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Income Tax Appellate Tribunal, DELHI “I-1” BENCH: NEW DELHI
Before: SHRI KUL BHARAT & DR.B.R.R.KUMAR
PER KUL BHARAT, JM : This appeal filed by the assessee against the order passed by the
Assessing Officer in pursuance of the directions of the Dispute Resolution
Panel (“DRP”) for the assessment year 2016-17 u/s 143(3) r.w.s. 144C of the
Income tax Act, 1961 (“the Act”). The assessee has raised following grounds of
appeal:-
“That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ('Act'), is bad in law and unsustainable.
1.1 That the assessing officer erred on facts and in law in completing assessment under section 144C/l43(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs.186,18,12,440 as against the income of Rs. 1,72,57,98,490 determined by the appellant in its income tax return.
ITA No.467/Del/2021
That the assessing officer erred on facts and in law in making an addition of Rs.10,07,80,000 allegedly on account of difference in arm’s length price of international transactions of payment of trademark fee entered into by the appellant with its associated enterprise, the Goodyear Tire & Rubber Company, USA on the basis of order passed by the Transfer Pricing Officer ('TPO') and sustained by the Dispute Resolution Panel ('DRP').
2.1. That the DRP/TPO erred on facts and in law in holding the arm’s length price of the international transaction of payment of trademark fee of Rs. 10,07,80,000 at Nil allegedly holding that no recognizable benefit has been passed on to the appellant and therefore there was no rationale for paying this trademark fees to the AE.
2.2. That the DRP erred on facts and in law in sustaining the transfer pricing adjustment made by the TPO, holding the arm's length price of international transaction of payment of royalty as NIL, following its orders for preceding assessment years, i.e. assessment year 2007 -08 to 2014- 15.
2.3. That the DRP/ TPO erred on facts and in law in determining the arm's length price of international transaction of payment of royalty at NIL without bringing on record any comparable uncontrolled transaction and therefore, not correctly applying CUP method in terms of Rule 10B(1) of the Income Tax Rules, 1962.
2.4 Without prejudice, that the DRP/ TPO erred on facts and in law in disregarding the comparable uncontrolled transaction considered for benchmarking the transaction of payment of royalty applying CUP method. in the Transfer Pricing Report and as submitted during the course of assessment proceedings.
That the assessing officer erred on facts and in law 111 making an adhoc disallowance of Rs.3,52,33,953 being 30% of the total expenditure Page | 2
ITA No.467/Del/2021
of Rs.11,74,46.510 incurred by the appellant on advertisement and publicity following the finding in the preceding assessment year allegedly holding that the expenditure was incurred for the benefit of the enterprise who owns brand name.
3.1. That the assessing officer erred on facts and in law in relying on the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited to held that if the brand name is not owned by the assessee. such expenditure is incurred for the benefits of the enterprise who own the brand name, not appreciating that the said decision was made redundant by the Hon'ble Supreme Court.
3.2. That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were incurred by the appellant in the course of carrying on of its business and were allowable deduction as business expenditure.
That the assessing officer erred on facts and in law in levying interest under Section 234B of the Act.
At the outset, Ld. Counsel for the assessee submitted that there are two
issues in this appeal. Both issues in this appeal are covered by the order of the
Tribunal in the immediate preceding years in assessee’s own cases. He further
submitted that Ground Nos.1 & 1.1 of the assessee are general in nature, need
no adjudication.
Ground Nos. 2 to 2.4 raised by the assessee are related to addition of
Rs.10,07,80,000/- made on account of difference in Arm’s Length Price (“ALP”)
of international transactions of payment of trademark fee entered into by the
assessee with its Associated Enterprise (“AE”), the Goodyear Tire & Rubber
Company, USA. Page | 3
ITA No.467/Del/2021
The facts giving rise to this ground are that the assessee company is
engaged in the business of manufacturing and trading of automotive tyres,
tubes, flaps and other industrial rubber products. During the year under
consideration, the assessee company had undertaken certain international
transactions. A reference was made to the Transfer Pricing Officer (“TPO”) for
determining the Arm's Length Price. The DCIT-Transfer Pricing Officer-(2)(1)(2),
New Delhi recommended the upward adjustment vide order dated 10.10.2019
thereby, the TPO concluded that the assessee had been mandatorily using the
Goodyear trademark/logo in India since 1922. Over the years, the assessee
made efforts by way of expenditure and human effort to develop the brand in
India. It continued to do so to replenish the brand value. The entire marketing
effort in India was admittedly driven, planned and executed by the assessee.
