L'OREAL INDIA P. LTD, MUMBAI V. ASST CIT CIR 6(3), MUMBAI

ITA 130/MUM/2013

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 7991 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 09-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 04-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; International transaction; Commercial expediency; Set aside
• Section: 271(1)(c); 92C; 92CA; 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI , ' ,# $ BEFORE VIKAS AWASTHY, JUDICIAL MEMBER & SHRI N.K.PRADHAN, ACCOUNTANT MEMBER . 130/ / 2013 (. . 2007-08 ) IT(TP)A NO.130/MUM/2013(A.Y.2007-08) M/S. LOREAL INDIA PVT. LTD. A-WING, 8 TH FLOOR, MARATHON FUTUREX, N.M. JOSHI MARG, LOWER PAREL, MUMBAI 400 013 PAN: AAACL0738K ...... ) / APPELLANT VS. THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 6(3), AAYKAR BHAVAN, M.K.ROAD, MUMBAI 400 020 ..... '*/ RESPONDENT ASSESSEE BY : SHRI NIRAJ SHETH REVENUE BY : SHRI ANAND MOHAN +* / DATE OF HEARING : 02/03/2021 ,-. +* / DATE OF PRONOUNCEMENT : 23/03/2021 / ORDER PER VIKAS AWASTHY, J.M. : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-15, MUMBAI (IN SHORT THE CIT(A)) DA TED 25/10/2012 FOR THE ASSESSMENT YEAR 2007-08. 2 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM TH E DOCUMENTS ON RECORD ARE: THE ASSESSEE IS A SUBSIDIARY OF LOREAL SA, FRANCE. THE ASSESSEE IS AN INTEGRAL PART OF LOREAL GROUP WORLDWIDE. THE OPERATIONS OF THE AS SESSEE COMPANY IN INDIA ARE DIVIDED IN TWO SEGMENTS: (I) MANUFACTURING OF FINISHED GOODS (II)DISTRIBUTION OF IMPORTED PRODUCTS. DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR U NDER APPEAL, THE ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS W ITH ITS GROUP COMPANIES: (I) IMPORT OF RAW MATERIAL FOR MANUFACTURE OF FINISHED PRODUCTS; (II) IMPORT OF FINISHED GOODS FOR RESALE IN INDIA; (III) EXPORT OF FINISHED GOODS MANUFACTURED BY THE ASSESS E; (IV) ROYALTY PAYMENTS; AND (V) OTHER REIMBURSEMENT VIZ. BILLS AND RECEIPTS. IN SO FAR AS ABOVE INTERNATIONAL TRANSACTIONS, THE ONLY ISSUE RAISED BY THE ASSESSEE IN GROUND NO.1 OF ITS APPEAL IS REGARDING TRANSFER PRI CING ADJUSTMENT OF RS.5,72,99,914/- ON ACCOUNT OF INTERNATIONAL MARKETING EXPENSES. 3. SHRI NIRAJ SHETH APPEARING ON BEHALF OF THE ASS ESSEE SUBMITTED THAT ASSESSEE HAD MADE PAYMENTS TO ITS ASSOCIATED ENTERPRISE (AE) IN RESPECT OF MARKETING SERVICES. THE PAYMENTS WERE MADE IN ACCORDANCE WIT H SERVICE AGREEMENTS BETWEEN THE ASSESSEE AND LOREAL SA FRANCE. THE TRANSFER P RICING OFFICER (TPO) MADE ADJUSTMENT IN RESPECT OF THE AFORESAID PAYMENT PRIM ARILY FOR THE FOLLOWING REASONS: (I) THE ASSESSEE PAID ROYALTY FOR BUNDLE OF SERVI CE RIGHTS. THE PAYMENTS MADE UNDER LICENSE/ROYALTY AGREEMENT INCLUDE PAYMEN T FOR MARKETING AND ADVERTISEMENT. 