GODREJ HOUSEHOLD PRODUCTS LTD, MUMBAI V. ADDL CIT 10(2), MUMBAI

ITA 7369/MUM/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71753 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 28-08-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 28-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI
• Keywords: Transfer pricing
• Section: 143(3); 115JB; 80IB

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI .. , !'# $ $ $ $ % &' , ( !'# !) BEFORE SHRI P.M. JAGTAP, AM AND SHRI AMIT SHUKLA, J M !./ I.T.A. NO. 7369/MUM/2010 ( (+ , $-, (+ , $-, (+ , $-, (+ , $-, / / / / ASSESSMENT YEAR : 2006-07 M/S GODREJ HOUSEHOLD PRODUCTS LTD. (EARLIER GODREJ SARA LEE LTD. (NOW AMALGAMATED INTO GODREJ CONSUMER PRODUCTS LTD.), KALYANIWALLA & MISTRY, ARMY & NAVY BUILDING, 3 RD FLOOR, 148, MAHATMA GANDHI ROAD, FORT, MUMBAI 400 001. + + + + / VS. ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 10(2), AAYAKAR BHAVAN, MUMBAI 400 020. #. !./ PAN : AAACT1921C ( ./ / // / APPELLANT ) .. ( 01./ / RESPONDENT ) APPELLANT BY SHRI F.V. IRANI RESPONDENT BY : SHRI CHANDRAJIT SINGH !+$ 2 / // / DATE OF HEARING : 28-08-2013 34- 2 / DATE OF PRONOUNCEMENT : 22-11-2013 '& / O R D E R PER P.M. JAGTAP, A.M . : .. , !'# THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE ADDL. CIT 10(2) MUMBAI (ASSESSING OFFICER) DATED 30 -11-2009 PASSED U/S 143(3) R.W.S. 144-C(1) OF THE INCOME TAX ACT, 1961 (THE ACT). ITA 7369/M/2010 2 2. THE FIRST ISSUE RELATING TO THE RESTRICTION OF A SSESSEES CLAIM FOR DEDUCTION U/S 80IB/80IC OF THE ACT IS RAISED BY THE ASSESSEE IN GROUND NO. 1 & 2 WHICH READ AS UNDER:- 1. THE LEARNED DISPUTE RESOLUTION PANEL ERRED IN HO LDING THAT THE ASSESSEE HAS CLAIMED EXCESS DEDUCTION U/S 80IB/80IC OF THE ACT. 2. THE LEARNED DISPUTE RESOLUTION PANEL ERRED IN DI SREGARDING THE METHOD OF ALLOCATION CONSISTENTLY ADOPTED BY THE AP PELLANT AND IN RE-ALLOCATING 50% OF THE FOLLOWING OVERHEADS OF THE NON-ELIGIBLE UNDERTAKINGS TO THE ELIGIBLE UNDERTAKINGS OF THE AP PELLANT, 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 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF HOUSEHOL D INSECTICIDES AND AIR FRESHENERS SUCH AS MATS, COILS, ELECTRONIC MOSQUITO DESTROYERS UNDER THE BRAND NAME OF GOODNIGHT, JET, BANISH, HIT ETC. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 19-10-2 006 DECLARING TOTAL INCOME OF RS. 12,29,90,492/- UNDER THE NORMAL PROVISIONS O F THE ACT AND BOOK PROFIT OF RS. 58,52,58,709/- AS PER THE PROVISIONS OF SECT ION 115JB OF THE ACT. ALL THE MANUFACTURING UNITS OF THE ASSESSEE ARE SITUATE D IN BACKWARD AREAS AS SPECIFIED IN EIGHTH SCHEDULE OF THE INCOME TAX ACT WHICH ARE ELIGIBLE FOR DEDUCTION EITHER AT 100% OR 30% OF ITS PROFITS U/S 80IB/80IC OF THE ACT. THE ASSESSEE WAS ALSO HAVING NON 80IB UNITS/SEGMENT REP RESENTING ITS TRADING ACTIVITY AND THE TOTAL TURNOVER OF THIS SEGMENT DUR ING THE YEAR UNDER CONSIDERATION WAS RS. 80,04,65,664/- OUT OF THE TOT AL TURNOVER OF RS. 476,76,04,000/-. THE DIRECT EXPENDITURE RELATED TO THIS TRADING ACTIVITY WAS PURCHASES OF RS. 64,76,53,049/- AND AFTER REDUCING THE SAME FROM THE CORRESPONDING SALES, THE GROSS PROFIT WAS DECLARED AT RS. 15,28,12,615/-. THE COMMON ADMINISTRATIVE & SELLING EXPENSES WERE ALLOC ATED BY THE ASSESSEE TO ITA 7369/M/2010 3 THE ELIGIBLE AS WELL AS NON-ELIGIBLE UNITS/SEGMENT IN THE RATIO OF SALES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS CALLED UPON BY THE A.O. TO EXPLAIN WHY CERTAIN EXPENDITURE SUCH AS MIS CELLANEOUS EXPENSES, CONVEYANCE AND TRAVELING EXPENSES, RENT RATES AND T AXES, ADVERTISEMENT AND PUBLICITY AND SCHEMES AND PROMOTIONS SHOULD