Bausch & Lomb Eyecare (India) Private Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 3861/DEL/2010

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6372 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 26-02-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 13-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: YOGESH KUMAR VERMA
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Additional evidence; Wholly owned subsidiary; Bad and doubtful debts; Notional interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 92C; 92B; 92F; 234B; 260A; 115JB; 37(1); 37; 2; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI R.P. TOLANI: JUDICIAL MEMBER AND SHRI B.C. MEENA : ACCOUNTANT MEMBER ITA NOS. 3861/DEL/2010, 4924/DEL/2011, 6382/DEL/2012 & 6580/DEL/2013 ASSTT. YRS: 2006-07, 2007-08, 2008-09 & 2009-10. BAUSCH & LOMB EYECARE (INDIA) VS. ADDL. CIT, RANGE- 2, PVT. LTD., RAJENDRA BHAVAN, NEW DELHI. 210, DEEN DAYAL UPADHAYA MARG, NEW DELHI-110012. PAN: AABCB 3877 E (APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI MUKESH BHUTANI ADV. SH. VRINDA TULSHAN ADV. SHRI SANJEEV MALHOTRA ADV. RESPONDENT BY : SHRI YOGESH KUMAR VERMA CIT (D R) DATE OF HEARING: 04-03-2014. DATE OF ORDER : 23-05-2014. O R D E R PER R.P. TOLANI, J.M: : THIS IS A SET OF 4 APPEALS BY THE ASSESSEE FILED AG AINST THE RESPECTIVE ASSESSMENT ORDERS OF AO, PASSED UNDER THE DIRECTION S OF DISPUTE RESOLUTION PANEL (DRP) U/S 144C, PERTAINING TO ASSESSMENT YEAR S 2006-07 TO 2009-10. VARIOUS GROUNDS ARE RAISED INVOLVING TP AND CORPORA TE ISSUES. FOR THE SAKE OF CONVENIENCE THE GROUNDS ARE TABULATED IN FOLLOWING ABRIDGED FORM: PAGE 2 OF 47 2 S. NO. AY ITA NO. FILED BY ISSUES INVOLVED 1. 2006- 07 3861/DEL/2010 APPELLANT TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE. 2. 2007- 08 4924/DEL/2011 APPELLANT TRANSFER PRICING (I) ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE. (II) DISALLOWANCE ON ACCOUNT OF INTRA-GROUP SUPPORT SERVICES. (III) CORPORATE TAX ISSUES. 3. 2008- 09 6382/DEL/2012 APPELLANT TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE (II) (II) DISALLOWANCE ON ACCOUNT OF INTRA-GROUP SUPPORT SERVICES 4. 2009- 10 6580/DEL/2013 APPELLANT TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE. (II) ADJUSTMENT IN RELATION NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES. 2. A PERUSAL OF ABOVE REVEALS THAT ONE COMMON ISSUE IN ALL THE YEARS PERTAINS TO ADJUSTMENT ON ACCOUNT OF ADVERTISING, MARKETING AND PROMOTION (AMP) EXPENDITURE INCURRED BY THE APPELLANT FOR AY 2006-0 7, 2007-08, 2008-09 & 2009-10. BRIEF FACTS IN THIS BEHALF ARE: 2.1. THE APPELLANT IS A WHOLLY OWNED SUBSIDIARY OF BAUSC H & LOMB SOUTH ASIA INC., USA, PRIMARILY ENGAGED IN THE BUSINESS O F (I) MANUFACTURING AND DISTRIBUTION/TRADING OF VISION CA RE PRODUCTS SUCH AS SOFT CONTACT LENSES, TORIC LENSES, INFRA-OCULAR LENSES, EYE CARE SOLUTION AND PROTEIN REMOVING ENZYME TABLETS (VISION CARE S EGMENT). (II) DISTRIBUTION/TRADING OF SURGICAL EQUIPMENT SU CH AS EXCIMER LASER SYSTEM, CATARACT MACHINES AND INTRA-OCULAR LENSES ( SURGICAL EQUIPMENT SEGMENT). PAGE 3 OF 47 3 2.2. FOR EACH OF THESE SEGMENTS, THE APPELLANT ACTS AN I NDEPENDENT MANUFACTURER AND DISTRIBUTOR/ TRADER WHICH INVOLVES UNDERTAKING NORMAL RISKS THERETO INCLUDING MARKET RISKS, PRICE RISKS AND OTH ER INCIDENTAL RISK FACTORS. ALL COSTS OF EXPANDING AND MAINTAINING THE MARKET FOR B &L INDIAS VISION CARE PRODUCTS AND SURGICAL EQUIPMENTS ARE ATTRIBUTABLE TO THE ASSESSEE. THUS, THE ASSESSEE IS TO BE CHARACTERIZED AS A MANUFACTURER A ND DISTRIBUTOR/ TRADER I.E. ONE THAT UTILIZES ROUTINE ASSETS AND UNDERTAKES NORMAL BUSINESS AND ECONOMIC RISKS. 2.3. THE APPELLANTS MARKETING EFFORTS IN THIS BEHA LF ARE FOCUSED TOWARDS EXPANDING AND MAINTAINING THE SALES OF ITS PRODUCTS IN INDIA SINCE MARKET PENETRATION OF CONTACT LENSES IN INDIA IS LOWER THA N OTHER DEVELOPED ECONOMIES. IT IS TO BE APPRECIATED THAT ASSESSEE IS ENGAGED IN THE SALE OF TECHNOLOGY RELATED PRODUCTS WHEREIN THE PRIMARY CUSTOMERS ARE DOCTORS, WHO ARE NOT INFLUENCED BY THE BRAND OF A PRODUCT BUT BY THE PRODUCT UTILITY. TO PROMOTE THIS SEGMENT, THE APPELLANTS MARKETING EFFORTS ARE FOCUSED TOWARDS P ARTICIPATING IN TECHNICAL SEMINARS, CONFERENCES AND EDUCATING THE DOCTORS ABO UT FEATURES OF ITS PRODUCTS. THUS, THESE EXPENSES ARE PREDOMINANTLY SELLING IN N ATURE RATHER THAN RELATED TO ADVERTISEMENT. 2.4. DURING THE IMPUGNED ASSESSMENT YEARS, THE APPE LLANT ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH B&L GROUP C OMPANIES FROM TIME TO TIME INCLUDING AGREEMENT DATED DECEMBER 16, 2002 PLACED ON PB PG. 157-163 OF PB FOR AY 2006-07) WITH ITS ASSOCIATED ENTERPRISES (A E) FOR ITS OWN MANUFACTURING OPERATIONS AND DISTRIBUTION OF PRODUC T MANUFACTURED BY ITS GROUP COMPANIES I.E., THE AE AND OTHER SUBSIDIARIES. THEY DO NOT PERTAIN TO TRADEMARK OR BRAND ENHANCEMENT ACTIVITIES. 2.5. THIS EXPENDITURE BEING PURELY SALES RELATED IN CURRED WHOLLY AND EXCLUSIVELY FOR ASSESSES BUSINESS IN INDIA WAS CLAI MED AS ROUTINE REVENUE PAGE 4 OF 47 4 EXPENDITURE AND ACCORDINGLY THE ASSESSEES TP REPOR T IS PREPARED KEEPING THIS VIEW IN MIND. 2.6. APROPOS TPOS OBJECTIONS THEREON, THEY HAVE B EEN DULY REPLIED BY THE ASSESSEE, HOWEVER, THEY HAVE NOT BEEN CONSIDERE D OBJECTIVELY, AS TPO WAS DETERMINED TO SOME HOW CONSIDER THEM AS BRAND BUIL DING EXPENSES AND MAKE CONSEQUENT TP ADJUSTMENTS, WHICH ARE AS UNDER: APPROACH ADOPTED BY THE TRANSFER PRICING OFFICER ( TPO): 2.7. LD. TPO HELD ASSESSEES AMP EXPENDITURE TO BE EXCESSIVE AND BENCHMARKED THE SAME BY COMPARING IT WITH THAT OF T HE HIS CHOSEN COMPARABLES. POST DETERMINATION OF ALP QUA AMP, A TRANSFER PRICI NG ADJUSTMENT WAS CARRIED OUT ON THIS ACCOUNT IN THESE YEARS HOLDING THAT THE APPELLANT SHOULD HAVE BEEN COMPENSATED BY AE FOR THE ALLEGED BRAND PROMOTION S ERVICES ALLEGED TO BE RENDERED BY THE ASSESSEE. BESIDES LD. TPO FURTHER A DDED A MARK-UP ON RENDITION OF SUCH SERVICES. 2.8. THE TPO THUS CALCULATED THE ADJUSTMENTS AS UND ER: PARTICULARS AY 2006-07 (INR) AY 2007-08 (INR) AY 2008-09 (INR) AY 2009-10 (INR) AMP OF APPELLANT INCLUDING TRADE DISCOUNT/ COMMISSION 20,90,47,349 25,67,02,198 17,60,95,512 12,95,73,460 LESS ARMS LENGTH AMP EXPENDITURE (AS COMPUTED BY TPO) 3,08,74,221 (ALP=2.77%) 3,16,33,605 (ALP=3.61%) 5,84,81,920 (ALP=5.62%) 4,36,18,644 (ALP=3.71%) EXPENDITURE 17,81,73,129 22,50,68,593 11,76,13,592 8,59,54,816 PAGE 5 OF 47 5 INCURRED FOR DEVELOPING INTANGIBLES ADD: MARK-UP 1,78,17,312 (@10%) 3,36,02,740 (@14.93%) 1,76,42,039 (@15%) 1,31,25,300 (@15.27%) ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING 19,59,90,441 25,86,71333 13,52,55,631 9,90,80,116 2.9. AGAINST THE PROPOSED ADJUSTMENTS ASSESSEE APPR OACHED THE LD. DISPUTE RESOLUTION PANEL ( DRP ), AGAIN WITHOUT GIVING COGENT REASONS ON DETAILED OBJECTIONS FILED BY THE ASSESSEE LD. DRP UPHELD THE TP ADJUSTMENTS MADE IN THIS BEHALF AND THE FINAL ASSESSMENT ORDER WAS PASSED BY AO IN ACCORDANCE WITH SUCH DRP DIRECTIONS. 2.10. AGGRIEVED ON THE CONSEQUENT ORDERS PASSED BY LD AO IN ALL THE IMPUGNED YEARS, APPELLANT HAS FILED THESE APPEALS BEFORE TH IS TRIBUNAL. 3. LD COUNSEL FOR THE ASSESSEE SHRI MUKESH BUTANI ADDRESSED THIS ISSUE BASED ON CATEGORICAL AUGMENTS IN FOLLOWING MANNER: EFFECT OF SPECIAL BENCH ORDER IN THE CASE OF LG ELE CTRONICS INDIA LTD: 3.1. THE AMP RELATED ISSUES ARE INFLUENCED BY ITAT SPECIAL BENCH JUDGMENT IN LG ELECTRONICS INDIA LTD VS. ACIT CASE (ITA NO. 5140/DEL/2011). THE APPELLANT WAS ONE OF THE INTERVENER. FOLLOWING TWO MAIN PROPOSITIONS ARE ADJUDICATED BY THE SPECIAL BENCH: 1. WHETHER, ON THE FACTS AND IN CIRCUMSTANCES OF T HE CASE, THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING TRANSFER PRICING ADJUSTMENT IN RELATION TO ADVERTISEMENT, MARKETING AND SALES PROM OTION EXPENSES INCURRED BY THE ASSESSEE? PAGE 6 OF 47 6 2. WHETHER THE ASSESSING OFFICER WAS JUSTIFIED IN H OLDING THAT THE ASSESSEE SHOULD HAVE EARNED A MARK UP FROM THE ASSO CIATED ENTERPRISE IN RESPECT OF AMP EXPENSES ALLEGED TO HAVE BEEN INC URRED FOR AND ON BEHALF OF THE AE? 3.2. THE SPECIAL BENCH VIDE ORDER DATED JANUARY 2 3, 2013 LAID DOWN BROAD PARAMETERS IN RELATION TO THE TP ADJUSTMENT ON ACCO UNT OF AMP. THE KEY PRINCIPLES EMERGING FROM THE HONBLE SPECIAL BENCH RULING MAY BE CATEGORIZED INTO THREE CATEGORIES AS UNDER: CATEGORY 1 TREATMENT OF SELLING EXPENSES SUCH AS TRADE DISCOUNT, VOLUME REBATES ETC, AND; RECEIPT OF SUBSIDY FROM TH E PARENT COMPANY IN RESPECT OF AMP WHICH HAVE BEEN DECIDED BY THE HONB LE SPECIAL BENCH IN FAVOUR OF THE TAX PAYERS. CATEGORY 2 CRITERIA/ FACTORS TO BE CONSIDERED BY THE TPO WHILE BENCHMARKING AMP, SUCH AS BUSINESS MODEL, CONTRACTU AL ARRANGEMENTS, PRODUCT LIFE CYCLES, CHOICE OF COMPARABLES, ETC. CATEGORY 3 LEGAL ISSUES BEFORE THE SPECIAL BENCH, SUCH AS VALIDITY OF TPO JURISDICTION, QUALIFICATION AS TRANSACTION/ INT ERNATIONAL TRANSACTION, USE OF BRIGHT LINE APPROACH, ETC. 3.3. THAT SPECIAL BENCH HAS DECIDED THEM IN FOLLOWI NG MANNER: CATEGORY 1 SELLING EXPENSES SUCH AS TRADE/ CHANNE L DISCOUNTS, COMMISSION ARE NOT PART OF AMP. IN ASSESSEES CASE HOWEVER, THEY HAVE BEEN HELD TO BE AMP EXPENSES, WHICH IS AGAINST THE SPECIAL BENCH PAGE 7 OF 47 7 JUDGMENT, RELEVANT GROUNDS ARE RAISED IN RESPECTIVE GROUNDS OF APPEAL AS UNDER: AY 2006-07 - GROUND NO. 11 & 12 AY 2007-08 - GROUND NO. 9 AY 2008-09 - GROUND NO. 8 & 8.1 AY 2009-10 - GROUND NO. 6 A) IT IS SUBMITTED THAT THE APPELLANT PROVIDED CERTAIN CHANNEL DISCOUNTS TO ITS DEALERS DEPENDING ON THE SALES VOL UMES ACHIEVED. THESE DISCOUNTS ARE ESSENTIALLY IN THE NATURE OF TRADE DI SCOUNTS PROVIDED TO INCENTIVIZE DEALERS TO INCREASE THE SALES VOLUME OF THE APPELLANT. THE APPELLANT ALSO INCURRED COMMISSION EXPENSES WHICH W ERE IN THE NATURE OF NORMAL DEALER COMMISSION PAID TO DISTRIBUTORS/ CHAN NEL PARTNERS DEPENDING UPON APPROVED COMMISSION PERCENTAGE. IN ADDITION TO THE ABOVE, THE APPELLANT ALSO INCURR ED EXPENSES DIRECTLY RELATED TO SALES SUCH AS (I) POINT OF SALE RELATED EXPENSES LIKE BOOKING STALLS, ERECTING STALLS, DISPENSERS, ETC; (II) CONF ERENCE RELATED EXPENSES LIKE COSTS INCURRED FOR PARTICIPATION IN VARIOUS CONFERE NCES ORGANIZED BY LEADING OPHTHALMIC ASSOCIATIONS WHEREIN VARIOUS TRE NDS AND TECHNOLOGIES ARE DISCUSSED BY LEADING DOCTORS; (III) MARKET RESE ARCH; (IV) FREE TRIAL OF CONTACT LENSES RELATED EXPENSES, (V) FREEBIES PROVI DED TO PROMOTE SALES, ETC. THESE EXPENSES ARE PURELY SALES RELATED AND HA VE NO BEARING WHATSOEVER TO THE BRAND OF THE AES. B) IN THE CASE OF THE APPELLANT, WHILE BENCHMARKING AM