3 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) (II) THERE IS AN OVERLAP OF SERVICES/RIGHTS IN VA RIOUS AGREEMENTS WITH RESPECT TO ADVERTISEMENT AND MARKETING. (III) THE ALLEGED SERVICES RENDERED BY WAY OF INTE RNATIONAL MARKETING SERVICES NOT ONLY PERTAIN TO THE SERVICES RENDERED IN INDIA BUT THEY ALSO REPRESENT WHAT THE ASSESSEE IS ALREADY ENTITLED TO UNDER THE LICENCE AGREEMENT. (IV) THE BRANDS FOR WHICH ADVERTISEMENT AND MARKE TING EXPENSES ARE INCURRED, ARE CONTINUE TO BE OWNED BY OVERSEAS AE, HENCE, THE REAL BENEFIT IS TO THE FOREIGN AE IN THE FORM OF BRAND BUILDING. 3.1. THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSES SEE SUBMITTED THAT THE CIT(A) IN THE IMPUGNED ORDER HAS ERRED IN UPHOLDING THE ADJUS TMENT MADE BY THE TPO. THE LD. AR POINTED THAT THE CIT(A) HAS ERRED IN HOLDING THA T ARMS LENGTH PRICE OF THE SAID TRANSACTION IS TO BE DETERMINED AT NIL FOLLOWING CU P AS MOST APPROPRIATE METHOD, AS NO THIRD PARTY WOULD PAY TWICE FOR SAME SERVICES, ONCE IN THE SHAPE OF INCREMENTAL ROYALTY AND AGAIN AS PAYMENT TOWARDS SERVICES. THE CIT(A) HAS FAILED TO APPRECIATE THAT THE SERVICES/RIGHTS PROVIDE TO THE ASSESSEE BY LOREAL SA FRANCE (AE) UNDER SERVICE AGREEMENT AND LICENCE AGREEMENT DISTINCT WI THOUT ANY OVERLAPPING. THE SERVICES/RIGHTS UNDER LICENCE AGREEMENT ARE WITH RE SPECT TO ACTIVITIES OF MANUFACTURING, USE OF TRADEMARK ETC., WHEREAS, SERV ICE AGREEMENT COVER ACTIVITIES POST MANUFACTURING. THE LD. AR ASSERTED THAT THE AU THORITIES BELOW HAVE FAILED TO APPRECIATE THAT THE INTERNATIONAL MARKETING SERVICE S ARE ESSENTIAL TO THE ENTIRE SALES AND MARKETING ACTIVITY WITHIN INDIA AND OUTSIDE IND IA. 3.2. THE LD. AR FURTHER SUBMITTED THAT THE CIT(A) H AS ERRED IN HOLDING THAT THE MARKETING SERVICES ARE FOR BRAND PROMOTION OF THE B RANDS OWNED BY THE OVERSEAS AE. THE LD. AR ASSERTED THAT THE MARKETING AND ADVERTIS EMENT EXPENSES INCURRED BY THE ASSESSEE ARE FOR INCREASING THE SALES OF ASSESSEES OWN PRODUCTS. THE ASSESSE IS AN 4 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) INDEPENDENT ENTITY AND DEVISES ITS OWN MARKETING ST RATEGY IN LINE WITH THE GROUP POLICY. THE TPO AND THE CIT(A) HAVE ERRED IN COMBIN ING ROYALTY AND MARKETING SERVICES TRANSACTIONS. THERE ARE NO OVERLAPPING OF SERVICES IN THE AGREEMENTS FOR SERVICES AND ROYALTY AND HENCE, NO DOUBLE PAYMENT F OR THE SAME SERVICES. 3.3. THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSES SEE POINTED THAT THE CIT(A) HAS ERRED IN OBSERVING THAT IN THE PAST NO PAYMENTS WER E MADE BY THE ASSESSEE IN RESPECT OF MARKETING SERVICES TO THE AE. THE LD. AR REFERRED TO THE SERVICE AGREEMENTS AT PAGES 148 TO 165 OF THE PAPER BOOK TO SHOW THAT THE AGREEMENTS WERE EXECUTED IN 2001 AND LICENCE AGREEMENTS AT PAG ES 166 TO 189 OF THE PAPER BOOK TO SHOW THAT THE AGREEMENTS WERE EXECUTED IN N OVEMBER 2005. THUS, THE PAYMENTS FOR MARKETING SERVICES WERE BEING MADE SIN CE FINANCIAL YEAR (FY) 2001-02 RELEVANT TO AY 2002-03 AND FOR ROYALTY FROM FY 2005 -06 RELEVANT TO AY 2006-07. THEREFORE, THE FIRST YEAR IN WHICH THE PAYMENT FOR ROYALTY UNDER LICENSE AGREEMENTS, AS WELL AS MARKETING EXPENSES UNDER SERVICE AGREEME NTS WERE MADE WAS IN ASSESSMENT YEAR 