NOT BE ENTIRELY ALLOCATED TO 80IB (ELIGIBLE) SEGMENT. IN REPLY, THE FOLLOWING EX PLANATION WAS OFFERED BY THE ASSESSEE:- OVERHEADS ALLOCATION WE WOULD LIKE TO DRAW TO YOUR ATTENTION THAT WHILE LOOKING AT A FIGURE OF RS 12.72 CRORES OF OVERHEADS, ONE HAS TO SEE THAT T HE TOTAL FIGURE WAS 154.63 CRORES OUT OF WHICH RS 141.91 CRORES HAS BEE N ALLOCATED TO ELIGIBLE UNITS ONLY. THE COMPANYS TOTAL OVERHEAD EXPENSES UNDER FOLLOWI NG HEADS HAVE BEEN ALLOCATED TO VARIOUS UNITS ON ACTUAL BASIS WHE RE APPLICABLE AND GENERAL OVERHEADS ON SALES BASIS EMPLOYEE COSTS RS 27,04,75,709 ADMIN AND OTHER EXPENSES RS 22,75,90,572 ADVT. SELLING AND PROMOTIONS RS 38,22,18,426 EXCISE DUTY RS 37,64,34,934 FREIGHT, POWER AND FUEL RS 28,96,31,483 TOTAL RS 1,54,63,51,124 DETAILED BASIS OF ALLOCATION IS AS IN SHEET ENCLOSE D - ANN 2. OUT OF ABOVE ADMINISTRATION EXPENSES AND OVERHEADS (INCLUDING HE AD OFFICE EXPENSES) ETC HAVE BEEN ALLOCATED ON A SALES TO TURNOVER RATI O OVER ALL UNITS. AS IS EVIDENT FROM THE ENCLOSED SHEET, 91.8% OF ABOVE EXP ENDITURE HAS BEEN ALLOCATED TO THE ELIGIBLE UNITS AND 8.2% ONLY TO NON 80IB BUSINESS. BASIS OF ALLOCATING OVERHEADS TO SALES TO TOTAL SAL ES HAS BEEN ACCEPTED AS A FAIR BASIS OVER PAST SEVERAL YEARS OF THE COMP ANYS ASSESSMENTS. SUCH ALLOCATION OF SATES TURNOVER TO TOTAL TURNOVER ARE ALSO BEEN RECOGNIZED BY VARIOUS COURTS AS A REASONABLE BASIS. THE ASSESSING OFFICER HAD NOT APPRECIATED THE FACT THAT THE TRADING ACTIVITY WAS ONLY OF SAME PRODUCTS AS THOSE MANUFAC TURED BY ASSESSEE. NORMALLY, WHEN PRODUCTION TARGETS ARE NOT MET, TO M EET SALES TARGETS, THE COMPANY PROCURES SIMILAR PRODUCTS FROM VENDORS AND SELLS THEM UNDER OWN BRAND NAME AS OWN PRODUCTS. ITA 7369/M/2010 4 SUCH EXPENSES ARE RELATED TO SELLING THE GOODS AND WILL BE INCURRED WHETHER THE GOODS ARE MANUFACTURED OR PURCHASED. SI NCE THE BRAND BELONGS TO GODREJ SARA LEE, ALL EXPENSES RELATED TO SELLING A PRODUCT WILL HAVE TO BE ALLOCATED TO THE GOODS SOLD AND THE SOUR CE OF PROCUREMENT DOES NOT HAVE ANY RELATION. SINCE A&P SCHEMES AND F REIGHT ARE RELATED TO SELLING & DISTRIBUTING PRODUCTS THE SAME HAS BEE N ALLOCATED TO NON 80 IB UNITS AS WELL. 84% OF ADVERTISEMENT, SELLING ETC ARE ALLOCATED AND REDUCED FROM ELIGIBLE UNITS ONLY. HENCE, AS THE EXP ENSES HAVE BEEN ALLOCATED ON A REASONABLE BASIS AND ON SALES BASIS, AND WE REQUEST YOU NOT TO REALLOCATE WITHOUT ANY BASIS. 4. BASED ON THE ABOVE SUBMISSION MADE BY THE ASSESSEE, THE A.O. PROCEEDED TO EXAMINE THE BASIS OF ALLOCATION OF EXP ENDITURE OF RS. 12.72 CRORES TO NON 80IB UNIT/SEGMENT IN RESPECT OF EACH HEAD OF EXPENDITURE AND RECORDED HIS FINDINGS/OBSERVATIONS ON SUCH EXAMINAT ION AS UNDER:- MISCELLANEOUS EXPENSES RS.7275 5681/ -. AGAINST THE NON ELIGIBLE INCOME OF RS.85,9837,989/- ,THE ASSESSEE HAS CLAIMED MISCELLANEOUS EXPENSES OF RS 72,75,568 BASE D ON ALLOCATION OF SALES RATIO. DETAILS OF MISCELLANEOUS ALLOCATED EXP ENSES REVEAL EXPENSES OF GENERAL ADMINISTRATIVE NATURE. THE ALLOCATION OF RS.72,75,568/- APPEAR TO BE ON VERY HIGH SIDE AND NOT REASONABLE. FURTHER, IT IS NECESSARY TO KEEP IN MIND THAT THE TRADING IS NOT T HE MAIN ACTIVITY OF THE ASSESSEE. THE PURCHASES AND SALES ARE IN THE BU LK AS THE ASSESSEE IS NOT A SMALL RETAILER. HENCE, AFTER TAKING IN TO ACCOUNT ALL PROBABILITIES THE 50% OF RS.72,75,568/-WHICH WORKS OUT TO RS. 36, 37,784/- IS HELD AS REASONABLE EXPENDITURE RELATED TO NON-80IB SECTI ON. CONSEQUENTLY, THE BALANCE EXPENDITURE OF RS.36,37,784/- IS HELD A S PERTAINING TO THE MANUFACTURING UNITS OF THE ASSESSEE. 