Act on the contention that the underlying expenditure was not in the nature of donation, rather the same represented mandatory contribution towards Corporate Social Responsibility as specified under the Companies Act. 2013.
That on the facts and circumstances of the case and in law, the Ld. AO has grossly erred in considering the total income as INR 898,667,870 in the computation sheet whereas the total assessed income as per the assessment order passed under section 143(3) read with section 144C(13) of the Act is computed at INR 475,199,604.
5 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd 10 That on the facts and circumstances of the case & in law, the Ld. AO/DRP has erred in initiating the penalty under section 270A of the Act for under-reporting of income without appreciating the fact that there is no under-reporting of income by the Appellant The above grounds and sub-grounds are without prejudice to each other The Appellant craves leave to add, alter, amend, modify or withdraw all or any of the aforesaid grounds of appeal as may be considered necessary at any time before or at the time of hearing of the appeal.
The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.”
The brief facts of the case are that the assessee, M/s Royal Canin India Private Limited (RC India), is a wholly owned subsidiary of Royal Canin S.A.S. (RC SAS' or Overseas Affiliate', or 'Franchisor"). The assessee is primarily engaged in the marketing, sales and distribution of pet care products. The assessee group manufactures, processes, and sells food products worldwide. During the alleged assessment year, the assessee undertook the following international transactions with its AEs:
Particulars Most Value of Tested party Arm’s length Appropriate international Margin range Method (‘MAM’) transaction (INR) Payment of Comparable 244,691,341 9% 8% to 10% with franchisee fees uncontrolled median of 9.5% price (‘CUP’) Purchase of Transactional 1,066,691,280,789 Not Applicable finished goods net margin method (‘TNMM’) Payment of Other method 66,787,167 Not Applicable communication charges Payment for Other method 12,571,038 Not Applicable advertisement
6 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd and sales promotion Payment for Other method 12,204,864 Not Applicable employee training and recruitment expenses Reimbursement Other method 25,572,222 Not Applicable of expenses Recovery of Other method 15,646,143 Not Applicable expenses For the year under consideration, the assessee filed its return of income on 14/02/2021 declaring total income of Rs. 132,979,460/-.The assessee has summarized in the following paragraphs the facts of the case and its contentions against the approach adopted by the Hon'ble DRP&Ld. TPO for impugned Assessment Year. B. Approach adopted by the Ld. TPO during the Assessment Proceedings. During the course of TP assessment proceedings, a show-cause notice was issued and the assessee complied the said notice. The Ld. TPO in his order proposed the TP adjustment, amounting to Rs. 29.29,74.285/- on account of the following issues: Sr. Nature of international taxation Amount (in Rs) No.
Franchisee Fee – The Ld.TPO determined the arm’s length price as Nil 24,46,91,342/- 2. Intra Group Services Payment-50% arbitrary disallowance by the Ld. 4,82,82,943/- TPO C. Approach adopted by the Ld. AO during the Assessment Proceedings Thereafter, the Ld. AO passed the draft assessment order dated 26/09/2023 under section 144C(1) of the Act proposing the following additions/disallowances
7 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd to the returned income of the Appellant, against which the Appellant filed objections before the DRP dated23/10/2023. Description Amoun (in Rs) Variation in respect of addition made under section 92CA of the Act 292,974,285 Variation in respect of disallowance made under sectin 40(a)(ia) read with 448,967 section 194J of the Act Variation in respect of disallowance of deduction claimed under section 80G 1,925,834 Total 295,349,086 D. Proceedings before the Hon'ble Panel During the DRP proceedings, the assessee submitted its detailed contentions on the additions made by the Ld. AO in draft assessment order. The TPO was called for remand report and the assessee complied the said before the DRP. In addition to the remand report, the BRP issued a notice under Section 144C (8) dated 05/05/2024, wherein the DRP proposed to enhance the assessee's income and disallow the entire amount of Franchisee fee and the intra-group services under section 37(1) of the Act. In response to the same, the assessee filed a detailed submission, wherein the assessee contented against the enhancement of income proposed by the DRP.The DRP passed the directions dated 12/06/2024, accepting the assessee's contention on disallowance u/s 40(4)(ia) and disregarded the assessee's contentions & disallowed the payment of Franchise Fee, Intra-group services and deduction claimed under section 80G which is restricted to the amount of Rs. 962,917/-.Additionally, the DRP proposed an alternate disallowance of the sum paid in respect of franchisee fee and intra-group service charges by the assesseeto its Associated Enterprise(s) (in short “AE”), as being ineligible for deduction under Section 37(1) of the Act E. Approach adopted by the Ld. AO in the Final Assessment Order.
8 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd The Ld. AO in the Final AO order dated 12/07/2024, reiterated the directions issued by Hon'ble Panel and thus disallowed the payment of Franchise Fee, Intra- group services and deduction claimed u/s 80G made by the assessee. The details are as follows:- Description Amount (in Rs) Income as per Return of Income 132,979,460/- Add: Variation in respect of addition made under section 92CA of the Act 341,257,227/- Add: Variation in respect of disallowance of deduction claimed under 962,917/- section 80G Income determined as per the draft assessment order dated 12 July 2024 475,199,604/- Being aggrieved on final assessment order the assessee filed an appeal before the ITAT.
The Ld. AR argued and filed paper book which is kept in record. The Ld. AR proceeded to argue the appeal ground wise which are as follows: - Ground no. 1, 3& 4 These are general grounds. No specific averments have been made in respect of this ground. So, the appeal of the assesseeGround nos. 1,3 & 4 is dismissed. Ground no. 2 5. It is argued that the final assessment is void ab initio as the Ld. AO has not followed the specific direction issued by the DRO. The relevant part of DRP order is extracted hereinbelow: - Specific Directions issued for Franchise Fees Vide page 264 of the DRP’s order. “7.5. Factual Finding by the DRP …………………………………………………….
9 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd However, apart from the ALP of so-called Franchise Fees being determined as "Nil" by the Ld. TPO, the Panel holds that the Assessing Officer is also liable to undertake the alternate disallowance of the payments as failing to fulfil ingredients of section 37.
6.2 The Assessing Officer is directed to go through the Paragraphs above and succinctly assess the income accordingly. Needless to mention, there would not be double addition/disallowance of Rs. 24,46,91,342/-, but the Assessing Officer will provide the additional supporting argument that the sums have not only "Nil" ALP as determined; but also are not eligible for deduction under ss. 37(1) of the I.T. Act. This is and additional ground addressed by the Panel. The Assessing Officer is directed to comply with the additional ground and incorporate the same."
Specific Directions issued for IGS Fees Vide page 345 of the DRP’s order. "8.14 Factual Finding by the DRP: …………………………………………………………….. However, apart from the ALP of so-called IGS Fees being determined as "Nil", the Panel holds that the Assessing Officer is also liable to undertake the alternate disallowance of the payments as failing to fulfil ingredients of section 37.
The Assessing Officer is directed to go through the Paragraphs above and succinctly assess the income accordingly. Needless to mention, there would not be double addition/disallowance of Rs. 9,65,65,885/-, but the Assessing Officer will provide the additional supporting argument that the sums have not only "Nil" ALP as determined; but also are not eligible for deduction under s.s. 37(1) of the I.T. Act. This is an additional ground raised by the Panel. The Assessing Officer is directed to comply with the additional ground and incorporate the same."
The Ld. AR argued that the Ld. AO has not followed the directions issued as no alternate disallowance has been proposed or discussed, thereby violating the mandatory provisions of the section 144C(13) of the Act. Thus, the final assessment order dated 12/07/2024 passed by the Ld. AO pursuant to the DRP directions dated 12/06/2024 is bad in law and void as the same has not been passed in conformity with the DRP directions.It is stated that basis the above 10 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd stated facts and observations of the Ld. AO, it leads to an unmistakable conclusion that the final assessment order has not been passed in compliance to the statutory provisions that mandate in terms of Section 144C(13) of the Act that upon receipt of the directions of the DRP, the Ld. AO shall in conformity with the directions complete the assessment without providing any further opportunity of being heard to the assessee within one month from the end of the month in which such direction is received.
Reliance is placed on the recent decision of the Coordinate bench of ITAT-Delhi in Olympus Medical Systems Pvt. Ltd. Vs ACIT, date of pronouncement 13/01/2022 quashed the final assessment order which was passed without following the directions issued by the Hon'ble DRP. The relevant findings are extracted below: "11Income of Rs.10,41,53,180/– is the same as computed in the draft assessment order dated 21.12.2019. Considering the aforementioned factual matrix,we are of the opinion that as per the provisions of section 144C(5) of the Act, directions given by the DRP are binding on the Assessing Officer and in terms of section 144C(13) of the Act, the Assessing Officer was obliged to pass final order of assessment in accordance with the directions of the DRP. In the present case, final order of assessment does not incorporate the directions of the DRP and is verbatim repetition of the draft order of assessment. We are of the view that final order of assessment, in conformity with the directions of the DRP, has to be passed within one month from the end of the month in which the directions are issued by the DRP. Since the impugned order is not in conformity with the provisions of section 144C of the Act, the same is to be held as bad in laws." 7.1. Reliance is also placed on the following decisions: Global One India (P.) Ltd. us DCIT (2019) 112 taxmann.com 185 (Delhi-Trib.) held that Final assessment order passed by Assessing Officer without following directions issued by Dispute Resolution Panel under section 144C is null and void and hence was to be quashed.
11 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd Software Paradigms Infotech (P.) Ltd. v. ACIT (2018) 89 taxmann.com 339 (ITAT Bangalore) held that Where Assessing Officer/TPO passed impugned final order of assessment under section 143(3) read with section 92CA without giving effect to or carrying out binding directions of DRP as required under section144C(10) within time specified under section 144C(13), said impugned final order was to be set aside 7.2. Respectfully reliance is placed on the order of the Hon’ble DelhiHigh Court wherein the any exercise of powers by the AO in contravention of the specific directions of the DRP was held to be excessive and hence illegal: ESPN Star Sports Mauritius S.N.C. ET Compagnie us UOI, [2016] 68 taxmann.com 377 (Delhi).
The Ld. DR argued filed a written submission which is kept in record. The Ld. DR prayed to setaside the issue before the Ld. AO for reconsideration the issue.
9.We have heard the rival contention of both parties in the matter and perused the material on record. The undisputed facts on record, as brought out by the discussions above, is that the Ld. AO, as per law, was required to pass the final order of assessment dated 12/7/2024 for asst. year 2020-21 u/s 143(3) r.w.s 144C (13) r.w.s. 144B of the Act in conformity with the directions issued by the DRP u/s 144C(5) of the Act, which are binding on him as per section 144C(10) thereof and within the time prescribed u/s 144C(13) of the Act. We find that instead of passing the final order of assessment as required by law, the Ld. AO passed the impugned final order of assessment which, as contended by the Ld AR against the 12 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd direction of the DRP related the issues IGS fees and franchise fees. In view of the provisions of the Act and respectfully relied on the ruling of the Hon’ble Delhi High Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie(supra) and the ruling of coordinate benches of ITAT inOlympus Medical Systems Pvt Ltd. (supra),Global One India (P.) Ltd(supra) and Software Paradigms Infotech (P.) Ltd(supra) we find that the Ld. AO is required to pass the final assessment order in conformity with the DRP directions. In the present case, since the final assessment order passed by the Ld. AO is not in conformity with the DRP directions, In the present appeal, since the impugned assessment order passed by the Ld. AO is not in conformity with the DRP directions, the same is bad in law and therefore should be quashed. So, the ground no. 2 of the assessee’s appeal is allowed. Ground no. 5, adjustment on account of disallowance of franchisee fees. Rights granted under Franchisee Agreement 10. The Ld. AR argued that the assessee has been awarded with a bundle of rights to undertake business in India which enables it to function profitably. The franchisee license is a tested formula and RC Group operates globally on the similar model. The assesseeoperates in its assigned territory (ie., India) under the terms of the Franchise Agreement, APB pages 150-177 entered with RC SAS. Under the terms of the Franchise model, RC India receives from RC SAS (ie. the Franchisor) exclusive rights to the 'System' for the purpose of its own Franchise business within its assigned territory.System has been defined in the franchisee agreement as follows: "System Refers to a portfolio/bundle comprised of (i) IP rights (manufacturing), (ii) IP rights (marketing); (iii) Marks; and (iv) Services, developed, maintained 13 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd and/or provided by the Franchisor for use in the operation of the Franchised Business.”
The above clauses highlight the nature of rights, as defined under the term 'System', granted by the Franchisor to the assessee. In lieu of the franchisee fees, the assessee gets bundled IP rights for its business operations manufacturing as well marketing activities. The Ld. AR stated that RC India received a consolidated 'bundle' of services and intangibles ('System' rights), under the Franchise Agreement. The rights granted by RC SAS to the assessee in lieu of the franchisee fees are outlined below: 11.1. IP Rights (manufacturing) Under the franchisee agreement, RC SAS provides IP rights required for manufacturing of products. It also provides the Standards of quality required to be maintained by the franchisee. 11.2. Marketing support-RC SAS make available to RC India continuous marketing assistance in form of various merchandising and promotional tools, and packaging materials. Market team of RC SAS continuously performs various marketing services including market analyses, press announcements, leaflets and websites design, among others and publish the research insights on its library for RC India and other affiliates. Further, RC SAS, having immense experience about the worldwide trends and the demand patterns, it develops and manages all brand and product communication strategies including creation of supporting communication materials needed to explain the products in a manner that is consistent with the brand image.
14 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd The products are sold in India on the basis of recommendations/ knowledge proposition by the channel partners. Thus, for the channel partners to be able to recommend the products to the customers, it is essential that they are educated about the contents of the products and the underlying scientific benefits. The said information is received by the assessee from RC SAS, which is the developer of the content. Accordingly, the sales made in India are driven by the flow of information about the products of the assessee. The said information developed by RC SAS and used by the assessee is received under the consolidated 'bundle of services and intangibles (System' rights), provided to the assessee, under the Franchisee arrangement. Trade name and marks-It refers to the set of Trade Names, Trademarks and products brands owned by the Franchisor and licensed to the Franchisee's within the Franchisee's Authorized Territory as part of the system. All trademarks and trade names (and other associated elements such as domain names) are registered in the name of Franchisor without any exception as long as they relate to RC products. Franchisor centrally manages all aspects of the brand strategy. Services- It refers to the central IP management, technical, marketing and administrative services provided by Franchisor to the Franchisee as part of the system. The Franchisor under the Franchise arrangement also renders the following services to the Franchisees (including RC India) requisite for the Franchise business model. Central and Regional Sales & Marketing Management and Support Functions (and Regional teams)
15 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd Service & Finance ('S&F')- Consolidation & Reporting, Tax services, Treasury & Benefit, Innovation and Operation control and IT Legal Affairs People & Organization ('P&O') Corporate Affairs The franchisee fees paid by the assessee is towards bundle of rights. All these rights and services elucidates that the assessee gets significant benefits from the Franchise arrangement.
The adjustment relating to Franchisee fee is squarely covered in assessee’s own case for AY 2016-17 wherein the coordinate bench of ITAT-Mumbai Bench- J in order dated 22/09/2022. accepted the contentions of the assessee with respect to disallowance of payment of Franchisee fee by the Ld. TPO and held the finding of the Ld. TPO/AO to be unsustainable directing to delete the adjustment, by holding the following observations: "11.In the instant case, we observe that the TPO at threshold has discarded payment of franchise fee on the ground of need of such payment. The TPO has exceeded his jurisdiction in making such observation. The TPO cannot step into the shoes of assessee to decide prudence of expenditure. The TPO failed to examine the documents furnished by assessee to benchmark the transaction by applying one of the methods spepcified in Chapter-X of the Act. Thus, in the facts of the case and in the light of decisions refereed above, we hold that the findings of the TPO/Assessing Officer in making adjustment in respect of franchise fee are unsustainable. The adjustment is deleted and ground No.3 of appeal is allowed."
The Ld. DR argued andsupported the order of the ld. AO.
16 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd 14. We heard the rival submission and perused the documents available on record. Considering the ALP of its international transaction pertaining to payment of Franchisee Fees, the assessee had undertaken and maintained contemporaneous documentation. Further, a methodical process for the purpose of comparability analysis for the determination of the ALP was undertaken wherein the CUP was selected as most appropriate method and an arm's length range of 8% to 10% with a median of 9.5% was determined. Based on the same, payment of Franchisee Fees was concluded to be at arm's length, details in APB Page No. 71-74 & 107-111. The Ld. TPO determined the ALP of the international transaction pertaining to franchisee fees as Nil. However, while arriving at the said ALP, the Ld. TPO has not followed the mandatory statutory procedure as laid down under Rule 10B(1)(a) and Rule 10C of the Rules to identify the most appropriate method and in its application. The Ld. ARinvited our attention Coordinate bench of ITAT-Delhi in the case of Gates India Pvt. Ltd. vs. ACIT, Circle 10(1), Delhi. ΙΤA No.2379/DEL/2022date of pronouncement 22/08/2024, wherein the ITAT-Delhi has stated as follows: "13. The CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. If there is any difference between the two prices, this may indicate that the conditions of the commercial and financial relations of the AEs are not at arms’ length and that the prices in the uncontrolled transaction may need to be substituted for the price in the controlled transaction. The TPO cannot ordinarily benchmark a transaction value at ‘Nil’ under the guise of CUP method on the basis of alleged absence of benefit derived by the assessee from such intra group transactions for two reasons; (i) CUP method cannot be invoked without bringing the comparable services without first identifying the price charged or paid for the similar services provided in a comparable uncontrolled transaction. In the instant case, admittedly, no such comparable has been brought on record by the revenue.
17 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd (ii) The test of presence of commercial benefit or no benefit is essentially in the domain of Section 37 of the Act. The jurisdiction vested under transfer pricing provisions to the TPO is only to find out whether the prices paid by the services are at Arm’s Length Price or not, as held in Sony Ericson Mobile Communication vs. CIT, 374 ITR 118; CIT vs. EKL Appliances, (2012) 345 ITR 241 (Del) and many other decisions. We further note that Co-ordinate Bench in DCIT vs. Apollo Gleneagles Hospital Ltd., (2013) 150 taxmann.com 210 (Kol), it was held for the purposes of determination of analyzing the benefit test has no great relevance in TP analysis." The Ld. AR argued that DRP/Ld. AO/Ld. TPO by not identifying any comparable uncontrolled transaction and by considering the benchmark price of the said international transaction as 'Nil', has violated the explicit provisions of the Indian TP regulations. In our considered view the issue is squarely covered by assessee’sown case AY 2016-17 (supra). We direct to delete the adjustment as proposed in relation to franchise fees.
In the result, the appeal of the assesseeground no-5 is allowed. Ground No 6 &7 (adjustment on account of disallowance of payment of intra- group service charges) 16. The adjustment on account of IGS has already been adjudicated, and the bench has deleted the said adjustment for being in contravention of Section 144C(10) read with Section 144C(13) of the Act, as addressed in Ground No.
2. Accordingly, the assessee's appeal on Grounds No. 6 and 7 stands allowed. Ground no. 8 (alternate disallowance of franchisee fee and intra-group service charges by Appellant under section 37(1)) 17. The assessee has raised an alternative ground concerning the adjustment of franchise fees and IGS charges. Since both issues have already been decided in favor of the assessee in ground no-2, separate adjudication of this ground is rendered unnecessary.
18 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd Accordingly, the assessee's appeal on Ground No. 8 is treated as dismissed.
Ground no. 9 (part disallowance of deduction claimed under section 80G) 18. During the year under consideration, the Appellant incurred an expenditure amounting of Rs. 17,606,138 towards CSR activities as per section 135 read with schedule VII of the Companies Act, 2013. Since the said expenditure is not an allowable expenditure as per Explanation 2 to section 37(1) of the Act, the same was disallowed while computing the business income in the ITR filed by the assessee. The above-mentioned CSR expenditure includes donations amounting to Rs. 1,925,834 made to charitable institutions registered under section 80G of the Act. Accordingly, an amount of Rs. 962,917/- (i.e., 50% of Rs. 1,925,834/-) was claimed as deduction under section 80G of the Act.Deduction of expenditure made towards CSR under other provisions under the Act is to be determined independent of Explanation 2 to section 37 of the Act. Relevant extract of the Explanatory Memorandum to The Finance (No.2) Bill, 2014 wherein clarification regarding impact of Explanation 2 to section 37(1) of the Act is provided is reproduced as under: “The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an Appellant on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in 19 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein." (Emphasis added) From the above, it is clear that, no deduction will be allowed for CSR expenditure as business expenditure but the Explanatory Memorandum to The Finance (No.2) Bill, 2014 makes no reference to ineligibility or restriction in claiming deductions under section 80G of the Act for donations made pursuant to section 135 of Companies Act, 2013.No restrictions imposed on claim of CSR expenditure made towards donations under Section 80G of the Act.
The Ld. DR argued and relied on the order of revenue authorities.
We heard the rival submission and perused the documents available in record. The provisions of section 80G of the Act permits deduction for the contributions made by an assessee to specified relief funds and charitable institutions except where CSR expenditure is made towards donation to Swachh Bharat Kosh or Clean Ganga Fund. Respectful reliance is placed on judicial precedents where it was held that CSR expenditure is eligible for deduction under section 80G of the Act subject to satisfaction of the conditions mentioned in the said section. We respectfully relied on the order of the coordinate bench of ITAT-Mumbai in M/s Naik Seafoods Pvt. Ltd. v. Pr. CIT2,ITA No. 490/Mum/2021 date of pronouncement 26/11/2021. “17. We observe from the record that on merit assessee has a valid point to claim the deduction u/s. 80G of the Act and we observe that nowhere assessee has claimed deduction u/s. 37 of the Act. It is clear that the restriction given in section 37 of the Act is restricted to CSR expenses but similar restrictions are not given in section 80G of the Act.” In our considered view, we remand the matter to the file of the Ld. AO with direction to allow the deduction U/s 80G amount to Rs. 1,925,834/-subject to fulfilment of requisite conditions.
20 ITA 4546/Mum/2024 Royal Canin India Pvt. Ltd 21. In the result, appeal of the assessee Ground no.9 is allowed for statistical purpose. Ground no. 10& 11 22. Both the grounds of the assessee are consequential in nature and is not required for adjudication. So, appeal of the assessee bearing Ground nos. 10 & 11 are dismissed.