2006-07. THE EXPENDITURE INCURRED B Y THE ASSESSEE WAS ALLOWED AND NO ADJUSTMENT WAS MADE IN AY 2006-07. TO SUPPORT HI S CONTENTIONS, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE REFERRED TO THE ORDER OF CIT(A-12, MUMBAI DATED 20/03/2012 FOR ASSESSMENT YEAR 2006-07 AT PAG ES 73-79 OF THE PAPER BOOK. 3.4. THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSES SE, ASSAILING THE FINDING OF LOWER AUTHORITIES ASSERTED THAT THE TPO HAS NO POWER TO D ISALLOW EXPENDITURE OR SIT IN JUDGMENT TO EXAMINE, WHETHER THE EXPENDITURE WAS N ECESSARY FOR THE BUSINESS OR NOT. THE TPO HAS LIMITED JURISDICTION TO DETERMINE THE ARMS LENGTH PRICE OF THE TRANSACTION UNDER TRANSFER PRICING PROVISIONS. TO SUPPORT HIS CONTENTIONS, THE LD.AR RELIED ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. LEVER INDIA EXPORTS LTD., 292 CTR 393(BOM). 5 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) 3.5. THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSES SEE FURTHER REFERRED TO THE OBSERVATIONS OF THE CIT(A), WHEREIN THE FIRST APPEL LATE AUTHORITY HAS HELD THAT THE ALP OF THE MARKETING SERVICES ARE NIL IF CUP IS APP LIED. THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE PLACED RELIANCE ON T HE DECISION OF MERCK LTD. VS. DCIT, REPORTED AS 179 TTJ 121 (MUM) TO CONTEND THAT WERE BUNDLE OF SERVICES ARE RECEIVED UNDER AN AGREEMENT AND THE PAYMENTS ARE MADE FOR SU CH PACKAGE AND NOT FOR INDIVIDUAL SERVICES, IF THE ASSESSE DOES NOT USE AN Y PARTICULAR SERVICES FROM SUCH BUNDLE OF SERVICES IT IS NOT JUSTIFIED TO HOLD THAT THE PAYMENT IS NOT WARRANTED FOR THAT PARTICULAR SERVICE THAT HAS NOT BEEN UTILISED. THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE FURTHER POINTED THAT THE DECISION O F THE TRIBUNAL HAS BEEN APPROVED BY HON'BLE BOMBAY HIGH COURT IN CIT VS. MERCK LTD., 389 ITR 70 (BOM). 4. SHRI ANAND MOHAN REPRESENTING THE DEPARTMENT VEH EMENTLY DEFENDED THE IMPUGNED ORDER AND PRAYED FOR DISMISSING GROUNDNO. 1 RAISED BY THE ASSESSEE. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE TPO AFTER EXAMINING VARIOUS AGREEMENTS EXECUTED BY THE ASSESSEE WITH ITS OVERS EAS AE CONCLUDED THAT THERE IS A DUPLICATION OF SERVICES IN DIFFERENT SET OF AGREEME NTS. THE ASSESSEE HAS MADE PAYMENT FOR MARKETING SERVICES UNDER ROYALTY AGREEM ENTS, AS WELL AS SEPARATE SERVICE AGREEMENTS. THE LD. DEPARTMENTAL REPRESENT ATIVE FURTHER CONTENDED THAT THE ASSESSEE HAS NOT DONE ANY BENCHMARKING TO DETER MINE THE ARMS LENGTH PRICE OF THE TRANSACTIONS. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY RIVAL SIDE S AND HAVE EXAMINED THE ORDERS OF AUTHORITIES BELOW. IN GROUND NO.1 OF THE APPEAL THE ASSESSEE HAS ASSAILED TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTERNATI ONAL MARKETING EXPENSES. A PERUSAL OF THE DOCUMENTS ON RECORD REVEAL THAT THE ASSESSEE HAS ENTERED INTO VARIOUS AGREEMENTS WITH LOREAL SA FRANCE. THE LICENSE AGR EEMENTS UNDER WHICH THE ASSESSE HAS TO PAY ROYALTY IS IN RESPECT OF USE OF PATENTS