GODREJ SARA LEE LTD., MUMBAI V. ADDL. C.I.T. 10(2), MUMBAI

ITA 7227/MUM/2011

• Counselvise Citation: 722719914 RSA 2011
• Duration Of Justice: 2 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 17-02-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 25-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: F V IRANI
• Keywords: Transfer pricing
• Section: 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI . . , ! ' #'' '$ , % ! & BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. : 7227/MUM/2011 (ASSESSMENT YEAR: 2005-06) GODREJ SARA LEE LTD (NOW AMALGAMATED INTO GODREJ CONSUMER PRODUCTS LTD.), KALYANIWALLA & MISTRY, ARMY & NAVY BUILDING, 148, MAHATMA GANDHI ROAD, FORT, MUMBAI -400 001 PAN: AAACT 1921 C VS ADDL COMMISSIONER OF INCOME TAX RANGE 10(2), AAYAKAR BHAVAN, M.K. ROAD MUMBAI -400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI F V IRANI RESPONDENT BY : SHRI AJEET KUMAR JAIN /DATE OF HEARING : 17-02-2014 / DATE OF PRONOUNCEMENT : 19-02-2014 ' O R D E R #'' '$ , : PER VIVEK VARMA, JM: THE APPEAL ARISES FROM ORDER OF CIT(A) -15, MUMBAI, DATED 25.08.2011 WHEREIN THE FOLLOWING GROUNDS HAVE BEEN RAISED: THIS APPEAL IS AGAINST THE ORDER OF THE COMMISSION ER OF INCOME TAX (APPEALS) -15, MUMBAI, AND RELATES TO THE ASSESSMEN T YEAR 2005-2006 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN HOLDING THAT THE ASSESSEE HAS CLAIMED EXCESS DEDUCTION U/S 80IB/80IC OF THE ACT. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN DISREGARDING THE METHOD OF ALLOCATION CONSISTENTLY ADOPTED BY THE APPELLANT AND IN RE-ALLOCATING 50% OF THE FOLLOWING OVERHEADS OF THE NON-ELIGIBLE UNDERTAKINGS TO THE ELIGIBLE UNDERTAKI NGS OF THE APPELLANT, WHILE COMPUTING THE DEDUCTION U/S 80IB/8 0IC OF THE ACT. MISCELLANEOUS EXPENSES CONVEYANCE AND TRAVELLING EXPENSES RENT, RATES AND TAXES ADVERTISEMENT AND PUBLICITY SCHEMES OF PROMOTIONS GODREJ SARA LEE LTD (NOW AMALGAMATED INTO GODREJ CONSUMER PRODUCTS LTD. ) ITA 7227/MUM/2011 2 HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER BE DIR ECTED TO RE- COMPUTE THE DEDUCTION U/S 80IB/80IC OF THE ACT ON T HE BASIS OF ALLOCATION OF OVERHEADS ADOPTED THE APPELLANT IN IT S RETURN OF INCOME. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN T REATING THE GUARANTEE TO A BANKER AS AN INTERNATIONAL TRANSACT ION WITHIN THE MEANING OF SECTION 92B OF THE ACT. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN DIRECTING THE ASSESSING OFFICER TO CONSIDER THE AGG REGATE RATE CHARGED BY ICICI BANK AT 2.25%, BEING 1.45% AS FINA NCIAL GUARANTEE AND 0.8% AS PERFORMANCE GUARANTEE, INSTEAD OF CONSI DERING ONLY THE FINANCIAL GUARANTEE OF 1.45%. 5. WITHOUT PREJUDICE TO GROUND NOS. 3 AND 4 ABOVE, THE APPELLANT SUBMITS THAT THE ADJUSTMENT IS ARBITRARY AND EXCESS IVE AND OUGHT TO BE DELETED OR REDUCED SUBSTANTIALLY. 2. AT THE TIME OF HEARING, THE AR POINTED OUT THAT THE T WO ISSUES INVOLVED IN THE APPEAL ARE COVERED BY THE ORDER OF THE I TAT IN ITA NO. 7369/MUM/2010 IN ITS OWN CASE IN ASSESSMENT YEAR 2006-07. 3. THE AR POINTED OUT THAT IN SO FAR AS GROUNDS 1 & 2 ARE CONCERNED IDENTICAL GROUNDS WERE RAISED IN THE APPEAL PER TAINING TO ASSESSMENT YEAR 2006-07, WHICH READS AS: 2. THE FIRST ISSUE RELATING TO THE RESTRICTION OF ASSES SEES CLAIM FOR DEDUCTION U/S 80IB/80IC OF THE ACT IS RAISED BY THE ASSESSEE IN GRO UND NO. 1 & 2 WHICH READ AS UNDER:- 1. THE LEARNED DISPUTE RESOLUTION PANEL ERRED IN HOLDING THAT THE ASSESSEE HAS CLAIMED EXCESS DEDUCTION U/S 80IB/80IC OF THE ACT . 2. THE LEARNED DISPUTE RESOLUTION PANEL ERRED IN DISRE GARDING THE METHOD OF ALLOCATION CONSISTENTLY ADOPTED BY THE APPELLANT AND IN RE-ALLOCATING 50% OF THE FOLLOWING OVERHEADS OF THE NON-ELIGIBLE UNDERT AKINGS TO THE ELIGIBLE UNDERTAKINGS OF THE APPELLANT, WHILE COMPUTING THE DEDUCTION U/S 80IB/80IC OF THE ACT:- - MISCELLANEOUS EXPENSES - CONVEYANCE AND TRAVELING EXPENSES - RENT, RATES AND TAXES - ADVERTISEMENT AND PUBLICITY - SCHEMES AND PROMOTIONS 4. HE, THEREFORE, SUBMITTED THAT THE COORDINATE BENCH, DE CIDED THE ISSUE, 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PE RUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT OUT O F THE TOTAL OVERHEADS OF RS.154.63 CRORES INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION, OVERHEADS TO THE EXTENT OF RS. 141.91 CRORES WERE D IRECTLY ALLOCATED BY THE ASSESSEE TO THE ELIGIBLE UNITS BEING DIRECTLY ATTRIBUTABLE T O THE SAID SEGMENT. THE BALANCE AMOUNT OF OVERHEADS TO THE EXTENT OF RS. 12 .72 CRORES REPRESENTING THE INDIRECT EXPENSES WERE ALLOCATED BY THE ASSESSEE BETWEE N THE ELIGIBLE BUSINESS AND NON-ELIGIBLE BUSINESS IN THE RATIO OF TURNOVER AND THIS BASIS ADOPTED BY THE ASSESSEE WAS ACCEPTED BY THE A.O. EXCEPT IN THE CASE OF ADVERTISEMENT & PUBLICITY EXPENSES AMOUNTING TO RS. 4.23 CRORES, SCHEME S AND PROMOTIONS GODREJ SARA LEE LTD (NOW AMALGAMATED INTO GODREJ CONSUMER PRODUCTS LTD. ) ITA 7227/MUM/2011 3 EXPENSES AMOUNTING TO RS. 0.83 CRORES, MISCELLANEOUS EX PENSES AMOUNTING TO RS. 0.72 CRORES, CONVEYANCE AND TRAVELING EXPENSES AM OUNTING TO RS. 0.47 CRORES AND RENT, RATE & TAXES AMOUNTING TO RS. 0.48 CRORES. AS EXPLAINED BY THE LD. COUNSEL FOR THE ASSESSEE BEFORE US, THE EXPENDITU RE ON ADVERTISEMENT & PUBLICITY AND SCHEMES AND PROMOTIONS WAS INCURRED MAINLY TO CREATE AND PROMOTE THE BRAND IMAGE FOR THE COMPANYS PRODUCT AND THIS POSITION WAS ACCEPTED EVEN BY THE A.O. IN HIS ORDER. THE, A.O., H OWEVER, HELD THAT THE TRADER NORMALLY WOULD NEVER INCUR EXPENDITURE ON ADVERTISEMENT AND BRANDS OF THE MANUFACTURER OUT OF THE TRADING PROFIT. HE, HOWEVER, APPEARS TO HAVE OVERLOOKED THE FACT THAT GOODS PROCURED FROM THE THIRD PARTY WE RE SOLD BY THE ASSESSEE COMPANY AS A PART OF TRADING ACTIVITY UNDER THE SAME BRAND NAME AND THE BENEFIT OF THE SAID EXPENDITURE THUS WAS AVAILABLE EQUALL Y TO THE TRADING SEGMENT. INCIDENTALLY, THE A.O. ALSO IMPLIEDLY ACCEPTED TH IS POSITION WHILE OBSERVING IN HIS ORDER THAT SUCH EXPENSES ON ADVERTIS EMENT & PUBLICITY AND SCHEMES HAVE TO BE ALLOCATED TO SOME EXTENT TO THE NO N-ELIGIBLE SEGMENT. HE, HOWEVER, HELD THAT SUCH ALLOCATION COULD NOT BE VERY LAR GE AMOUNT AND ACCORDINGLY RE-ALLOCATED 50% OF THE SAID EXPENSES TO ELIGIBLE UNIT ON ADHOC BASIS. IN OUR OPINION, SUCH REALLOCATION MADE BY THE A.O. ON ADHOC BASIS CANNOT BE SUSTAINED HAVING REGARD TO ALL THE FACTS OF THE CASE INCLUDING ESPECIALLY THE FACT THAT THE EXPENDITURE ON ADVERTISEMENT & PUBLICITY AND SCHEMES WAS IN THE NATURE OF SELLING EXPENSES AND THE ALLOCATION MADE BY TH E ASSESSEE OF THE SAID EXPENSES ON THE BASIS OF TURNOVER WAS QUITE REASONAB LE. THE ALLOCATION SO MADE BY THE ASSESSEE ALSO CANNOT BE SAID TO HAVE RESULTED IN ALLOCATION OF LARGE AMOUNT OF EXPENSES TO THE NON-ELIGIBLE BUSINESS AS ALLEGED BY THE A.O. SINCE THE GROSS PROFIT RATIO AS SHOWN BY THE ASSESSEE IN THE TR ADING SEGMENT WAS 12.92% AND EVEN AFTER ALLOCATING ADVERTISEMENT, SCHEMES AND PR OMOTIONS EXPENSES ON THE BASIS OF TURNOVER, THE PROFIT OF TRADING SEGMENT W AS 6.59%. 9. SIMILARLY, THE OTHER INDIRECT EXPENSES ON CONVEYANC E AND TRAVELING, RATE AND TAXES AND MISCELLANEOUS WERE INCURRED BY THE ASSESSEE D URING THE NORMAL COURSE OF ITS BUSINESS OF SELLING THE FINISHED GOODS, WHE THER MANUFACTURED OR PROCURED FROM THIRD PARTY AND SINCE THE SAID EXPENSES WERE INCURRED EQUALLY FOR THE BENEFIT OF ELIGIBLE BUSINESS AS WELL AS NON-ELIGIBLE BUSINES S OF TRADING, WE ARE OF THE VIEW THAT THE BASIS OF TURNOVER ADOPTED B Y THE ASSESSEE TO ALLOCATE THE SAID EXPENSES WAS MORE SCIENTIFIC AND REASONABLE. ON THE OTHER HAND, THE REALLOCATION OF THE SAID EXPENSES MADE BY THE A.O. ON A DHOC BASIS WAS NOT SUPPORTED OR SUBSTANTIATED BY HIM AND THE SAME, IN O UR OPINION, CANNOT BE ACCEPTED AS A REASONABLE BASIS. IN THE CASE OF CONSOLID ATED COFFEE LTD. V. STATE OF KARNATAKA (SUPRA) CITED BY THE LD. COUNSEL FOR THE ASSESSEE, IT WAS HELD BY THE HONBLE SUPREME COURT THAT WHEN A BIFURCATION OF E XPENSES IS NOT POSSIBLE, SOME REASONABLE TEST WILL HAVE TO BE ADOPTED AND THAT A DOPTION OF THE METHOD OF APPORTIONING ON THE BASIS OF GROSS RECEIPTS COULD NO T BE SAID TO BE A PERVERSE METHOD TO APPLY. KEEPING IN VIEW THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CONSOLIDATED COFFEE LTD. V. STATE OF KARNATAK A (SUPRA) AND HAVING REGARD TO THE FACTS OF THE CASE, WE ARE OF THE VIEW THAT THE ALLOCATION OF EXPENSES MADE BY THE ASSESSEE BETWEEN ELIGIBLE BUSINESS AND NON-ELIG IBLE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80IB/80IC OF T HE ACT WAS REASONABLE AND THERE WAS NO JUSTIFIABLE REASON FOR THE A.O. TO D ISTURB THE SAME AND MAKE RE-ALLOCATION ON ADHOC BASIS. WE, THEREFORE, DELETE THE A DDITION MADE BY THE A.O. BY RESTRICTING THE CLAIM OF THE ASSESSEE FOR DED UCTION U/S 80IB/80IC OF THE ACT BY REALLOCATING THE COMMON INDIRECT EXPENSES AND ALLOW GROUND NO. 1 & 2 OF THE ASSESSEES APPEAL. AND DELETED THE ADDITION AS MADE BY THE REVENUE AUTHORITIES. 5. IN SO FAR AS GROUNDS NO. 3, 4 & 5 ARE CONCERNED, THE AR POINTED OUT THAT THE ISSUE COVERED IN THE GROUNDS ARE COVERED BY THE DECISION OF THE COORDINATE BENCH IN ITS OWN CASE IN ITA NO. 7369/M /2010 AND AT PARA 15 OF THIS ORDER, THE ITAT HAS HELD GODREJ SARA LEE LTD (NOW AMALGAMATED INTO GODREJ CONSUMER PRODUCTS LTD. ) ITA 7227/MUM/2011 4 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO P ERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT A SIMIL AR ISSUE RELATING TO DETERMINATION OF ARMS LENGTH RATE OF GUARANTEE COMMIS SION WAS INVOLVED IN THE CASE OF NIMBUS COMMUNICATIONS LTD. (SUPRA) AND THE SAME WAS DECIDED BY THE TRIBUNAL VIDE PARA NO. 10 OF ITS ORDER AS UNDER:- 10. AS REGARDS THE RATE OF GUARANTEE COMMISSION, IT IS NOTED THAT THE ARMS LENGTH PRICE OF GUARANTEE COMMISSION WAS DETERMINED BY T HE TPO BY APPLYING CUP METHOD AND THE ARITHMETIC MEAN OF 1.5% O F THE GUARANTEE COMMISSION CHARGED BY THE HSBC BANK IN THE RANGE OF 0. 15 TO 3% WAS TAKEN AS ARMS LENGTH PRICE. THE LD. CIT(A) UPHELD THE CU P METHOD APPLIED BY THE TPO BUT ADOPTED THE RATE OF 0.25% OF G UARANTEE FEE AS ARMS LENGTH PRICE RELYING ON THE DECISION OF FREN CH COURT IN THE CASE OF SOCIETE CARREFOUR. THE LD. D.R., AT THE TIME OF HEARING BEFORE US HAS RELIED ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S EVEREST KANTO CYLINDER LTD. (SUPRA) WH EREIN WHILE ACCEPTING THE CUP METHOD AS THE MOST APPROPRIATE MET HOD FOR BENCHMARKING THE GUARANTEE FEE, THE TRIBUNAL ACCEPTED 0.5% GUARANTEE FEE/COMMISSION TO BE AT ARMS LENGTH AFTER TAKING INTO CO NSIDERATION THE RATES OF GUARANTEE COMMISSION CHARGED BY VARIOUS BANKS INCLUDING THE GUARANTEE COMMISSION CHARGED BY THE HSBC BANK IN THE RANGE OF 0.15% TO 3%. SINCE THE FACTS INVOLVED IN THE PRESENT CASE ARE MATERIALLY SIMILAR TO THE FACTS INVOLVED IN THE CASE OF EVEREST KAN TO CYLINDER LTD. (SUPRA), WE PREFER TO FOLLOW THE DECISION RENDERED BY T HE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE SAID CASE OVER THE DECISION OF FRENCH COURT IN THE CASE OF SOCIETE CARREFOUR (SUPRA). WE, ACCORDING LY MODIFY THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE A.O. TO RECOMPUTE THE COMMISSION FOR GUARANTEE GIVEN BY THE AS SESSEE TO ITS ASSOCIATED ENTERPRISES @ 0.5% BEING THE ARMS LENGTH PR ICE. GROUND NO. 1 OF REVENUES APPEAL IS THUS PARTLY ALLOWED WHEREAS GR OUND NO. 2 OF ASSESSEES APPEAL IS DISMISSED. 16. A PERUSAL OF THE RELEVANT PORTION OF THE TRIBUNALS ORDER REPRODUCED ABOVE SHOWS THAT THE ALP OF GUARANTEE COMMISSION WAS DETERM INED BY THE TPO IN THE CASE OF NIMBUS COMMUNICATIONS LTD. (SUPRA) BY APPLYING CUP METHOD AND THE ARITHMETIC MEAN OF 1.5% OF THE GUARANTEE COMMISSION CH ARGED BY THE HSBC BANK IN THE RANGE OF 0.15 TO 3% WAS TAKEN AS ALP. TH E LD. CIT(A) UPHELD THE CUP METHOD APPLIED BY THE TPO BUT ADOPTED THE RATE OF 0.25% OF GUARANTEE FEE AS ARMS LENGTH PRICE RELYING ON THE DECISION OF FRENCH COURT IN THE CASE OF SOCIETE CARREFOUR. THE TRIBUNAL, HOWEVER, ADOPTED THE RATE OF GUARANTEE COMMISSION AT 0.5% AS THE ALP AFTER TAKING INTO CONSIDER ATION THE RATES OF GUARANTEE COMMISSION CHARGED BY THE VARIOUS BANKS INCLU DING THE GUARANTEE COMMISSION CHARGED BY HSBC LTD. IN THE RANGE OF 0.15% TO 3%. IN THE PRESENT CASE, THE FACTS INVOLVED ARE SIMILAR TO THE CASE OF NIMB US COMMUNICATIONS LTD. (SUPRA) INASMUCH AS THE RATES OF GUARANTEE COMMISSION C HARGED BY THE VARIOUS BANKS ARE FOUND TO BE IN THE RANGE OF 0.15% TO 3.0% AND THIS BEING SO, WE TAKE THE RATE OF GUARANTEE COMMISSION AT 0.5% AS ALP BY R ESPECTFULLY FOLLOWING THE DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF NIMBUS COMMUNICATIONS LTD. (SUPRA). THE A.O. IS ACCORDINGLY DIRE CTED TO RECOMPUTE THE ADDITION TO BE MADE ON ACCOUNT OF TRANSFER PRICING AD JUSTMENT IN RESPECT OF GUARANTEE COMMISSION BY TAKING THE ARMS LENGTH RATE OF GUARANTEE COMMISSION AT 0.5%. THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE THUS ARE PARTLY ALLOWED. 6. THE AR THEREFORE, SUBMITTED THAT SINCE THE ISSUES AR E COVERED, SIMILAR, DECISION MAY BE TAKEN IN THE INSTANT CASE AS WELL. 7. THE DR, ACCEPTING THE FACT THAT THE ISSUES ARE COVE RED BY THE ORDER OF THE COORDINATE BENCH, HOWEVER, RELIED ON THE ORD ERS OF THE REVENUE AUTHORITIES. GODREJ SARA LEE LTD (NOW AMALGAMATED INTO GODREJ CONSUMER PRODUCTS LTD. ) ITA 7227/MUM/2011 5 8. WE HAVE PERUSED THE DECISION TAKEN BY ONE OF US IN I TA NO. 7369/MUM/2010, DATED 22.11.2013. RESPECTFULLY FOLLOWING THE DECISIONS AS RENDERED BY THE COORDINATE BENCH, WE SET A SIDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO RECOMPUTE THE ALP, AS PER THE DIRECTIONS OF THE COORDINATE BENCH IN THE ABOVE MENTIONED ORDER. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH FEBRUARY, 2014. SD/- SD/- ( . . ) ( #'' '$ ) ! ! (P.M. JAGTAP) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 19 TH FEBRUARY, 2014 / COPY TO:- 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) THE CIT (A)-15, MUMBAI 4) THE CIT-10, MUMBAI, 5) ! '# $ , % '# , &'( / THE D.R. K BENCH, MUMBAI. 6) !)* + COPY TO GUARD FILE. %,$- / BY ORDER / / TRUE COPY / / . / / '0 % '# , &'( DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * CHAVAN