4.7 CONVEYANCE & TRAVELING RS. 46,78,131 AND RENT, RATES & TAXES RS. 48,28,515. CONSIDERING THE FACT THAT THE TRADING IS NOT THE MA IN ACTIVITY, ONLY 50% OF THE CONVEYANCE, TRAVELING AND RENT, RATES & TAXE S ARE HELD REASONABLE, AS RELATED TO NON-801B ACTIVITIES. ACCO RDINGLY, RS 47,53,324/- IS ALLOCATED UNDER THESE HEADS. THE BAL ANCE EXPENDITURE OF RS. 47,53,324/-IS HELD AS PERTAINING TO MANUFACTURI NG UNIT. 4.8 ADVERTISEMENT AND PUBLICITY RS.4, 23,76,829/- THE ASSESSEE HAS ALLOCATED ADVERTISEMENT EXPENSES O N THE BASIS OF TURNOVER. THE TRADER NORMALLY WOULD NEVER INCUR EXP ENDITURE ON ADVERTISEMENT AND BRANDS OF THE MANUFACTURER OUT OF THE TRADING PROFIT. IT APPEARS EXCESSIVE FOR A TRADER TO SPEND SUCH HUG E AMOUNT ON THE ITEM. THE TRADER WOULD NORMALLY SELL THE GOODS WHIC H ARE POPULAR AND FAST MOVING IN THE MARKET. IT IS ALSO EXTRAORDINARY PROFIT IN TRADING ITA 7369/M/2010 5 ACTIVITY UNDERTAKEN BY THE ASSESSEE. THE G.P RATIO IN THE TRADING SECTION OF THE ASSESSEE IS 12.92% BEFORE REDUCING S ELLING AND DISTRIBUTION EXPENSES AND FREIGHT. AFTER ALLOCATION OF ADVERTISEMENT OF RS 423,76,829/-,AND SCHEMES AND PROMOTIONS, THE RAT IO BECOMES 6.59%. IT IS, THEREFORE, CLEAR THAT ALLOCATION OF ADVERTISEMENT AND PUBLICITY EXPENSES TO TRADING ACTIVITY IS HIGHER. HOWEVER, BEARING IN MIND THE ASSESSEES SUBMISSION, AS ABOVE, A DISTINCTION HAS BEEN DRAWN OUT BETWEEN A PURE TRADI NG ACTIVITY ON BEHALF OF ANOTHER AND ACTIVITY OF ASSESSEE. IT IS TO BE APPRECIATED THAT THE COMPANY IS A SINGLE ENTITY AND SELLING PRODUCTS ON ITS OWN ACCOUNT AND NOT FOR ANY OTHER MANUFACTURER AND TRADING ACTI VITY WAS ONLY OF SAME PRODUCTS AS THOSE MANUFACTURED BY ASSESSEE. AS PER ASSESSEE, WHEN PRODUCTION TARGETS ARE NOT MET, TO MEET SALES TARGETS, THE COMPANY PROCURES SIMILAR PRODUCTS FROM VENDORS AND SELLS THEM UNDER OWN BRAND NAME AS OWN PRODUCTS. THEREFORE, THOUGH SOME EXPENSES ON ADVERTISEMENT, P UBLICITY AND HAVE TO BE ALLOWED, IT CANNOT BE A VERY LARGE AMOUNT. I, THEREFORE ALLOW 50% AS REASONABLE EXPENSES UNDER THIS HEAD. THEREFORE A N AMOUNT OF RS 2,11,88,415 IS CONSIDERED REASONABLE AND ALLOCATED TO NON ELIGIBLE BUSINESS SEGMENT AND RS 2,11,88,415/- IS ALLOCATED AS PERTAINING TO MANUFACTURING UNITS OF THE ASSESSEE. 4.9 SCHEMES AND PROMOTIONS RS. 83,09,430: THE ASSESSEE HAS ALLOCATED RS.83,09,430/- OUT OF SC HEMES AND PROMOTIONAL EXPENSES TO TRADING UNIT. IT IS A WELL KNOWN PRACTICE THAT THE MANUFACTURERS FLOAT DIFFERENT SCHEMES FOR BRAND ED GOODS MANUFACTURED BY THEM. THESE ARE ALL DONE TO PROMOTE THE PARTICULAR BRAND IN THE MARKET AND BOOST THE SALES. THE TRADER USUALLY HAS NOTHING TO DO WITH THIS. AS DISCUSSED IN PARA ABOVE , AND ON SAME BASIS, THOUGH SOME EXPENSES ON SCHEMES HAVE TO BE ALLOWED, IT CANNOT BE A VERY LARGE AMOUNT. I, THEREFORE, ALLOW 50% AS REASO NABLE EXPENSES UNDER THIS HEAD. THEREFORE AN AMOUNT OF RS 41,54,71 5/- IS CONSIDERED REASONABLE AND ALLOCATED TO NON ELIGIBLE BUSINESS S EGMENT AND RS 41,54,715/- IS ALLOCATED TO MANUFACTURING UNITS. 5. ON THE BASIS OF ABOVE OBSERVATIONS/FINDINGS, THE A.O. ARRIVED AT A CONCLUSION THAT THE FOLLOWING EXPENDITURE ACTUALLY PERTAINING TO THE MANUFACTURING UNIT ELIGIBLE FOR 80IB/80IC DEDUCTION S WAS WRONGLY ALLOCATED BY THE ASSESSEE TO NON 80IB UNIT/SEGMENT: RS. 36,37,784/- OUT OF MISC. EXPENSES RS. 47,53,324/- OUT OF CONVEYANCE, TRAVELING AN D RENT, RATES & TAXES. RS.2,11,88,415/- OUT OF ADVERTISEMENT & PUBLICI TY ITA 7369/M/2010 6 RS. 41,54,715/- OUT OF SCHEMES AND PROMOTIONS RS.3,37,34,238 /- TOTAL ACCORDINGLY, THE ABOVE EXPENSES WERE RE-ALLOCATED B Y THE A.O. TO THE 80IB UNITS/SEGMENT AND CONSEQUENTLY THE CLAIM OF THE ASS ESSEE FOR DEDUCTION OF RS. 47,46,23,571/- WAS RESTRICTED BY THE A.O. TO RS . 45,13,35,909/- IN THE DRAFT ASSESSMENT. THE ASSESSEE RAISED OBJECTION TO THIS DISALLOWANCE PROPOSED BY THE A.O. IN THE DRAFT ASSESSMENT BEFORE THE D.R. P. CHALLENGING THE BASIS OF ALLOCATION OF EXPENSES ADOPTED BY THE A.O. THE D.R .P., HOWEVER, DID NOT FIND THE SAID OBJECTION SUSTAINABLE AND ACCEPTING THE BA SIS GIVEN BY THE A.O. FOR RE-ALLOCATION OF EXPENSES IN THE DRAFT ASSESSMENT O RDER AS SCIENTIFIC, THE OBJECTION RAISED BY THE ASSESSEE ON THIS ISSUE WAS OVERRULED BY THE D.R.P. ACCORDINGLY, THE DISALLOWANCE PROPOSED IN THE DRAFT ASSESSMENT ORDER ON ACCOUNT OF DEDUCTION U/S 80IB/80IC OF THE ACT WAS C ONFIRMED BY THE A.O. IN THE FINAL ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE ACT VIDE ORDER DATED 30-8-2010. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ONLY DISPUTE INVOLVED ON THIS ISSUE IS RELATING TO THE ALLOCATIO N OF CERTAIN EXPENSES BETWEEN THE 80IB UNIT/SEGMENT AND NON 80IB SEGMENT. HE SUBM ITTED THAT ALTHOUGH THE NON 80IB UNITS/SEGMENT WAS ENGAGED IN TRADING A CTIVITY, THE PRODUCTS FINALLY SOLD OUT OF TRADING WERE THE SAME AS MANUFA CTURED BY THE ASSESSEE IN ELIGIBLE UNITS. HE CONTENDED THAT THE SELLING EXPEN SES SUCH AS ADVERTISEMENT & PUBLICITY, SCHEMES AND PROMOTIONS ETC. THUS WERE RIGHTLY ALLOCATED BY THE ASSESSEE BETWEEN THE ELIGIBLE UNITS AND NON-ELIGIBL E UNITS ON TURNOVER BASIS AND THERE WAS NO REASON FOR THE A.O. TO CHANGE THE SAID BASIS AND MAKE THE REALLOCATION ON ADHOC BASIS. HE EXPLAINED THE NATUR E OF EXPENDITURE INCURRED BY THE ASSESSEE ON SALES PROMOTION, ADVERTISEMENT A ND VARIOUS SCHEMES AND CONTENDED THAT THE SAME WAS INCURRED TO CREATE AND PROMOTE THE BRAND IMAGE FOR THE PRODUCTS MANUFACTURED AND DEALT WITH BY THE ASSESSEE COMPANY. HE SUBMITTED THAT SINCE THE GOODS PURCHASED FROM THIRD PARTIES WERE ALSO BEING ITA 7369/M/2010 7 SOLD AS A PART OF TRADING ACTIVITY IN THE SAME BRAN D NAME, THE EXPENDITURE INCURRED ON SALES PROMOTION, ADVERTISEMENT AND SCHE MES WAS FOR THE PURPOSE OF SALE OF GOODS, WHETHER MANUFACTURED OR PURCHASED . HE SUBMITTED THAT SIMILARLY, THE OTHER EXPENDITURE INCURRED BY THE AS SESSEE WERE NECESSARY FOR SELLING THE FINISHED GOODS WHICH WERE MANUFACTURED AS WELL AS PROCURED FROM THIRD PARTIES AND THE SAME THEREFORE WERE RIGHTLY A LLOCATED BY THE ASSESSEE COMPANY BETWEEN ELIGIBLE SEGMENT AND NON-ELIGIBLE S EGMENT IN THE RATIO OF TURNOVER. HE CONTENDED THAT THIS BASIS OF ALLOCATIO N WAS ADOPTED BY THE ASSESSEE COMPANY ONLY IN RESPECT OF COMMON EXPENSES AND ALL THE EXPENSES WHICH WERE DIRECTLY ATTRIBUTABLE TO THE ELIGIBLE UN ITS HAD BEEN DULY ALLOCATED TO THE SAID UNITS. HE CONTENDED THAT THE ALLOCATION OF INDIRECT EXPENSES THUS WAS MADE BY THE ASSESSEE COMPANY BY ADOPTING REASON ABLE BASIS AND THERE WAS NO JUSTIFICATION IN THE ACTION OF THE A.O. IN A DOPTING AN ADHOC BASIS AND REALLOCATE 50% OVERHEADS FROM NON-ELIGIBLE SEGMENT TO ELIGIBLE SEGMENT. RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CONSOLIDATED COFFEE LTD. V. STATE OF KARNATAKA (2001) 248 ITR 43 2 (SC), HE CONTENDED THAT THE BIFURCATION OF COMMON EXPENSES WAS RIGHTLY MADE BY THE ASSESSEE ON THE BASIS OF TURNOVER, WHICH WAS REASONABLE BASIS. HE A LSO CONTENDED THAT A SIMILAR METHOD ADOPTED BY THE ASSESSEE FOR ALLOCATI ON OF COMMON EXPENSES IN THE EARLIER YEARS WAS ACCEPTED BY THE DEPARTMENT. 7. THE LD. D.R., ON THE OTHER HAND, STRONGLY RELIED ON THE ORDERS OF THE A.O. AND DRP IN SUPPORT OF THE REVENUES CASE ON THIS IS SUE. HE SUBMITTED THAT THE ALLOCATION OF COMMON EXPENSES MADE BY THE ASSES SEE ON TURNOVER BASIS WAS NOT ACCEPTED BY THE A.O. FOR SPECIFIC REASONS G IVEN IN HIS ORDER. HE CONTENDED THAT KEEPING IN VIEW THE SAID REASONS GIV EN BY THE A.O., FURTHER ADJUSTMENT WAS REQUIRED TO BE MADE IN THE ALLOCATIO N OF EXPENSES BETWEEN ELIGIBLE SEGMENT AND NON-ELIGIBLE SEGMENT AND IF AT ALL SUCH ADJUSTMENT MADE BY THE A.O. TO THE EXTENT OF 50% OF THE CORRESPONDI NG EXPENSES IS FOUND TO BE NOT REASONABLE, THE SAME CAN BE SUITABLY VARIED. HE CONTENDED THAT THE NON- ITA 7369/M/2010 8 ELIGIBLE SEGMENT WAS CARRYING ON TRADING ACTIVITY A ND THIS BEING THE UNDISPUTED POSITION, SOME ADJUSTMENT IS REQUIRED TO BE MADE IN THE ALLOCATION OF COMMON EXPENSES MADE BY THE ASSESSEE ON TURNOVER BASIS. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT O UT OF THE TOTAL OVERHEADS OF RS.154.63 CRORES INCURRED BY THE ASSESSEE DURING TH E YEAR UNDER CONSIDERATION, OVERHEADS TO THE EXTENT OF RS. 141.9 1 CRORES WERE DIRECTLY ALLOCATED BY THE ASSESSEE TO THE ELIGIBLE UNITS BEI NG DIRECTLY ATTRIBUTABLE TO THE SAID SEGMENT. THE BALANCE AMOUNT OF OVERHEADS TO TH E EXTENT OF RS. 12.72 CRORES REPRESENTING THE INDIRECT EXPENSES WERE ALLO CATED BY THE ASSESSEE BETWEEN THE ELIGIBLE BUSINESS AND NON-ELIGIBLE BUSI NESS 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 EXP ENSES AMOUNTING TO RS. 4.23 CRORES, SCHEMES AND PROMOTIONS EXPENSES AMOUNT ING TO RS. 0.83 CRORES, MISCELLANEOUS EXPENSES AMOUNTING TO RS. 0.72 CRORES , CONVEYANCE AND TRAVELING EXPENSES AMOUNTING TO RS. 0.47 CRORES AND RENT, RATE & TAXES AMOUNTING TO RS. 0.48 CRORES. AS EXPLAINED BY THE L D. COUNSEL FOR THE ASSESSEE BEFORE US, THE EXPENDITURE ON ADVERTISEMENT & PUBLI CITY AND SCHEMES AND PROMOTIONS WAS INCURRED MAINLY TO CREATE AND PROMOT E THE BRAND IMAGE FOR THE COMPANYS PRODUCT AND THIS POSITION WAS ACCEPTE D EVEN BY THE A.O. IN HIS ORDER. THE, A.O., HOWEVER, HELD THAT THE TRADER NOR MALLY WOULD NEVER INCUR EXPENDITURE ON ADVERTISEMENT AND BRANDS OF THE MANU FACTURER OUT OF THE TRADING PROFIT. HE, HOWEVER, APPEARS TO HAVE OVERLO OKED THE FACT THAT GOODS PROCURED FROM THE THIRD PARTY WERE SOLD BY THE ASSE SSEE COMPANY AS A PART OF TRADING ACTIVITY UNDER THE SAME BRAND NAME AND THE BENEFIT OF THE SAID EXPENDITURE THUS WAS AVAILABLE EQUALLY TO THE TRADI NG SEGMENT. INCIDENTALLY, THE A.O. ALSO IMPLIEDLY ACCEPTED THIS POSITION WHIL E OBSERVING IN HIS ORDER THAT SUCH EXPENSES ON ADVERTISEMENT & PUBLICITY AND SCHE MES HAVE TO BE ALLOCATED TO SOME EXTENT TO THE NON-ELIGIBLE SEGMENT. HE, HOW EVER, HELD THAT SUCH ITA 7369/M/2010 9 ALLOCATION COULD NOT BE VERY LARGE AMOUNT AND ACCOR DINGLY RE-ALLOCATED 50% OF THE SAID EXPENSES TO ELIGIBLE UNIT ON ADHOC BASIS. IN OUR OPINION, SUCH RE- ALLOCATION MADE BY THE A.O. ON ADHOC BASIS CANNOT B E SUSTAINED HAVING REGARD TO ALL THE FACTS OF THE CASE INCLUDING ESPEC IALLY THE FACT THAT THE EXPENDITURE ON ADVERTISEMENT & PUBLICITY AND SCHEME S WAS IN THE NATURE OF SELLING EXPENSES AND THE ALLOCATION MADE BY THE ASS ESSEE OF THE SAID EXPENSES ON THE BASIS OF TURNOVER WAS QUITE REASONABLE. THE ALLOCATION SO MADE BY THE ASSESSEE ALSO CANNOT BE SAID TO HAVE RESULTED IN AL LOCATION 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 TRADIN G SEGMENT WAS 12.92% AND EVEN AFTER ALLOCATING ADVERTISEMENT, SCHEMES AND PR OMOTIONS EXPENSES ON THE BASIS OF TURNOVER, THE PROFIT OF TRADING SEGMENT WA S 6.59%. 