AND TECHNOLOGY, MARKRTING AND DISTRIBUTION OF LOREAL UNDER ITS BRAND NAME IN INDIA. THE SERVICE AGREEMENT 6 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) BETWEEN THE ASSESSEE AND LOREAL SA FRANCE IS IN RE SPECT OF INTERNATIONAL MARKETING STUDIES, ASSISTANCE IN DESIGN OF PACKAGING, DEVELOP MENT OF ADVERTISEMENT MATERIAL, ETC. THE TPO AFTER HAVING EXAMINED THE AGREEMENTS R ATHER THAN BENCHMARKING INTERNATIONAL TRANSACTIONS QUA MARKETING SERVICE, R AISED QUESTION ON THE PAYMENTS MADE UNDER THE AGREEMENTS, ALLEGING DUPLICATION OF SERVICES. A PERUSAL OF SECTION 92CA OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT), SHOWS THAT REFERENCE IS MADE TO THE TPO UNDER PROVI SIONS OF SUB-SECTION (1) OF SECTION 92CA FOR THE COMPUTATION OF ARMS LENGTH PR ICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS. THE TPO DOES NOT ENJOY UNFETTERED POW ERS UNDER TRANSFER PRICING MECHANISM, TO DISALLOW THE EXPENDITURE OR TO CHECK THE NECESSITY OF THE TRANSACTION. THE JURISDICTION OF TPO IS LIMITED TO ASCERTAIN WHE THER THE INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH ITS AE IS AT ARMS LENGTH BY APPLYING MOST APPROPRIATE METHOD AS SPECIFIED UNDER SECTION 92C(1 ) OF THE ACT. THE TPO CAN NEITHER QUESTION COMMERCIAL EXPEDIENCY OF THE TRANS ACTION NOR EXAMINE WHETHER SERVICE WAS NEEDED OR IS DUPLICATE IN NATURE. FURTH ER, THE TPO CANNOT QUESTION THE QUANTUM OF BENEFIT DERIVED BY THE ASSESSE FROM THE PAYMENT MADE FOR INTERNATIONAL TRANSACTION. THE TPO HAS NO AUTHORITY TO DISALLOW T HE EXPENDITURE FOR ANY EXTRANEOUS REASONS. THE JURISDICTION OF THE TPO IS ONLY TO EXA MINE INTERNATIONAL TRANSACTION AND MAKE SUITABLE ADJUSTMENT AFTER BENCHMARKING THE TRA NSACTION IN LINE WITH THE PROVISIONS OF SECTION 92C OF THE ACT. 6. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. LEVER INDIA EXPORTS LTD.(SUPRA) HAS HELD THAT IN TRANSFER PRICING PROCE EDINGS THE ROLE OF TPO IS TO EXAMINE WHETHER OR NOT METHOD ADOPTED TO DETERMINE ARMS LE NGTH PRICE IS MOST APPROPRIATE AND ALSO WHETHER COMPARABLES SELECTED ARE APPROPRIA TE OR NOT. IT IS NOT PART OF TPOS JURISDICTION TO CONSIDER WHETHER OR NOT EXPENDITURE INCURRED BY ASSESSEE HAS PASSED THE TEST OF SECTION 37 OF THE ACT. THE RELEVANT EX TRACT OF OBSERVATIONS MADE BY THE HON'BLE HIGH COURT ARE REPRODUCED HEREIN UNDER:- 7 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) 7. WE NOTE THAT THE TRIBUNAL HAS RECORDED THE FACT TH AT THE RESPONDENT ASSESSEE HAS LAUNCHED NEW PRODUCTS WHICH INVOLVED HUGE ADVERTISE MENT EXPENDITURE. THE SHARING OF SUCH EXPENDITURE BY THE RESPONDENT ASSESSEE IS A STRATEG Y TO DEVELOP ITS BUSINESS. THIS RESULTS IN IMPROVING THE BRAND IMAGE OF THE PRODUCTS, RESULTIN G IN HIGHER PROFIT TO THE RESPONDENT ASSESSEE DUE TO HIGHER SALES. FURTHER, IT MUST BE E MPHASIZED THAT THE TPO'S JURISDICTION WAS TO ONLY DETERMINE THE ALP OF AN INTERNATIONAL TRANS ACTION. IN THE ABOVE VIEW, THE TPO HAS TO EXAMINE WHETHER OR NOT THE METHOD ADOPTED TO DETERM INE THE ALP IS THE MOST APPROPRIATE AND ALSO WHETHER THE COMPARABLES SELECTED ARE APPRO PRIATE OR NOT. IT IS NOT PART OF THE TPO'S JURISDICTION TO CONSIDER WHETHER OR NOT THE EXPENDI TURE WHICH HAS BEEN INCURRED BY THE RESPONDENT ASSESSEE PASSED THE TEST OF SECTION 37 O F THE ACT AND/OR GENUINENESS OF THE EXPENDITURE. THIS EXERCISE HAS TO BE DONE, IF AT AL L, BY THE ASSESSING OFFICER IN EXERCISE OF HIS JURISDICTION TO DETERMINE THE INCOME OF THE ASSESSE E IN ACCORDANCE WITH THE ACT. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT DISALLO WED THE EXPENDITURE BUT ONLY ADOPTED THE TPO'S DETERMINATION OF ALP OF THE ADVERTISEMENT EXP ENSES. THEREFORE, THE ISSUE FOR EXAMINATION IN THIS APPEAL IS ONLY THE ISSUE OF ALP AS DETERMINED BY THE TPO IN RESPECT OF ADVERTISEMENT EXPENSES. THE JURISDICTION OF THE TPO IS SPECIFIC AND LIMITED I.E. TO DETERMINE THE ALP OF AN INTERNATIONAL TRANSACTION IN TERMS OF CHAPTER X OF THE ACT READ WITH RULE 10A TO 10E OF THE INCOME TAX RULES. THE DETERMINATION O F THE ALP BY THE RESPONDENT ASSESSEE OF ITS ADVERTISEMENT EXPENSES HAS NOT BEEN DISPUTED ON THE PARAMETERS SET OUT IN CHAPTER X OF THE ACT AND THE RELEVANT RULES. IN FACT, AS FOUND B OTH BY THE CIT (A) AS WELL AS THE TRIBUNAL THAT NEITHER THE METHOD SELECTED AS THE MOST APPROP RIATE METHOD TO DETERMINE THE ALP IS CHALLENGED NOR THE COMPARABLES TAKEN BY THE RESPOND ENT ASSESSEE IS CHALLENGED BY THE TPO. THEREFORE, THE AD-HOC DETERMINATION OF ALP BY THE T PO DEHORS SECTION 92C OF THE ACT CANNOT BE SUSTAINED. 7. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES LTD. REPORTED AS 345 ITR 241, AFTER REFERRING TO OECD GU IDELINES PARA 1.36 TO 1.41 OBSERVED: 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES L IES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTIONAL CASES, THE TAX ADMINISTRAT ION SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR TH EM AND THE EXAMINATION OF A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED O N THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATE D ENTERPRISES. IT IS OF FURTHER SIGNIFICANCE THAT THE GUIDELINES DISCOURAGE RE-STRU CTURING OF LEGITIMATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISATION OF SU CH RE-STRUCTURING AS AN ARBITRARY EXERCISE, AS GIVEN IN THE GUIDELINES, IS THAT IT HA S THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOES NOT S HARE THE SAME VIEW AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORESA ID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFE RS FROM ITS FORM AND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE S AME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALI TY, DIFFER FROM THOSE WHICH WOULD 8 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVI NG IN A COMMERCIALLY RATIONAL MANNER. THE HONBLE COURT AFTER CONSIDERING RELEVANT PROVIS IONS OF THE ACT, OECD GUIDELINES AND CATENA OF JUDGEMENTS HELD: 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPENDITURE IN CURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSI NESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EX PENDITURE SHOULD HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE O F BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDI TURE WAS UNREMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASS ESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE TO DECIDE. THE QUAN TUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING TH E ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE EN TIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTIN UOUS LOSSES. 8. IN VIEW OF THE LAW EXPOUNDED BY HONBLE HIGH COU RTS, OECD GUIDELINES AND THE PROVISIONS OF THE ACT, WE ARE OF CONSIDERED VIE W THAT IN THE INSTANT CASE OBJECTIONS RAISED BY THE TPO FOR MAKING ADJUSTMENT IN INTERNATIONAL MARKETING EXPENSE AND UPHELD BY THE CIT(A) ARE WITHOUT ANY LE GAL RATIONAL AND THUS, LIABLE TO BE SET ASIDE. ON MERITS, WE OBSERVE THAT PER SE PAYMENT FOR THE MARKETING SERVICES ARE NOT DISPUTED BY THE ASSESSING OFFICER, HOWEVER, THE TPO HAS NOT CARRIED OUT NECESSARY EXERCISE OF BENCHMARKING ALP OF THE INTER NATIONAL TRANSACTION IN QUESTION, ERGO, WE DEEM IT APPROPRIATE TO RESTORE THIS ISSUE TO THE FILE OF ASSESSING OFFICER/TPO FOR DETERMINATION OF ARMS LENGTH PRICE OF THE TRAN SACTIONS, AS PER THE PROVISIONS OF SECTION 92C OF THE ACT. NEEDLESS TO SAY THAT REASO NABLE OPPORTUNITY OF HEARING BE AFFORDED TO THE ASSESSEE, IN ACCORDANCE WITH LAW. T HE FINDINGS OF THE CIT(A) ON THE 9 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) ISSUE OF TRANSFER PRICING ADJUSTMENT OF INTERNATION AL MARKETING EXPENSES ARE SET ASIDE AND GROUND NO.1 OF THE APPEAL IS ALLOWED FOR STATISTICA L PURPOSE. 9. IN GROUND NO.2 OF THE APPEAL THE ASSESSEE HAS AS SAILED ADDITION OF RS.1,28,74,878/- UNDER SECTION 145A OF THE ACT. TH E LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS FOL LOWING EXCLUSIVE METHOD FOR ACCOUNTING EXCISE DUTY OF PURCHASES. THE ASSESSING OFFICER AND CIT(A) HAVE FAILED TO APPRECIATE THE FACT THAT UNDER EXCLUSIVE METHOD OF ACCOUNTING NO ADJUSTMENT IS WARRANTED AS THERE WOULD BE NO IMPACT AFTER ADJUSTM ENT UNDER SECTION 145A OF THE ACT. THE LD. AR REFERRED TO THE DETAILS OF CENVAT/S ERVICE TAX CREDIT AVAILED AND UTILISED AT PAGE 2 OF THE PAPER BOOK. THE LD. POINT ED THAT CENVAT CREDIT UTILISED IS DEBITED TO THE PROFIT AND LOSS ACCOUNT AS EXCISE DU TY EXPENSES AND UNUTILISED CENVAT IS CARRIED FORWARD UNDER THE HEAD LOANS & A DVANCES UNDER CURRENT ASSETS. THE ASSESSING OFFICER HAS MADE ADDITION WITH RESPEC T TO UNUTILIZED CENVAT CREDIT OF RS.1,28,74,878/- AS ON 31/03/2007 ONLY FOR THE REAS ON THAT THE ASSESSEE HAS FOLLOWED EXCLUSIVE METHOD OF ACCOUNTING. IN THE OPINION OF A SSESSING OFFICER THE ASSESSE SHOULD HAVE FOLLOWED INCLUSIVE METHOD OF ACCOUNTING ONLY. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT WHET HER EXCLUSIVE METHOD OF ACCOUNTING IS FOLLOWED OR INCLUSIVE METHOD OF ACCOU NTING IS APPLIED THERE WOULD BE NO ADJUSTMENT REQUIRED IN RESPECT OF CENVAT CREDIT. TO SUPPORT HIS SUBMISSIONS, THE LD. AUTHORIZED REPRESENTATIVE PLACED RELIANCE ON TH E FOLLOWING DECISIONS: (I) CIT VS. DIAMOND DYE CHEM. LTD., 396 ITR 536(BO M) (II) KANSAI NEROLAC PAINTS LTD. VS. ACIT IN ITA NO .4175 OF 2010 & ITA NO.9184 OF 2010 DECIDED ON 19/ 03/2018. 9.1. THE LD. AR FURTHER SUBMITTED THAT IN THE PRECE DING ASSESSMENT YEARS STARTING FROM AY 2002-03 TO 2006-07, THE ASSESSING OFFICER H AS MADE DISALLOWANCE UNDER SECTION 145A OF THE ACT FOR SIMILAR REASONS AND THE CIT(A) HAS BEEN CONSISTENTLY 10 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) ALLOWED THE SAME IN FAVOUR OF THE ASSESSE. IN THE I MMEDIATELY PRECEDING AY THE CIT(A) HAS AGAIN ALLOWED THE CLAIM OF ASSESSEE AND THE ASSESSING OFFICER HAS ALREADY PASSED THE ORDER GIVING EFFECT. THE LD. AR REFERRED TO THE TABLE AT PAGE 3 OF THE PAPER BOOK GIVING HISTORY OF THE ADDITION U/S145A OF THE ACT IN RESPECT OF UNUTILISED CENVAT CREDIT. THE LD.AR POINTED THAT EVEN IN THE S UBSEQUENT AY I.E. AY 2008-09 THE DISPUTE RESOLUTION PANEL GRANTED RELIEF AND THE SAM E HAS BEEN GIVEN EFFECT BY THE ASSESSING OFFICER IN FINAL ASSESSMENT ORDER. 10. AU CONTRAIRE , THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY DE FENDING THE IMPUGNED ORDER SUBMITTED THAT IT IS MANDATORY TO FO LLOWING INCLUSIVE METHOD OF ACCOUNTING W.E.F. 1999-2000. IN THE IMMEDIATELY PR ECEDING ASSESSMENT YEAR I.E. 2006-07 THE ASSESSING OFFICER HAD MADE DISALLOWANCE FOR THE SIMILAR REASONS, IN APPEAL BY THE ASSESSEE, THE CIT(A) ALLOWED RELIEF. IN APPEAL BEFORE THE TRIBUNAL BY THE DEPARTMENT, THE TRIBUNAL RESTORED THE ISSUE BAC K TO THE FILE OF ASSESSING OFFICER WITH DIRECTION TO VERIFY THE FACTS TO ENSURE THAT T HE ASSESSEE DOES NOT GET THE BENEFIT OF DOUBLE DEDUCTION ON ACCOUNT OF MODVAT ACCOUNT. 11. BOTH SIDES HEARD, ORDERS OF AUTHORITIES BELOW E XAMINED. THE ASSESSING OFFICER HAS MADE ADDITION UNDER THE PROVISIONS OF SECTION 1 45A OF THE ACT ON ACCOUNT OF ALLEGED UNUTILIZED CENVAT CREDIT. THE ASSESSEE HAS FOLLOWED EXCLUSIVE METHOD OF ACCOUNTING, WHEREAS, THE ASSESSING OFFICER INSISTED THAT INCLUSIVE METHOD OF ACCOUNTING SHOULD HAVE BEEN FOLLOWED. THE CONTENTI ON OF THE ASSESSEE IS, WHETHER INCLUSIVE METHOD OR EXCLUSIVE METHOD OF ACCOUNTING IS ADOPTED, BOTH WOULD GIVE SAME RESULT. 12. IN THE CASE OF DIAMOND DYE CHEM LTD. (SUPRA), T HE HON'BLE BOMBAY HIGH COURT UPHELD THE ORDER OF TRIBUNAL, WHEREIN THE ADDITION ON ACCOUNT OF MODVAT CREDIT WAS DELETED. IN THE SAID CASE, THE ASSESSEE THEREIN HA D ALSO ADOPTED EXCLUSIVE METHOD OF ACCOUNTING. THE RELEVANT EXTRACT OF THE JUDGMENT R EADS AS UNDER:- 11 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) 5. WE HAVE CONSIDERED THE SUBMISSIONS. IT IS NOT DISP UTED THAT THE ASSESSEE WAS LIABLE TO EXCISE DUTY. THE ASSESSEE GOT CREDIT IN THE EXCISE DUTY ALREADY PAID ON THE RAW MATERIALS PURCHASED BY IT AND UTILIZED IN THE MANUFACTURING O F EXCISABLE GOODS. THE ASSESSEE WAS ADOPTING THE EXCLUSIVE METHOD I.E. VALUING THE RAW- MATERIALS ON THE PURCHASE PRICE MINUS (-) THE MODVAT CREDIT. THE SAME WOULD BE PERMISSIBLE. T HE APEX COURT IN THE CASE OF INDO NIPPON CHEMICALS CO. LTD. (SUPRA) WHILE AFFIRMING T HE ORDER OF HIGH COURT, HAS OBSERVED THAT THE INCOME WAS NOT GENERATED TO THE EXTENT OF MODVA T CREDIT OR UNCONSUMED RAW-MATERIAL. MERELY BECAUSE THE MODVAT CREDIT WAS IRREVERSIBLE C REDIT OFFERED TO MANUFACTURERS UPON PURCHASE OF DUTY PAID RAW-MATERIALS, THAT WOULD NOT AMOUNT TO INCOME WHICH WAS LIABLE TO BE TAXED UNDER THE ACT. IT IS ALSO HELD THAT WHICHE VER METHOD OF ACCOUNTING IS ADOPTED, THE NET RESULT WOULD BE THE SAME. 13. IN THE CASE OF KANSAI NEROLAC PAINTS LTD. (SUPR A) ADDITION WAS MADE ON ACCOUNT UNUTILIZED MODVAT CREDIT UNDER SECTION 145A OF THE ACT. IN THE SAID CASE, THE ASSESSEE THEREIN FOLLOWED EXCLUSIVE METHOD FOR ACCO UNTING MODVAT. THE DEPARTMENT INSISTED FOR FOLLOWING INCLUSIVE METHOD OF ACCOUNTI NG. THE TRIBUNAL FOLLOWING THE DECISION RENDERED IN THE CASE OF DIAMOND DYE CHEM L TD. (SUPRA) DELETED THE ADDITION. 14. WE FIND THAT THE DISPUTE WITH REGARD TO CENVAT CREDIT IN THE CASE OF ASSESSEE IS PERENNIAL SINCE AY 2002-03. THE ASSESSEE HAS BEE N FOLLOWING EXCLUSIVE METHOD OF ACCOUNTING AS AGAINST INCLUSIVE METHOD AS REQUIRED UNDER SECTION 145A OF THE ACT. UNDER EXCUSIVE METHOD THE AMOUNT OF CENVAT CREDIT I S NOT ADDED TO THE SALES AND PURCHASES, BUT IS SHOWN SEPARATELY. THE ASSESSEE HA S FILED THE COPIES OF ORDER PASSED BY THE CIT(A) FROM AY 2002-03 ONWARDS (EXCEPT FOR AY 2003-04 WHEN NO ADDITION WAS MADE ON ACCOUNT OF UNUTILISED CENVAT CREDIT) AL ONGWITH ORDER GIVING EFFECT. THE CIT(A) HAS BEEN CONSISTENTLY ALLOWING THE BENEFIT O F CENVAT CREDIT TO THE ASSESSEE. THE ASSESSING OFFICER HAS BEEN GIVING EFFECT TO THE ORDER OF CIT(A), ACCORDINGLY. IN THE IMPUGNED ASSESSMENT YEAR POSITION IS NO DIFFERENT. WE FIND MERIT IN THE CONTENTIONS RAISED BY THE ASSESSEE. THE ASSESSING OFFICER IS DI RECTED TO DELETE THE ADDITION U/S 145A OF THE ACT. THE FINDINGS OF CIT(A) IN THE IMPU GNED ORDER ARE SET ASIDE AND GROUND NO.2 OF THE APPEAL IS ALLOWED. 12 IT(TP)A NO.130/MUM/2013(A.Y.2007-08) 15. IN GROUND NO.3 OF APPEAL, THE ASSESSEE HAS ASSA ILED PENALTY PROCEEDINGS INITIATED UNDER SECTION 271(1)(C) OF THE ACT. CHAL LENGE TO PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT AT THIS STAGE IS PREMA TURE, THUS, GROUND NO.3 RAISED IN THE APPEAL IS DISMISSED, AS SUCH. 16. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERMS AFORESAID. ORDER PRONOUNCED IN THE OPEN COURT ON TUESDAY THE 23 RD DAY OF MARCH, 2021. SD/- SD/- (N.K.PRADHAN) (VIKAS AWAST HY) # / ACCOUNTANT MEMBER / JUDICIAL MEMBER / MUMBAI, 0!/ DATED 23/03/2021 VM , SR. PS (O/S) '*1 2.* COPY OF THE ORDER FORWARDED TO : 1. ) / THE APPELLANT , 2. '* / THE RESPONDENT. 3. 3* ( ) / THE CIT(A)- 4. 3* CIT 5. 45 '*! , . . . , / DR, ITAT, MUMBAI 6. 567 89 / GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI