AKZO NOBEL INDIA LIMITED,KOLKATA vs. DCIT, CIRCLE - 10(1), KOLKATA, KOLKATA

Appellant by : Shri Manoneet Dalal, Adv. & Purba Banerjee, Advocate Respondent by : Dr. P. K. Srihari, CIT(DR) सुनवाई क� तार�ख / Date of Hearing : 20/11/2019 घोषणा क� तार�ख/Date of Pronouncement : 07/02/2020 आदेश / O R D E R

Per Dr. A. L. Saini, AM:

Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 117 wherein it was held as under : "51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P.) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses." In view of we note that the facts of the above case are identical to the present issue, thus the principle laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue. 6.2. The Kolkata ‘C’ Bench of the Tribunal in the case of Organon India Pvt. Ltd. vs. DCIT in & 2459/Kol/2017, order dt. 24/10/2018, applied the ratio of decision in the case of Philips India Ltd vs ACIT in ITA No. 2489/Kol/2017 dated 4.4.2018 for Asst Year 2013-14, and came to a conclusion that the AMP expenditure is not an international transaction. 6.3. The argument of the ld. D/R that on facts the assessee is a distributor, is not emanating from the records. The assessee is engaged in manufacturing and supply activities. Thus, the argument of the ld. D/R is rejected on facts. The facts of the assessee’s case and the facts in the case of Philips India Ltd. (supra) and Organon India Pvt. Ltd. (supra) are same as all these companies are engaged in manufacturing and sale.

7. In view of the above discussion, AMP Expenses cannot be regarded as an international transaction as per Section 92B of the Act, in the case of the assessee so as to invoke provisions of Section 92 of the Act. As we have held that the AMP expenditure in question is not an international transaction, the TP adjustment made in this regard is hereby deleted and these grounds of the assessee are allowed.” Respectfully following the decision cited supra in assessee’s own case, we hold that the AMP expenditure in question is not an international transaction, therefore, the TP adjustment made in this regard is hereby directed to be deleted and this ground of appeal of assessee is allowed.”

7. As the issue is squarely covered in favour of the assessee by the decision of the coordinate bench, in assessee`s own case (supra) and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Division Bench (supra). We find no reason to interfere in the said order of the Division Bench, therefore, respectfully following the judgment of the Coordinate Bench in assessee’s own case we delete the addition made by AO/TPO on account of compensation for advertising, marketing and promotion expenses (AMP Expenses). Therefore, ground raised by the assessee is allowed.

8. Ground No.3 raised by the assessee relates to transfer pricing adjustment of Rs.6,31,20,532/- determining arm’s length price of intra-group services in respect of support services received from its AEs as Nil.

10 Learned Departmental Representative relied upon the orders of the authorities below.

11 We see no reasons to take any other view of the matter than the view so taken by the Division Bench of this Tribunal in assessee’s own case vide order dated 18.10.2019. In this order, the Tribunal has inter alia observed as follows:

“10. Ground no. 4 of the appeal of the assessee is against the action of the AO in enhancing the income of the assessee by Rs.69,963,072/- by determining arm’s length price of intra-group services in respect of support services received from its AEs as nil. This issue has been considered by this Bench of the Tribunal in the earlier AY 2011-12 in assessee’s own case in & ITA No. 315/Kol/2016 vide order dated 28.08.2019 in which the Tribunal has observed as under: “9. Ground No. 5, is against the TP Adjustment made with regard to the International Transaction pertaining to “Intra Group Services”. This issue has been considered by this Bench of the Tribunal in the earlier Assessment Years, in the assessee’s own case in ITA No. 229 & 346/Kol/2015, Assessment Year 2010-11, order dt. 14/02/2018, wherein it has been held as follows:- “7. We have heard both the parties. We note that the TPO has not carried out the exercise for computing the arm's length price on the plea that assessee did not provide the agreement with ANCR, whereas the assessee claims to have provided a copy on 21.01.2014. Though the DRP observes that nature of service provided by ANCR are in the nature of service for strategic and operations and helps in achieving corporate objectives by aligning workforce and organizational objectives in the field of marketing HR, Finance, Management Services, Purchases etc., held it as stewardship services. We note that TPO has not carried out any exercise to determined the arms length price of benefit, service etc. as per the most appropriate method as envisaged in sec. 92C(1) of the Act. Since the TPO has not carried out the exercise which he ought to have carried out as envisaged by the Act on the erroneous plea that agreement between assessee and ANCR was not placed before him, we set aside the order of ld. DRP/AO & TPO and remand the matter back to TPO for fresh consideration and pass order in the light of the Tribunal's detailed analysis of the agreement between assessee and ANPAP which we decided supra. The TPO is directed to pass speaking order after giving proper opportunity to assessee on this issue.”

of assessee is allowed for statistical purposes.”

12. As the issue is squarely covered in favour of the assessee by the decision of the coordinate bench, in assessee`s own case and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Division Bench (supra). We find no reason to interfere in the said order of the Division Bench, therefore, respectfully following the judgment of the Coordinate Bench in assessee’s own case we restore this issue back to the file of the A.O/TPO. Therefore, grounds raised by the assessee is allowed for statistical purposes.

13. Ground No.4 raised by the assessee relates to transfer pricing adjustment of Rs.1,75,36,845/- towards contract research and development services rendered to the AE.

14 At the outset itself, the ld. Counsel for the assessee invited our attention to the order dated 18.10.2019, passed by the Division Bench of this Tribunal in assessee’s own case in for the Assessment Year 2012-13 whereby the issue relating to transfer pricing adjustment towards contract research and development services rendered to the AE was discussed and the issue was remanded back to the file of TPO for fresh consideration, the contention of the assessee as well as ld. DR on this issue. Learned counsel for the assessee submitted that the present issue is squarely covered by the aforesaid order of the Tribunal, a copy of which was also placed before the Bench.

15 Learned Departmental Representative relied upon the orders of the authorities below.

16 We see no reasons to take any other view of the matter than the view so taken by the Division Bench of this Tribunal in assessee’s own case vide order dated 18.10.2019. In this order, the Tribunal has inter alia observed as follows:

“13. After hearing the rival submissions, we note that as per the assessee, the adjustment made by TPO towards contract Research & Development Service (Contract R&D) rendered to the AE is erroneous for not taking into consideration the Tribunal’s decision in assessee’s sister concern M/s. Akzo Novel Car Refinishes India Pvt. Ltd. wherein the Tribunal while adjudicating similar issue has excluded Pharma Companies from the list of comparables and which action of Tribunal has been followed by the Ld. DRP in assessee’s own case for AY 2014-15. If that is the case, then we are inclined to set aside the impugned order and remand the issue back to the Ld. TPO for fresh consideration the contention of assessee as well as Ld. DR on this issue and to pass order afresh in the light of discussion supra by a speaking order after giving opportunity to the assessee.” 17 As the issue is squarely covered in favour of the assessee by the decision of the coordinate bench, in assessee`s own case (supra) and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Division Bench (supra). We find no reason to interfere in the said order of the Division Bench, therefore, respectfully following the judgment of the Coordinate Bench we remand the issue back to the file of TPO/A.O for fresh consideration the contention of assessee as well as ld. DR on this issue and to pass order afresh in the light of discussions made (supra) by a speaking order after giving opportunity to the assessee.

18 Ground No.5 raised by the assessee relates to transfer pricing adjustment of Rs.8,78,78,120/- towards research & training expenditure provided by the assessee to its AE for development and improvement of product of AEs.

19 At the outset itself, the ld. Counsel for the assessee invited our attention to the order dated 18.10.2019, passed by the Division Bench of this Tribunal in assessee’s own case in for the Assessment Year 2012-13 whereby the issue relating to transfer pricing adjustment of research & training expenditure provided by the assessee to its AE for development and improvement of product of AEs was considered and adjudicated in favour of assessee. Learned counsel for the assessee submitted that the present issue is squarely covered by the aforesaid order of the Tribunal, a copy of which was also placed before the Bench.