9. SIMILARLY, THE OTHER INDIRECT EXPENSES ON CONVEY ANCE AND TRAVELING, RATE AND TAXES AND MISCELLANEOUS WERE INCURRED BY THE AS SESSEE DURING THE NORMAL COURSE OF ITS BUSINESS OF SELLING THE FINISH ED GOODS, WHETHER MANUFACTURED OR PROCURED FROM THIRD PARTY AND SINCE THE SAID EXPENSES WERE INCURRED EQUALLY FOR THE BENEFIT OF ELIGIBLE BUSINE SS AS WELL AS NON-ELIGIBLE BUSINESS OF TRADING, WE ARE OF THE VIEW THAT THE BA SIS OF TURNOVER ADOPTED BY THE ASSESSEE TO ALLOCATE THE SAID EXPENSES WAS MORE SCIENTIFIC AND REASONABLE. ON THE OTHER HAND, THE REALLOCATION OF THE SAID EXP ENSES MADE BY THE A.O. ON ADHOC BASIS WAS NOT SUPPORTED OR SUBSTANTIATED BY H IM AND THE SAME, IN OUR OPINION, CANNOT BE ACCEPTED AS A REASONABLE BASIS. IN THE CASE OF CONSOLIDATED COFFEE LTD. V. STATE OF KARNATAKA (SUP RA) CITED BY THE LD. COUNSEL FOR THE ASSESSEE, IT WAS HELD BY THE HONBLE SUPREM E COURT THAT WHEN A BIFURCATION OF EXPENSES IS NOT POSSIBLE, SOME REASO NABLE TEST WILL HAVE TO BE ADOPTED AND THAT ADOPTION OF THE METHOD OF APPORTIO NING ON THE BASIS OF GROSS RECEIPTS COULD NOT BE SAID TO BE A PERVERSE METHOD TO APPLY. KEEPING IN VIEW THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F CONSOLIDATED COFFEE LTD. V. STATE OF KARNATAKA (SUPRA) AND HAVING REGARD TO THE FACTS OF THE CASE, WE ITA 7369/M/2010 10 ARE OF THE VIEW THAT THE ALLOCATION OF EXPENSES MAD E BY THE ASSESSEE BETWEEN ELIGIBLE BUSINESS AND NON-ELIGIBLE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80IB/80IC OF THE ACT WAS REASONABLE A ND THERE WAS NO JUSTIFIABLE REASON FOR THE A.O. TO DISTURB THE SAME AND MAKE RE-ALLOCATION ON ADHOC BASIS. WE, THEREFORE, DELETE THE ADDITION MAD E BY THE A.O. BY RESTRICTING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 80IB/80 IC OF THE ACT BY RE- ALLOCATING THE COMMON INDIRECT EXPENSES AND ALLOW G ROUND NO. 1 & 2 OF THE ASSESSEES APPEAL. 10. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFO RE THE TRIBUNAL, THE ASSESSEE HAS SOUGHT TO RAISE THE FOLLOWING ADDITION AL GROUNDS:- 1) THE ASSESSING OFFICER/TRANSFER PRICING OFFICER E RRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS. 10,05,360/- IN R ESPECT OF GUARANTEE GIVEN BY THE APPELLANT ON BEHALF OF ITS ASSOCIATED ENTERPRISES. 2) THE ASSESSING OFFICER ERRED IN INCLUDING THE RAT E OF GUARANTEE COMMISSION DETERMINED BY THE TRANSFER PRICING OFFIC ER WHILE DETERMINING THE AVERAGE RATE OF GUARANTEE COMMISSIO N TO BE CHARGED TO THE ASSOCIATED ENTERPRISE AND IN NOT CONSIDERING TH E DIRECTION OF THE DISPUTE RESOLUTION PANEL TO RE-WORK THE RATE OF GUA RANTEE COMMISSION BY CONSIDERING THE AVERAGE RATES OF THE FINANCIAL A ND PERFORMANCE GUARANTEE CHARGED BY ICICI BANK. 3) WITHOUT PREJUDICE, AND IN ANY EVENT, THE APPELLA NT SUBMITS THAT THE TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF GUARANTEE GIVEN BY THE APPELLANT ON BEHALF OF ITS ASSOCIATED ENTERPRIS E IS HIGHLY ARBITRARY AND EXCESSIVE AND REQUIRES TO BE REDUCED SUBSTANTIA LLY. 11. THE ASSESSEE HAS FILED AN APPLICATION SEEKING ADMISSION OF THE AFORESAID ADDITIONAL GROUND. AS SUBMITTED IN THE SAID APPLICA TION, THE ISSUE RAISED IN THE ADDITIONAL GROUND RELATING TO TRANSFER PRICING ADJUSTMENT OF RS. 10,05,360/- MADE IN RESPECT OF GUARANTEE FEES IS AR ISING FROM THE ORDERS OF THE AUTHORITIES BELOW BUT THE SAME REMAINED TO BE R AISED INADVERTENTLY IN THE GROUNDS ORIGINALLY TAKEN IN THE APPEAL FILED BEFORE THE TRIBUNAL. SINCE THIS POSITION IS CLEARLY EVIDENT FROM THE ORDERS OF THE AUTHORITIES BELOW AND THE LD. D.R. HAS ALSO NOT DISPUTED THE SAME, WE ADMIT THE A DDITIONAL GROUNDS RAISED ITA 7369/M/2010 11 BY THE ASSESSEE AND NOW PROCEED TO CONSIDER AND DEC IDE THE ISSUE RAISED THEREIN RELATING TO THE TRANSFER PRICING ADJUSTMENT OF RS. 10,05,360/- MADE IN RESPECT OF GUARANTEE FEES. 12. DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE HAD GIVEN GUARANTEE TO BANKS ON BEHALF OF ITS SUBSIDIARY IN BANGLADESH. THE SAID SUBSIDIARY HAD TAKEN THE LOAN FROM CITY BANK IN BANGLADESH FOR WHI CH A GUARANTEE HAD BEEN GIVEN BY THE ASSESSEE TO THE CONSTITUENT BRANCH OF CITI BANK IN INDIA. THE AMOUNT OF BANK GUARANTEE WAS RS.5.68 CRORES.THIS IN TERNATIONAL TRANSACTION OF THE ASSESSEE COMPANY WITH ITS ASSOCIATED CONCERN WAS REFERRED BY THE A.O. TO THE T.P.O. ALONG WITH OTHER INTERNATIONAL TRANSA CTIONS FOR DETERMINING THE ARMS LENGTH PRICE (ALP). IN THIS REGARD, THE STAN D TAKEN BY THE ASSESSEE BEFORE THE T.P.O. WAS THAT IT HAD NOT INCURRED ANY FINANCIAL COSTS BY WAY OF BANK GUARANTEE COMMISSION, BANK CHARGES ETC. AND SI NCE THIS TRANSACTION HAD NO BEARING ON ITS PROFITS, LOSSES OR ASSETS, NO PRICING SHOULD BE PUT TO SUCH NON-EXISTENT TRANSACTION. THE T.P.O. DID NOT ACCEPT THE STAND TAKEN BY THE ASSESSEE ON THIS ISSUE. ACCORDING TO HIM, THE T RANSACTION RELATING TO PROVISION OF GUARANTEE AND THE PAYMENT OF COMMISSIO N FOR SUCH GUARANTEE WAS COVERED WITHIN THE DEFINITION OF THE TERM INTE RNATIONAL TRANSACTION GIVEN IN SECTION 92-B OF THE ACT. HE ALSO HELD THAT THE SAID TRANSACTION WOULD CERTAINLY HAVE A BEARING ON THE PROFITS, INCOME, LO SSES OR ASSETS OF THE ASSESSEE. HE, THEREFORE, PROCEEDED TO DETERMINE THE ALP OF THE COMPENSATION REQUIRED TO BE RECOVERED BY THE ASSESSEE FROM ITS A SSOCIATE ENTERPRISE (AE) FOR PROVIDING THE BANK GUARANTEE. IN THIS REGARD, HE MA DE CERTAIN ENQUIRIES FROM BANK WHICH REVEALED THAT THE HSBC LTD., MUMBAI WAS CHARGING THE BANK GUARANTEE FEE AT THE RATES RANGING BETWEEN 0.15% TO 3%. HE ALSO FOUND FROM THE WEBSITE OF ALLAHABAD BANK THAT THE SAID BANK WA S CHARGING BANK GUARANTEE FEES @ 3% PER ANNUM. HE, THEREFORE, ADOPT ED THE ARMS LENGTH RATE OF BANK GUARANTEE AT 3% OF THE GUARANTEE AMOUN T AND PROPOSED THE ITA 7369/M/2010 12 TRANSFER PRICING ADJUSTMENT OF RS. 17,04,000/- BEIN G 3% OF THE BANK GUARANTEE AMOUNT OF RS. 5.68 CRORES. 13. THE ASSESSEE OBJECTED TO THE TRANSFER PRICING A DJUSTMENT IN RESPECT OF GUARANTEE COMMISSION BY FILING ITS OBJECTION BEFORE THE D.R.P. IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE BEFORE THE D.R. P., INTER ALIA, THAT THE ARMS LENGTH RATE OF GUARANTEE COMMISSION TAKEN BY THE T.P.O. AT 3% WAS HIGHLY EXCESSIVE BECAUSE ICICI IN ASSESSEES OWN CA SE WAS CHARGING GUARANTEE COMMISSION @ 1.5% PER ANNUM FOR FINANCIAL GUARANTEE AND 0.8% FOR PERFORMANCE GUARANTEE. KEEPING IN VIEW THIS SUBMISS ION OF THE ASSESSEE, THE D.R.P. DIRECTED THE A.O. TO WORK OUT THE ARMS LENG TH RATE OF GUARANTEE COMMISSION BY INCLUDING THE RATES OF GUARANTEE COMM ISSION CHARGED BY ICICI BANK IN ASSESSEES OWN CASE. ACCORDINGLY, THE A.O. WORKED OUT THE ARMS LENGTH RATE OF GUARANTEE COMMISSION AT 1.77% BY TAK ING THE AVERAGE OF 3% ADOPTED BY THE T.P.O. AND 1.50% AND 0.80% CHARGED B Y ICICI BANK IN ASSESSEES OWN CASE FOR FINANCIAL GUARANTEE AND PER FORMANCE GUARANTEE. ACCORDINGLY, THE TRANSFER PRICING ADJUSTMENT IN RES PECT OF GUARANTEE COMMISSION WAS MADE BY THE A.O. TO THE EXTENT OF RS . 10,05,360/-. 14. THE LD. COUNSEL FOR THE ASSESSEE IN SUPPORT OF THE ASSESSEES CASE ON THIS ISSUE RELIED ON THE ORDER OF THE CO-ORDINATE B ENCH OF THIS TRIBUNAL DATED 12-6-2013 PASSED IN THE CASE OF M/S NIMBUS COMMUNIC ATIONS LTD. (ITA NO. 3664 & 2359/MUM/2010) WHEREIN THE ARMS LENGTH RATE OF GUARANTEE COMMISSION WAS TAKEN BY THE TRIBUNAL AT 0.5%. THE L D. D.R., ON THE OTHER HAND, STRONGLY RELIED ON THE ORDERS OF THE AUTHORIT IES BELOW IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT A SIMILAR ISSUE RELATING TO DETERMINATION OF ARMS LENGTH RATE OF GUARANTEE COM MISSION WAS INVOLVED IN ITA 7369/M/2010 13 THE CASE OF NIMBUS COMMUNICATIONS LTD. (SUPRA) AND THE SAME WAS DECIDED BY THE TRIBUNAL VIDE PARA NO. 10 OF ITS ORDER AS UN DER:- 10. AS REGARDS THE RATE OF GUARANTEE COMMISSION, I T IS NOTED THAT THE ARMS LENGTH PRICE OF GUARANTEE COMMISSION WAS DETE RMINED BY THE TPO BY APPLYING CUP METHOD AND THE ARITHMETIC MEAN OF 1 .5% OF THE GUARANTEE COMMISSION CHARGED BY THE HSBC BANK IN TH E RANGE OF 0.15 TO 3% WAS TAKEN AS ARMS LENGTH PRICE. THE 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 O F FRENCH COURT IN THE CASE OF SOCIETE CARREFOUR. THE LD. D.R., AT THE TIM E 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) WHEREIN WHILE ACCEPTING THE CUP METHOD AS THE MOST APPROPRIATE ME THOD FOR BENCHMARKING THE GUARANTEE FEE, THE TRIBUNAL ACCEPT ED 0.5% GUARANTEE FEE/COMMISSION TO BE AT ARMS LENGTH AFTER TAKING I NTO CONSIDERATION THE RATES OF GUARANTEE COMMISSION CHARGED BY VARIOUS BA NKS INCLUDING THE GUARANTEE COMMISSION CHARGED BY THE HSBC BANK IN TH E RANGE OF 0.15% TO 3%. SINCE THE FACTS INVOLVED IN THE PRESE NT CASE ARE MATERIALLY SIMILAR TO THE FACTS INVOLVED IN THE CAS E OF EVEREST KANTO CYLINDER LTD. (SUPRA), WE PREFER TO FOLLOW THE DECI SION RENDERED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE SAID CASE OVER THE DECISION OF FRENCH COURT IN THE CASE OF SOCIETE CARREFOUR (SUPR A). WE, ACCORDINGLY MODIFY THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE A.O. TO RECOMPUTE THE COMMISSION FOR GUARANTEE GIVE N BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES @ 0.5% BEING THE ARM S LENGTH PRICE. GROUND NO. 1 OF REVENUES APPEAL IS THUS PARTLY ALL OWED WHEREAS GROUND NO. 2 OF ASSESSEES APPEAL IS DISMISSED. 16. A PERUSAL OF THE RELEVANT PORTION OF THE TRIBUN ALS ORDER REPRODUCED ABOVE SHOWS THAT THE ALP OF GUARANTEE COMMISSION WA S DETERMINED BY THE TPO IN THE CASE OF NIMBUS COMMUNICATIONS LTD. (SUPR A) BY APPLYING CUP METHOD AND THE ARITHMETIC MEAN OF 1.5% OF THE GUARA NTEE COMMISSION CHARGED BY THE HSBC BANK IN THE RANGE OF 0.15 TO 3% WAS TAKEN AS ALP. THE 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 RELYIN G 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 CONSIDERATION THE RATES OF GUARANTEE COMMISSIO N CHARGED BY THE VARIOUS BANKS INCLUDING THE GUARANTEE COMMISSION CHARGED BY HSBC LTD. IN THE RANGE OF 0.15% TO 3%. IN THE PRESENT CASE, THE FAC TS INVOLVED ARE SIMILAR TO ITA 7369/M/2010 14 THE CASE OF NIMBUS COMMUNICATIONS LTD. (SUPRA) INAS MUCH AS THE RATES OF GUARANTEE COMMISSION CHARGED BY THE VARIOUS BANKS A RE FOUND TO BE IN THE RANGE OF 0.15% TO 3.0% AND THIS BEING SO, WE TAKE T HE RATE OF GUARANTEE COMMISSION AT 0.5% AS ALP BY RESPECTFULLY FOLLOWING THE DECISION OF CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF NIMB US COMMUNICATIONS LTD. (SUPRA). THE A.O. IS ACCORDINGLY DIRECTED TO RECOMP UTE THE ADDITION TO BE MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPEC T OF GUARANTEE COMMISSION BY TAKING THE ARMS LENGTH RATE OF GUARANTEE COMMIS SION AT 0.5%. THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE THUS ARE PARTLY ALLOWED. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND NOVEMBER, 2013. . '& 2 34- 5'[phone] SD/- SD/- (AMIT SHUKLA) (P.M. JAGTAP ) ( !'# JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; 5'+ DATED 22-11-2013 $.(+.!./ RK , SR. PS '& 2 0(%7 87- '& 2 0(%7 87- '& 2 0(%7 87- '& 2 0(%7 87-/ COPY OF THE ORDER FORWARDED TO : 1. ./ / THE APPELLANT 2. 01./ / THE RESPONDENT. 3. 9 () / THE ADDL CIT10(2), MUMBAI. 4. 9 / DRP -1, MUMBAI 5. 7$< 0((+ , , / DR, ITAT, MUMBAI K BENCH 6. =, > / GUARD FILE. '&+! '&+! '&+! '&+! / BY ORDER, !17 0( //TRUE COPY// ? ? ? ?/ // /!@ !@ !@ !@ ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI