Titan Industries Limited, Hosur V. ACIT, CHENNAI

ITA 2192/CHNY/2010

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4955 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 15-03-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 28-12-2010
• Court: TRIBUNAL
• Department Lawyers: PATHALAVATH PEERYA
• Assessee Lawyers: K VASUDEVAN
• Keywords: Transfer pricing; International transaction
• Section: 92B; 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' #! ' $ . %& ' () BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.2192 /MDS./2010 ( / ASSESSMENT YEAR :2006-07) M/S.TITAN INDUSTRIES LTD., 3,SIPCOT INDUSTRIAL COMPLEX, HOSUR 635 126. VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(2), CHENNAI-34. PAN AAACT 5131 A ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) / APPELLANT BY : MR.K.VASUDEVAN,ADVOCATE / RESPONDENT BY : MR.PATHALAVATH PEERYA, CIT, D.R / DATE OF HEARING : 15.03.2017 ! /DATE OF PRONOUNCEMENT : 03.04.2017 . / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE DIRECTED AGA INST THE ASSESSMENT ORDER DATED 29.10.2010 PASSED U/S.143(3) R.W.S.144C OF THE ACT CONSEQUENT TO THE DIRECTIONS OF THE DRP PASSED ITA NO.2192/MDS/2010 2 U/S.144C(5) R.W.S. 144C(8) OF THE ACT ON 27.9.2010 FOR THE ASSESSMENT YEAR 2006-07. 2. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD T O ARMS LENGTH PRICE (ALP) IN RESPECT OF ADVERTISEMENT EXPENDITURE INCURRED BY THE ASSESSEE TO THE ASSOCIATE ENTERPRISES (AES). 3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE DECIS ION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN IT A NO.1592/MDS./2007 DATED 12.05.2016 WHEREIN THE TRIB UNAL DISPOSED OFF THIS GROUND BY OBSERVING AS FOLLOWS:- 2.4.6 WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. IN THIS CASE, TITAN INTERNATIONAL MARKETIN G LTD., (TIML), LONDON INCURRED ` 854.08 LAKHS TOWARDS ADVERTISEMENT EXPENDITURE DURING THE YEAR. THE ASSESSEE HAS TAKEN A PLEA THA T IT WAS INCURRED FOR MARKETING TITAN PRODUCTS AT ABROAD. OUT OF THIS, A SUM OF ` 803.31 LAKHS IS CLAIMED BY THE PARENT/ASSESSEE COM PANY M/S.TITAN INDUSTRIED LTD.( TIL) AS ITS OWN EXPENDI TURE. THIS SUM OF ` 803.31 LAKHS WAS REIMBURSED TO TIML AS EXPENDITURE BY ASSESSEE. THE TOTAL EXPORTS IN THE YEAR WAS ` 1237.69 LAKHS AGAINST WHICH THE ADVERTISEMENT EXPENSES OF ` 803.31 LAKHS WAS ITA NO.2192/MDS/2010 3 65%.FURHTER, THE DESIGN FOR WATCHES DEVELOPED BY AN OTHER AE TITAN INTERNATIONAL HOLDINGS BV (TIHBV), WHICH IS A DESIGN OFFICE IN PARIS, BEING A TAX RESIDENT OF NETHERLANDS HAVE PAT ENTED THE DEVELOPMENT DESIGNS IN FAVOUR OF IT AND THE OUTSIDE INDIA, THE BRAND TITAN IS OWNED GLOBALLY BY TITAN BRAND HOLD INGS NV OF NETHERLANDS (TBHNV), WHICH IS 100% SUBSIDY OF TIHBV . ALL THE DESIGNS DEVELOPED FOR THE UNIQUE FOREIGN MARKETS, A LSO PATENTED AND OWNED BY TAX RESIDENTS OF OTHER COUNTRIES. THE ASSESSEE THE OWNER OF THE TRADE MARK TITAN IN INDIA, FOR THE REST OF THE WORLD THIS TRADE MARK IS OWNED BY TBHNV FOR WHICH IT IS C OLLECTING ROYALTY FROM THE MARKETING CONCERNS USING THEM AS 1% OF THE SALE. THUS, THE LEGAL AND ECONOMIC OWNERSHIP OF THE BRAND TITA N IN OVERSEAS MARKET BELONGS TO AND EXPLOITED BY TBHNV F OR MANUFACTURING AND SUPPLY OF WATCHES, TIL HAS BEEN P AID MARK UP OF 9.73% AND TOTAL COST INCURRED FOR MANUFACTURING. THE PRODUCTS ARE MANUFACTURED BY TIL, SOLD TO AE AND OTHER ENTE RPRISES WORLDWIDE, WHO IN TURN SELL IT TO ULTIMATE CUSTOMER IN THEIR RESPECTIVE TERRITORY. THE RISK ASSOCIATED WITH MARK ETING AND DISTRIBUTION, IS NOT BORNE BY TIL IN INDIA. ON THE OTHER HAND, IT IS BORNE BY AE OUTSIDE INDIA AND THE TIL IS ONLY TO PE RFORM FUNCTION OF CONTRACT MANUFACTURER FOR WHICH IT HAS GOT 9.73% MARK UP ON TOTAL COST. IN THIS BACKGROUND, WE HAVE TO SEE THE CLAIM OF EXPENDITURE OF ` 803.31 LAKHS ON ADVERTISEMENT EXPENDITURE, WHICH IS SEEN FROM THE TABLE AT PAGE-3 OF THIS ORDER. TH ERE IS NO AGREEMENT OR DOCUMENTS PRODUCED BY THE ASSESSEE TO SHOW THE ASSESSEE IS LIABLE TO INCUR THIS EXPENDITURE. IN OT HER WORDS, THE ASSESSEE IS GETTING ONLY MARK-UP ON THE COST OF MAN UFACTURE OF THE GOODS SUPPLIED TO THE AE AND IT IS NOWHERE CONNECTE D WITH THE SALES OF THE AES. ALL THE RISKS ASSOCIATED WITH TH E SALES OF AES, IS ITA NO.2192/MDS/2010 4 TO BE BORNE BY AE ONLY. IN SUCH CIRCUMSTANCES, ASS ESSEE IS NOT REQUIRED TO INCUR ANY EXPENDITURE TOWARDS SALES. M ORE SO, WHEN THERE IS NO STIPULATION BY WAY OF ANY AGREEMENT BET WEEN THE ASSESSEE AND THE AE, IT IS TO BE BORNE IN MIND THAT IF THE ASSESSEE HAD SOLD SIMILAR GOODS TO OTHER NON-AE, ASSESSEE WO ULD NOT HAVE INCURRED SUCH EXPENDITURE. THE BENEFIT DERIVED FRO M THE IMPUGNED EXPENDITURE IS NOT AT ALL FOR THE ASSESSEE AND IT G OES DIRECTLY TO THE AE ONLY. IN OUR OPINION, SERVICES IN CONNECTION WI TH SUCH ADVERTISEMENT COST WHICH WAS INCURRED IN ABROAD, BE NEFIT ACCRUED TO AE AND THE ASSESSEE CANNOT CLAIM ANY OF SUCH EXP ENDITURE AS THE AE IS IN DIFFERENT TAX JURISDICTION CONSTITUTED DISTINCT AND INDEPENDENT ENTITY SUBJECT TO THE LAW OF THE RESPEC TIVE COUNTRIES AND THE PARENT COMPANY CANNOT CLAIM THE BENEFITS OF THEIR AES BUSINESS OR MAY CLAIM A BENEFICIAL OWNERSHIP TREAT ING THE AE AS VIRTUALLY NON ENTITIES. THIS VIEW IS SUPPORTED BY THE RECENT JUDGEMENT OF SUPREME COURT IN THE VODAFONE INTERNA TIONAL HOLDINGS B. V. VS. UOI REPORTED IN [2012] 341 ITR 01. 2.4.7 FURTHER, AS HELD BY MUMBAI BENCH IN THE CAS E OF STEAM INTERNATIONAL SERVICES PVT. LTD VS. ACIT REPO RTED IN 141 ITD 492 THAT INVESTMENT OF EXPENDITURE TO AE IS VERY MUCH A TRANSACTION AS PER SECTION 92F(V) AND CONSEQUENTLY IT IS A INTERNATIONAL TRANSACTION AS PER SEC.92B OF THE ACT REQUIRING CONSIDERATION U/S.92 OF THE ACT. FURTHER, THE ARGU MENT OF THE ASSESSEE IS THAT TIML IS UNDER LOSSES AND HENCE NO TP ADJUSTMENT IS NECESSARY ON TRANSACTION WHICH IS NOT TENABLE IN VIEW OF THE DECISION OF THE BANGALORE TRIBUNAL IN T HE CASE OF 24/7 CUSTOMER.COM PVT. LTD., IN 140 ITD 344 (BANGALORE) . ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS REJECTED. ITA NO.2192/MDS/2010 5 3.1 ACCORDINGLY, PLACING RELIANCE ON THE ORDER OF THE TRIBUNAL IN ASSESSEE'S OWN CASE, WE ARE INCLINED TO DISMISS THE GROUND TAKEN BY THE ASSESSEE. 4. THE SECOND GROUND IS WITH REGARD TO TRANSFER P RICING ADDITION ON ACCOUNT OF INTEREST OF ` 23,76,936/- IN RESPECT OF INTEREST FREE ADVERTISEMENT ADVANCES MADE BY THE ASSESSEE TO ITS A.ES. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDERATION BEFOR E THIS TRIBUNAL IN ASSESSEE'S OWN CASE CITED SUPRA WHEREIN THE TRIBUNA L HELD AS UNDER:- 3.5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE MADE INTEREST F REE ADVANCES TO THE ASSOCIATE COMPANY, WHICH INCLUDES THE AMOUNTS S PENT FOR BRAND BUILDING, ADVERTISEMENT AND RELATED EXPENDITU RES. AS WE DISCUSSED IN THE EARLIER PARA WITH REFERENCE TO ALP OF ADVERTISEMENT EXPENSES, THE TRANSACTION BETWEEN THE ASSESSEE AND THE AE FALLS WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION AS PER THE PROVISIONS OF THE SECTION 92B OF THE ACT, THEN ALP WITH ITA NO.2192/MDS/2010 6 REFERENCE TO THE INTEREST ON SUCH ADVANCES IS TO BE COMPUTED. ACCORDINGLY, THE TPO AFTER CONSIDERING THE FACT TH AT ASSESSEE HAD ADOPTED FOLLOWING RATE OF INTEREST ON ITS FOREIGN C URRENCY LOANS TO ITS AE IN ACCORDANCE WITH THE BANK RATES PRESCRIBED BY RESERVE BANK OF INDIA. A) 01.04.2002 TO 29.10.2002 6.5% B)30.10.2002 TO 31.03.2003 6.25% THUS, THE TPO/AO APPLIED THE SAME RATE TO DETERMINE THE ALP OF THE ADVANCES MADE BY IT TO ITS AE, TIML HAD WORKED OUT ` 1,20,41,897/-. SINCE THE ASSESSEE HAS INVESTED ITS FUNDS IN AE, THEREBY ASSESSEE HAD TAKEN A RISK OF EMPLOYEE ITS W ORKING CAPITAL WITH THE AE AND IF THE ASSESSEE HAD NO RELATION WIT H THAT ENTITY, IT WOULD NOT HAVE INCURRED SUCH EXPENDITURE ON BEHALF OF THE ASSESSEE OR ADVANCED MONEY TO SUCH AN ENTITY. THUS , NON- CHARGING OF INTEREST TO SUCH OUTSTANDING ATTRACTS T RANSFER PRICING PROVISIONS AND IT IS APPROPRIATE TO CHARGE INTEREST AT LEAST LIBOR PLUS 2% RATE AS HELD BY MUMBAI BENCH OF THE TRIBUNA L IN THE CASE OF M/S.AURINPRO SOLUTIONS LTD. VS.ADDL.CIT(27 ITR ( TRIB.) 276). ACCORDINGLY, WE UPHELD THE ARGUMENT OF THE LD.D.R O N THIS ISSUE. IF ANY DIFFERENCE IN THE RATE OF INTEREST IS CHARGED B Y THE TPO/AO AS COMPARED TO LIBOR PLUS 2%, THE SAME TO BE RECOMPUTE D. ITA NO.2192/MDS/2010 7 ACCORDINGLY, PLACING RELIANCE ON THE ORDER OF THE T RIBUNAL IN ASSESSEE'S OWN CASE, WE ARE INCLINED TO DISMISS THE GROUND TAKEN BY THE ASSESSEE. 6. THE THIRD GROUND IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE U/S.14A OF THE ACT. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. FOR ASSESSMENT YEAR 2006-07, RULE-8D IS NOT APPLICABLE AS IT WAS INSERTED WITH EFFECT FROM 24.0 3.2008. ACCORDINGLY, IN OUR OPINION FOR THESE ASSESSMENT YE ARS WE DIRECT THE A.O TO DISALLOW 2% OF THE EXEMPTED INCOM E ON PLACING RELIANCE ON THE JURISDICTION HIGH COURT IN THE CASE OF SIMPSON & CO. LTD. V. DCIT IN TAX CASE NO.2621 OF 2 006 DATED 15.10.2002. THIS GROUND RAISED BY THE ASSESSEE IS P ARTLY ALLOWED. ITA NO.2192/MDS/2010 8 8. THE FOURTH GROUND IS WITH REGARD TO APPORTIONMENT O F THE COMMON EXPENSES ON THE BASIS OF TURNOVER FOR THE PU RPOSE OF DEDUCTION U/S.80-IC OF THE ACT. 9. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE O PINION THAT SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN ITA NO.1592/MDS./2007 DATED 12.05.2016 WHER EIN THE TRIBUNAL HELD AS UNDER:- 8.4 WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. THE CLAIM OF DEDUCTION U/S.80-IB OF THE ACT IN RESPECT OF PROFITS OF EURO WATCH DIVISION CANNOT BE DENIED ON THE GROU ND THAT IT IS ONLY NOTIONAL PROFIT, AS ASSESSEE USES THE PRODUCTS OF E URO WATCH DIVISION FOR CAPTIVE CONSUMPTION OF THE ASSESSEE OR FOR THE REASON THAT ASSESSEE HAS NOT EARNED ACTUAL PROFITS. IN OUR OPI NION, THE PROFIT FROM EURO WATCH DIVISION TO BE WORKED OUT ON STANDALONE BASIS BY APPORTIONING OF NECESSARY EXPENDITURE IN PROPORTION ATE TO THE TURNOVER TO THIS DIVISION AND ASCERTAINED THE TRUE PROFIT OF THE EURO WATCH DIVISION. THE MARKET VALUE OF PRODUCT OF THE EURO WATCH DIVISION IS TO BE DETERMINED ON THE AVERAGE PRICE TO BE PAID, OR P AID BY THE ASSESSEE TO THE OTHER PARTIES IN THE OPEN MARKET, H AD IT BEEN PURCHASED FROM THE OUTSIDERS WHICH WOULD BE IN TERM S OF SEC.80-IA(8) ITA NO.2192/MDS/2010 9 R.W.SEC.80-IB(13) OF THE INCOME TAX ACT. ACCORDING LY, THE ISSUE IN DISPUTE IS REMITTED TO THE FILE OF THE AO FOR RE-CO MPUTATION OF THE PROFIT OF EURO WATCH DIVISION AND CONSIDERED THE CLAIM OF ASSESSEE FOR DEDUCTION U/S.80-IB IN THE LIGHT OF ORDER OF TRIBUN AL IN THE CASE OF WEST COAST PAPER MILLS LTD., VS. ACIT REPORTED IN [2006] 103 ITD 19 (ITAT)[MUM]. THIS ISSUE IS PARTLY ALLOWED FOR STATI STICAL PURPOSES. ACCORDINGLY, PLACING RELIANCE ON THE ORDER OF THE T RIBUNAL IN ASSESSEE'S OWN CASE, WE ARE REMITTED THE ISSUE TO T HE FILE OF AO FOR FRESH CONSIDERATION IN THE LIGHT OF THE DIRECTIONS. 10. THE LAST GROUND IS WITH REGARD TO PROVISION FO R DOUBTFUL ADVANCES OF ` 25 CRORES. 11. BEFORE US, LD.A.R PLEDED THAT THE ASSESSEE HAS ALREADY DISALLOWED WHILE COMPUTING THE INCOME OF ASSESSEE I N THE ASSESSMENT YEAR UNDER CONSIDERATION WHILE DETERMINI NG THE TAX LIABILITY AND THE SAME CANNOT BE OFFERED TO TAX TWI CE IN THE HANDS OF THE ASSESSEE. ITA NO.2192/MDS/2010 10 12. AFTER HEARING BOTH THE SIDES, WE ARE OF THE OP INION THAT THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE BEFORE US TO SUBSTANTIATE THIS ARGUMENT. ACCORDINGLY, WE REMIT THE ISSUE IN DISPUTE TO THE FILE OF AO WITH A DIRECTION TO ASSESSEE TO PLACE NECESSARY EVIDENCE TO SUPPORT OF ITS CLAIM BEFORE THE AO. THEREFORE, THIS ISSUE IS REMITTED TO THE FILE OF AO FOR FRESH CONSIDERATION. 13 . IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 03 RD APRIL, 2017 AT CHENNAI. SD/- SD/- ' # $ . % & ' ( DUVVURU RL REDDY ) ) ( ( ( ) * + ) ) ' CHANDRA POOJARI ', JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 03 RD APRIL, 2017 . K S SUNDARAM. -.,, /0,10 /COPY TO: , 1. /APPELLANT 2. /RESPONDENT 3. , 2,'' /CIT(A) 4. , 2 /CIT 5. 034, 5 /DR 6. 4,6 /GF