P, THE TPO INCLUDED THE AMOUNT RELATING TO TRADE/CHANNEL DISCO UNT (FOR AY 2006-07, 2007-08 & 2008-09), COMMISSION (FOR AY 2008-09 & 2009-10) AND OTHER SELLING EXPENSES RELATING TO POINT OF SALE, CONFERENCES, MARKET RESE ARCH, PAGE 8 OF 47 8 FREE TRIAL, FREEBIES, ETC (FOR AY 2006-07 TO 2009- 10) AS PART OF AMP AND SUCH AMP WAS THEN COMPARED WITH THE AMP SPENT OF TH E COMPARABLES WHILE DETERMINING THE ARMS LENGTH PRICE OF AMP AND EVENTUALLY LEADING TO A HIGHER TP ADJUSTMENT. C) THE SPECIAL BENCH IN ITS JUDGMENT (PARA 18.3, 18.4, 18.5 AND 18.6) HAVE CATEGORICALLY EXPRESSED THAT THE EXPENDITURE I N CONNECTION WITH THE SALES HAS TO BE DISTINGUISHED FROM THE EXPENDITURE FOR PROMOTION OF SALES AND AS SUCH EXPENDITURE IN CONNECTION WITH THE SALE S CANNOT BE COVERED WITHIN THE EXPRESSION OF AMP. REFERENCE IS ALSO MA DE TO THE PROVISIONS OF ERSTWHILE SECTION 37(3B) OF THE ACT AND THE LEGA L PRECEDENTS IN THIS REGARD TO ELUCIDATE THE SCOPE OF ADVERTISEMENT, PU BLICITY AND SALES PROMOTION [AN EXPRESSION USED IN THE ERSTWHILE SEC TION 37(3B)], WHICH IS PARI MATERIA TO AMP AS IS USED IN THE PRESENT CONTE XT. D) THE SPECIAL BENCH HAS CATEGORICALLY LAID DOWN A DIV IDER TO DISTINGUISH EXPENSES INCURRED WITH RESPECT TO PROMO TION OF SALES AND EXPENSES INCURRED IN CONNECTION WITH THE SALES. IT HAS BEEN ELABORATELY APPRECIATED BY THE SPECIAL BENCH THAT THE EXPENSES IN CONNECTION WITH SALES ARE INCURRED POST OCCURRENCE OF SALES AND SUC H EXPENSES REDUCES THE COST OF GOODS SOLD AND ARE DIRECTLY LINKED TO SALES . THEREFORE, THE SAME CANNOT BE CATEGORIZED AS SALES PROMOTION EXPENSES A ND BY ANY PARAMETER CAN NOT BE HELD FOR HELPING IN BUILDING BRAND. E) IT IS SUBMITTED THAT THE PRINCIPLES ENUNCIATED BY T HE SPECIAL BENCH HAVE BEEN FOLLOWED BY ITAT DELHI BENCH AS IN VARIOU S CASES INCLUDING CANON INDIA LTD. (ITA NO. 4602/DEL/2010, 5593/DEL/2 011 & 6086/DEL/2012), WHIRLPOOL OF INDIA LTD. (ITA NO. 42 6/DEL-2013) (PARA 6,7 & 8) AND SONY INDIA PVT. LTD. (ITA NO. 4978/DEL /2011 & PAGE 9 OF 47 9 6389/DEL/2012) AND CHANDIGARH BENCH IN THE CASE OF M/S GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD. (ITA NO. 1148/C HD/2011). F) THUS LD. TPO HAS SUMMARILY HELD THAT IT HAS INCURRE D EXCESSIVE EXPENDITURE IN THE FORM OF AMP WHICH LEADS TO BRAND BUILDING FOR ITS FOREIGN AE IN INDIA. THUS, THE LOWER AUTHORITIES HA VE PURPOSELY AVOIDED GOING INTO THE ACTUAL EXPENDITURE AND THE FACT THAT THEY WERE SALES RELATED AS AGAINST ALLEGED BRAND BUILDING. G) IT IS SUBMITTED THAT FOLLOWING EARLIER PATTERN OF A CCOUNTS HEADING EVEN IF THE APPELLANT INCLUDED TRADE/CHANNEL DISCO UNT, COMMISSION, OTHER SELLING EXPENSES, ETC UNDER THE NOMENCLATURE AMP A ND HAS CLAIMED THE SAME AS REVENUE EXPENDITURE AS AGAINST REDUCING THE SAME DIRECTLY FROM SALES. THE EXPENDITURE CANNOT BE CLASSIFIED AS AMP EXPENDITURE, MERELY ON THE BASIS OF ENTRIES IN THE BOOKS OF ACCOUNT. TH E ENTRIES IN THE BOOKS OF ACCOUNTS ARE NOT DETERMINATIVE OF DEDUCTIBILITY OF AN ITEM OF EXPENDITURE FOR THE PURPOSES OF COMPUTATION OF TAXABLE INCOME U NDER THE PROVISIONS OF THE ACT. RELIANCE, IN THIS REGARD, IS PLACED ON KEDARNATH JUTE MFG. CO. LTD. VS CIT: 82 ITR 363 (SC). AS SUCH EXPENSES GO T O REDUCE THE COST OF GOODS SOLD AND HAVE A LIVE NEXUS TO THE SALES MADE DURING THE YEAR(S). THE SPECIAL BENCH OF THE TRIBUNAL APPRECIATING THE SAME, THEREFORE, HELD THAT SUCH EXPENDITURE SHOULD BE EXCLUDED FROM THE A MP BEFORE BENCHMARKING. H) THUS APPLYING PRINCIPLES ENUNCIATED IN LG INDIA SP ECIAL BENCH DECISION, EXPENSES HAVING DIRECT CORRELATION WITH S ALES CANNOT, BE BROUGHT WITHIN THE AMBIT OF AMP FOR DETERMINING THE COST/ V ALUE OF THE INTERNATIONAL TRANSACTION. PAGE 10 OF 47 10 I) SCHEDULE 14 OF THE AUDITED FINANCIAL STATEMENTS CAT EGORICALLY CLASSIFIES THE EXPENSES UNDER THE HEADS OF ADVERTI SEMENT, CHANNEL DISCOUNT AND COMMISSION. THE INCONSISTENCY IN TH E APPROACH ADOPTED BY THE TPO WHILE BENCHMARKING AMP EXPENDITURE INCUR RED BY THE APPELLANT IS AS FOLLOWS: - IN AY 2006-07 AND 2007-08, THE TPO HAS INCLUDED THE AMOUNT OF TRADE DISCOUNT AND NOT INCLUDED COMMISSION. (PG. 21 2 OF PB FOR AY 2006-07 AND PG. 412 OF PB FOR AY 2007-08) - IN AY 2008-09, THE TPO HAS INCLUDED BOTH CHANNEL DI SCOUNTS AS WELL AS COMMISSION (PG. 419 OF PB FOR AY 2008-09) - IN AY 2009-10, THE TPO HAS INCLUDED COMMISSION AND NOT TRADE DISCOUNTS (PG. 369 OF PB FOR AY 2009-10) J) WITHOUT PREJUDICE TO ABOVE CONTENTIONS, THE COMPUTA TION OF NET AMP EXPENDITURE POST REDUCTION OF TRADE/ CHANNEL DISCOU NTS AND COMMISSION HAS BEEN TABULATED AS UNDER: PARTICULARS AY 2006-07 (INR) AY 2007-08 (INR) AY 2008-09 (INR) AY 2009-10 (INR) AMP INCLUDING TRADE DISCOUNT/ COMMISSION 20,90,47,349 25,67,02,188 17,60,95,512 12,95,73,460 LESS: TRADE DISCOUNT 12,52,63,219 16,20,44,325 12,08,47,641 - LESS: COMMISSION - - 10,11,787 14,47,646 LESS: OTHER SELLING EXPENSES RELATING TO POINT OF SALE CONFERENCES, TRIAL GENERAL, MARKET RESEARCH, FREEBIES ETC. 3,76,92,008 3,49,56,215 3,49,17,733 4,65,70,351 TOTAL AMP INCURRED BY APPELLANT 4,60,92,122 5,97,01,658 1,93,18,351 8,15,55,463 K) LD. TPO FURTHER NOTED THAT THE TOTAL AMP TABULAT ED ABOVE (AFTER DELETION OF TRADE DISCOUNT/ COMMISSION/ OTHER SELLI NG EXPENSES RELATING TO POINT OF SALE, CONFERENCES, TRIAL GENERATION, MARKE T RESEARCH, FREEBIES ETC) PAGE 11 OF 47 11 MAY STILL INCLUDE CERTAIN EXPENSES IN THE NATURE OF SELLING EXPENSES AND DEALER INCENTIVES. L) ASSESSEE HAS PROVIDED ALL THE RELEVANT DETAILS IN T HIS BEHALF WHICH HAVE NOT BEEN CONTROVERTED BY TPO IN ANY MANNER. IN THIS SITUATION, THE ASSUMPTION THAT THE DETAILS MAY STILL CONTAIN SOME ELEMENT TOWARDS BRAND BUILDING IS PURELY A GUESS WORK BEREFT OF ANY COGEN T REASONING AND NOT FORM A BASIS FOR FURTHER INTERFERENCE. IT IS PLEAD ED THAT THE AO/ TPO MAY BE DIRECTED TO GRANT RELIEF WITH REGARD TO THE EXP ENDITURE RELATING TO TRADE DISCOUNT, COMMISSION AND ANY OTHER SELLING EXPENSES INCURRED BY THE APPELLANT, AND THE SAME SHALL BE EXCLUDED FROM AMP AT THE THRESHOLD ITSELF BEFORE EVEN INITIATING THE BENCHMARKING EXER CISE. 3.4. CATEGORY 2 KEY FACTORS ENUMERATED BY SPECIAL BEN CH TO BE CONSIDERED BY TPO DURING BENCHMARKING EXERCISE 3.5. THE SPECIAL BENCH OF THE TRIBUNAL (PARA 17.4) HAS CATEGORICALLY SUGGESTED FACTORS FOR DETERMINATION OF COST/ VALUE OF INTERNATIONAL TRANSACTION. THE FACTORS ENUMERATED BY HONBLE SPECIAL BENCH ALO NG WITH APPELLANTS FACTS HAVE BEEN REPRODUCED BELOW: CRITERIAS/ FACTORS SUGGESTED BY SPECIAL BENCH (PARA 17.4) APPELLANTS FACTS FAR OF THE TAX PAYER THE TPO HAS GROSSLY ERRED ON FATS OF THE BUSINESS M ODEL OF THE APPELLANT IN ASSUMING (I) THE ENTIRE AMP EXPENDITURE WAS INCURRED FOR THE DISTRIBUTION ACTIV ITY OF (II) THE APPELLANT IS A LIMITED RISK DISTRIBUTOR. IN THIS REGARD IT IS SUBMITTED THAT THE APPELLANT I S ENGAGED IN BOTH DISTRIBUTION AND MANUFACTURING ACTIVITIES A S MENTIONED IN THE TP DOCUMENTATION AND, ACCORDINGLY, THE APPELLANT IS A ROUTINE MANUFACTURER AND DISTRIB UTOR- MARKETER THAT UTILIZES ROUTINE ASSETS AND UNDERTAKE S NORMAL BUSINESS AND ECONOMIC RISKS. TERMS OF THE APPELLANT ENTERED INTO AGREEMENT WITH ITS AE FOR ITS PAGE 12 OF 47 12 ARRANGEMENT/ AGREEMENTS BETWEEN TAX PAYER AND AE OWN MANUFACTURING OPERATIONS AND DISTRIBUTION OF PRODUCT MANUFACTURED BY ITS GROUP COMPANIES I.E. TH E AE AND OTHER SUBSIDIARIES AND THE SAME HAVE BEEN PLACE D ON RECORD. USE AND EXISTENCE OF BRAND NAME THERE IS NO EXPLICIT ARRANGEMENT OR AGREEMENT ENTER ED INTO BY THE APPELLANT WITH ITS AES FOR EXCLUSIVE US E OF BRAND. ALL MARKETING STRATEGY IS INDIA SPECIFIC ALT HOUGH BRAND IDENTITY IS GLOBAL. THE BRAND NAMES ARE OWNED BY THE AES. THESE BRANDS HAVE BEEN IN EXISTENCE FROM MUCH BEFORE THE APPELLA NT STARTED ITS OPERATION IN INDIA. 3.6. IN VIEW OF THE ABOVE, IT IS PLEADED THAT APPRO PRIATE ORDERS/ DIRECTIONS MAY BE GIVEN TO THE AO/TPO TO IDENTIFY COMPARABLES FOR COMPUTATION OF THE ALP OF B&L INDIA IN LIGHT OF THE FACTORS SUGGESTED BY THE SPECIAL BENCH FOR DETERMINATION OF COST/VALUE OF INTERNATIONAL TRANSA CTIONS. 3.7. CATEGORY 3 APPELLANTS SUBMISSION AGAINST IN TERPRETATION OF LEGAL ISSUES THE LEGAL ISSUES HAVE BEEN DECIDED BY THE SPECIAL B ENCH IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEES. THE APPELLANT RE SERVES ITS RIGHT TO CHALLENGE THE SAME BEFORE HONBLE HIGH COURT IN APPEAL UNDER SECTION 260A OF THE ACT, SUBMISSIONS IN REGARD TO SUCH FINDINGS OF THE HONB LE SPECIAL BENCH ARE PLEADED AS UNDER: S. NO. ISSUES LGS DECISION APPELLANTS REMARKS/ FACTS 1. JURISDICTION OF TPO UPHOLDS RETROSPECTIVE APPLICATION OF SEC. 92CA(2B) ENHANCING TPOS POWERS SUB- SECTION (2B) OF SECTION 92CA COVERS ALL TYPES OF THE APPELLANT EMPHATICALLY CLAIMS THAT PROVISIONS OF SEC. 92CA(2B) ARE NOT APPLICABLE RETROSPECTIVELY. THE SETTLED LAW IN THIS BEHALF PROPOUNDS THAT SUCH PAGE 13 OF 47 13 INTERNATIONAL TRANSACTIONS IN RESPECT OF WHICH THE ASSESSEE HAS NOT FURNISHED REPORT, WHETHER OR NOT THESE ARE INTERNATIONAL TRANSACTIONS AS PER THE ASSESSEES VERSION. LAWS WHICH CREATE UNANTICIPATED LIABILITY CAN BE BROUGHT INTO FORCE WITH PROSPECTIVE EFFECT. RETROSPECTIVITY CANNOT BE ASSUMED BY IMPLICATIONS. 2. TRANSACTION INCURRENCE OF HIGH AMP AND USE OF FOREIGN BRAND ENTAILS UNDERSTANDING AND CONSTITUTES TRANSACTION (PARA 9.11, 9.12 (LAST 4 LINES) & 12.1 TO 13) IT WILL BE APPRECIATED THAT THE QUESTIONS REFERRED TO SPECIAL BENCH WERE ACTUALLY FACT SPECIFIC I.E. THEY WERE REQUIRED TO BE ANSWERED BY THE SPECIAL BENCH IN LIGHT O FACTS AND CIRCUMSTANCES OF THE PRINCIPAL APPLICANT I.E. LG INDIA. THUS, TO A GREAT EXTENT, THE OBSERVATIONS OF THE SPECIAL BENCH WERE RESTRICTED IN THE CONTEXT OF THE FACTS OF THE PRINCIPAL APPLICANT AND DID NOT CONSIDER THE FACTS IN THE CASE OF INTERVENERS. THEREFORE, A JUDGMENT CANNOT IN OUR RESPECTFUL SUBMISSIONS, BE APPLIED UNIFORMLY TO THE INSTANT CASE DE HORS APPRECIATION OF THE RELEVANT FACTS INVOLVED HEREIN. FURTHER, IT IS SUBMITTED THAT THE TPO HIMSELF HAD ACCEPTED THAT THE AMP EXPENSES ARE PAYMENTS TO UNRELATED ENTITIES AND HAS NOT, ANYWHERE, INCURRED IN RELATION TO THE BUSINESS OF THE ENTITY. THE SAME SHOULD BE INCLUDED AS OPERATING PAGE 14 OF 47 14 EXPENSE WHILE COMPUTING THE MARGIN OF APPELLANT UNDER TNMM. WITHOUT PREJUDICE, IF SUCH AMP IS CONSIDERED AS AN INTERNATIONAL TRANSACTION, THEN THE BENCHMARKING SHOULD HAVE BEEN AGGREGATED WITH THE PRINCIPAL TRANSACTION OF APPELLANT I.E. IMPORT OF FINISHED PRODUCTS FOR DISTRIBUTION. 