Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the assessee against the order dated 31.12.2015 of the Dispute Resolution Panel [hereinafter referred to as the DRP] relevant to assessment year 2011-12.
The assessee has taken the following grounds of appeal: “Based on the facts and circumstances of the case, A.W.Faber Castell (India) Pvt. Ltd (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax Circle, 9(1)(1), Mumbai [hereinafter referred to as the 'learned AO] under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel-I, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another.
On the facts and in the circumstances of the case and in law, the learned AO/ Transfer Pricing Officer 1(1)(1) ('TPO') has:
2 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. General 1. erred in assessing the total income at Rs.3,28,42,910 as against income of Rs.1,35,88,741 computed by the Appellant;
Transfer Pricing Grounds Adjustment on account of payment of Royalty of Rs. 1,76,02,005
2. erred in determining the arm's length price for royalty payment as Nil (without undertaking economic analysis) and disallowing the entire royalty payment amounting to Rs. 1,76,02,005;
3 erred in holding that the appellant has failed to discharge the initial onus of applying one of the prescribed method for benchmarking royalty payment;
4 erred in rejecting the transfer pricing analysis undertaken by the appellant by considering the FIPB approval as comparable uncontrolled price ('CUP');
5. erred in not appreciating the fact that the royalty payments is already benchmarked under TNMM analysis under bundled transaction approach.
6. erred in holding that the appellant should have adopted profit split method ('PSM') in absence of CUP data without appreciating that PSM is not applicable in appellant's case;
Corporate Tax Grounds Disallowance of employees contribution towards Provident Funds and ESIC of Rs.6,11,614
7. erred by disallowing employees contribution towards Provident Fund and ESIC of Rs.6,11,614 u/s 36(1)(va) r.w.s 2(24)(x)of the Act;
Disallowance of claim on loss by fire amounting to Rs.10,40,553
8. erred in disallowing claim on loss by fire amounting to Rs.10,40,553;”
The brief facts of the case as derived from the impugned order are that the assessee company is a subsidiary of ‘A.W. Faber- Castell A.G. Germany’. The assessee is engaged in the business of manufacturing and distribution of stationery items. Its total turnover during the F.Y. was Rs.93 crores, out of which trading sales was Rs.73 crores and manufacturing sales was Rs.17 crores. The assessee had entered into various international transactions
3 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. consisting of import of raw material, import of traded goods, export of finished goods and royalty. The significant among the same were export of finished goods amounting to Rs.5.21 crores, royalty of 1.76 crores and import of traded goods of Rs.2.55 crores. The assessee benchmarked these transactions by combining its transaction of import of raw material, import of finished goods and export of finished goods. The assessee undertook TNM (Transactional net margin) analysis and determined its profit margin on manufacturing activity at 9.73%. Similarly, it also determined its gross profit margin on the traded goods of Rs.73 crores at 37%. The assessee used two sets of comparables, and based on the same, contended that its transactions were at arm's length. The Associate Enterprise(AE) of the assessee i.e. A.W. Faber-Castell Unternehmensverwaltung GmbH & Co. owns the trademarks and corporate brand name. The Assessee Company - Faber India utilizes these trademarks and the corporate brand name in relation to the marketing and the sale of the products procured in the territory. In consideration of the grant of the license and right to use the Trade marks, the assessee pays royalty @ 3% on sale value of the product (net of taxes & duties). This transaction was bench marked using CUP (Comparable Uncontrolled Price) method. The royalty agreement along with transfer pricing study report was furnished to the AO. It was submitted that the royalty payment of these transactions were at rates approved by various Government authorities. In the course of TP proceedings, the TPO noted that the transaction relating to Royalty had not been benchmarked by the assessee. It was, however, submitted on behalf of the assessee that the royalty was paid in respect of right to use the trademark owned by the AE. The assessee paid royalty @ 3% on the total sale value, excluding AE sales, and sale of non- branded products. The assessee claimed that the transaction of royalty was at arm's length under CUP method by contending that the same was covered by the approval received from the Government of India, Ministry of Industries, Department of Industrial Policy and Promotions, Secretariat for Industrial
4 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. Approvals. It was contended that though the approved rate for royalty payment by the Govt. was upto 8% on exports and 5% on domestic sales, yet the assessee was paying royalty at the rate of only 3% of sales. The TPO, however, did not agree with the above contentions of the assessee. He observed that no comparable royalty agreement was produced by the assessee to justify the CUP method adopted by it. The TPO therefore, determined the ALP at nil in respect of Royalty. The TPO further noted that while the royalty was paid for the use of trademark, the assessee was also incurring significant AMP (Advertisement, Marketing & Promotion) expenses and the same amounted to 8.08% of the assessee's total sales. He relying upon the decision of the Special Bench of ITAT in the case of ‘LG Electronics’, made an adjustment on account of AMP amounting to Rs.92 lakhs. While doing so, the TPO categorically mentioned that no separate adjustment on account of royalty was being made, only for the reason that AMP adjustment was being made for the development of marketing intangible namely the trademark owned by the AE and the royalty was also for the right to use of the same trademark given to the assessee. The TPO further noted that in the event AMP adjustment was deleted, then the issue of ALP of royalty would arise and the same should be treated as nil.
4. So far as the transfer pricing adjustments on account of AMP expenditure was concerned, the Ld. DRP, while relying upon the decision of the Tribunal in the own case of the assessee for earlier year i.e. A.Y. 2010-11, held that no adjustments were warranted. Since the AMP adjustments were deleted, hence the DRP proceeded to decide the Royalty adjustment issue.
In relation to transfer pricing adjustments on royalty, the DRP observed that identical issue was involved in the case of the assessee for earlier year also wherein, the ITAT has categorically held that RBI approval does not imply that the transaction is at arm’s length in accordance with the provisions of the IT Act. The ITAT has further directed the assessee to benchmark the transaction
5 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. using comparable transactions. The DRP further observed that the TPO had ) asked the assessee to provide data of comparable transactions using Royalty stat database. In response to the same, the assessee vide its letter dated 02.12.2015 had submitted that no comparable data was available in the Royalty stat database. The DRP, therefore, observed that the assessee had not submitted any other comparable transaction or any fresh comparability analysis to benchmark its international transaction relating to royalty. Further that the TPO had referred to Profit Split Method, being an appropriate method in this case. However, the relevant material to apply this method was neither available on record nor has the assessee made the same available before the DRP. On the contrary the assessee submitted that Profit Split Method also could not be applied in its case. The TNMM has already been rejected by the ITAT. CUP & PSM were the only alternatives available. Regarding CUP method, the assessee had submitted that comparable data of similar transaction was not available. The assessee had also rejected Profit Split Method. The assessee therefore had rejected all the methods to benchmark the royalty transaction. The DRP observed that the only justification of the assessee in its reply dated 30.12.2015 that as the trade mark belonged to the AE, in the absence of royalty, the AE may terminate the license, did not serve the purpose of determination of ALP. The Ld. DRP, therefore, while relying upon on the Special Bench decision of the ITAT in case of “Aztec Software” (2007) 109 TTJ 0892, held that the onus to maintain the relevant data of comparable transactions for determining of ALP and to apply the most appropriate method and determine the ALP was on the assessee. Further, it is the assessee who has to maintain documentation of comparable transactions justifying the fact that the transaction is at arm's length. It is only when the TPO rejects the basic documentation produced by the assessee that the onus shifts to the TPO. The DRP, therefore, held that the assessee in this case had failed to discharge the initial onus of applying one of the prescribed methods which is the most appropriate method in respect of the royalty transaction. That in the absence of 6 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. comparable data/ comparability analysis being produced by the assessee, the onus did not shift to the TPO who was not expected to have the comparable transactions to determine the ALP. The DRP, therefore, held that the ALP for the transaction of royalty should be treated as NIL. Being aggrieved by the above findings of the DRP the assessee has come in appeal before us.
We have considered the rival submissions. The Ld. A.R. of the assessee, before us, has relied upon various case laws to stress that FIPB approval should be considered as CUP for benchmarking of payment of royalty. He, in this respect, has relied upon page No.341 of the paper book which is a letter of the FIPB dated 09.03.05 addressed to the assessee, wherein, it has been stated that the royalty payment up to 8% on exports is on the automatic route without restriction on the duration of the royalty payment as per Press Note 2 (2003 series) issued by Department of Industrial Policy and Promotion. That there is no need to obtain further approval from FIPB for extension of the validity period of the PC approval. That the foreign collaborator may bring investment as per their requirement. He in this respect has also strongly relied upon the decision of the Hon’ble jurisdictional Bombay High Court in the case of “SGS India Pvt. Ltd.” vide order dated 18.11.15.
7. On the other hand, Ld. D.R. has submitted that automatic route under which FIPB approvals or RBI approvals are granted have been devised for the "ease of doing business". These approvals emanate from other legislation or policy and are not in relation to determination of Arms Length Price. The purpose of the RBI approval / FIPB approval is entirely different and cannot be equated with the arm's length principle. In this respect, the Ld. D.R. has relied upon the following decisions: 1. SKOL Brewaries Ltd., (29 taxmann.com 111) (Mumbai) 2. Perot System TSI (India) Ltd., 37 SOT 358 (Del)
7 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. 3. Tata Autocomp Systems Ltd., (21 taxmann.com 48) dt. 30/04/2012 (Mumbai ITAT) 4. Tata Autocomp Systems Ltd., of 2012 dt. 3/2/2015 (Bombay High Court) Tata Autocomp Systems Ltd., ITA No. 774 & 1508/M/ 2014 5. dt.18/11/2015.
The D.R. has further submitted that the decision of the Hon’ble Bombay High Court in the case of “SGS India Pvt. Ltd.” (supra) does not hold binding precedent as in the said decision the Hon’ble Bombay High Court has dismissed the appeal of the Revenue holding that no substantial question of law arises. The Ld. A.R., on the other hand, has stated that the Hon’ble Bombay High Court has thoroughly examined the issue and after giving thoughtful consideration has held that the benchmarking of royalty paid at 3% by the assessee to arrive at the ALP was much below the royalty for trademark/brand name which was allowed to be paid by fully owned subsidiary to its offshore parent company as per clause IV of the press note No.09 (2000 series) issued by Ministry of Commerce, Government of India. Before discussing further, we think it proper to reproduce the relevant part of the order of the Hon’ble Bombay High Court hereunder: “2. The appellant - Revenue urges the following question of law for our consideration:- "(1) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in deleting the addition made by Transfer Pricing Officer of Rs.1,59,88,100/- on account of fees for technical services?”
3. The respondent-assessee is a wholly owned 100% Indian subsidiary of Generale De Survillance (SGS) (parent company). The parent company is based in Geneva, Switzerland. The respondent-assessee is engaged in India in providing certification with regard to various agricultural, mineral, petroleum, consumer goods and other services.
For the aforesaid purpose of its business, the respondent – assessee uses the trade mark of its parent company and it pays Royalty for the same ranging between 2.5 % to 4% of the Revenue generated. For the purpose of 8 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. transfer pricing, respondent-assessee contended that 3% of the revenue generated should be considered as reasonable Royalty for use of trade mark provided by its parent company. This 3% according to the respondent would be the appropriate bench-mark while considering the Arms Length Price (ALP) in respect of its transactions with its Associated Enterprise i.e. parent company. In support the respondent placed reliance upon the approval granted by Foreign Investment Promotion Board (FIPB) dated 25 September 2000. However, theTransfer Pricing Officer (TPO) did not accept the same and placed reliance upon the Press Note No.9 (2000 series) issued by the Ministry of Commerce and Industries, Government of India, wherein the royalty is allowed at 1% on domestic sale and 2% on export for the use of trademark/brand name of a foreign collaborator. In the circumstances, the TPO lowered the bench mark to less than 3% for purposes of computing the ALP. In terms of the above order of the TPO, the Assessing Officer passed a final assessment order dated 24 March 2005.
5. In appeal the Commissioner of Income Tax (Appeals), by order dated 20 January 2006 sustained the order dated 24 March 2005 passed by the Assessing Officer.
6. On further appeal, the Tribunal on consideration of all the facts concluded that the Royalty between the range of 5% to 8% if taken, could not be faulted as it was covered by FIPB instructions. Besides, the Tribunal records the fact that Transfer Pricing study indentified the uncontrolled transaction of royalty at 10%, whereas the respondent-assessee makes only a payment at 3% to its Associated Enterprises. Thus, the Tribunal accepted the contention of the respondent that bench marking at 3% to arrive at ALP of payment made to parent company as Royalty for use of Trade Mark.
The Revenue before us contends that Press Note No.9 (2000 series) issued by Ministry of Commerce, Government of India in clause III thereof provides as under:- “Payment of royalty upto 2% for exports and 1% for domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer”.
Thus, it is submitted that the bench marking of royalty payable by the respondent to its parent company has to be lower than 3% for the purposes of arriving at the ALP.
8. As against the above, the respondent-assessee pointed out that the Press Note No.9 (2000 series) being relied upon by the Revenue, even if applied would indicate that in case of wholly owned subsidiaries such as respondent, a Royalty payment is allowed for user of brand name upto 8% on export and 5% on domestic sales. In support reliance is placed on Clause (IV) of the Presss Note
9 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. which reads thus:-
“IV. Payment of royalty upto 8% on exports and 5% on domestic sales by wholly owned subsidiaries to offshore parent companies is allowed under the automatic route without any restriction on the duration of royalty payments.”
It is an undisputed position before us that the respondent-assessee is a wholly owned subsidiary of its parent company which is registered in Switzerland. The respondent pays to its parent company Royalty for use of its Trademark/brand name. Therefore, admittedly the present case is covered by Clause IV and not Clause III of the Press Note 9 (2000 series). The aforesaid clause IV of the Press Note (2000 series) allows payment of Royalty upto 8% on export sales by wholly owned subsidiaries to its offshore parent companies.
10. On the last occasion that is on 23 September 2015 Mr. Tejveer Singh, learned Counsel for the Revenue sought time to take instructions on whether Clause IV as reproduced hereinabove is applicable in the case of respondent- assessee. Today Mr. Tejveer Singh, on instructions, states that the respondent- assessee is covered by clause IV of the Press Note 9 (2000 series) dated 8 September 2000. Therefore, the bench marking of the Royalty paid at 3% by the respondent to arrive at ALP is much below the Royalty for trade mark/brand name which is allowed to be paid by wholly owned subsidiary to its offshore parent company.
In view of the above, the grievance of the Revenue that the Tribunal ought to have lowered the bench marking on application of Clause III of the Press Note 9 (2000 series) dated 8 September 2000 does not survive. Accordingly, question as proposed does not give rise to any substantial question of law. Thus not entertained.
12. The appeal is dismissed. No order as to costs.”
We have perused the above decision of the Hon’ble Bombay High Court as well as the related decision of the Tribunal dated 30.01.2013 in the said case of ‘SGS Pvt. Ltd.’ A perusal of the above decisions reveals that in the said case the comparables considered by the assessee in the TP study were rejected by the TPO and the TPO harped on the Press Note No.9 issued by Ministry of Commerce stating that payment of 1% on domestic sale and 2% on export was permitted for use of trade mark and brand name on foreign collaboration.
10 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. The Tribunal on consideration of all the facts had concluded that the Royalty @ 3% could not be faulted as it was covered by FIPB instructions. Besides, that the Tribunal has recorded the fact that Transfer Pricing study indentified the uncontrolled transaction of royalty at 10%, whereas the respondent-assessee had made only a payment at 3% to its Associated Enterprises. It is the Department who took the stand that as per as per clause III of the Press Note No.9 (2000 series) issued by Ministry of Commerce, Government of India the payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer and therefore the bench marking of royalty payable by the assessee to its parent company has to be lower than 3% for the purposes of arriving at the ALP. However when it was pointed out that the case of the said assessee was covered under clause IV of the said circular, the counsel for the revenue on instructions of the Department, stated that the respondent-assessee was covered by clause IV of the Press Note 9 (2000 series) dated 8 September 2000 vide which royalty Royalty upto 8% is admissible on export sales by wholly owned subsidiaries to its offshore parent companies. The Hon’ble Bombay High Court thus considered the issue and held that the case of the assessee was covered under the Govt. Instructions. Having taken a specific stand before the Hon’ble Bombay High Court relying upon the FIPB circular in the case of another assessee, now the department is estopped from its own act and conduct to agitate in the case of the present assessee that the FIPB circular can not be applied. The Department is supposed to adopt uniform policy in cases of all the assesses in respect of the same issue and can not be allowed to adopt different yardsticks for different assessees on the same issue. Even, under the circumstances, it cannot be said that the Hon’ble Bombay High Court has not laid down any proportion of law. We may point out here that the said decision of the Hon’ble Jurisdictional High Court in the case of 11 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. “SGS India Pvt. Ltd.” (supra) has also been followed in the latest decision of the co-ordinate bench of the Tribunal in the case of “ACIT vs. Dow Agrosciences India Pvt. Ltd.” vide order dated 10.08.2016. The relevant part of the said order is reproduced as under: “7.2 Now in the present year, the case of the assessee is that the plea that rate of royalty approved by the Central Government as also by the Reserve Bank of India constitutes a valid CUP data has been affirmed by the Hon'ble Bombay High Court in the case of CIT vs. SGS India Pvt. Ltd., ITA No.1807 of 2013 dated 18/11/2015. In this context, the Ld. Representative for the assessee pointed out that before the Hon'ble High Court, the Revenue had relied upon Press Note No.9 (2000 series) issued by Central Government for adopting the rates of royalty prescribed therein for benchmarking royalty payable. In this context, reference was made to para 8 of the order of the Hon'ble High Court, wherein clause(IV) of the Press Note was specifically noted, which provided for payment of royalty upto 8% on export sales and 5% on domestic sales. The Ld. Representative for the assessee explained that though clause (IV) of Press Note No.9 (2000 series) considered by the Hon'ble High Court related to payment of royalty by a wholly owned subsidiary to its offshore parent company, but similar treatment has been extended even to other entities also vide A.P.(DIR Series) Circular No.5 dated 21/7/2003 issued by Reserve Bank of India, Exchange Control Department, Central Office, Mumbai, a copy of which has been placed on record. The Ld. Representative for the assessee pointed out that before the Hon'ble High Court, Revenue stated the Press Note No.9 (2000 series) dated 8/9/2000 was applicable to examine the reasonableness of the royalty paid while computing the arm's length price.
7.3 On the basis of aforesaid it is canvassed that the royalties paid by the assessee are in terms of the approval granted by SIA as also in terms of Circular No.5 dated 21/7/2003(supra) of the Reserve Bank of India and, therefore, the royalties paid @ 8% on export and 5% on domestic sales are to be considered at arm's length rate.
7.4 Although the Ld. Departmental Representative did not dispute the factual matrix, but he has merely relied upon the order of the TPO in support of the case of the Revenue.
7.5 In our considered opinion, following the judgment of the Hon'ble Bombay High Court in the case of SGS India Ltd.(supra), the payment of royalty by the assessee to its associated enterprise, Dow Netherlands @ 5% on domestic sales and 8% on export sales is liable to be considered as at an arm's length rate in view of the Circular No.5 dated 21/7/2003(supra). Therefore, the addition made by the Assessing Officer on this count is unsustainable. In the ultimate analysis, we uphold the action of the CIT(A) in deleting the addition, albeit, on a different ground.”
9. Further, the Ld. A.R. has also brought our attention to the decision of the Hon’ble Gujarat High Court in the case of “Nirma Industries Ltd. vs. Dy. Commissioner of Income Tax” (2006) 283 ITR 402 wherein the Hon’ble
12 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. Gujarat High Court has held that whenever an order of a subordinate forum is carried in appeal, operative part thereof merges into the judgment, order or decision of the superior court after the confirmation, reversal or modification, as the case may be, and the order of the lower court or the forum does not have any independent existence thereafter in relation to the issue which was carried before the appellate court or forum. Thus, where the High Court comes to the conclusion that no substantial question of law arises on a particular issue, it cannot be stated that the subject matter of the controversy between the parties has not been dealt with by the High Court. In such an event, the decision of the Tribunal is affirmed on the issue brought before the High Court and for all intents and purposes it is the decision of the High Court which is operative and which is capable of being given effect to.
In view of the above discussion, in our view, the order of the Hon’ble jurisdictional Bombay High Court in the case of “SGS India Pvt. Ltd.” (supra) is a decision arrived at by the Hon’ble jurisdictional Bombay High Court after considerations of the facts and circumstances of the case and the relevant government notifications in this regard and the same holds binding precedent upon this Tribunal. Respectfully following the said decision of the Hon’ble Bombay High Court, this issue is decided accordingly in favour of the assessee.
Ground No.2 11. The ground No.2 relates to the adjustments on account of disallowance of employees’ contribution towards provident fund and ESIC. The Ld. A.R., at the outset, has stated that the payment of employees’ contribution towards provident fund & ESIC was made by the assessee before due date of filing of return of income for the year under consideration. He, therefore, has stated that the issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of “CIT vs. Alom Extrusions Ltd.” reported in (2009) 319
13 IT(TP)A No.1018/M/2016 M/s. A.W. Faber Castell (India) Pvt. Ltd. ITR 306 (SC) wherein the Hon’ble Supreme Court inter alia has held that the amendment to section 43B vide Finance Act, 2003 w.e.f. 01.04.2004, whereby, the second proviso to section 43B has been deleted and further amendment to 1st proviso has been made, whereby, it has been provided that nothing contained in the said section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable for furnishing the return of income, is retrospective in nature and would operate from 01.04.1988. The Hon’ble Bombay High Court has in the case of “CIT vs. Hindustan Organics Chemicals Ltd.” in of 2012 vide order dated 11.07.14 has held that the Employees’ Contribution to PF is covered by the said decision and that the applicable date will be on or before the due date of filing of return of income for deposit of the said contribution. We, therefore, restore this issue to the file of the AO for the limited purpose to verify that if the contributions towards provident fund & ESIC were paid by the assessee on or before due date of filing of return of income and if the above contentions of the assessee are found correct, then to allow the same in the light of the decision of the Hon’ble Supreme Court in the case of “Alom Extrusions Ltd.” (supra).
In view of our observations made above, the appeal of the assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on 30.09.2016.