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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI SANDEEP GOSAIN
अऩीराथी की ओय से / Assessee by : Shri Ajit Kumar Jain, Pranith Golecha and Siddhesh Chaugule प्रत्मथी की ओय से/ Revenue by : Shir N.K. Chand, CIT and Shri Mahesh Shah, Addl. CIT सुनवाई की तायीख / Date of Hearing : 1.9.2015 घोषणा की तायीख /Date of Pronouncement : 30.10.2015 आदेश / O R D E R PER D. KARUNAKARA RAO, AM: There are two appeals and one Cross Objection under consideration involving the assessment year 2003-2004. Out of them, appeal and the Cross objection no.161/M/2012 are filed by the assessee, and appeal ITA No.6519/M/2011 is filed by the Revenue. Since, the issues raised in all these appeals are inter-connected, therefore, for the sake of convenience, they are clubbed, heard together and disposed of in this consolidated order. Appeal wise and ground wise adjudication is given in the following paragraphs of this order.
ITA No.6391/M/2011 (By assessee)
This appeal filed by the assessee on 16.9.2011 is against the order of the CIT (A)-15, Mumbai for the assessment year 2003-2004. In this appeal, assessee raised the following grounds which read as under:
“1. The Ld CIT (A) erred in not allowing the additional claim of the appellant company of INR 4,36,058/- being contributions to provident fund etc made by the appellant company and which were paid before filing the return of income.
2. The Ld CIT (A) erred in confirming the disallowance of INR 11,34,779/- being expenses towards customs duty, duty drawback, etc., which although pertaining to earlier years were actually crystallized during the assessment year under consideration. 3. (i) The Ld CIT (A) erred in confirming the disallowance of INR 35,64,988 being the amount in respect to unreconciled sundry creditors. (ii) The Ld CIT (A) erred in not considering the submission of the appellant company in correct perspective.
The Ld CIT (A) erred in confirming the disallowance of INR 11,62,250 being travelling expenses of the sales team incurred during the year.
The Ld CIT (A) erred in confirming the disallowance of INR 47,78,416/- being expenses incurred under the head Advertisement and Sales Promotion.
The Ld CIT (A) erred in confirming the disallowance of INR 1,37,866/- being expenses incurred under the head travelling and conveyance.
The Ld CIT (A) erred in confirming the disallowance of INR 14,53,20/- in respect of deprecation on general plant and machinery.
The Ld CIT (A) erred in confirming the addition of INR 440,82,451/- in respect of transfer pricing adjustment made in respect of the international transactions related to import of finished goods. 9. the Ld CIT (A) erred in not appreciating in correct perspective the submissions made by the appellant company with regard to the aforesaid disallowances/ addition.
Each one of the grounds of appeal
is without prejudice to the other.”
3. Before us and at the outset, Ld Counsel for the assessee brought our attention to the above grounds and mentioned that Ground nos. 1 to 7 stand either covered (Ground no.1 and 7) or not pressed (Ground no.6) or required to be remanded for fresh adjudication considering the judgment of the Supreme Court in the case of Goetze (India) Limited vs. CIT [2006] 284 ITR 323 an also the order of the Tribunal in the assessee‟s own case for the A Y 2002-03. On hearing both the parties, we approve the Ld AR‟s arguments.
4. Ground no.1 relates to the disallowance u/s 43B of the Act in respect of contribution to PF amounting to Rs. 4,36,058/-. In this regard, Ld AR briefly narrated the facts and relied on the Tribunal‟s order for the AY 2002-2003 in the assessee‟s own case, wherein the Tribunal adjudicated the identical issue and allowed the assessee‟s claim u/s 43B of the Act vide para 8 of its order dated 12.6.2013. On perusal of the said decision of the Tribunal for the AY 2002-03 in the assessee‟s own case (supra), we direct the AO to examine and apply the ratio laid down in the said Tribunal‟s order (supra) to the issue under consideration and allow the claim accordingly in accordance with law. Accordingly, Ground no.1 is allowed.
5. Ground no.2 relates to disallowance of prior period expenses of Rs. 11,34,779/-. In the assessment, AO treated the same as prior period items and disallowed the same as not pertaining to the AY under consideration. On appeal, CIT (A) confirmed the same and therefore, assessee is in appeal before the Tribunal. Before us, Ld Counsel for the assessee relied on the Tax Audit Report and stated that as per the said report no prior period expenses are debited to the profit and loss account. He further submitted that forfeiture of customs duty / lapse of duty drawback are allowable expenditure under section 37 of the Act. In support of this, he relied on various precedents. On the other hand, Ld DR relied on the orders of the Revenue Authorities. On hearing both the parties and on perusal of the relevant material placed before us, we find this matter should be remanded to the file of the AO with a direction to examine and adjudicate the issue afresh after affording a reasonable opportunity of being heard to the assessee. Accordingly, Ground no.2 is allowed for statistical purposes.
6. Ground no.3 relates to the disallowance of unreconciled sundry creditors of Rs. 35,64,988/-. During assessment proceedings, AO called for explanation in this regard and on perusal of the same, AO observed that the assessee debited an excess amount of Rs. 35,64,988/- against the confirmation from the creditors. Accordingly, AO disallowed the said amount considering the assesseed‟s failure to reconcile the difference. On appeal, CIT (A) confirmed the AO‟s decision and upheld the disallowance made by him. Before us, Ld AR submitted that even after repeated requests, the Revenue Authorities have not provided the relevant material filed by the creditors in response to the notice issued u/s 133(6) of the Act as well as the basis on which „the amount debited by the assessee‟ has been arrived to determined the shortfall. As well, the Revenue Authorities also have not provided sufficient opportunity to furnish the reconciliation which is against the principle of natural justice. Considering the above, Ld AR requested to remand the matter to the file of the AO for fresh consideration and decision in the matter. After hearing the Ld DR in this regard, we remand this matter to the file of the AO to examine the reconciliation and other relevant material, if any, relevant to the issue under consideration furnished by the assessee and adjudicate the issue afresh after affording a reasonable opportunity of being heard to the assessee. Accordingly, Ground no.3 raised by the assessee is allowed for statistical purposes.
7. Ground no.4 relates to a disallowance of travelling expenses for sales team of Rs. 11,62,250/-. In the assessment, AO disallowed the said amount of Rs. 11,62,250/- on the ground that the assessee could not substantiate its claim of travelling expenses by furnishing the relevant details. On appeal, CIT (A) called for remand report from the AO. On perusal of the remand report from the AO and also after considering the submissions made by the assessee, CIT (A) upheld the disallowance made by the AO and therefore, the assessee is aggrieved and filed an appeal before the Tribunal by raising the above mentioned ground no.4. Before us, it is the contention of the assessee that though the sales performance in the month of March, 2003 may not be available by the year end, the sales performance for the period April 2002 to February 2003 would be available in March and that should be sufficient reason to anticipate the obligation towards foreign travel incentive to the sales team. He further submitted that, since the assessee is following the mercantile system of accounting, therefore, irrespective of the actual cash flow, the expenses incurred towards earning an income should be considered to determine the taxable profits. For this proposition, Ld AR relied on the Apex Court judgment in the case of Calcutta Co Ltd (37 ITR 1)(SC) wherein it has been held that any sum representing the estimated expenditure which had to be incurred by the assessee in discharging a liability. Alternatively, it is the submission of the assessee that since the expenses are actually incurred during the FY 2003-2004, the expenses should be allowed for AY 2004-05 corresponding to the FY 2003-2004. After hearing both the Ld Representatives in this regard, we are of the opinion that this matter should also be remanded to the file of the AO to adjudicate the issue afresh in the light of the above mentioned Apex Court judgment and also considering the relevant material available on the subject after affording a reasonable opportunity of being heard to the assessee. Accordingly, Ground no.4 raised by the assessee is statistically allowed.
7. Ground no.5 Relates to the disallowance of expenses under the head advertisement and sales promotion of Rs. 47,78,416/-. Briefly stated, in the P & L Account, assessee debited an amount of Rs. 1,34,59,595/- under the head „customer / trade promotions‟ grouped under the head „advertisement and sales promotion‟. In the assessment, AO observed that the assessee has furnished only a breakup of expenses and not furnished any relevant details and therefore, he disallowed an amount of Rs. 47,78,416/-. On appeal, CIT (A) confirmed the decision of the AO. Aggrieved, assessee is in appeal before the Tribunal. Before us, Ld AR submitted that since, the assessee is method of accounting is mercantile system the treatment given by the assessee is correct and no disallowance is called for. After hearing Ld Representatives of both the parties, we find it relevant to remand the matter to the file of the AO to examine and adjudicate the issue after granting a reasonable opportunity of being heard to the assessee. Accordingly, Ground no.5 raised by the assessee is allowed for statistical purposes.
9. Ground 6 relates to disallowance of travelling and conveyance expenses of Rs. 1,37,866/-. Before us, Ld Counsel mentioned that this ground is not pressed. Therefore, the ground is dismissed as not pressed.
10. Ground no.7 relates to the disallowance of depreciation on plant and machinery amounting to Rs. 14,53,206/-. In the assessment, AO observed that assessee discontinued the manufacturing of toys and considered other options in respect of manufacturing unit. Accordingly, AO held that the plant and machinery was not put to use during the year and the same was not kept ready for use, and therefore, depreciation claimed on the general plant and machinery amounting to Rs. 14,53,206/- was disallowed. On appeal, CIT (A) confirmed the AO‟s decision. Aggrieved, assessee is in appeal before the Tribunal. Before us, Ld Counsel for the assessee relied on the order of the Tribunal in assessee‟s own case for the AY 2002- 2003 (supra) wherein the identical issue was adjudicated by the Tribunal and restored the matter to the file of the AO with a direction to verify whether the plant and machinery were used for other than the manufacturing purpose, and directed to grant depreciation in case such plant and machinery were used. Therefore, it is prayed that considering the commonality of the issue, the matter may be decided in the same lines. On hearing both the parties, we direct the AO to apply the decision taken by the Tribunal for the AY 2002-2003 on this matter in the assessee‟s own case and adjudicate the issue afresh after granting a reasonable opportunity of being heard to the assessee. Accordingly, Ground no.7 is allowed in the above manner.
Transfer Pricing Issues 11. Ground no.8 relates to the addition of Rs. 4,40,82,451/- made in respect of Transfer Pricing adjustment made in respect of the international transaction related to import of finished goods. Briefly stated relevant facts include that the assessee (Mettel) is an indirectly wholly owned subsidiary of Mattel Inc. USA. During the year, assessee recorded manufacturing and distribution segments. Like in earlier AY, the assessee imported high end Toys from its AE for sale third parties in India worth Rs 6.44 crores. Assessee benchmarked the said international transaction by applying TNMM method initially and subsequently substituted the same with RPM method. Application of ‘most appropriate method’ is the subject matter of dispute before the Tribunal in AY 2002-03. Assessee claims, being a distributor, the RPM is the most appropriate one. In the AY 2003-2004, assessee benchmarked the transaction by using RPM method and the TPO rejected the same. Instead, he applied the TNMM method. Assessee is of the view that being a distributor, the RPM is most appropriate method. Rejecting the same, the TPO computed adjustment of INR 4,50,53,151/- after considering the ALP at 0.75 % applying the TNMM. However, TPO did not dispute that the internal comparables are preferable to the external comparables. As per the TPO, the role played by the assessee as a third party contract manufacturer is different from the role played by it as a distributor, when it deals with its AE. TPO / CIT (A) are of the view that the assessee is not mere a distributor as it undertook building of „intangibles‟ as 65% of the operational cost was incurred on AMP expenses. TPO also mentioned that assessee is engaged in manufacturing activity too. As per the TPO, where value addition oriented functions are undertaken by the assessee, RPM is not the most appropriate method. Rejecting the RPM and the GP level ALP studies of the assessee, TPO benchmarked the international taxation by applying TNMM method and OP/OC as PLI. Before the CIT (A), assessee objected to the said adjustments amounting to Rs 4.5 cr (rounded off) and the same are rejected. CIT (A) confirmed the adjustments made by the AO / TPO. However, CIT (A) granted relief on account of standard deduction of 5% amounting to Rs. 9.7 lakhs. Revenue is aggrieved on this. Therefore, there are cross appeals. Assessee also filed Cross Objection against the appeal of the revenue.
With the above brief facts, before us, Ld AR submitted that (i) most appropriate method is the subject matter of appeal before the Tribunal in the AY 2002-2003 and the same was decided in favour of the assessee. RPM is held to be most appropriate method. In this regard, he brought our attention to paras 38 to 40 of order of the Tribunal vide (copy placed at page 295 of the APB). He also submitted that the order of the Tribunal for the AY 2002-2003, dated 12.6.2013 was passed later in time and therefore, the CIT (A) / TPO were not the beneficiaries of this order at the time of making of their orders. Referring to the benchmarking events ie selection of comparables, Ld AR justified that the internal comparable. Referring to the magnitude of AMP expenses and the creation of intangibles and value addition, he submitted that the company registered similar AMP expenditure and consequential value addition earlier and later years too. In such circumstances, there is need for complying with the order of the Tribunal for the AY 2002-2003. He relied on the Third Member decision in the case of Technimont ICB India (P) Limited in ITA No. 5085/Mum/2010 which is relevant for the proposition that with the internal comparables, the higher degree of comparability is achieved.
On the other hand, Sri Mahesh Shah, Ld Sr DR for the Revenue (on rottion duty) argued stating that the assessee not merely a distributor for applying the internal RPM of the assessee. He relied heavily on the order of the AO / TPO / CIT (A) and traced the correspondence of the TRO with the assessee on the requirement of benchmarking the impugned international transactions with AE by using the TNMM and the external comparable. Considering the non compliance, TPO proceeded to under take the ALP studies by using his six comparables which were selected by the assessee in the AY 2002-03. 0.75% is the average operating margin of the said comparables. TPO rejected the RPM and the GP margins of the assessee. On the issue of the covered nature of the issues relating to the „most appropriate method‟ and the related issues, Ld Sr DR is of the view that the order of the Tribunal for the AY 2002-03 needs to distinguished as the same do not deal with the issue of AMP expenditure and the intangibles created by such expenditure. Mr Shah submitted that the assessee adopted TNMM in ay 2002-03 and rejected the RPM in its TP studies. In this regard he relied on the contents of para 20 on page 8 and para 41 of the order of the Tribunal for the said AY.Ld DR also submitted that the Tribunal in that order were under the bonafide belief that the assessee is merely a simple distributor to apply RPM. Further he submitted that the assessee is not a simple distributor but he created marketing intangibles in India as well as value addition. In such case, RPM is not most appropriate method. He laboured a lot to demonstrate that the order of the Tribunal do not have any discussion on these marketing intangibles and the value addition created by virtue of huge AMP expenditure claimed in the P and L account. Referring to para 38 of the order of the Tribunal, Mr Shah inferred that the Tribunal justified the RPM in that AY under the belief that the „value addition‟ is not in existence and therefore APPROVED the RPM. Therefore, the Ld DR summed up by stating that when the assessee is not a pure distributor and he is in use of the marketing intangibles and is in creating the value addition by incurring huge AMP expenditure. Therefore, RPM is not most appropriate method as held by the Tribunal under the wrong premise that the assessee is a pure distributor. Relying on the TP study, quoting the write up on the company‟s “over view”, Mr Shah tried to demonstrate that the assessee is not a pure distributor. In order to demonstrate that the assessee is not pure distributor, Sri Shah submitted the following,-
“... activities of the assessee company proves that the assessee company is using marketing intangibles as well as local market research including maintenance of customer list and customer relationships/ the assessee company has also engaged in value addition in the form of attractive packaging of the products. It has also developed unique marketing and promotional plans to suit the Indian market. This clearly shows that the assessee company is using intangibles as well as making vlue addition in the products which are procured from its AE for distribution. The assessee company has spent 18% of its revenue on marketing and promotion cost during the year. Therefore, it can be concluded that the assessee company is not a pure distributor as has been claimed by the assessee”. (from page 13 of his write up).
Further, compiling the data on AMP, he tried to make out that the expenditure incurred by the assessee on advertisement is on higher side with 3.06% where the comparables registered on that advertisement a/c varying from 0.001% to 0.38% to 1.98%. Thus, Ld DR argued that the Tribunal, without going into the facts relating to 1. marketing intangibles; and 2. Value additions such as packaging, delivery methods etc, approved the RPM method in the asst year 2002-03. He pleaded for distinguishing the same and approve the order of the AO/TPO/CIT(A) on this issue.
We have heard both the parties and perused the orders of the AO / TPO / CIT (A) as well as the written submissions of both the parties. Relevance of the Order of the Tribunal for the AY 2002-03: on this issue, the undisputed fact is that the said orders primarily deal with the most appropriate method of account between the RPM and the TNMM. In that year, the assessee initially conducted the ALP studies based on the TNMM and substituted the RPM during the proceedings before the revenue authorities. The said order is categorical in mentioning that the assessee is a distributor in that year. Relevant extracts are inserted in the para here under. The contents of para 38 of the said order of the Tribunal is categorical in recording the following fact ie “In the instant case, the assessee is a distributor of Mattel Toys and gets the finished goods from its AE and resells the same to independent parities without any value addition. In such a situation, RPM can be the best method to evaluate the transaction whether they are at ALP” From the above it is evident that the Tribunal is in knowledge of the legal proposition that the „value additions‟ shall make a difference in matters of selection of the most appropriate method. This line of our interpretation is supported by the use expressions ie „distributor‟ and „without any value addition‟. The AMP expenditure which are capable of creating the Value addition to the high end toys ie Barbee etc becomes the relevant for factorization in ALP studies. The said order of the Tribunal is expressively silent on the extent of such expenditure incurred in that year 2002-03. Further, it is not clear as to how the Tribunal has come to the conclusion that there is no value addition to the toys sold by the assessee after importing from the AE. Even before us, assessee‟s counsel although mentioned about spending of the similar expenditure debited to the P and L account for the ay 2002-03, is silent in their written submission on the facts relating to the extent of such expenditure vis a vis the claim in the instant year. Therefore, it is difficult for us conclude that the facts of this year are identical on this issue and therefore, and therefore, the claim of the assessee should be allowed on the basis of set principle of consistency. Further, we find there is huge gap between the GP and NP rates in this case meaning thereby that the assessee spent huge expenditure as evident from the financial statements after importing and before the reselling of the imported toys. In the case of the distributor, the gap between the NP and GP is narrow if not the same. Therefore, it is settled proposition that the GP is adopted in RPM method and OP/OC or equivalent is the PLI in TNMM. Prima facie, considering the expenditure in this year under consideration, it does not suggest that the assessee is a mere distributor. In any case we find no clarity in the order of the Tribunal cited above on how the Tribunal has come to the finding of fact that there are no market intangibles and value addition to the resold products in that year. Further, it is a fact that the said order of the tribunal was made after the impugned orders are made. The same was available to the TPO /CIT(A) at the relevant point of time. Before us, the counsels also indicated for remanding to AO for decision on the above issues in the light of the said order of the Tribunal if the facts are similar. Of course, Ld counsels both the parties vehemently argued on the issue of the similarity of the facts relating the AY 2002-03 and the instant year. Further, the new contention of the Ld DR revolves around the huge AMP expenses incurred by the assessee and their contribution to the generation of value addition to the products imported from the AE and the marketing intangibles. Ld DR‟s arguments are essentially focussed on the creation of the „intangibles‟ ie brand or other commercial rights etc and therefore, he justifies the adopting of the TNMM.
After hearing both the parties and perusing the written submissions, we find the order of the Tribunal for the AY 2002-2003 should make lot of differences.
Therefore, we remand this issue of most appropriate method to the file of the CIT (A) to decide the same after hearing the assessee and in the light of the order of the Tribunal for the AY 2002-2003. CIT (A) is also directed to pass a speaking order on the other aspects of benchmarking events ie selection of comparables. Accordingly, the issue raised in Ground no.8 is allowed for statistical purposes.
In the result, appeal of the assessee is partly allowed for statistical purposes. (By Revenue)
This appeal filed by the Revenue on 27.9.2011 is against the order of the CIT (A)15, Mumbai dated 25.7.2011 for the assessment year 2003-2004. In this appeal, Revenue raised the following grounds which read as under: “1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in allowing relief of Rs. 9,70,700/- @ 5% of Arm‟s Length Price as per the amended provisions of section 92C(2) without appreciating the fact that the said amendment is effective from 1.4.2009 ie AY 2009-2010.
2. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in allowing relief @ 5% of Arm‟s Length Price as per provisions of section 92C(2) in the form of standard deduction without appreciating fact that it is in the nature of tolerance fund.”
17. Revenue raised the above grounds relating to the granting of standard deduction @ 5% of the ALP and the applicability of the amended provisions to all the assessments pending as on 1st day of October, 2009. The same is now covered by the amended provisions. In any case, we have remanded the issues relating to the TP adjustments raised by the assessee in its appeal to the file of the AO. Accordingly, the grounds raised by the Revenue stand allowed.
18. In the result, appeal of the Revenue is allowed. C.O. No.161/M/2012 (By assessee) (Arising out of (AY 2003-04)
19. This Cross Objection (CO) raised by the assessee and it arose from the appeal ITA No.6519/M/2011. In this CO, assessee raised certain cross objections relating to the most appropriate method applicable to this case ie whether RPM or TNMM method. All the 15 objections raised by the assessee in the present CO again relate to the core issues adjudicated by us while dealing with the assessee‟s appeal in the above paragraphs of this order. Accordingly, all the cross objections raised by the assessee stand remanded for coordinated adjudication by the AO in the remanding proceedings. Accordingly, CO raised by the assessee is allowed for statistical purposes.
20. In the CO of the assessee is allowed for statistical purposes.
21. Conclusively, appeal as well as the CO raised by the assessee are allowed for statistical purposes and the Revenue‟s appeal is allowed.