3. COST/ VALUE OF TRANSACTION BRIGHT LINE CONSIDERED AS A TOOL TO DETERMINE COST OF INTERNATIONAL TRANSACTION. (PARAS 15.7 & 15.10) SECTION 92C OF THE ACT PROVIDES THAT ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE PRESCRIBED METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OR CLASS OF TRANSACTION OR CLASS OF THE ASSOCIATED ENTERPRISE OR FUNCTIONS PERFORMED BY THE ENTITIES PARTICIPATING IN THE TRANSACTIONS. BRIGHT LINE IS NOT A METHOD AS PRESCRIBED UNDER THE INDIAN REGULATIONS. 4. METHODS FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION AMP IS A TRANSACTION DISTINCT FROM OTHER TRANSACTIONS, HAVING INDEPENDENT EFFECT ON THE OVERALL NET PROFIT OF THE INDIAN AE. THUS, REQUIRED TO BE SEPARATELY BENCH MARKED AS PER THE TP PROVISIONS AND THE METHODS PRESCRIBED UNDER THE ACT. THE BENCH THOUGH ON SPECIFIC FACTS OF LGS CASE HAS UPHELD THE COST PLUS METHOD FOR DETERMINING THE MARK UP ON SUCH BRAND BUILDING SERVICES. HOWEVER, THE BENCH AHS ALSO HELD AT PARA 22.11 THAT THE AMP EXPENDITURE HAS TO BE BENCH MARKED AS PER THE METHODS PRESCRIBED UNDER THE ACT. PAGE 15 OF 47 15 (REFER RULE 10.) ARGUMENTS RELATING TO APPLICATION OF MARK-UP A) ON SPECIFIC FACTS OF LGS CASE, SPECIAL BENCH UPH ELD THAT A MARK- UP IS TO BE APPLIED AND RULED THAT THE DRP HAS ERRE D IN ARBITRARILY DETERMINING A MARK-UP WITHOUT SHOWING WHAT ARE THE FAR PARAMETERS OF THE INDEPENDENT COMPARABLE ENTITY WOULD HAVE EARNED FROM A SIMILAR INTERNATIONAL TRANSACTION. THE SPECIAL BENCH ON THI S ISSUE RESTORED THE MATTER BACK TO THE FILE OF TPO FOR DETERMINATION OF CORRECT MARK-UP. B) IN THE WAKE OF THESE FINDINGS IT IS CONTENDED THAT IF NO SERVICE HAS BEEN RENDERED THEN THERE SHOULD NOT BE ANY QUESTION OF MARK-UP THEREON. FURTHER, THE AMP EXPENSES HAVE BEEN BENCHMARKED USI NG TNMM. THUS, IF THE TRANSACTION IS ALREADY AT ARMS LENGTH THEN AN ADDITIONAL MARK UP SHOULD NOT BE FURTHER CHARGED THEREON. C) IN THE CASE OF THE APPELLANT, THE TPO / DRP FOLLOWE D AN INCONSISTENT APPROACH TO DETERMINE THE MARK-UP ON F OLLOWING COUNTS: - FOR AY 2006-07 AND 2007-08, THE TPO APPLIED MARK-UP OF 10 PERCENT AND 14.93 PERCENT RESPECTIVELY WHEREIN TPO HAS NOT UNDERTAKEN ANY MEANINGFUL SEARCH FOR SELECTION OF APPROPRIATE COMP ARABLES. FURTHER, THE TPO DID NOT EVER PROVIDE AN OPPORTUNITY TO THE APPELLANT TO RESPOND TO THE COMPARABLES AS FINALLY DISCLOSED IN THE TRANSFER PRICING ORDER. THE COMPARABLES USED BY THE TPO / DRP TO COM PUTE THE ARMS LENGTH MARK-UP ARE NOT COMPARABLE TO THE ALLEGED MA RKETING SERVICES RENDERED BY THE APPELLANT. THE SPECIFIC OBJECTIONS OF THE APPELLANT PERTAINING TO THE USE OF THE COMPARABLES ARE PLACED AT PGS 61-62 OF PB FOR AY 2006-07 & PGS. 87-89 OF PB FOR AY 2007-08. - FOR AY 2008-09 AND 2009-10, THE TPO APPLIED MARK-UP OF PRIME LENDING RATE (PLR) PLUS AN ASSOCIATED SERVICE CHA RGE AND ARRIVED AT A MARK-UP OF 15 PERCENT (PLR OF 12.5 PERCENT PLU S 2.5 PERCENT MARK-UP) AND 15.27 PERCENT (PLR OF 12.77 PERCENT PL US 2.5 PERCENT MARK-UP) RESPECTIVELY. IT IS RESPECTFULLY SUBMITTED THAT THE APPLICATION PAGE 16 OF 47 16 OF PLR TO COMPUTE THE MARK-UP IS ERRONEOUS. THE SPE CIFIC OBJECTIONS OF THE APPELLANT ARE PLACED AT PGS. 130-132 OF PB F OR AY 2008-09 & PGS. 158-159 OF PB FOR AY 2009-10. D) WITHOUT PREJUDICE TO OTHER CONTENTIONS, IT IS SUBMI TTED THAT THE TPO/AO BE DIRECTED TO FOLLOW A CONSISTENT APPROACH IN LIGHT OF THE DECISION OF THE HONBLE SPECIAL BENCH. 4. DISALLOWANCE ON ACCOUNT OF PAYMENT MADE FOR AVAILIN G INTRA-GROUP SUPPORT SERVICES FOR AY 2007-08 & 2008-09 4.1. DURING AY 2007-08 & AY 2008-09, THE APPELLANT ENTER ED INTO A SUPPORT SERVICES AGREEMENT DATED APRIL 1, 2006 WITH B&L HON G KONG LTD. (B&L HK) (PG 313 & 320 OF PB FOR AY 2008-09). THEREAFTE R, DURING AY 2008-09, THE APPELLANT ENTERED INTO SIMILAR AGREEMENTS DATED APRIL 1, 2007 WITH B&L INCORPORATED, USA (B&L INC) (PG 303 & 309 OF PB F OR AY 2008-09) AND BAUSCH & LOMB (SINGAPORE) PRIVATE LIMITED (B&L SIN G) (PG 294 OF PB FOR AY 2008-09). AS PER THE TERMS OF THE AGREEMENTS, TH E APPELLANT PAID A COST PLUS 5 PERCENT IN LIEU OF CERTAIN SUPPORT SERVICES RECEI VED. 4.2. DETAILS OF THE SERVICES RECEIVED BY APPELLANT ARE PLACED AT PG. 94-100 OF PB FOR AY 2007-08 AND PG. 137-140 OF PB FOR AY 2008 -09 . KEY SERVICES PROVIDED BY THE AES ARE AS FOLLOWS: B&L HK B&L INC. B&L SING CONSULTING LEGAL SURGICAL MARKETING MANUFACTURING CORPORATE IT CLINICAL APPLICATIONS CREDIT AND ASSET MGT. CORPORATE TAX SALES SUPPORT PAGE 17 OF 47 17 ADVISORY SERVICES CORPORATE TREASURY TECHNICAL VISION CARE MARKETING GLOBAL PRODUCT CATEGORY SUPPLY CHAIN PROFESSIONAL TRAINING REGULATORY SALES SUPPORT GLOBAL SOURCING INSURANCE LEAN MANUFACTURING IT SAFETY R&D IT GLOBAL OPERATIONS AND ENGINEERING EXECUTIVE QUALITY 4.3. THUS, THE APPELLANT PAID INR 3,75,90,391 FOR AY 20 07-08 AND INR 9,69,30,610 FOR AY 2008-09 TO ITS AES FOR AVAILING SUPPORT SERVICES. WHILE CONDUCTING THE BENCHMARKING, THE FOREIGN AE WAS CON SIDERED AS THE TESTED PARTY USING TNMM AS THE MOST APPROPRIATE METHOD. THE APPE LLANTS INTERNATIONAL TRANSACTION RELATING TO RECEIPT OF SUPPORT SERVICES WAS CONCLUDED TO BE AT ARMS LENGTH SINCE THE AVERAGE MARGIN EARNED BY THE COMPA RABLES WAS HIGHER THAN THE 5% MARK-UP OVER TOTAL COSTS CHARGED BY THE FOREIGN AES. (PG 164 OF PB FOR AY 2008-09) 4.4. THE TPO MADE AN ADJUSTMENT ALLEGING THAT NO SERVICE HAS ACTUALLY PASSED TO THE APPELLANT AND, FURTHER, NO INDEPENDENT PARTY SHALL PAY FOR AVAILING THE SERVICES SIMILAR TO THOSE RECEIVED BY THE APPELLANT FROM ITS AES. IN OTHER WORDS, THE TPO, WHILE REJECTING THE TNMM AS BENCHMARKING M ETHODOLOGY STATED THAT TNMM SHOULD BE APPLIED AT TRANSACTIONAL LEVEL AND N OT ENTITY LEVEL. ACCORDINGLY, THE TPO APPLIED CUP METHOD FOR DETERMI NING THE ALP AS NIL AND NOT ACKNOWLEDGING THE FACT THAT THE SERVICES WE RE ACTUALLY RECEIVED BY THE APPELLANT AND THE SAME HAVE BENEFITTED THE APPELLAN T. PAGE 18 OF 47 18 4.5. IT IS SUBMITTED THAT SERVICES AVAILED FROM THE AES ARE UTILIZED BY THE APPELLANT IN ITS OPERATIONS AND SERVE AS A BUSINESS MAINTAINING TOOL FOR THE APPELLANT. SUCH SERVICES ASSIST WITH STRATEGIC PLAN NING, MANAGEMENT AND MONITORING OF THE APPELLANTS OPERATIONS AND PROVID E MATERIAL BENEFITS TO THE APPELLANT IN TERMS OF REVENUE GROWTH, COST SAVINGS, OPERATIONAL EFFICIENCY AND SUSTAINABILITY. BY INCURRING THESE EXPENSES, THE AP PELLANT HAS ACCESS TO NETWORK, EXPERTISE, SKILLS, KNOWLEDGE, INFORMATION, ETC., TH AT IS AVAILABLE WITHIN THE B&L GROUP. FURTHER, THE APPELLANT HAS NOT PROCURED / PU RCHASED SIMILAR SERVICES FROM UNRELATED PARTIES DURING THESE YEARS AND THE R ESPECTIVE JURISDICTION FROM WHERE THE APPELLANTS AES ARE OPERATING EARN AN ARM 'S-LENGTH MARKUP ON ITS SERVICE ACTIVITIES. 4.6. IT IS SUBMITTED THAT THE INDUSTRY IN WHICH BAUSCH AND LOMB OPERATES I.E. THE VISION CARE INDUSTRY HAS ITS INHERENT RISKS AS THE PRODUCTS CLOSELY RELATE WITH HEALTH AND THE HIGH SENSITIVITY OF HUMAN EYES. CONS EQUENTLY THE RISK OF QUALITY EVENT IS NATURALLY HIGHER THAN OTHER INDUSTRIES. AC CORDINGLY, SUPPORT IN TERMS OF MANUFACTURING SUPPORT, ADVISORY SUPPORT, CONSULTING ETC. IS ESSENTIAL FOR THE INDIAN COMPANY. BESIDES, THE APPELLANT PROVIDED ECO NOMIC JUSTIFICATIONS AS WELL AS A COST BENEFIT ANALYSIS FOR THE PAYMENT OF SUPPORT SERVICE FEE TO ITS AES ALONG WITH SAMPLE DOCUMENTATION TO SUBSTANTIATE THE SAME. THE DETAILED SUBMISSIONS IN THIS REGARD CONTAINING EMAILS, AGREE MENTS, COST ALLOCATION SHEET, COST BENEFIT ANALYSIS, TP DOCUMENTATION OF THE OVER SEAS AE ARE PLACED AT PGS 282-366 OF PB FOR AY 2008-09. 4.7. LD . TPO HAS PROPOSED AN ADJUSTMENT ON ACCOUNT OF REIMB URSEMENT OF SUPPORT SERVICES BY STATING THAT APPELLANT HAD NEIT HER PROVIDED EVIDENCE OF RECEIPT OF SUCH SERVICES FROM AES NOR SUBMITTED WHA T WAS THE BENEFIT RECEIVED / DERIVED FROM SUCH SERVICES. IN THIS REGARD, IT IS SUBMITTED THAT THE BENEFIT TEST IS NOT A METHOD PRESCRIBED UNDER THE REALM OF THE A CT AND IN SPECIFIC UNDER THE PAGE 19 OF 47 19 TRANSFER PRICING PROVISIONS. RELIANCE IS PLACED ON THE FOLLOWING JUDICIAL PRECEDENTS COPIES WHEREOF ARE PLACED ON THE CASE LA WS PAPER BOOK: - CIT VS. EKL APPLIANCES LTD. [2012] 345 ITR 241 (DEL ) - HIVE COMMUNICATIONS PVT. LTD. VS. CIT (ITA NO. 306 OF 2011) - LUMAX INDUSTRIES LIMITED (ITA NO. 5252/DEL/2011) - THE ITAT HAS LAID DOWN THE PRINCIPLE THAT BENEFIT TEST IS NOT A METHOD. - DRESSER RAND VS. ADDL. CIT (2011) 47 SOT 423 (MUM)- ITAT HELD THAT BENEFITS DERIVED BY THE ASSESSEE IS NOT RELEVA NT CRITERIA FOR DETERMINATION OF ALP OF AN EXPENDITURE INCURRED BY THE ASSESSEE. - AIR LIQUIDE ENGINEERING INDIA P. LTD. VS. DCIT (ITA NO. 1040/HYD/2011) - ERICSSON INDIA PVT. LTD. VS. DCIT (2012-TII-48-ITAT -DEL-TP) - IT HAS BEEN HELD THAT THE DOMAIN OF THE TPO IS ONLY TO EXAMINE AS TO WHETHER THE PAYMENT BASED ON THE AGREEMENT ADHERES TO THE ARMS LENGTH PRINCIPLE OR NOT. - SC ENVIRO AGRO INDIA LTD. VS. DCIT (ITA NO. 2057 & 2058/MUM/2009) - THE TPO IS NOT AUTHORIZED TO DISALLOW ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME AND, THEREFORE, THE TPO EXCEEDED THE JURISDICTION IN EXAMINING THE ARMS LENGTH PRICE ON A TRANSACTION. 4.8. INCORRECT APPLICATION OF CUP : CUP CANNOT BE CONSIDERED AS THE MOST APPROPRIATE METHOD SINCE, CUP METHOD COMPARES THE P RICE CHARGED FOR PROPERTY OR SERVICES TRANSFERRED IN A CONTROLLED TRANSACTION TO THE PRICE CHARGED FOR PROPERTY OR SERVICES TRANSFERRED IN A COMPARABLE UN CONTROLLED TRANSACTION IN COMPARABLE CIRCUMSTANCES. HOWEVER, NO SUCH DATA IS AVAILABLE FOR COMPARABILITY PURPOSES. THE TPO WHILE PROPOSING SUCH AN ADJUSTMEN T DID NOT IDENTIFY ANY UNRELATED COMPARABLE TRANSACTIONS FOR APPLICATION O F CUP AND ARBITRARILY CONSIDERED THE ALP AS NIL, THEREBY, PROPOSING AN AD JUSTMENT AMOUNTING TO THE TOTAL VALUE OF REIMBURSEMENTS. IT IS RESPECTFULLY S UBMITTED THAT THE TPO ERRED IN ADOPTING SUCH AN ARBITRARY APPROACH FOR MAKING AN A DJUSTMENT PER SE WHICH IS NOT THE INTENT OF CHAPTER-X. RELIANCE IS PLACED ON THE RECENT JUDGMENT OF THE PAGE 20 OF 47 20 HONBLE DELHI OF BENCH OF THE TRIBUNAL IN THE CASE OF HERO MOTOCORP LIMITED (2013)156 TTJ 139 (DEL) WHEREIN, THE APPLICANT HAD PAID MODEL DEVELOPMENT FEE AND THE TPO APPLIED CUP FOR DETERMINING THE ALP TO BE NIL. THE DRP ARBITRARILY USED 25 PERCENT AS THE CUP. THE TRIBUNA L REJECTED THE APPROACH OF THE DRP/ TPO STATING THAT IT IS TPOS RESPONSIBILIT Y TO COMPUTE THE APPROPRIATE ALP AND THE SAME CANNOT BE DETERMINED AS NIL OR A R ANDOMLY ASSIGNED PERCENTAGE. 4.9. RELIANCE CAN ALSO BE PLACED ON THE DELHI TRIBUNAL RULING IN THE CASE OF ABHISHEK AUTO INDUSTRIES LTD (ITA NO. 1433/DEL/2009 ) WHEREIN THE TRIBUNAL HAS EMPHASIZED THAT LEGALLY BINDING AGREEMENTS CANN OT BE DISREGARDED WITHOUT ASSIGNING ANY COGENT REASONS. THE ABOVE CASE IS DIR ECTLY APPLICABLE TO THE CASE OF THE APPELLANT, WHEREIN, THERE IS AN INTER-COMPAN Y SERVICE AGREEMENT THAT STIPULATE THAT THE APPELLANT WILL PAY A PORTION OF ITS AES TOTAL COSTS IN A GIVEN YEAR. SINCE IT IS NOT POSSIBLE TO INDIVIDUALLY IDEN TIFY EACH OF THE SERVICES RENDERED BY THE APPELLANTS AES AND TO DIRECTLY EST ABLISH THE CORRESPONDING COSTS, THE APPROPRIATE ALLOCATION KEYS AND TEMPLATE HAVE BEEN PREPARED. 4.10. THE APPELLANT PAID FOR SUPPORT SERVICES WITH A SOLE INTENTION OF IMPROVING ITS OPERATIONS AND ALIGN THEM WITH B&L GR OUPS GLOBAL STANDARDS. IT IS CLEARLY A BUSINESS DECISION WHICH IS TO BE CONSI DERED FROM THE POINT OF VIEW OF A NORMAL PRUDENT BUSINESSMAN. THE REASONABLENESS OF THE PAYMENT WITH REFERENCE TO THESE FACTORS HAS TO BE JUDGED NOT ON ANY SUBJECTIVE STANDARD OF THE ASSESSING AUTHORITY BUT FROM THE OBJECTIVE POINT OF VIEW OF COMMERCIAL EXPEDIENCY PRINCIPLE. THE OBJECTIVE BEHIND THE SECT IONS STIPULATED UNDER LAW IS TO PREVENT EVASION OF TAX AND NOT TO CLOTHE THE ROL E OF BUSINESS MAN ON THE TAX COLLECTOR. PAGE 21 OF 47 21 4.11. IT IS WELL-ESTABLISHED PRINCIPLE LAID DOWN BY THE COURTS THAT THE REVENUE CANNOT SIT IN THE ARM CHAIR OF THE ASSESSEE FOR DET ERMINING BUSINESS EXPEDIENCY OF THE EXPENDITURE INCURRED. BY DISPUTING THE BENEF IT ARISING OUT OF THE EXPENDITURE AND THE METHOD OF ALLOCATING THE COSTS, THE TPO HAS EXCEEDED HIS POWERS WHICH IS IN CLEAR VIOLATION OF SUCH PRINCI PLES. RELIANCE IS PLACED ON FOLLOWING JUDICIAL PRONOUNCEMENTS: - SA BUILDERS LTD. VS CIT: [2007] 288 ITR 1 (SC) - CIT VS WALCHAND & CO LTD: [1967] 65 ITR 381 (SC) - CIT VS B. DALMIA CEMENT LTD.: [2002] 254 ITR 377 (D EL) - CIT VS ORACLE INDIA (P) LTD.: [2011] 199 TAXMAN 181 (DELHI) - MCCANN ERICKSON INDIA PRIVATE LIMITED VS ACIT (ITA NO. 5871/DEL/2011) 4.12. IT IS VEHEMENTLY CONTENDED THAT IN THE IMMEDI ATELY SUCCESSIVE YEAR I.E. AY 2009-10, NO TRANSFER PRICING ADJUSTMENTS HAVE BE EN MADE BY THE TPO/AO IN THIS BEHALF I.E. ON ACCOUNT ON RECEIPT OF SUPPORT S ERVICES. 4.13. IN VIEW OF THE ABOVE CONTENTIONS SHRI BUTANI PLEADS THAT LD. TPO HAS ERRED IN: (A) NOT APPRECIATING THE BENEFITS RECEIVED BY THE APPEL LANT FROM THE SERVICES RENDERED BY AES. (B) DETERMINING THE ALP OF THE TRANSACTION AS NIL. ACCO RDINGLY, THE SAID ADJUSTMENT IS NOT SUSTAINABLE. 5. RE-CHARACTERIZING DELAYED PAYMENTS AS UNSECURED L OANS TO AE AND IMPUTING A NOTIONAL INTEREST ON SUCH ALLEGED LOAN. GROUND NO. 12 & 13 FOR AY 2009-10 5.1. IT IS CONTENDED THAT LD. TPO HELD AS UNDER IN THIS BEHALF: PAGE 22 OF 47 22 A) CERTAIN RECEIVABLES, NAMELY, AMOUNTS OUTSTANDING FR OM THE APPELLANTS AES BEING B&L SING AND B&L HK, HAVE NOT BEEN RECEIVED WITHIN THE STIPULATED TIME AND, THEREFORE, TREATED THE RECEIVABLES AS UNSECURED LOANS ADVANCED TO AES. B) AS A CONSEQUENCE OF INSERTION OF EXPLANATION (I)(C) TO SECTION 92B RETROSPECTIVELY RECEIVABLES HAVE BEEN INCLUDED IN THE DEFINITION OF INTERNATIONAL TRANSACTIONS. C) INTEREST RATE WAS ARRIVED AT 15.77% BY USING PLR AS THE AVERAGE LENDING RATE OF SBI PLUS 300 BASIS POINTS, TO ACCOU NT FOR THE VARIOUS RISKS INVOLVED (NAMELY FINANCIAL RISK, CREDIT RISK, BUSIN ESS RISK AND STRUCTURAL RISK) AND THE SAME WAS CONSIDERED AS THE CUP FOR MA KING AN ADJUSTMENT OF INR 3,12,643. 5.2. ADVERTING TO THE TPO ADJUSTMENT QUA NOTIONAL CHARGI NG OF INTEREST ON RECEIVABLES FROM AE LD. COUNSEL CONTENDS THAT AT TH E OUTSET THE INTEREST ON RECEIVABLES BEYOND A STIPULATED CREDIT PERIOD IS NO T AN INTERNATIONAL TRANSACTION FROM INDIAN TRANSFER PRICING PERSPECTIVE AND, THUS, DOES NOT WARRANT AN IMPUTED CHARGE. BESIDES, TRANSFER PRICING ADJUSTMENT CANNOT BE MADE ON HYPOTHETICAL AND NOTIONAL BASIS UNLESS THERE WAS SOME MATERIAL O N RECORD THAT THERE HAD BEEN UNDER CHARGING OF SUCH INTEREST OR REAL INCOME. 5.3. THE ASSESSEE AS A POLICY, DOES NOT CHARGE ANY INTE REST ON ANY DELAYED PAYMENT IRRESPECTIVE OF WHETHER THE OTHER PARTY WAS AN AE OR NOT. SINCE, THE APPELLANT DID NOT CHARGE ANY INTEREST ON DELAYED PA YMENTS FROM ITS UNRELATED CUSTOMERS, NOT CHARGING ANY INTEREST FROM ITS AES I S CONSISTENT WITH THE ARMS LENGTH PRINCIPLE WHILE APPLYING THE CUP METHOD FOR DETERMINING ALP. IN THIS REGARD, REFERENCE IS DRAWN TO THE OECD GUIDELINES ( PARA 1.29) WHEREIN IT HAS PAGE 23 OF 47 23 BEEN PRESCRIBED THAT NO INTEREST COULD BE CHARGED O N DELAYED PAYMENT ON COMMERCIAL CONSIDERATION FOR ENSURING A LONG AND HE ALTHY RELATIONSHIP. 5.4. RELIANCE IS PLACED ON THE FOLLOWING CASE LAWS: - BOMBAY HIGH COURT DECISION IN THE CASE OF CIT VS. INDO AMERICAN JEWELLERY LTD. (ITA NO. 1053 OF 2012 ) [AFFIRMED MUMBAI ITAT DECISION OF DCIT VS INDO AMERICAN JEWELLERY LIMITED (2012) 5 0 SOT 528 (MUM)] IS SQUARELY APPLICABLE TO THE FACTS OF THE A PPELLANT WHEREIN THE HIGH COURT HELD THAT THE SPECIFIC FINDINGS OF THE ITAT IS THAT THERE IS COMPLETE UNIFORMITY IN THE ACT OF THE ASSESSEE IN N OT CHARGING INTEREST FROM BOTH THE ASSOCIATED ENTERPRISES AND NON ASSOCI ATED ENTERPRISES- DEBTORS AND THE DELAY IN REALIZATION OF THE EXPORT PROCEEDS IN BOTH THE CASES IS SAME. IN THESE CIRCUMSTANCES THE DECISION OF THE TRIBUNAL IN DELETING THE NOTIONAL INTEREST ON OUTSTANDING AMOUN T OF EXPORT PROCEEDS REALISED BELATEDLY CANNOT BE FAULTED. - A SIMILAR VIEW HAS BEEN TAKEN IN LINTAS INDIA P. LT D VS. ACIT [2013] 152 TTJ 706 (MUM). - IN THE CASE OF MASTEK LTD. VS. ACIT (ITA NO.3120/AH D/2010), THE TRIBUNAL IN THIS BEHALF HELD AS UNDER: IF THE AES ARE NOT RECOVERING INTERESTS FROM THIRD PARTIES FOR LATE RECOVERIES, THEN IN THE INSTANT CASE IT WOULD BE TO O MUCH TO EXPECT THE ASSESSEE TO CHARGE THE INTEREST FROM THE AES. T HERE IS NO RATIONALE TO INFLICT UPON THE ASSESSEE, MERELY ON P RESUMPTION, THAT HE OUGHT TO HAVE CHARGED THE INTEREST FROM ITS AES. W E THEREFORE HOLD THAT THERE WAS NO JUSTIFICATION TO PRESUME THAT THE RE WAS A SHIFT OF PROFIT TO AVOID TAX IN INDIA. 5.5. WITH REGARDS TO THE APPLICATION OF THE CUP METHOD B Y THE TPO, IT WAS SUBMITTED THAT AS PER THE ACT AND THE RULES, UNDER THE CUP METHOD THE PROCEDURE IS TO COMPARE THE PRICE CHARGED FROM AE W ITH UNCONTROLLED PAGE 24 OF 47 24 TRANSACTION I.E. NON-AE. IF THE PRICE CHARGED FROM NON-AE IS COMPARABLE WITH AE, THEN NO ADDITION CAN BE MADE. IN THE PRESENT CA SE, THE APPELLANT HAS NOT CHARGED ANY INTEREST FROM NON-AE DEBTORS IN RESPECT OF DELAYED REALIZATION. THE TPO ERRED IN APPLYING THE CUP METHOD AS SIMILAR TRA NSACTIONS WERE NOT ENTERED INTO BY THE APPELLANT WITH THIRD PARTIES AND THE AP PELLANT IS NOT AVOIDING ANY TAX BY INTENTIONALLY NOT CHARGING ANY INTEREST FROM AES BUT CHARGING IT FROM NON-AES. AS THE CASE OF NON-CHARGING OF INTEREST IN THE CONTROLLED TRANSACTION IS COMPARABLE WITH THAT OF NON-CHARGING FROM UNCONTROL LED TRANSACTIONS, NO TRANSFER PRICING ADJUSTMENT CAN BE MADE. 5.6. IT IS FURTHER SUBMITTED THAT THE NOTIONAL INTEREST DUE ON PAYABLES AMOUNTED TO INR 41,61,327 WHEREAS THE NOTIONAL INTE REST ON RECEIVABLES AMOUNTED TO INR 3,12,643 (AS COMPUTED BY THE TPO). DETAILS OF INTEREST ON RECEIVABLES POST NETTING OFF INTEREST ON PAYABLES H AS BEEN PROVIDED AT PG. 39-51 OF PB FOR AY 2009-10 WHEREIN THE DIFFERENCE IS CALCULATED AT INR 38,48,6 85. ACCORDINGLY, BASED ON THE ABOVE THE TRANSFER PRICIN G ADJUSTMENT ON NOTIONAL INTEREST DUE ON RECEIVABLES OUGHT TO BE DELETED. 5.7. IT IS DEMONSTRATED THAT THE APPELLANT IS A DEBT FR EE COMPANY AND THAT THERE WAS NO INTEREST BURDEN ON THE APPELLANT. THER EFORE, IT CANNOT BE JUSTIFIABLE TO PRESUME THAT THE BORROWED FUNDS HAVE BEEN UTILIZ ED TO PASS ON THAT FACILITY TO AES. CONSEQUENTLY ANY NOTIONAL CHARGING OF INTEREST IS ARBITRARY, CONTRARY TO TP ADJUSTMENTS AND AGAINST THE MATERIAL AVAILABLE ON R ECORD. 5.8. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED TH AT THE APPELLANT HAS NOT AGREED FOR ANY CREDIT PERIOD FOR RECEIPT OF PAYMENT S FOR EXPORT OF FINISHED GOODS TRANSACTION AND SUCH AMOUNTS ARE RECEIVED WITHIN A REASONABLE PERIOD OF TIME. HOWEVER, THE TPO HAS ARBITRARILY FIXED A PAYMENT PE RIOD OF 30 DAYS FOR THE FINISHED GOODS EXPORT TRANSACTION AND 60 DAYS FOR R EGIONAL SERVICES RENDERED TO PAGE 25 OF 47 25 THE AES AND HELD ANY PAYMENT RECEIVED SUBSEQUENTLY TO BE BENCHMARKED. IN THE CASE OF M/S. LOGIX MICRO SYSTEMS LTD. VS. ACIT (ITA NO. 423/BANG/2009 AND 524/BANG/2009), THE BANGALORE TRIBUNAL HELD THAT A REASONABLE PERIOD MAY BE PROVIDED AS INTEREST-FREE PERIOD AND NO INTEREST BE CALCULATED FOR SUCH INTEREST- FREE PERIOD OF 180 DAYS. INTEREST IS TO BE CALCULAT ED FOR THE PERIOD OVERFLOWING THE INTEREST-FREE PERIOD. IN LIGHT OF THE ABOVE, IT IS SUBMITTED THAT THE PERIOD OF 30 DAYS ON EXPORTS AND 60 DAYS ON REGIONAL SUPPLIES I S TOO SHORT AND A PERIOD OF 180 DAYS CONSIDERED REASONABLE BY ITAT MAY BE CONSI DERED AS INTEREST-FREE PERIOD. 5.9. WITHOUT PREJUDICE TO THE ABOVE, IT IS ALSO SUBMITTE D THAT THE TPO HAS ERRONEOUSLY ARRIVED AT AN INTEREST RATE OF 15.77% B Y USING PLR AS THE AVERAGE LENDING RATE OF SBI PLUS 300 BASIS POINTS. IN THE C ASE OF M/S. LOGIX MICRO SYSTEMS LTD. VS. ACIT (SUPRA), IT WAS HELD THAT IT IS NOT PROPER TO RELY ON PLR OF SBI BECAUSE IF THE FUNDS WERE BROUGHT IN TIME AND T HOSE FUNDS WERE PROPERLY DEPLOYED, THE ASSESSEE COMPANY MAY EARN AN INCOME A T THE MAXIMUM RATE APPLICABLE TO DEPOSITS AND NOT AT THE RATE APPLICAB LE TO LOANS. INSTEAD, THE TRIBUNAL ADOPTED A REASONABLE RATE THAT WOULD BE AV AILABLE TO THE ASSESSEE ON SHORT-TERM DEPOSITS AND FIXED THE ALP INTEREST RATE AT 5%. 5.10. THE FOLLOWING JUDICIAL PRONOUNCEMENTS SUPPORT THE A RGUMENTS OF THE APPELLANT: - EVONIK DEGUSSA INDIA PRIVATE LIMITED VS ACIT [2013] 55 SOT 566 (MUM) 28. EVEN IF THE PAYMENTS HAVE BEEN MADE BY THE AE BEYOND THE NORMAL CREDIT PERIOD, THERE IS NO INTEREST COST TO THE ASSESSEE. MOREOVER, THERE IS NO SUCH AGREEMENT WHEREBY INTERE ST IS TO BE CHARGED ON SUCH A DELAYED PAYMENT.MOREOVER, THE TP ADJUSTMENT CANNOT BE MADE ON HYPOTHETICAL AND NOTIONAL BASIS U NTIL AND UNLESS THERE IS SOME MATERIAL ON RECORD THAT THERE HAS BEE N UNDER CHARGING OF REAL INCOME . THUS, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT ADDITION AN ACCOUNT OF NOTI ONAL INTEREST PAGE 26 OF 47 26 RELATING TO ALLEGED DELAYED PAYMENT IN COLLECTION O F RECEIVABLES FROM THE AES, IS UNCALLED FOR ON THE FACTS OF THE PRESEN T CASE AND IS, ACCORDINGLY, DELETED. - M/S NIMBUS COMMUNICATIONS LTD. VS ACIT [2013] 145 I TD 582 (MUM- TRIB.) EVEN ASSUMING THAT THE CONTINUING DEBIT BALANCES OF ASSOCIATED ENTERPRISES CAN BE TREATED AS 'INTERNATIONAL TRANSA CTIONS' UNDER SECTION 92B, THE RIGHT COURSE OF APPLYING THE CUP M ETHOD, IN THE CASE OF NON-CHARGING OF INTEREST ON OVERDUE BALANCE S, WOULD HAVE BEEN BY COMPARING THIS NOT CHARGING OF INTEREST WIT H OTHER CASES IN WHICH THE ASSESSEE HAS CHARGED INTEREST ON OVERDUES WITH INDEPENDENT ENTERPRISES (INTERNAL CUP) OR WITH THE CASES IN WHICH OTHER ENTERPRISES HAVE CHARGED INTEREST, IN RESPECT OF OVERDUES IN RESPECT OF SIMILAR BUSINESS TRANSACTIONS, WITH INDE PENDENT ENTERPRISES (EXTERNAL CUP). NO SUCH EXERCISE HAS BE EN CARRIED OUT IN THIS CASE 5.11. IN LIGHT OF THE ABOVE, IT IS SUBMITTED THAT THE AF OREMENTIONED TP ADJUSTMENTS ARE NEITHER FACTUALLY NOR LEGALLY SUSTA INABLE. 