20 Learned Departmental Representative relied upon the orders of the authorities below.

21 We see no reasons to take any other view of the matter than the view so taken by the Division Bench of this Tribunal in assessee’s own case vide order dated 18.10.2019. In this order, the Tribunal has inter alia observed as follows:

“9. We have heard rival submissions and carefully gone through the material available on record. We note that in the facts and circumstances of the case of assessee, the R&D expenses incurred by it cannot be regarded as an international transaction as per section 92 B of the Act. We also note that the issue in hand is squarely covered by the decision of this Tribunal in assessee’s own case in & ITA No. 315/Kol/2016 wherein this Tribunal by order dated 28.08.2019 has held that the expenses in question covered under R&T Expenses relate to, service fee paid by the company for R&T Services obtained by the company, from another group company of the assessee i.e., ICT India Research & Technology Centre (ICI). ICT is a company registered u/s 25 of the Act as a “not for profit” organization. ICT provides manufacturing and training support services to the assessee on cost to cost basis. Accordingly, the expenses covered under the head ‘R&T expenses’ pertain to the fee paid to ICT. ICT provides technical support and training to the manufacturing and marketing operations of Paints Business Division. The Tribunal after examining the services rendered by the ICT has given a factual finding that the assessee has not carried out any R&T activities. The expenditure in question is incurred only for its manufacturing operations and local environmental compliance from HSE perspective. The assessee submitted that ICT also does not carry out any research and development activities for development of any new project/technology. It is primarily a captive support centre for the local India operation of the assessee. Thus, considering these facts, the Tribunal held that the expenditure on research and training does not constitute any international transaction. Thus, the Tribunal held that the expenditure incurred on R&T is not an international transaction as per Section 92B of the Act, so as to enable invocation of provision of Section 92 of the Act and observed as under: “8.1. Here also, though a number of arguments were raised, the jurisdictional issue is whether R&T Expenses can be considered as an international transaction. The expenses in question covered under R&T Expenses relate to, service fee paid by the company for R&T Services, obtained by the company, from another group company of the assessee i.e., ICT India Research & Technology Centre (ICI). ICT is a company registered u/s 25 of the Act as a “not for profit” organization. ICT provides manufacturing and training support services to the assessee on cost to cost basis. Accordingly, the expenses covered under the head ‘R&T expenses’ pertain to the fee paid to ICT. ICT provides technical support and training to the manufacturing and marketing operations of Paints Business Division. The services provided by ICT during the relevant financial year can be summarized as follows: assisted the Appellant in complying with various Health Safety and Environment (HSE) procedures mandated for the chemical industry in India. provided solutions for compliance of environmental regulations governed by various local authorities in India. provided assistance to the production department and the Company's factories in determining the appropriate mixture of various raw material components for achieving the desired colour and texture of the paint to be manufactured. provided technical training on the manufacturing processes to the production team from time to time to ensure technical updation, improvement and refinement of the production team for the overall efficient execution of manufacturing operations of the Appellant. provided other technical support on day to day basis to the manufacturing operations and addressed the manufacturing process gaps. provided training to the marketing team on the product, the nature and feature of the products etc. necessary for sales and marketing of the Appellant's products in the designated market i.e. India. assisted the Quality department in handling product defect/ quality issue or redressing any product complaints from the customers. 8.2. A perusal of the above demonstrates that, on facts the assessee has not carried out any R&T activities. The expenditure in question is incurred only for its manufacturing operations and local environmental compliance from HSE perspective. The assessee submitted that ICT also does not carry out any research and development activities for development of any new project/technology. It is primarily a captive support centre for the local India operation of the assessee. Thus, we are of the considered opinion that the expenditure on research and training does not constitute any international transactions on facts. We also find that the TPO/AO has not considered this expenditure incurred in the earlier years towards R&T expenses, as international transactions. Thus, in view of the above discussion, we hold that the expenditure incurred on R&T is not an international transaction as per Section 92B of the Act, so as to enable invocation of provision of Section 92 of the Act. Thus, we delete the TP Adjustment made in this regard and allow this ground of the assessee.” Respectfully following the decision cited supra in assessee’s own case, we hold that the AMP expenditure in question is not an international transaction, therefore, the TP adjustment made in this regard is hereby directed to be deleted and this ground of appeal of assessee is allowed.”

22. As the issue is squarely covered in favour of the assessee by the decision of the coordinate bench, in assessee`s own case and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Division Bench (supra). We find no reason to interfere in the said order of the Division Bench, therefore, respectfully following the judgment of the Coordinate Bench in assessee’s own case we delete the addition made by AO/TPO on account of transfer pricing adjustment of Rs.8,78,78,120/- towards research & training expenditure provided by the assessee to its AE for development and improvement of product of AEs. Therefore, ground raised by the assessee is allowed.

23. Ground No.7 raised by the assessee relates to disallowance of expenses amounting to Rs.19,10,58,444/- u/s 37(1) of the Act on the ground that the said expenses are not in the nature of advertisement and publicity.

24 At the outset itself, the ld. Counsel for the assessee submitted the breakup of expenses disallowed u/s 37(1) of the Act, which is given below:

(i) Maintenance exp of color solution machine – Rs.8,14,71,248/- (ii) Tinting Support / Materials Other Cos – Rs.9,39,10,043/- (iii) Inventory - mixing machines MM W/off for the period – Rs.40,02,475/- (iv) Mixing machine expenses – Rs.1,16,74,678/- 25 The ld. Counsel for the assessee submitted before the Bench that Assessing Officer disallowed 10% of total advertisement and publicity expenses being Rs.11.21 crore on estimate basis on the ground of absence of complete documentary evidences of the expenditure. The ld. Counsel submitted before us that the assessment order was framed u/s 143(3) of the Act therefore, the Assessing Officer cannot disallow the expenses on estimate basis.

26 On the other hand, the ld. DR on behalf of Revenue submitted that assessee during the course of assessment stage has not submitted the documents and evidences before the Assessing Officer to examine the veracity of the claim of the assessee for these expenses. Since the assessee failed to produce the relevant documents and evidence before the Assessing Officer therefore, the ld. DR for the Revenue prayed the Bench that this issue should be remitted back to the file of Assessing Officer for de novo adjudication.

27 We have heard both the parties and perused the materials available on record. We note that pursuant to remand report dated 24.08.2017, the ld. DRP held that these expenses cannot be considered as advertisement expenses. The ld. DRP also held that the above expenses should be disallowed in absence of proper explanation by the assessee. However following the direction of the ld. DRP, the Assessing Officer disallowed the impugned expenses to the extent of Rs.19,10,58,444/-. We note that although the assessee had submitted that advertisement and publicity also comprises of selling and distribution expenses incurred during the year. Therefore the expenses may not be restricted to only advertisement and publicity expenses per se. The ld. Counsel submitted before us that even if certain expenditure are not in the nature of Advertisement and publicity, it does not signify that such expenditures be disallowed for the reason of incorrect classification or on a presumption that these are duplicate. However ld. DR for the Revenue submitted that since the assessee has failed to produce the evidence/documents relating to these expenses during the assessment stage therefore the Assessing Officer could not verify the nature of these expenses whether they are under the head of ‘advertisement and publicity’ or whether they will fall under the ceiling of distribution expenses. Therefore, we are of the view that one more opportunity should be given by the assessee to explain the nature of these expenses before the Assessing Officer and therefore we direct the Assessing Officer to examine these expenses and adjudicate the issue in accordance with law. The ld. DR has no objection if the issue is remitted back to the file of Assessing Officer. Therefore we set aside the order of ld. DRP/A.O on this particular issue and remit the issue back to the file of the Assessing Officer to examine these expenses and adjudicate the issue in accordance with law. For statistical purposes, this ground of the assessee is allowed.

12 Akzo Nobel India Limited The assessee raised the issue of disallowance of expenditure u/s 14A of the Act while computing book profit u/s 115JB of the Act.

The AO held that expenditure under section 14A of the Act should be considered while computing book profit as per clause (f) under explanation [1] of section 115JB of the Act. The DRP considered the submission of the assessee and directed the AO to follow judicial decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. and restrict the disallowance under section 14A to Rs.33,12,488/-.

13 Akzo Nobel India Limited that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon'ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra). Therefore, we direct the AO to compute the disallowance under rule 8D(2)(iii) of the rules by taking into account dividend bearing securities.

14 Akzo Nobel India Limited