By these efforts, the brand had grown in value and significant economic
substance had been added to it by the company making decent profits. The
correct Arm's Length Price for the transaction related to payment of trademark
fee to AE was held to be NIL instead of 10,07,80,000/-. Accordingly, the
Assessing Officer was advised to enhance the income by Rs.10,07,80,000/-.
Against the draft assessment order, the assessee filed its objection before the
DRP-1, New Delhi who vide order dated 10.02.2021 sustained the finding of the
TPO.
Now, the assessee is in appeal before this Tribunal.
At the outset, Ld. Counsel for the assessee submitted that the issue is
squarely covered in favour of the assessee in the assessee’s own case in the
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earlier years. He took us through the assessment order and also the direction
of the DRP and the decision of Tribunal in ITA Nos.5650/Del/2011,
6240/Del/2012 & 916/Del/2014. Further, Ld. Counsel for the assessee drew
our attention to Paper Book Page Nos. 273 to 276, to buttress the contention
that issue is covered in favour of the assessee by the decision of the Tribunal
rendered in appeal pertaining to Assessment Years 2007-08 to 2012-13 and
2014-15.
Per contra, Ld. CIT DR vehemently opposed these submissions and
supported the orders of the authorities below. He drew our attention to the
agreement with the AE to buttress the contention that the authorities below
were justified in directing the upward adjustment. He submitted that a bare
reading of terms of agreement would suggest that action of the Assessing
Officer for upward adjustment is justified and in accordance with law.
We have heard the rival contentions and perused the material available
on record. We find that the facts were identical as in ITA No.5650/Del/2011
wherein the Co-ordinate Bench of this Tribunal decided the issues in favour of
the assessee. The relevant contents of the order are reproduced hereunder for
ready-reference:-
“We have heard the rival contentions in light of the material produced and the decisions relied upon. Ld. Counsel of the assessee has emphasized on the benchmarking of payment of trademark as closely linked transaction with the manufacturing segment. The Ld. Counsel of the assessee has submitted that the royalty relates to the entire turnover/production of the appellant and constitutes an essential part of
ITA No.467/Del/2021
the cost of sales. The entire business model of the appellant is based on the licenses granted by the associated enterprise to manufacture the tyres which have been highly successful and renowned throughout the world, and for providing all the I.P. rights and technology necessary for the same, for which the royalty payment has been made. Without which, the appellant’s business will cease to exist and its entire operations would come to a halt. Accordingly, since the entire operation of the appellant is based on rights and licenses to manufacture the automobile tyres and tubes, for which royalty is being paid, the royalty payments cannot be separately evaluated. In the case of the appellant, it is nobody’s case that the company has entered into diverse activities. The international transactions of the appellant primarily relate to its business of manufacturing of tyres and such international transactions are closely interlinked or inter-twined. It would also not be possible to determine separately profit from the international transactions of payment of trademark fees. Reliance in this regard is placed by the Ld. Assessee counsel on the decision of Hon’ble coordinate Bench of Tribunal, in a similar case of Maruti Suzuki India Limited vs. ACIT (ITA No. 5237/Del/2011), for assessment year 2005-06, too, held as under:
“13.1 Thus, we agree with the submission of the appellant’s counsel that the entire business model of the appellant is based on license from SMC, Japan for which royalty has been paid. Without such technology supply the appellant’s business will cease to exist and its entire operations would come to a halt. Thus, we agree with the appellant’s submission TPO has arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement.”
Reliance has also been placed by the assessee on the decision of Delhi Bench of Tribunal in the case of Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012), wherein, in the similar case of payment of royalty, this Tribunal concluded that: Page | 6
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“.............the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines ‘transaction’ as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis………………..
Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PLI of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range.” The Hon’ble Tribunal accordingly held that the assessee was correct in applying overall TNMM for examining royalty.
The aforesaid decision of this Tribunal has been upheld by the Hon’ble High Court in the case of ACIT vs. Lumax Industries Ltd. (ITA No. 102/2014).
The assessee has also rightly made reference to the decision of Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd vs. CIT (ITA No 16/2014) reported at 374 ITR 118, wherein, the Court has upheld clubbing of closely linked transactions for undertaking benchmarking analysis applying entity wise TNMM. In fact, in the case of
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CIT vs. Reebok India Co Ltd (ITA no 213/2014), being part of the decision of Hon’ble High Court in the case of Sony Erickson, the Court has held as under:
“185. Royalty payable for availing the right to use would depend upon corresponding price, which would have been paid by an independent or unrelated enterprise. This is judged by applying comparables. TPO has not rejected the quantum of royalty on the said principle. The reasoning given by the TPO is not only erroneous for the reasons stated above, but is also contrary to the Rules. Depending upon the method selected, net profit or gross profit of the assessed has to be compared with profit margins of related enterprise. The formula prescribed under the Rules does not accept the ratiocination adopted and applied by the TPO.”
Another contention of the TPO that the Goodyear Brand was weak and therefore does not require payment of royalty, is not brought out from the records. The AR of the assessee has made elaborate submission and placed evidence on record to show that ‘Goodyear’ brand is considered to be one of the top most acclaimed brand across the globe. Therefore, there is no merit in the allegation of the TPO that Goodyear brand has no worth and therefore, the payment made by the assessee for use of Goodyear brand is unwarranted.
The DRP has further added that since the sister concern of the assessee, Goodyear South Asia Private Limited, is not making payment of royalty, therefore, there shall be no payment of royalty by the assessee either. We have considered this aspect and found that there is difference in business dynamics and commercial realities in both the companies in as much as 60% of the sales made by Goodyear South Asia Limited is made to its related parties itself. Nevertheless, the AR of the assessee has rightly pointed out that in terms of Rule 10B(1)(a) of the Rules, international transactions entered into by the assessee with its AE, Goodyear Inc. USA
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cannot be compared with the international transaction entered between another AE, Goodyear South Asia Pvt. Ltd. with Goodyear Inc. USA.
The AR of the assessee has rightly placed reliance on the decision of third Member Bench of the Mumbai Tribunal, in the case of Tecnimont ICB Pvt. Ltd. vs. ACIT (ITA No. 4608 & 5085/Mum/2010), wherein, while explaining the import of clause (i) of Rule 10B(e) of the Act, held that the Rules strictly provides that an uncontrolled transaction shall be a transaction undertaken between two unrelated parties and cannot be given a wider term to include transaction entered between two other related parties, as under:
“14. What is an ‘uncontrolled transaction’ has been clearly defined under Rule 10A(a) to mean ‘a transaction between enterprises other than associated enterprises whether resident or non-resident’. A plain reading of the meaning given to the expression ‘uncontrolled transaction’ leaves no room for any doubt that it is a transaction between two non-associated enterprises. If he transaction is between two associated enterprises, it goes out of the ambit of ‘uncontrolled transaction’ under Rule 10A. When section 92C is read along with Rule 10B(e) and 10A, it becomes abundantly clear that in computing ALP under the transactional net margin method, a comparison of the assessee’s net profit margin from international transactions with its AEs has necessarily to be made with that of the net profit margin realized by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction, i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise’s international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the Page | 9
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purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AE so that the profit likely to arise from such transactions is not underreported vis- à-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus, it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction.”
It is also not acceptable that an international transaction which is not undertaken in the preceding year, cannot be undertaken between parties subsequently. In pursuance to direction of the Bench, the appellant has submitted three documents as additional evidence, i.e. (i) certificate issued by the associated enterprise, i.e. The Goodyear Tire & Rubber Company, USA explaining the reasons for not charging royalty in the earlier years; (ii) Copy of extracts of Minutes of Board of Directors meeting dated 31.07.2006 regarding approval for execution of Trademark License Agreement and (iii) copy of an email exchanged between the appellant and the associated enterprise regarding payment of trade mark fee in July
ITA No.467/Del/2021
2006. These evidences are admitted on record. The ld. DR has no objection to admit these evidences on record. In these evidences, the AE has clarified that it did not charge royalty in the earlier years in order to support the appellant who was yet to achieve higher market share, stabilize operations, maintain competitive pricing and was recovering from financial difficulties. Subsequently, when the financial position of the assessee improved, the AE started charging royalty in consideration for allowing the assessee to use its valuable brand name. The reasons given by the AR of the assessee, for not charging royalty by the AE, prior to the year under consideration is duly corroborated from the year to year profits shown by the company. It is valid reason that the AE was not charging royalty prior to financial year 2006-07 was due to the losses incurred by the assessee and prior to year 2000, no Indian companies were allowed to pay trademark fees under automatic route. Nevertheless, the Mumbai Bench of Tribunal has, in the case of Dresser- Rand India Pvt Ltd vs. ACIT (ITA No. 8753/Mum/2010 held that whether the services given by the AE to the assessee, without charging consideration, on gratuitous basis in the preceding year, cannot de bar the AE from charging fee for the same services subsequently. The observations are:
“8……When evaluating the arm’s length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm’s length price of these services is ‘nil’. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm’s length
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price of the costs incurred by the assessee in cost contribution arrangement.
In light of the above, we conclude that there exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. Further, the ld. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities. The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO.
Accordingly, in view of the aforesaid, we are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm’s length applying TNMM as the most appropriate method.
We therefore direct the assessing officer to delete the adjustment on this account.”
This decision of the Tribunal has been followed in the preceding
Assessment Years 2007-08 to 2012-13 and 2014-15 in ITA Nos.
5650/Del/2011, 6240/Del/2012, 916/Del/2014, 1516/Del/2015,
1004/Del/2016, 1706/Del/2017 and 8006/Del/2018 respectively.
ITA No.467/Del/2021
There is no change into the facts and circumstances of the case in the
present year. Therefore, taking a consistent view, we hereby direct the
Assessing Officer to delete the addition in the light of decisions of the Tribunal
pertaining to Assessment Years 2007-008 to 2012-13 and 2014-15 in
assessee’s own case. Thus, Ground Nos. 2 to 2.4 raised by the assessee in this
appeal are allowed.
Now, coming to Ground Nos. 3 to 3.2 raised by the assessee are against
the making of adhoc disallowance amounting to Rs.3,52,33,953/- being 30% of
the total expenditure of Rs.11,74,46,510/- incurred by the assessee on
advertisement and publicity.
Facts giving rise to the present case are that the Assessing Officer
observed during the assessment proceedings that during Financial Year 2015-
16, the assessee company had incurred a total sum of Rs.11,74,46,510/-
towards advertisement, publicity and sales promotion. The assessee was
show-caused as to why the expenditure incurred on advertisement should not
be disallowed being in nature of brand building activity. In response thereto,
the assessee filed a detailed reply stating that the assessee company is engaged
in the manufacturing/trading of tyres and related products. It had incurred
these expenses for promoting its sale and to beat its competitor companies as
its competitors were also expending on advertisements of their products. It
was stated that benefit of such expenditure was derived entirely by the
assessee company and not by an affiliate company. In support of this, the
assessee had relied upon the following case laws:-
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(i) CIT vs Walchand & Co. 65 ITR 381.
(ii) J.K. Woolen Manufacturers vs CIT 72 ITR 612.
(iii) Aluminum Corporation of India Ltd. vs CIT 86 ITR 11.
(iv) CIT vs Panipat Woollen & General Mills Co.Ltd. 103 ITR 666.
(v) Sassoon J David and Co.P. Ltd. vs CIT 118 ITR 261 (SC).
(vi) CIT vs Chandulal Keshavlal & Co. 38 ITR 601 (SC).
(vii) SA Builders Limited vs CIT 288 ITR 1 (SC).
(viii) CIT vs. Sales Magnesite P. Ltd. 214 ITR 1(Bom).
(ix) JR Patel & Sons P. Ltd. vs. CIT : 69 ITR 782 (Guj) .
(x) CIT vs. Khambhatta Family Trust (215 Taxman 602) (Guj).
(xi) Star India P. Ltd.: 103 ITD 73 (TM)
(xii) National Panasonic (India) Ltd. vs. JCIT: ITA 3238/Del/2002 (Del)
(xiii) Nestle India Ltd. vs. DCIT (Del)(2007) 111 ITR 498 (Del).
(xiv) Sony India P. Ltd. vs. DCIT: 114 ITD 448.
(xv) CIT vs Adidas India Marketing (P) Ltd 195 Taxman 256 (Del).
(xvi) CIT vs Agra Beverages Corporation P Ltd (ITA No. 966/2009 & 836/2010)(Del)
(xvii) DCIT vs. Maruti Countrywide Auto Financial Services P. Ltd. (ITA Nos. 2181 to 2183/De1/2010).
(xviii) CIT vs Modi Revlon P.Ltd. (ITA No.1450, 1451, 1640, 1652/2010 & 825/201) (2012).
ITA No.467/Del/2021
(xix) ACIT vs NGC Network India P.Ltd. (ITA No.635 (Mum) of 2010) (2011).
However, the submission of the assessee was not found acceptable by
the Assessing Officer who proceeded to disallow this expenditure. Hence, the
addition of Rs.3,52,33,953/- being 30% of the entire expenditure incurred on
advertisement and publicity was made by the Assessing Officer.
Aggrieved against this, the assessee is in appeal before this Tribunal.
Ld. Counsel for the assessee vehemently argued that this issue is also
covered in favour of the assessee in assessee’s own case in ITA
no.1516/Del/2015, 1004/Del/2016 and 1706/Del/2017 pertaining to
Assessment Years 2010-11 to 2012-13 respectively. Ld. Counsel for the
assessee submitted that the Assessing Officer has not given any specific reason
for making adhoc disallowances. He submitted that such disallowance is not
permissible under law hence, deserves to be deleted.
On the contrary, Ld.CIT DR opposed these submissions and supported
the orders of the authorities below. Ld.CIT DR took us through the Agreement
entered into between the parties. He submitted that the AE of the assessee
company would certainly be benefitted by expenditure incurred on
advertisement and publicity of the products of the AE in India since the
advertisement and the publicity would certainly have impact. He therefore,
strongly supported the orders of the authorities below.
ITA No.467/Del/2021
We have heard the rival contentions and perused the material available
on record. We find that the similar issues arose in earlier years as well and the
Tribunal was pleased to decide the issue in favour of the assessee. The
Tribunal in ITA No.8806/Del/8006/Del/2018 pertaining to Assessment Year
2014-15 has observed as under:-
“We have heard the rival submissions and perused the orders of the lower authorities and materials available on the record. The undisputed facts of the case are that during the financial year 2014-15, the assessee company incurred a sum of Rs.12,69,00,000/- towards advertising and sales promotion. The AO required the assessee to show cause as to why the expenditure incurred on advertisement should not be disallowed being in the nature of brand building activity. In reply to the show cause notice, the assessee submitted that any disallowance on account of advertisement and sales promotion expenses holding the same to be incurred for brand building for the entities owing brand shall not be sustainable in law. It was further submitted that the expenses were incurred for advertisement/marketing support activities etc. and are incidental to carrying on the business and were incurred by the assessee regularly for promotion/quality control and its product. The expenses incurred are to enable and increase efficiency in business and therefore, was revenue in nature and deductible u/s 37 of the Act. The expenses are solely incurred for the benefit of the assessee and not its foreign affiliate. Any benefit flowing to the foreign affiliate out of the said expenditure is purely incidental. Thus, the expenditure incurred on advertisement is wholly and exclusively for the business of the assessee. The Assessing Officer disallowed the same on the ground that the brand (marketing intangibles) is not owned by the assessee, such expenditure is incurred for the benefits of the enterprise who owns the brand name. The issue was examined in detail in earlier assessment years and 30% of advertisement and sales promotion expenses were disallowed which has also been Page | 16
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upheld by the DRP. Accordingly, he made the disallowance of 30% of the expenses and made an addition of Rs.3,80,70,000/- to the income of the assessee (marketing intangibles) is not owned by the assessee, such expenditure is incurred for the benefits of the enterprise who owns the brand name. The issue was examined in detail in earlier assessment years and 30% of advertisement and sales promotion expenses were disallowed which has also been upheld by the DRP. Accordingly, he made the disallowance of 30% of the expenses and made an addition of Rs.3,80,70,000/- to the income of the assessee. 13. On appeal, the DRP confirmed the same. 14. Both the parties have agreed that the issue is covered by the order of the Tribunal in the earlier assessment years 2007- 08, 2008-09 & 2009-10 vide order dated 29.04.2016 wherein it was held as under: "61. The Id. AR of the assessee submitted before us that against the total increase in advertisement and sales promotion expense of Rs. 4,87,14,000/- the assessing officer accepted only Rs. 4,20,43,000 and disallowed 50% of the difference of Rs.33,08,50O i.e. (Rs.4,87,14,000 - 4,20,43,000) on the basis of his conjecture and surmises. 62. The Id. AR of the assessee further made following written submission: "It was submitted that in a fast growing and very tough competitive business environment, the appellant had to spend a good amount on advertisement and marketing activities to show its presence in the market and sustain in business. Also, for the initiative of Branded Retail Stores, the appellant had spent nearly Rs. 2,27,35,000 during the year and an amount of Rs.1,93,08,000 was spent towards launching and introducing the new product range called "Excellence" for passenger cars. This two expenses
ITA No.467/Del/2021
alone totaled to Rs.4,20,43,000 out of total increase in expenditure of Rs. 4,87,14,000. Further, it was submitted that with the increase in advertisement and sales promotion expense, the company has demonstrated sales growth of nearly 28% as compared to financial year 2005-06. The gross sale in year 2005-06 was Rs.751.74 crores, which has grown to Rs. 958.11 crores in 2006-07. It would be appreciated that despite having low spending on advertisement and marketing expenditure, the appellant has maintained substantial growth in terms of sales and sustained in this competitive business. In terms of section 37(1) of the Act, deduction is admissible for expenditure incurred wholly and exclusively for purposes of business. Expenditure justified by business considerations and incurred out of commercial expediency is allowable deduction. It was also submitted that since the aforesaid expenditure of advertisement and brand promotion has undergone a benchmarking analysis under the Transfer Pricing regulations and an arm's length price thereof has been determined, there could not be any further disallowance of the said payment under section 37(1) of the Act, holding the same to be not an expenditure incurred wholly and exclusively for the purpose of the business of the appellant. Reliance is placed on the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Whirlpool of India Ltd. vs. DCIT (ITA No. 426/D/13), wherein, it is held as under: "16 ………………..Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee's business, there can be no scope for again reverting to section 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred Page | 18
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'wholly and exclusively' for the purposes of assessee's business. If the amount of AMP expenses is disallowed by processing under both the sections, that is 37 and 92, it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up. In view of the foregoing discussion, we are of the considered view that the AO was not justified in observing alternatively that a sum of RS.180 crore and odd is not allowable as per section 3 7( 1) of the Act. We, therefore, vacate the alternative finding given by the AO for disallowance. " 63. Ld. CIT-DR placed reliance on the order of the assessing officer and DRP. 64. We have heard the rival contentions in the light of the material produced and precedent relied upon. We have already held that the advertisement expenditure incurred by the assessee is incurred wholly for the purpose of its business and profession and ought to be allowed deduction in entirety. Further, the assessing officer has clearly made an ad-hoc disallowance of advertisement expenditure incurred by the assessee, which is not permissible under the law. We are of the considered view that AO was not justified in making such ad-hoc disallowances and therefore, direct the assessing officer to delete the adjustment on this account." 15. Facts being identical respectfully following the precedent, we vacate the disallowance of Rs.3,80,70,000/- and allow this ground of appeal of the assessee.”
The Revenue could not point out any change in facts and circumstances
of the case as the issue has already been decided in favour of the assessee by
the Tribunal in earlier years. We do not see any reason to take a different view.
Therefore, respectfully following the precedents, we hereby direct the Assessing
ITA No.467/Del/2021
Officer to delete the adhoc disallowance as made by Assessing Officer. Ground
Nos. 3 to 3.2 raised by the assessee are allowed.
Ground No.4 raised by the assessee is against the levying penalty u/s
234B of the Act. This being consequential in nature. We hold accordingly.
Thus, Ground No.4 raised by the assessee is allowed.
In the result, the appeal of the assessee is allowed.
Above decision was pronounced on conclusion of Virtual Hearing in the
presence of both the parties on 11th August, 2021.
Sd/- Sd/-
(DR.B.R.R.KUMAR) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIAL MEMBER
* Amit Kumar *