6. GROUND NO 24 FOR AY 2007-08 ON CORPORATE ISSUE P ERTAINING TO DISALLOWANCE OF ADVANCES WRITTEN OFF. BRIEF FACTS ARE, D URING THIS AY, THE APPELLANT HAD WRITTEN OFF ADVANCES AMOUNTING TO INR 79,80,994 TO ITS PROFIT AND LOSS ACCOUNT AND CLAIMED DEDUCTION OF THE SAME AS BUSINESS LOSS IN COMPUTING THE TAXABLE INCOME. ON QUERIES DURING THE ASSESSMENT PROCEEDINGS, ASSESSEE FURNISHED RELEVANT DETAILS OF ADVANCES AN D EXPLANATION FOR WRITING OFF. WITHOUT CONSIDERING THE MERITS OF ASSESSES SUBMISSI ONS AO HELD THAT: A. APPELLANT FAILED TO PROVE THAT ADVANCES WERE GIVEN IN THE ORDINARY COURSE OF BUSINESS AND ARE REVENUE IN NATURE. PAGE 27 OF 47 27 B. ON BASIS OF THE DETAILS FILED BY ASSESSEE, IT WAS D IFFICULT TO ASCERTAIN THE NATURE OF ADVANCES BEING CAPITAL OR REVENUE AS PRIMA FACIE SOME ITEMS APPEARS TO BE CAPITAL IN NATURE. C. RELYING ON THE PROVISIONS OF SECTION 36, THE AO HEL D THAT CONDITIONS OF SECTION 36(2) READ WITH SECTION 36(1) (VII) OF THE ACT WERE NOT SATISFIED IN THE CASE OF THE APPELLANT AND HENC E DEDUCTION FOR ADVANCES WRITTEN OFF SHOULD NOT BE AVAILABLE. 6.1. BEFORE THE DRP, THE ASSESSEE FILED ADDITIONAL EVIDENCE BEING PARTY WISE DETAILS OF ALL THE ADVANCES AMOUNTING TO INR 79,80, 994 EXTENDED TO INDIVIDUAL PARTIES ALONG WITH A BRIEF DESCRIPTION OF NATURE OF EXPENSE AND ACCORDINGLY, THE DRP REMANDED BACK THE MATTER TO AO FOR FRESH CONSID ERATION OF ADDITIONAL EVIDENCE. 6.2. IN REMAND ASSESSEE SUBMITTED BEFORE THE AO, THAT AD VANCES GIVEN TO VARIOUS PARTIES WERE IN NATURE OF EXPENSES INCURRED TOWARDS MARKETING AND SALES PROMOTION ACTIVITIES, SPONSORSHIP OF EVENTS, CONFER ENCES, TRAVEL HOTEL STAY, EMPLOYEE SALARY ADVANCE ETC. AND WERE NECESSARILY I NCURRED IN THE ORDINARY COURSE OF BUSINESS. BESIDES IT ALSO FILED DETAILS O F NATURE OF EXPENSES FOR WHICH THE ADVANCES WERE GIVEN TO PROVE THAT THE EXPENSES WERE OF REVENUE NATURE AND WERE WHOLLY AND EXCLUSIVELY INCURRED IN THE ORDINAR Y COURSE OF BUSINESS. 6.3. LD AO FILED THE REMAND, REPORTING THAT, THE AP PELLANT HAD ONLY SUBMITTED COPIES OF VOUCHERS, BILLS OF ADVANCES GIVEN TO VARI OUS PARTIES AND NO OTHER DETAILS SUMMARIZING THE NATURE OF EXPENSES WERE FIL ED AND DID NOT PROVIDE ANY CLARITY AS TO WHETHER THE ADVANCES WERE GIVEN IN OR DINARY COURSE OF BUSINESS. WITHOUT GIVING COGENT REASONS IT WAS REPORTED THAT THEY WERE ADVANCED FOR THE LONG TERM BENEFIT OF THE APPELLANT AND THAT THE LI ST PROVIDED DID NOT CLARIFY THAT PAGE 28 OF 47 28 THE EXPENDITURES WERE INCURRED IN ORDINARY COURSE O F BUSINESS. THE EXPENDITURE HAVING BEEN INCURRED FOR PROTECTING INTEREST OF CUS TOMERS WAS NOT THE TEST FOR DETERMINATION OF REVENUE OF CAPITAL EXPENDITURE. AO THUS GAVE SELF CONTRADICTORY AND SHIFTED FROM REASONS TO REASON TO ARBITRARILY HOLD IT BE NOT ALLOWABLE. 6.4. LD. DRP WITHOUT CONSIDERING THE MERITS AND OFF ERING COGENT REASONS SUMMARILY CONFIRMED THE AOS REMAND REPORT HOLDING THAT ASSESSEE HAS NOT BEEN ABLE TO REASONABLY EXPLAIN HOW THESE EXPENDITU RE HAVE BEEN INCURRED IN THE ORDINARY COURSE OF BUSINESS. LD. DRP ALSO WENT BEYO ND EVEN THE OBSERVATIONS OF AO AND HELD THAT IT APPEARED THAT SUCH EXPENDITU RE WAS IN THE NATURE OF CAPITAL EXPENDITURE OR DONATIONS TO VARIOUS ORGANIZ ATIONS FOR HOLDING/SPONSORING MEETINGS. THUS DRP ALSO DID NOT CONSIDER THE MERITS AND GAVE NO COGENT REASONS TO DISLODGE THE VALID CLAIM OF THE ASSESSEE . 6.5. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT, A S PART OF ITS BUSINESS OPERATIONS, THE APPELLANT INCURRED BUSINESS PROMOTI ON EXPENDITURE AND FROM TIME TO TIME MADE ADVANCES TO VARIOUS PARTIES FOR S PONSORSHIP OF CONFERENCES, INCENTIVES FOR FACILITATING SALES PROMOTION. MANY A TIMES SUCH ADVANCES BECOME IRRECOVERABLE, WHICH IS A USUAL EXIGENCY OF BUSINES S IN SUCH TRANSACTIONS. THE NATURE OF EXPENSES FOR WHICH ADVANCES WERE PAID IS CONNECTED WITH ROUTINE OPERATIONS OF THE APPELLANT AND DID NOT GIVE RISE T O ANY ENDURING BENEFIT OF CAPITAL NATURE. ACCORDINGLY, SUCH PAYMENTS BEING M ADE WHOLLY AND EXCLUSIVELY FOR ASSESSEE'S BUSINESS PURPOSES ON REVENUE ACCOUNT . THEY NOT BE CHARACTERIZED AS PAYMENTS RESULTING IN CREATION OF CAPITAL ASSET. ALL THE RELEVANT DETAILS WERE FILED BEFORE LOWER AUTHORITIES. SUCH ADVANCES HAD A PROXIMATE AND DIRECT NEXUS WITH THE REGULAR BUSINESS OPERATIONS, THEY HAVING B ECOME IRRECOVERABLE, WERE ACTUALLY WRITTEN OFF ARE SQUARELY ALLOWABLE BAD DEB TS WRITTEN OFF AS A DEDUCTION PAGE 29 OF 47 29 FOR COMPUTING THE TAXABLE INCOME UNDER SECTION 37(1 ) OF THE ACT. RELIANCE IS PLACED ON FOLLOWING CASE LAWS IN THIS BEHALF: - SUPREME COURT IN THE CASE OF BADRIDAS DAGA VS CIT [ 1958] 34 ITR 10 (SC ), WHEREIN IT WAS OBSERVED AS UNDER: AT THE SAME TIME, IT SHOULD BE EMPHASISED THAT THE LOSS FOR WHICH A DEDUCTION COULD BE MADE UNDER SECTION 10(1) MUST BE ONE THAT SPRINGS DIRECTLY FROM THE CARRYING ON OF THE BUSINE SS AND IS INCIDENTAL TO IT AND NOT ANY LOSS SUSTAINED BY THE ASSESSEE, EVEN IF IT HAS SOME CONNECTION WITH HIS BUSINESS. IF, FOR EXAM PLE, A THIEF WERE TO BREAK OVERNIGHT INTO THE PREMISES OF A MONEY-LEN DER AND RUN AWAY WITH FUNDS SECURED THEREIN, THAT MUST RESULT I N THE DEPLETION OF THE RESOURCES AVAILABLE TO HIM FOR LENDING AND THE LOSS MUST, IN THAT SENSE, BE A BUSINESS LOSS, BUT IT IS NOT ONE INCURR ED IN THE RUNNING OF THE BUSINESS, BUT IS ONE TO WHICH ALL OWNERS OF PRO PERTIES ARE EXPOSED WHETHER THEY DO BUSINESS OR NOT. THE LOSS I N SUCH A CASE MAY BE SAID TO FALL ON THE ASSESSEE NOT AS A PERSON CARRYING ON BUSINESS BUT AS- OWNER OF FUNDS. THIS DISTINCTION, THOUGH FINE, IS VERY MATERIAL AS ON IT WILL DEPEND WHETHER DEDUCTION COU LD BE MADE UNDER SECTION 10(1) OR NOT - SUPREME COURT IN THE CASE OF CIT VS MYSORE SUGAR CO LTD [1962] 46 ITR 649 (SC), WHEREIN IT WAS OBSERVED AS UNDER: TO FIND OUT WHETHER AN EXPENDITURE IS ON THE CAPIT AL ACCOUNT OR ON REVENUE, ONE MUST CONSIDER THE EXPENDITURE IN RELAT ION TO THE BUSINESS. SINCE ALL PAYMENTS REDUCE CAPITAL IN THE ULTIMATE ANALYSIS, ONE IS APT TO CONSIDER A LOSS AS AMOUNTING TO A LOS S OF CAPITAL. BUT THIS IS NOT TRUE OF ALL LOSSES, BECAUSE LOSSES IN T HE RUNNING OF THE BUSINESS CANNOT BE SAID TO BE OF CAPITAL. THE QUEST IONS TO CONSIDER IN THIS CONNECTION ARE: FOR WHAT WAS THE MONEY LAID OU T? WAS IT TO ACQUIRE AN ASSET OF AN ENDURING NATURE FOR THE BENE FIT OF THE BUSINESS, OR WAS IT AN OUTGOING IN THE DOING OF THE BUSINESS? IF MONEY BE LOST IN THE FIRST CIRCUMSTANCE, IT IS A LO SS OF CAPITAL, BUT IF LOST IN THE SECOND CIRCUMSTANCE, IT IS A REVENUE LO SS. IN THE FIRST, IT BEARS THE CHARACTER OF AN INVESTMENT, BUT IN THE SE COND, TO USE A COMMONLY UNDERSTOOD PHRASE, IT BEARS THE CHARACTER OF CURRENT EXPENSES PAGE 30 OF 47 30 6.6. THE AFORE-MENTIONED VIEW HAS BEEN REITERATED B Y THE JAMMU AND KASHMIR HIGH COURT IN THE CASE OF CHENAB FOREST CO VS CIT [ 1974] 96 ITR 568 (J&K), WHEREIN, IT HAS BEEN HELD THAT ADVANCE GIVEN IN THE ORDINARY COURSE OF BUSINESS FOR CARRYING OUT THE BUSINESS OPERATIONS WHICH SUBS EQUENTLY BECOMES IRRECOVERABLE IS LIABLE FOR DEDUCTION UNDER SECTION 37(1) OF THE ACT. THE RELEVANT EXTRACT OF THE DECISION HAS BEEN REPRODUCE D BELOW: ON A CONSIDERATION OF ALL THE FACTS, IT IS CLEAR T HAT THE NATURE OF THE BUSINESS, THE SYSTEM OF WORKING WAS SUCH THAT IT WA S NECESSARY TO CARRY ON THE BUSINESS THAT ADVANCES MAY BE MADE AND WITHOUT WHICH THE FOREST LESSEES MAY FIND IT EXTREMELY IMPOSSIBLE TO CARRY ON THE BUSINESS. THE ADVANCES MADE IN THE ORDINARY COURSE OF BUSINESS WOULD HAVE BEEN ADJUSTED AND RECOUPED IF THERE HAD BEEN A RENEWAL OF THE LEASES BUT THIS COULD NOT BE POSSIBLE ONLY B ECAUSE THERE WAS NO RENEWAL OF THE LEASES AND AS ALREADY MENTIONED A BOVE THE CIRCUMSTANCES SHOW THAT THE NON-RECOVERABILITY WAS A RESULT OF THE CIRCUMSTANCES. IN VIEW OF ALL THE FACTS ALREADY STA TED ABOVE, I AM ALSO OF THE VIEW THAT THE WORD 'INCOME' OR 'PROFIT' SHOULD NOT BE GIVEN AN ARTIFICIAL MEANING BUT SHOULD BE GIVEN A M EANING AS WOULD BE GIVEN BY A REASONABLE AND PRUDENT BUSINESSMAN. T HE ASSESSEE WAS THEREFORE ENTITLED TO A DEDUCTION IN RESPECT OF THIS ADVANCE AS EXPENDITURE AS CONTEMPLATED BY SECTION 37 OF THE IN COME-TAX ACT OF 1961 AND THE QUESTION REFERRED BY THE TRIBUNAL IS, THEREFORE, ANSWERED IN THE NEGATIVE. 6.7. THE AFORE-MENTIONED JUDICIAL PRINCIPLES HAS BEEN RE LIED BY DELHI HIGH COURT IN THE DECISION OF MOHAN MEAKIN LIMITED VS CI T [2012] 348 ITR 109 (DELHI) WHEREIN IT WAS HELD AS UNDER: 10 . APPLYING THE PRINCIPLES OF LAW AS REGARD INTERPRETA TION OF SECTIONS 28, 29, 36(1)(VII), 36(2) AND SECTION 37 O F THE ACT AS ENUNCIATED BY THE DIVISION BENCH OF J&K HIGH COURT AND THE APEX COURT IN THE AFORE-CITED CASES, WE ARE OF THE CONSI DERED VIEW THAT IT WAS IN THE TOTALITY OF OVERALL SITUATION OF THE MAT TER THAT THE ASSESSEE DECIDED TO WRITE OFF THE ADVANCES MADE TO M/S. KANP UR BOOT HOUSE AS BAD DEBT. IT IS KNOWN PRACTICE THAT USUALLY M ANUFACTURER GIVES ADVANCES TO THE WORKERS WHICH ARE ADJUSTED OR CARRIED FORWARD PAGE 31 OF 47 31 IN THE COMING TIMES AGAINST THE WORKS DONE BY THEM. THIS WAS NOT AN UNUSUAL PRACTICE WHICH WAS LIABLE TO BE OUTRIGHTLY REJECTED BY THE DEPARTMENT. WHEN THE ASSESSEE HAD WRITTEN OFF THE D UES RECOVERABLE FROM THE CORPORATION AND THE SAME WERE ACCEPTED BY THE DEPARTMENT AND IT HAD ALSO SO WRITTEN OFF, THE ADVA NCES MADE TO M/S. KANPUR BOOT HOUSE IN ITS BOOKS OF ACCOUNT, WHAT ELS E COULD BE THE PROOF WITH THE ASSESSEE FOR ITS BEING UNABLE TO REC OVER THE SAME. THE CIT(A) RIGHTLY RECORDED THAT THE DE BT HAD BECOME BAD AND NOT RECOVERABLE AND IT WOULD BE A FU TILE EXERCISE TO TAKE ANY ACTION AGAINST THE LEGAL HEIRS OF THE DECE ASED. IN VIEW OF THE DISCUSSION AS MADE BY THE DIVISION BENCH OF J&K HIG H COURT AND THE HONBLE SUPREME COURT, AS QUOTED ABOVE, THAT TH E ADVANCES MADE BY THE ASSESSEE IN THE CASE WERE CERTAINLY OF A TYPE WHICH WOULD BE WITHIN THE CONTEMPLATION OF THE WORDS 'LAI D OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS'. AS NO PORTION OF THE SAID ADVANCES COULD BE STATED TO BE LOSS OF CAPITAL EXPENDITURE, BUT IT BEING A PLAIN CASE OF B USINESS LOSS, IT WOULD CERTAINLY BE ALLOWABLE TO BE DEDUCTED UNDER T HE PROVISIONS OF SECTION 37 OF THE ACT - MINDA HUF VS JCIT [2006] (285 ITR 88) (DELHI) - JHALANI AND COMPANY VS ACIT [2001] (77 ITD 44) (DE LHI) 6.8. IN VIEW OF THESE FACTS, CIRCUMSTANCES AND ABOV E JUDICIAL DECISIONS, ASSESSES IMPUGNED CLAIM QUA ADVANCES ACTUALLY WRI TTEN OFF DESERVES BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) OF THE ACT . 7. GROUND NO 27 TO 28 PERTAINING TO ADDITION ON ACC OUNT OF PROVISION FOR DOUBTFUL DEBTS AND ADVANCES TO BOOK PROFITS UNDER S ECTION 115JB OF THE ACT IS NOT PRESSED BY THE ASSESSEE HENCE DISMISSED ACCORDI NGLY. 8. GROUND NO 30 PERTAINING TO LEVY OF INTEREST UNDER S ECTION 234B OF THE ACT, IS PLEADED TO BE CONSEQUENTIAL IN NATURE. 9. LD DR ON THE OTHER HANDS CONTEND THAT NON APPLIC ATION OF RES JUDICATA IN MATTERS OF TAXATION AS FACTS OF EACH PERIOD DIFFER. CONSISTENCY WITHOUT PAGE 32 OF 47 32 REASONING SHALL NOT BE DETRIMENTAL TO CORRECT DETER MINATION AS PER THE T.P. PROVISIONS AND INCOME TAX ACT 1961. A. BRIGHT LINE CONCEPT: 10. THE CONCEPT OF BRIGHT LINE TEST IS FOR DETERMIN ING THE COST RELEVANT TO THE INTERNATIONAL TRANSACTION, WHICH HELPS TO ARRIVE AT CORRECT ALP HONBLE DELHI HIGH COURT LAID DOWN THE FOLLOWING GUIDANCE IN THIS BEHALF: - IF THE AMP SPENDS ARE AT A LEVEL COMPARABLE TO SIMI LAR THIRD PARTY COMPANIES, THEN THE FOREIGN ENTITY I.E. SMC WOULD N OT BE REQUIRED TO COMPENSATE MSIL. - IN CASE THE AMP SPENDS ARE SIGNIFICANTLY HIGHER THA N THIRD PARTY COMPANIES, THE USE OF SMCS LOGO IS MANDATORY AND T HE BENEFITS DERIVED BY SMC ARE NOT INCIDENTAL, THEN SMC WOULD B E REQUIRED TO COMPENSATE MSIL. 10.1. HOWEVER, HONBLE SUPREME COURT HAS REMITTED T HE MATTER WITH THE DIRECTION TO THE TPO TO EXAMINE THE MATTER IN ACCOR DANCE WITH LAW, WITHOUT BEING INFLUENCED BY THE OBSERVATIONS OR DIRECTIONS GIVEN BY THE DELHI HIGH COURT. 10.2. THE SB RULING IN CASE OF L.G. ELECTRONICS HAS NOT DEALT WITH THE ISSUE INVOKING BRIGHT LINE CONCEPT DIRECTLY, YET THE METH ODOLOGIES/ CONCEPTS ARTICULATED BY THE OECD GUIDELINES AND THE UNITED N ATIONS TPM ARE IMPLICITLY ENDORSED IN THE FACTORS IDENTIFIED BY THE SB FOR UN DERTAKING A COMPARABILITY ANALYSIS. B. AMP ISSUES: 11. ASSESSEES ALLEGATION THAT THE TPO HAS BEEN INCO NSISTENT IS FACTUALLY INCORRECT WHICH EMERGES FROM THE FACT THAT THE TPO HAS EXCLUDED THE SELLING EXPENSES AS INDICATED IN LG CASE. ASSESSEES REQUES T THAT WHOLE OF SELLING EXPENSES AS MENTIONED AT PAGE 212/PB FOR AY 2006-07 , ONLY BE INCLUDED AS AMP EXPENSES, MAY BE CONSIDERED BY THE BENCH. HOWEV ER THE PLEA FOR PAGE 33 OF 47 33 EXCLUSION OF SELLING EXPENSES WHICH ARE NOT PART AN D PARCEL OF NORMAL SELLING EXPENSES IS NOT TENABLE AS IT REPRESENT INNOVATIVE TECHNIQUES EMPLOYED TO CREATE AND ENHANCE MARKETING INTANGIBLES INCLUDING BRAND B UILD UP. FURTHER, THE TPO HAS EXCLUDED THE DIRECT SELLING EXPENSES AS OUTLINE D IN SCHEDULE 14 OF THE FINAL ACCOUNTS FOR THE AY 2006-07. C. INTRA GROUP SERVICES: 12. NO EVIDENCE FOR RENDERING ANY SERVICES WAS FURN ISHED BY ASSESSEE BEFORE LOWER AUTHORITIES. BESIDES, TPO ASKED FOR A LIST OF INFORMATION WHICH IS NOT COMPLIED BY ASSESSEE. THE QUESTION THAT THE SET OF ALLEGED SERVICES IS RENDERED BY THE AE OR A GROUP OF AES REMAINS UNCONTROVERTED. IT IS TO BE SEEN THAT AS TO WHOM THE ASSESSEE SELLS AND THROUGH WHOM THE DISTRI BUTION IS DONE. APROPOS STEWARDSHIP SERVICES FOR CONTROLLING THE ENTITY BY THE PARENTAL GROUP, THE ALLOWABILITY OF SUCH EXPENSES ON THE INDIAN ENTITY TO SAY THE LEAST, IS TO BE CONSIDERED. FURTHER, TPO IS WITHIN RIGHTS TO DETERM INE ALP FOR THE INTRA GROUP SERVICES RENDERED PER FORCE TO THE ASSESSEE. THE C ASE LAWS CITED BY LD AR ARE DISTINGUISHABLE ON THE FACTS AS ALSO ON THE UNDERLY ING PRINCIPLES. TWO SUCH CITATIONS ARE REPRODUCED BELOW AND THE DISTINCTION IS CLEAR ON BOTH THE FACTS AS ALSO THE LAW: (I) EKL APPLIANCES ([2012] 24 TAXMANN.COM 199 DELH I/ 345 ITR 241 DELHI) BY HON'BLE DELHI HIGH COURT: THE HON'BLE COURT HAS RATHER UPHELD THE AUTHORITY O F THE TPO IN PARA 22 OF THE ORDER. RELEVANT QUOTE IS A S UNDER: 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 T HE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BU SINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDIT URE. THESE ARE PAGE 34 OF 47 34 IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 1 0B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESS EE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF A S BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE EN TIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE H AS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE; THER E IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PR ESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED IN TO THE AGREEMENT TO PAY ROYALTY/ BRAND FEE, BECAUSE IT HAS BEEN SUFF ERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW T HE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDE LINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION A S HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BU T A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON TH E GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR A UTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EVE N ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ ROYALTY PAYME NT WAS NOT WARRANTED. THE ASSESSEE HAS FURNISHED COPIOUS MATER IAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOU SLY AND THESE HAVE BEEN REFERRED TO BY US EARLIER. FULL USTIFICAT ION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE TH AT THE INCREASE IN THE EMPLOYEES COST, FINANCE CHARGES, ADMINISTRAT IVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE HAVE CONTRI BUTED TO THE CONTINUOUS LOSSES. THE COMPARATIVE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFORE THE CIT (APPEALS) AND THEY ARE REFERRED TO I N A TABULAR FORM IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STATEMENTS FURNISHED BY THE ASSESSEE BEFORE THE CIT (APPEALS) IN SUPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. T HERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE C IT (APPEALS) OR BEFORE THE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON MERITS THE REASON S FOR THE LOSSES ARE NOT GENUINE. 24. WE ARE, THEREFORE, UNABLE TO HOLD THAT THE TRIB UNAL COMMITTED ANY ERROR IN CONFIRMING THE ORDER OF THE CIT (APPEA LS) FOR BOTH THE YEARS DELETING THE DISALLOWANCE OF THE BRAND FEE/ R OYALTY PAYMENT WHILE DETERMINING THE ALP. ACCORDINGLY, THE SUBSTAN TIAL QUESTIONS PAGE 35 OF 47 35 OF LAW ARE ANSWERED IN THE AFFIRMATIVE AND IN FAVOU R OF THE ASSESSEE AND AGAINST THE REVENUE. THE APPEALS ARE ACCORDINGL Y DISMISSED WITH NO ORDER AS TO COSTS. THE TPO HAS NOT GONE INTO THE BUSINESS ALLOWABILITY OF INTRA GROUP SERVICES EXPENSES, ONLY ALP OF SUCH ITEM HAS BEEN D ETERMINED. (II) DRESSER RAND INDIA P LTD ( 47 SOT 423 [MUMBAI ] 2012): 10. IN CASE THE ASSESSING OFFICER COMES TO THE CON CLUSION THAT THE ASSESSEE HAS INDEED RECEIVED THE SERVICES FROM THE AE THE NEXT QUESTION WHICH WE HAVE TO DECIDE IS AS TO WHAT IS T HE ARM'S LENGTH PRICE OF THESE SERVICES RECEIVED UNDER COST CONTRIB UTION AGREEMENT. IT HARDLY NEEDS TO BE EMPHASIZED THAT EVEN COST CON TRIBUTION ARRANGEMENT SHOULD BE CONSISTENT WITH ARM'S LENGTH PRINCIPLE, WHICH, IN PLAIN WORDS, REQUIRES THAT ASSESSEE'S SHA RE OF OVERALL CONTRIBUTION TO THE COSTS IS CONSISTENT WITH BENEFI TS EXPECTED TO BE RECEIVED, AS AN INDEPENDENT ENTERPRISE WOULD HAVE A SSIGNED TO THE CONTRIBUTION IN HYPOTHETICALLY SIMILAR SITUATION . IN THE CASE BEFORE US, AS EVIDENT FROM THE COST CONTRIBUTION AGREEMENT , THE COSTS HAVE BEEN SHARED AT AVERAGE OF PERCENTAGE OF (I) HEAD CO UNT TO THE TOTAL COUNT AND (II) SALES REVENUE TO TOTAL REVENUE. THE ASSESSEE'S SHARE OF HEAD COUNT IS 3.90% AND OF TOTAL REVENUE IS 3.30 %, AND, ACCORDINGLY, 3.50%, BEING AVERAGE OF THESE TWO PARA METERS, IS TAKEN AS THE COST CONTRIBUTION RATIO. WE SEE NO INF IRMITY IN THIS CONTRIBUTION BEING TAKEN AS AN ARM'S LENGTH CONTRIB UTION TO THE COSTS. THE TPO'S OBJECTION TO THIS ARRANGEMENT WAS TWO FOLD - FIRST, THAT THE COST SHOULD BE SHARED IN THE RATIO OF ACTU AL USE OF SERVICES; AND - SECOND, THAT THE COSTS SHOULD BE CHARGED TO T HE ASSESSEE AS PER INDIAN EMPLOYEE COSTS. NONE OF THESE OBJECTIONS HAS ANY LEGALLY SUSTAINABLE MERITS. THERE IS NO OBJECTIVE WAY IN WH ICH USE OF SERVICES CAN BE MEASURED AND AS IS THE COMMERCIAL P RACTICE EVEN IN MARKET FACTORS DRIVEN SITUATION, THE COSTS ARE S HARED IN ACCORDANCE WITH SOME OBJECTIVE CRITERION, INCLUDING SALES REVENUES AND NUMBER OF EMPLOYEES. THE QUESTION OF CHARGING A S PER DOMESTIC EMPLOYEE COSTS CANNOT BE A BASIS OF ALLOCA TION THE COSTS BECAUSE SUCH AN ALLOCATION WILL DEAL WITH SOME HYPO THETICAL PRICING WHEREAS THE ALLOCATIONS ARE TO BE DONE FOR THE ACTUAL COSTS INCURRED. AS IT IS AN ALLOCATION OF COSTS ON THE BA SIS OF ACTUAL COSTS AND THE FACT OF EXPENDITURE IS NOT EVEN IN DISPUTE, THE DISPUTE IS CONFINED TO THE BASIS ON WHICH COST ALLOCATIONS MUS T TAKE PLACE, AND SINCE WE FIND THE BASIS OF ALLOCATION OF COSTS AS REASONABLE, NO INTERFERENCE IS REALLY CALLED FOR. IN ANY CASE, WE HAVE NOTED THAT THE PAGE 36 OF 47 36 ASSESSEE HAS ADOPTED TNMM AS MOST APPROPRIATE METHO D, AND THE REVENUE AUTHORITIES HAVE NEITHER MADE AN EFFORT TO SHOW AS TO HOW THIS METHOD IS NOT APPROPRIATE TO THE FACTS OF THIS CASE, NOR SHOWN AS TO WHICH OTHER PRESCRIBED METHOD OF ASCERTAINING ARM'S LENGTH PRICE OF SERVICES RECEIVED UNDER CCA WILL BE MORE A PPROPRIATE TO THESE FACTS. 13. LD CIT(DR) FURTHER RELIES ON THE FOLLOWING CASES: (I) KNORR BREMSE INDIA P LIMITED (ITA NO. 5097/DEL/ 2011) ASSTT. YR: 2007-08 FOLLOWING INTERNATIONAL TRANSACTIONS OF THE APPELLA NT: I. PAYMENT OF MANAGEMENT FEE; II. PAYMENT OF PROFESSIONAL FEE; AND III. PAYMENT OF SAP IMPLEMENTATION FEE. 5.10. IN THE CASE OF DELOITTE CONSULTING INDIA PVT. LTD. VS. DCIT IN ITA NO. 579, 1272 & 1273/MUM/2011 & OTHERS DATED 30 -3-2012 THE MUMBAI BENCH OF THE TRIBUNAL HAS EXPRESSED ITS OPIN ION IN FOLLOWING TERMS' '39. ON THE ISSUE AS TO WHETHER THE TPO IS EMPOWERE D TO DETERMINE THE ALP AT 'NIL', WE FIND THAT THE BANGAL ORE BENCH OF THE TRIBUNAL IN GEMPLUS INDIA PVT. LTD. (S UPRA), HELD THAT THE ASSESSEE HAS TO ESTABLISH BEFORE THE TPO THAT THE PAYMENTS MADE WERE COMMENSURATE TO THE VOLUME AND QUALITY SERVICE AND THAT SUCH COSTS ARE COMPARABLE. WHEN COMMENSURATE BENEFIT AGAINST THE PAYMENT OF SERVICES IS NOT DERIVED, THEN THE TPO IS JUSTIFIED IN MAKING AN ADJUSTMENT UNDER ALOP. 40. IN THE CASE IN HAND, THE TPO HA DETERMINED THE ALP AT 'NIL' KEEPING IN VIEW THE FACTUAL POSITION AS TO WHETHER IN A COMPARABLE CASE, SIMILAR PAYMENTS WOULD HAVE B EEN MADE OR NOT IN TERMS OF THE AGREEMENTS. THIS IS A C ASE WHERE THE ASSESSEE HAS NOT DETERMINED THE ALP. THE BURDEN IS INITIALLY ON THE ASSESSEE TO DETERMINE TH E ALP. THUS, THE ARGUMENT OF THE ASSESSEE THAT THE TPO HAS EXCEEDED HIS JURISDICTION BY DISALLOWING CERTAIN EXPENDITURE, IS AGAINST THE FACTS. THE TPO HAS NOT PAGE 37 OF 47 37 DISALLOWED ANY EXPENDITURE. ONLY THE ALP WAS DETERMINED. IT WAS THE ASSESSING OFFICER WHO COMPUT ED THE INCOME BY ADOPTING THE ALP DECIDED BY THE TPO A T 'NIL'. 5.14. THE ASSESSEE HAS ALSO MADE A PLEA THAT THE OE CD GUIDELINES PERMIT AGGREGATION OF ALL INTERNATIONAL TRANSACTION S WITH THE MAIN ACTIVITY. SUCH GUIDELINES, HOWEVER, ARE NOT BINDING BUT ARE MERELY ELUCIDATIVE. MOREOVER, INDIAN IS NOT A MEMBER OF OE CD. THE ASSESSEE HAS RELIED UPON THE ORDER OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES [ITA NO. 1068/2011 & 1070 /2011). THE HON'BLE HIGH COURT HAS RENDERED ITS JUDGMENT IN A S PECIFIC SITUATION ONLY, WHERE THE TPO MADE WHOLESALE DISALLOWANCE OF THE EXPENDITURE FOR THE REASON THAT THE ASSESSEE HAD SUFFERED CONTI NUOUS LOSSES. THIS CASE, THEREFORE, IS NOT APPLICABLE AS DISALLOWANCE HAS NOT BEEN MADE IN THIS CASE ON ACCOUNT OF EXPENSE AND HAVING BEEN INCURRED INSPITE OF CONTINUOUS LOSSES. THIS ORDER OF THE HON'BLE DELHI HIGH COURT HAS BEEN INTERPRETED BY THE DELHI BENCH OF T4HE TRIBUNA L IN THE CASE OF M/S ERICSSON INDIA PVT. LTD. VS. DCIT (ITA NO. 5141 /DEL/2011 DATED 11-5-2012, BY OBSERVING THAT REASONABLENESS OF AN E XPENDITURE HAS NOT BEEN EXCLUDED FROM DETERMINATION IN THE AFORESA ID ORDER BY THE HON'BLE DELHI HIGH COURT. THE OBSERVATIONS ARE CONT AINED AT PARA 30 OF THE SAID TRIBUNAL'S ORDER, REPRODUCED AS UNDER: '30. KEEPING IN VIEW THE AFOREMENTIONED DECISION OF HON'BLE DELHI HIGH COURT, WE ARE OF THE OPINION THA T IT WILL BE WRONG TO HOLD THAT THE EXPENDITURE SHOULD B E DISALLOWED ONLY ON THE GROUND THAT THESE EXPENSES W ERE NOT REQUIRED TO BE INCURRED BY THE ASSESSEE. AT THE SAME TIME IT HAS ALSO TO BE SEEN THAT WHETHER THE PRICE PAID BY THE ASSESSEE IS AT ARM'S LENGTH. THE TERM 'ARM'S LE NGTH PRICE' HAS BEEN DEFINED IN SECTION 92F WHICH MEANS A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN THE TRANSACTIONS BETWEEN THE PERSONS OTHER THAN ASSOCIA TE ENTERPRISES IN UNCONTROLLED CONDITIONS. IT IS ONLY BECAUSE OF THAT THEIR LORDSHIPS IN THE AFOREMENTIONED DECIS ION HAVE OBSERVED THAT 'THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDG ING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, H E HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERE D CONTINUOUS LOSSES'. EARLIER TO THIS THEY HAVE OBSER VED PAGE 38 OF 47 38 THAT REVENUE CANNOT DISALLOW ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE. LOOKING INTO OBSERVATIONS OF THEIR LORDSHIPS, IT HAS TO BE HELD THAT REASONABLENESS OF AN EXPENDITURE HAS NOT BEEN EXCLU DED FROM DETERMINATION.' 5.15. THE PRINCIPLE STATED IN MC ERICSION VS. ACIT (ITA NO. 5871/DEL/11 DATED 8-6-2012) IS ON THE ISSUE OF COMM ERCIAL EXPEDIENCY. THOUGH IT DOES NOT NEED ANY DELIBERATIO N, THE APPLICABILITY OF PRINCIPLE OF ARM'S LENGTH TEST OF INTERNATIONAL TRANSACTIONS HAS NOT BEEN DONE AWAY WITH. THE EXPEN DITURE INCURRED IN AN INTERNATIONAL TRANSACTION HAS NECESSARILY TO PASS THE TEST OF ALP. 5.16. FURTHER MORE, IT HAS BEEN CONTENDED THAT THE EXPENDITURE WHICH IS THE SUBJECT MATTER OF ADJUSTMENTS BY THE TPO OUG HT TO HAVE BEEN ALLOWED IN THE SAME MANNER AS THE EXPENDITURE IS AL LOWABLE U/S 37(1) OF THE ACT. THIS PLEA OF THE ASSESSEE HOWEVER CANNO T BE ALLOWED FOR THE SIMPLE REASON THAT THE PROVISIONS OF SEC. 37(1) AND PROVISO TO SEC. 92 OPERATE IN DIFFERENT FIELD AND THUS THE ARGUMENT BE COMES DEVOID OF ANY MERIT. 5.17. FOR THIS REFERENCE MAY BE MADE AT PARA 10 OF THE TRIBUNAL'S ORDER IN DRESSER RAND INDIA PVT. LTD. (ITA NO. 8753 /MUM/2010) DATED 7-9-2011, THE RELEVANT PORTION IS REPRODUCED BELOW: '10. ONCE WE COME TO THE CONCLUSION THAT THE ASSESS EE HAS INDEED RECEIVED THE SERVICES FROM THE AI THE NE XT QUESTION WHICH WE HAVE TO DECIDE IS AS TO WHAT IS T HE ARM'S LENGTH PRICE OF THESE SERVICES RECEIVED UNDER COST CONTRIBUTION AGREEMENT. IT HARDLY NEEDS TO BE EMPHA SIZED THAT EVEN COST CONTRIBUTION ARRANGEMENT SHOULD BE CONSISTENT WITH ARM'S LENGTH PRINCIPLE, WHICH, IN P LAIN WORDS, REQUIRES THAT ASSESSEE'S SHARE OF OVERALL CONTRIBUTION TO THE COSTS IS CONSISTENT WITH BENEFI TS EXPECTED TO BE RECEIVED AS AN INDEPENDENT ENTERPRIS E WOULD HAVE ASSIGNED TO THE CONTRIBUTION IN HYPOTHET ICALLY SIMILAR SITUATION.' 5.18. IN THE CASE OF DRESSER RAND INDIA PVT. LTD. ( SUPRA), THE ASSESSEE HAD ADOPTED TNMM AS THE MOST APPROPRIATE METHOD. PAGE 39 OF 47 39 5.19. THE REVENUE IN THIS CASE HAS ALREADY DEMONSTR ATED THAT TNMM METHOD IS NOT THE MOST APPROPRIATE METHOD IN THE AS SESSEE'S CASE. SINCE THE CUP METHOD ADOPTED BY THE TPO IS THE MOST APPROPRIATE METHOD AND THE ASSESSEE HAS NOT BEEN ABLE TO DEMONS TRATE THAT AN INDEPENDENT PARTY WOULD HAVE MADE SUCH PAYMENTS IN SIMILAR CIRCUMSTANCES, NO INTERFERENCE IS CALLED FOR IN THE WELL REASONED DECISION OF THE TPO FOLLOWED BY THE AO AND APPROVED BY THE DRP............ 9.2. AFTER HEARING THE PARTIES WITH REFERENCE TO MA TERIAL ON RECORD, WE FIND THAT THE AUTHORITIES BELOW HAVE NOT CONCLUSIVE LY HELD THAT THE ASSESSEE COULD NOT ENTER INTO SUCH A TRANSACTION NO R HAD THEY DISALLOWED THE SAME BY HOLDING THAT SUCH AN EXPENDI TURE IS NOT ASSESSEE'S BUSINESS EXPENDITURE. THE DRP AS WELL AS THE AUTHORITIES BELOW HAVE MERELY ELUCIDATED THAT THE PAYMENTS ARE REIMBURSEMENT IN RESPECT OF MS. RITA RICKEN AND OTHER PERSONNEL'S CA SE TO SERVE THE INTEREST OF SHARE HOLDERS. BY SAYING SO THEY HAVE O NLY DESCRIBED THE CIRCUMSTANCE UNDER WHICH THE INTERNATIONAL TRANSACT ION HAS BEEN ENTERED BY THE APPELLANT, SO AS TO TEST THE BENEFIT THAT CAN BE SAID TO HAVE REACHED THE ASSESSEE. IT, THEREFORE, CANNOT BE SAID TO HAVE QUESTIONED THE COMMERCIAL EXPEDIENCY OF SUCH TRANSA CTIONS ENTERED BY THE APPELLANT. THE I.T. RULES CONTAIN EXHAUSTIVE DE TAIL REGARDING NATURE OF INFORMATION AND DOCUMENTS WHICH ARE REQUI RED TO BE MAINTAINED BY THE ASSESSEE. RULE 10D(1) OF THE I.T. RULES, 1962 ALSO MANDATES THE MAINTAINABILITY OF RECORD OF UNCONTROL LED TRANSACTIONS TO BE TAKEN INTO ACCOUNT IN ANALYSING THE COMPARABILIT Y OF THE INTERNATIONAL FUNCTIONS ENTERED INTO BY THE ASSESSE E. IT, THEREFORE, IS OBLIGATORY ON PART OF THE APPELLANT TO MAINTAIN SUC H RECORD AND PRODUCE THE SAME BEFORE THE TPO TO SHOW THAT IT HAS BENCHMARKED THE INTERNATIONAL TRANSACTION AT ALP. THIS OBLIGATION, HOWEVER, HAS NOT BEEN DISCHARGED BY THE ASSESSEE. 9.3. THE APPELLANT IN THE PRESENT CASE IS ALSO NOT SHOWN TO BE WILLING TO PAY ANY AMO UNT FOR SUCH SERVICES, IF IT WERE, SO PROVIDED BY AN INDEPENDENT ENTERPRISE OR IF THE SAME WOULD HAVE BEEN PERFORMED IN HOUSE. THE DRP IS FOUND TO HAVE CONSIDERED THESE SERVICES AS NON-BENEFICIAL FOR THE RECIPIENT AND DID NOT TAKE IT AS CHARGEABLE SERVICES. THE PERUSAL OF E-MAILS AND OTHER CONTEMPORANEOUS RECORD ONLY GOES TO REVEAL THAT INC IDENTAL AND PASSIVE ASSOCIATION BENEFIT HAS BEEN PROVIDED BY TH E ASSOCIATE ENTERPRISE. IN THIS VIEW OF THE MATTER THERE COULD NEITHER BE ANY COST CONTRIBUTION OR COST REIMBURSEMENT NOR PAYMENT FOR SUCH SERVICES TO THE AE. THE TPO, THEREFORE, HAS RIGHTLY ADOPTED NIL VALUE FOR BENCHMARKING THE ARM'S LENGTH PRICE IN RESPECT OF B OTH THESE SERVICES. PAGE 40 OF 47 40 WE, THEREFORE, DO NOT FIND ANY REASON TO INTERFERE WITH THE WELL REASONED CONCLUSION REACHED BY THE AO ON THIS COUNT . THE GROUNDS RAISED IN APPEAL IN THIS RESPECT, THEREFORE, STAND REJECTED. - LM WINDPOWER (INDIA) LTD AY 2006-07 & 2008-09/ IT (TP)A NOS 1165/B/2010 & 1681/B/2012 - DELLOITTE CONSULTING INDIA PVT LTD/ AY 2002-03/20 03-04/ ITA 3910, 3911/M/2009 - DENTLEY SYSTEMS INDIA PVT. LTD. AY: 2007-08/ ITA NO.5730/DEL/2011/ 14. TREATMENT OF OUTSTANDING RECEIVABLES FROM AE FO R AY 2009-10: THE IMPUGNED AMOUNTS ARE OUTSTANDINGS FOR A PERIOD LONGER THAN THE NORMAL COMMERCIAL CREDIT PERIODS. THE DELAY IN REPAYMENT T HEREOF AMOUNT TO INTERNATIONAL TRANSACTION AS THE DEEMED EARNING HAS BEEN ALLOWED TO ACCRUE TO THE AE. THE INTERVENING PERIOD IS BOUND TO ATTRACT THE RELEVANT PROVISIONS OF SECTION 92B; DRP HAS DEALT WITH THE ENTIRE ISSUE. T HE DEFINITION OF INTERNATIONAL TRANSACTION AS LAID DOWN IN SB ORDER IN CASE OF LG ELECTRONICS SHALL BE SQUARELY APPLICABLE ON THE FACTS OF THIS ISSUE. THE INORDINA TE DELAY IN REALIZATION OF PAYMENT IS BENEFIT PASSED ON TO THE AE. CONSTITUTES REAL INCOME. THE CASE LAW CITED BY ASSESSEE IN THIS BEHALF ARE DISTINGUISHABL E. 14.1. RELIANCE IS PLACED ON ORDERS THE OF LOWER AUT HORITIES. 15. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND PROCEED TO DECIDE THE GROUNDS/ ISSUES AS UNDER: - T.P. ADDITIONS: 16. AMP ADJUSTMENT (COMMON IN ALL ASSTT. YEARS): BI FURCATION OF AMP EXPENSES TO WORK OUT THE EXPENSES RELATABLE TO BRAN D BUILDING AND MARK UP THEREON: 16.1. LD. COUNSEL FOR THE ASSESSEE HAS PLEADED THAT KEEPING IN VIEW THE SPECIAL BENCH JUDGMENT FROM THE AMP EXPENSES, TRADE DISCOU NT, COMMISSION, OTHER PAGE 41 OF 47 41 SELLING EXPENSES RELATING TO POINT OF SALE CONFEREN CES, TRIAL GENERAL, MARKET RESEARCH, FREEBIES ETC. SHOULD BE EXCLUDED. 16.2. ACCORDING TO LD. COUNSEL A DETAILED DEMARCAT ION OF THESE EXPENSES AND DETAILS THEREOF WAS PROVIDED BEFORE TPO AND DRP. T HUS ASSESSEE HAS PROVIDED ENOUGH DETAILS IN THIS BEHALF AND APPLYING THE L.G. SPECIAL BENCH DIRECTIONS THE TOTAL AMP EXPENSES INCURRED BY THE ASSESSEE IS TAB ULATED AT PAGE 10, IN SUB PARA (J), ABOVE. THESE FIGURES OF AMP EXPENSES AS T ABULATED SHOULD BE ADOPTED AND NO FURTHER VERIFICATION OF THE EXPENSES SHOULD BE DIRECTED TO BE CARRIED BY TPO IN AS MUCH AS IT WILL AMOUNT TO SUBJECTING ASSE SSEE AGAIN TO RIGOROUS EXERCISE, WITHOUT THERE BEING ANY FAULT ATTRIBUTAB LE TO IT. IN SUM AND SUBSTANCE, LD. COUNSEL CONTENDS THAT FOR WORKING OF ADJUSTMEN T ATTRIBUTABLE TO BRAND BUILDING IN TERMS OF THE SPECIAL BENCH JUDGMENT IS REFLECTED BY THE FIGURES MENTIONED IN THE ABOVE TABLE. THEREAFTER SUITABLE C OMPARABLES MAY BE TAKEN AND BASED ON OBJECTIVE DATA THE MARK UP MAY BE APPLIED AND THE ADJUSTMENT SHOULD BE WORKED OUT. THUS THIS EXERCISE DOES NOT FURTHER VERIFICATION OF EXPENSES. 16.3. PER CONTRA, LD. CIT (DR) CONTENDS THAT THE C ONCEPT OF BRIGHT LINE TEST IS A RECOGNIZED CONCEPT TO DETERMINE THE COST RELEVANT TO THE INTERNATIONAL TRANSACTIONS. THE SPECIAL BENCH RULING IN THE CASE OF L.G. ELECTRONICS THOUGH HAS NOT ESPECIALLY DEALT WITH THE ISSUE OF BRIGHT LINE CONCEPT, HOW4EVER, THE METHODOLOGIES AS PROVIDED BY ECD AND UN MODEL GUID ELINES ARE IMPLICITLY ENDORSED AND FACTORED IN BY THE SPECIAL BENCH FOR U NDERTAKING AN APPROPRIATE COMPARABILITY ANALYSIS. 16.4. LD. DR CONTENDS THAT THE ASSESSEE HAS PROVIDE D THE DETAILS ONLY AS PER THE HEADS OF ACCOUNTS MAINTAINED BY IT. THERE IS NO VER IFICATION AS TO WHETHER THE POSTING OF EXPENSES IS PROPER AND WHETHER THEY HAVE NOT ACCOUNTED FOR BY THE ASSESSEE IN A PROPER MANNER. THE ASSESSEES TABLE A S MENTIONED ABOVE IS ONLY ON THE BASIS OF PRIMA FACIE HEADS OF THE ACCOUNTS AND NOT BASED ON ANY VERIFICATION PAGE 42 OF 47 42 OF THE ACTUAL DETAILS. THIS SITUATION AROSE BECAUSE FOLLOWING OTHER CASES, THE ENTIRE AMP EXPENSES WERE CONSIDERED BY TPO FOR T.P. ADJUSTMENT. THE L.G. SPECIAL BENCH JUDGMENT WAS NOT AVAILABLE AT THAT TI ME. DUE TO CONSIDERATION OF ENTIRE EXPENDITURE AS AMP THE AO AND DRP DID NOT VE RIFY THE ACTUAL NATURE OF EXPENSES AS IT WAS NOT NEEDED. BESIDES, THE PLEA OF THE ASSESSEE THAT THE EXPENSES ON CONFERENCES, MARKET RESEARCH, FREEBIES ETC. IS TO BE EXCLUDED FROM AMP EXPENSES DESERVES TO BE LOOKED INTO BEFORE EXCL UDING THEM. IT IS THE OBLIGATION OF THE ITAT TO ENSURE THAT A FAIR AND PR OPER ASSESSMENT IS MADE. THE TPO AND DRP ADOPTED THE BRIGHT LINE TEST BY TREAT ING ENTIRE AMP EXPENSES BY A UNIFORM PRACTICE OF DEPARTMENT IN ALL SUCH CAS ES, DID NOT LOOK INTO THE INTRINSIC DETAILS OF EXPENSES. THERE IS A SIGNIFICA NT CHANGE IN THE BRIGHT LINE ADJUSTMENT. THE SPECIAL BENCH ITSELF HAS DIRECTED T HAT EXPENDITURE SHOULD BE VERIFIED AND CATEGORIZED AS PER THE DIRECTIONS CONT AINED IN ITS ORDER. THIS IMPLICITLY MEANS THAT A PROPER EXERCISE OF IDENTIFY ING THE INCLUDIBLE AND EXCLUDIBLE EXPENSES IS TO BE CARRIED OUT. 16.5. LD. DR POINTED OUT CERTAIN DEFECTS IN THE POS TING OF EXPENSES AND HEADS IN THE ACCOUNTS AS MADE BY THE ASSESSEE. IT IS THUS PL EADED THAT IN ORDER TO ARRIVE AT A FAIR AND PROPER AMP ADJUSTMENT IT WILL BE DESIRAB LE THAT THE ENTIRE ISSUE IS SET ASIDE TO THE TPO TO DECIDE IT DE NOVO IN THE LIGHT OF SPECIAL BENCH DIRECTIONS IN THE CASE OF LG ELECTRONICS (SUPRA), DE NOVO. 16.6. WE FIND MERIT IN THE ARGUMENT OF LD. DR, IN O UR VIEW THE NATURE AND HEADING OF EXPENSES AS MADE BY THE ASSESSEE NEEDS TO BE VERIFIED. THE APPROACH OF THE TPO AND DRP HAS BEEN FUNDAMENTALLY CHANGED B Y THE SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS (SUPRA). SINCE THE APP ROACH EARLIER ADOPTED BY THE LOWER AUTHORITIES DID NOT REQUIRE VERIFICATION OF E XPENSES AND CATEGORIZATION OF HEADS, IN THE CHANGED SCENARIO IT WILL BE DESIRABLE THAT RELEVANT EXPENSES ARE VERIFIED BY THE AO. IN VIEW THEREOF, WE ARE INCLINE D TO SET ASIDE THE GROUNDS RAISED BY THE ASSESSEE IN THIS BEHALF BACK TO THE F ILE OF TPO TO DECIDE THE SAME PAGE 43 OF 47 43 AFRESH AFTER GIVING THE ASSESSEE ADEQUATE OPPORTUN ITY OF BEING HEARD. ASSESSEES GROUND ON THIS ISSUE FOR ALL THE ASSESSMENT YEARS I N QUESTION STANDS ALLOWED FOR STATISTICAL PURPOSES. 17. DISALLOWANCE OF INTRA GROUP SUPPORT SERVICES ( A.Y. 2007-08 & 2008- 09) : 17.1. BEFORE TPO, ASSESSEE FURNISHED A LIST OF SERV ICES CLAIMED TO BE RENDERED BY THE GROUP CONCERNS FOR WHICH THE AMOUNT IN QUEST ION WAS PAID AS INTRA GROUP SERVICES. THE TPO HAS GIVEN A CATEGORICAL FINDING T HAT ASSESSEE HAS NOT PROVIDED ANY EVIDENCE TO SUBSTANTIATE THE CLAIM OF RECEIVING ANY SERVICE. ASSESSEES OBJECTION IS TO THE EFFECT THAT THE BENEFIT TEST IS NOT A METHOD PRESCRIBED UNDER THE REALM OF T.P. PROCEEDINGS. DRP IN PARA 6.7.1 & 6.7.2 OF ITS ORDER FOR A.Y. 2007-08 HAS UPHELD THE ORDER OF TPO ON FOLLOWING LI NES: (I) SERVICES CLAIMED TO HAVE BEEN RENDERED WERE NEI THER IDENTIFIED NOR PROVED BY ANY CONTEMPORANEOUS DOCUMENTARY EVIDENCE. (II) DETAILS OF TANGIBLE AND DIRECT BENEFIT DERIVED BY THE ASSESSEE HAS NOT BEEN FURNISHED. (III) NO INFORMATION HAS BEEN PROVIDED AS TO WHETHE R THE GROUP AES WERE RENDERING SUCH SERVICES TO OTHER AES OR INDEPE NDENT PARTIES. (IV) THE APPLICABILITY OF BENEFIT TEST HAS BEEN HEL D TO BE PROVIDED BY OECD GUIDELINES OF 1979 PROVIDING FOR A BENEFIT TES T FROM THE PROSPECTIVE RECIPIENTS. 17.2. ASSESSEES CLAIM IS TO THE EFFECT THAT SOME E VIDENCE WAS PRODUCED BEFORE THE LOWER AUTHORITIES WHICH HAS NOT BEEN CONSIDERED . FOR A.Y. 2007-08 NO OBJECTIONS IN THIS BEHALF SEEMS TO HAVE BEEN RAIS ED BEFORE DRP IN GROUND NO. PAGE 44 OF 47 44 1.1.6 & 1.1.7. A PERUSAL OF THESE GROUNDS INDICATE THAT BEFORE DRP THE ALLEGATION OF THE TPO THAT NO EVIDENCE WAS FURNISHE D IN RESPECT OF SERVICES HAS NOT BEEN CHALLENGED. BE THAT AS IT MAY, IN SUBSEQUE NT YEARS SUCH ADJUSTMENT HAS NOT BEEN MADE BY DEPARTMENT. IN VIEW OF THESE FACTS WE ARE INCLINED TO SET ASIDE THIS ISSUE BACK TO THE FILE OF TPO. LOOKING AT ASSE SSEE CLAIMS THAT EVIDENCE WAS PRODUCED BEFORE TPO AND SUBSEQUENTLY IT IS ALLOWED, IT WILL BE DESIRABLE THAT THE ISSUE OF INTRA GROUP SERVICE IS DECIDED DE NOVO BY THE TPO AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND ALLOWING TO PRODUCE ANY CONTEMPORANEOUS EVIDENCE IN THIS BEHALF. THE CASE L AWS REFERRED TO BY BOTH THE PARTIES ARE NOT NECESSARY TO BE ADDRESSED. THEREFOR E, THIS GROUND IN A.Y. 2007- 08 AND 2008-09 IS ALLOWED FOR STATISTICAL PURPOSES. 18. ADJUSTMENT IN RELATION TO NOTIONAL INTEREST IN RESPECT OF OUTSTANDINGS: (A.Y. 2008-09 & 2009-10): 18.1. WE FIND THAT LD. DR HAS CLAIMED THAT INORDINA TE DELAY IN RECEIVING THE OUTSTANDING AMOUNTS TO PASSING A BENEFIT TO AE AND IT CONSTITUTES REAL INCOME. APROPOS ASSESSEE HAS BEEN ABLE TO DEMONSTRATE THAT ASSESSEE AS A POLICY DOES NOT CHARGE ANY INTEREST ON ANY DELAYED PAYMENT IRRE SPECTIVE OF THE PARTY BEING AE OR NON AE, AS IT WAS A CONSISTENT BUSINESS POLIC Y. RELIANCE IS PLACED BY ASSESSEE ON OECD GUIDELINES AT PARA 1.9 PRESCRIBING THAT NO INTEREST COULD BE CHARGED ON DELAYED PAYMENT ON COMMERCIAL CONSIDERAT ION FOR ENSURING A LONG AND HEALTHY RELATIONSHIP AS PERSUASIVE VALUE. PAGE 45 OF 47 45 18.2. IN THE CASE OF INDO AMERICAN JEWELLERY LTD. ( SUPRA), HONBLE BOMBAY HIGH COURT WHILE AFFIRMING THE ITAT DECISION HAS HE LD THAT THERE BEING UNIFORMITY IN ASSESSEES ACT IN NOT CHARGING INTERE ST BOTH FROM AE AND NON AE AND DELAY IN REALIZATION IN BOTH THE CASES IS SAME, , NOTIONAL INTEREST CANNOT BE CONSIDERED WITH ALP ON DELAYED REALIZATION. THIS HA S BEEN FURTHER FOLLOWED BY THE ITAT IN THE CASE OF LINTAS INDIA P. LTD. (SUPRA ) & MASTEK LTD. (SUPRA). 18.3. IN VIEW OF ABOVE FACTS, RESPECTFULLY FOLLOWIN G THESE JUDICIAL PRECEDENTS WE ARE OF THE VIEW THAT THE ADJUSTMENT IN RELATION TO NOTIONAL INTEREST ON OUTSTANDING RECEIVABLES CANNOT BE MADE IN THE CASE OF THE ASSESSEE. THIS GROUND OF THE ASSESSEE IS ALLOWED. 19. CORPORATE ADDITION (A.Y. 2007-08) : 19.1. THE SOLE ISSUE RELATES TO DISALLOWANCE OF ADV ANCES WRITTEN OFF, WHICH WAS DISALLOWED BY AO HOLDING THAT THEY WERE GIVEN IN T HE ORDINARY COURSE OF BUSINESS AND WERE REVENUE IN NATURE, BESIDES CONDIT IONS OF SEC. 36(2) READ WITH SEC. 36(1)(VII) WERE NOT SATISFIED. BEFORE DRP ASSE SSEE FILED ADDITIONAL EVIDENCE ALSO ON WHICH A REMAND REPORT WAS CALLED FROM AO. I N THE REMAND PROCEEDINGS ASSESSEE SUBMITTED BEFORE THE AO, THAT ADVANCES GIV EN TO VARIOUS PARTIES WERE IN NATURE OF EXPENSES INCURRED TOWARDS MARKETING AND S ALES PROMOTION ACTIVITIES, SPONSORSHIP OF EVENTS, CONFERENCES, TRAVEL HOTEL ST AY, EMPLOYEE SALARY ADVANCE ETC. AND WERE NECESSARILY INCURRED IN THE ORDINARY COURSE OF BUSINESS. BESIDES IT ALSO FILED DETAILS OF NATURE OF EXPENSES FOR WHICH THE ADVANCES WERE GIVEN TO PROVE THAT THE EXPENSES WERE OF REVENUE NATURE AND WERE WHOLLY AND EXCLUSIVELY PAGE 46 OF 47 46 INCURRED IN THE ORDINARY COURSE OF BUSINESS. AO, HO WEVER, SUBMITTED REMAND REPORT FOR NOT ALLOWING THE CLAIM ON THE FOLLOWING OBJECTIONS: (I) ASSESSEE HAS ONLY SUBMITTED COPIES OF VOUCHERS , BILLS AND NO OTHER DETAILS SUMMARIZING THE NATURE OF EXPENSES WERE FIL ED. (II) ASSESSEE DID NOT PROVIDE ANY CLARIFICATION AS TO WHETHER THE ADVANCES WERE GIVEN IN ORDINARY COURSE OF BUSINESS. (III) NO COGENT REASONS ARE GIVEN THAT THEY WERE NO T FOR LONG TERM BENEFIT TO THE ASSESSEE. 19.2. ACCORDING TO ASSESSEE, AO THUS GAVE SELF CONT RADICTORY OBSERVATIONS FROM REASON TO REASON AND FILED THE REMAND REPORT, WHIC H IS VAGUE AND LD. DRP WITHOUT CONSIDERING THE MERIT OF THE EXPLANATION AN D EVIDENCE FILED BY THE ASSESSEE SUMMARILY CONFIRMED THE REMAND REPORT AND DISALLOWED THE EXPENDITURE. 19.3. IN OUR VIEW FROM THE ABOVE FACTS, IT EMERGES THAT IN REMAND PROCEEDINGS THE EVIDENCE WAS FILED BY THE ASSESSEE. THE OBJECTI ONS GIVEN BY AO ARE VAGUE IN AS MUCH AS THOUGH VOUCHERS AND BILLS WERE PRODUC ED STILL THERE IS OBJECTION THAT THERE ASSESSEE DID NOT CLARIFY AND IT DOES NO T APPEAR WHETHER THE EXPENDITURE WAS IN THE ORDINARY COURSE OF BUSINESS. SIMILARLY, THERE IS A VAGUE FINDING THAT IT IS NOT CLEAR WHETHER ANY LONG TER M BENEFIT WAS DERIVED BY THE ASSESSEE. 19.4. IN OUR CONSIDERED VIEW, THE NATURE OF EXPEND ITURE IS DEMONSTRATED BY THE ASSESSEE IN TERMS, AS REPRODUCED ABOVE. BESIDES, TH E EXPLANATION HAS NOT BEEN CONTROVERTED EITHER BY THE TPO OR DRP IN OBJECTIVE TERMS. IN VIEW THEREOF, WE SEE NO COGENCY OR JUSTIFICATION IN THE REASONS APPL IED BY DRP TO SUSTAIN THE DISALLOWANCE. IN OUR CONSIDERED VIEW THE EXPENDITUR E INCURRED WAS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE ON REVENUE AC COUNT. THE ADVANCES HAVE A PROXIMATE AND DIRECT NEXUS WITH ASSESSEES REGULAR BUSINESS OPERATIONS WHICH IS EXPLICIT FROM THE NATURE OF EXPENDITURE REMANDE D BY THE AO HIMSELF. PAGE 47 OF 47 47 ADVANCES HAVING BECOME IRRECOVERABLE AND ACTUALLY W RITTEN OFF ARE ALLOWABLE AS BAD DEBT WRITTEN OFF, AS WELL AS BUSINESS LOSS/ EXP ENDITURE U/S 37(1). OUR VIEW IS SUPPORTED BY HONBLE SUPREME COURT JUDGMENT IN THE CASE OF BADRIDAS DAGA (SUPRA) AND MYSORE SUGAR CO. LTD. (SUPRA). BESIDES, SIMILAR VIEW HAS BEEN ADOPTED BY HONBLE DELHI HIGH COURT IN THE CASE OF MOHAN MEIKENS (SUPRA). IN VIEW THEREOF, WE DELETE THIS ADDITION. GROUND IS AL LOWED. 20. IN THE RESULT, ASSESSEES APPEALS FOR A.Y. 2006 -07 AND 2008-09 ARE ALLOWED FOR STATISTICAL PURPOSES AND APPEALS FOR A. Y. 2007-08 & 2009-10 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 23-05-2014. SD/- SD/- ( B.C. MEENA) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23-05-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR