Appeal Details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 75498 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 1 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
05-02-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
K
Next Hearing Date
14-10-2013
Assessment Year
2006-2007
Appeal Filed On
05-01-2011
Judgement Text
, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, M UMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND D. KARUNAKARA RAO, (AM) . . , . , ./I.T.A. NO.83/MUM/2011 ( / ASSESSMENT YEAR : 2006-07) JOHNSON & JOHNSON LIMITED 30 FORJETT STREET, MUMBAI-400036 / VS. COMMISSIONER OF INCOME TAX - LTU , 28 TH FLOOR, CENTRE NO.1, WORLD TRADE CENTRE, CUFFE PARADE, MUMBAI-400005. ( # / APPELLANT) .. ( $# / RESPONDENT) ./ ./PAN/GIR NO. : AAACJ0866E # / APPELLANT BY : S /S HRI R R VORA & NIKHIL TIWARI $# ( /RESPONDENT : S /S HRI AJIT KUMAR JAIN & NEERJA PRADHAN ( + / DATE OF HEARING : 14.10.2013/02.12.2013 ( + /DATE OF PRONOUNCEMENT : 5.2.2014 / O R D E R PER B.R.MITTAL, JM: ASSESSEE HAS FILED THIS APPEAL AGAINST ORDER OF AS SESSING OFFICER DATED 27.10.2010 PASSED U/S 143(3) R.W.S.144C(13) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. BRIEF FACTS GIVING RISE TO THIS APPEAL ARE THAT ASSESSEE IS AN INDIAN COMPANY AND IT IS A SUBSIDIARY OF JOHNSON & JOHNSON INC. US WHO IS HOLDING 75% SHARES AND THE BALANCE 25% ARE HELD BY DEPUY MEDICAL PRIVATE LIMIT ED, INDIA. THE ASSESSEE-COMPANY IS DEALING IN VARIOUS PRODUCTS WHICH ARE EITHER MAN UFACTURED BY ASSESSEE OR TRADED ON ACCOUNT OF LOCAL PURCHASES OR FOREIGN PURCHASES. 3. BEFORE WE PROCEED TO ADJUDICATE THIS APPEAL, WE CONSIDER IT RELEVANT TO STATE THAT, WE HEARD THE APPEAL ON 14.10.2013. HOWEVER, WHILE GOING THROUGH THE ORDER OF TPO, IT WAS OBSERVED THAT TPO IN HIS ORDER FOR T HE ASSESSMENT YEAR UNDER CONSIDERATION AND WHILE SUGGESTING ADJUSTMENTS TO BE MADE IN RESPECT OF THE PAYMENT OF ROYALTY BY THE ASSESSEE ON TECHNICAL KNOW-HOW AS WELL AS BRAND USAGE ETC STATED THAT I.T.A. NO.83/MUM/2011 2 SIMILAR DISALLOWANCES WERE ALSO MADE BY HIM IN HIS ORDERS FOR ASSESSMENT YEARS 2003-04 TO 2005-06 AND ON SIMILAR LINES SUGGESTED THE DI SALLOWANCES IN THE ASSESSMENT YEAR UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2006-07; WHICH ARE BEING DISPUTED BY THE ASSESSEE IN GROUND NOS.12 TO 17, AS MENTIONED HEREI NABOVE. IN VIEW OF ABOVE, THE MATTER WAS FIXED FOR CLARIFICATION ON 30.10.2013. LD. AR SUBMITTED THAT APPEALS FOR ASSESSMENT YEARS 2003-04 TO 2005-06 ARE STILL PEND ING BEFORE LD. CIT(A) BUT THE APPEAL FOR THE ASSESSMENT YEAR UNDER CONSIDERATION I.E. AS SESSMENT YEAR 2006-07 HAS COME UP TO THE TRIBUNAL BECAUSE THIS APPEAL IS ARISING OUT OF ORDER OF DRP AND WHEREAS IN THE PRECEDING ASSESSMENT YEARS THERE WAS NO CONSTITUTIO N OF DRP AND THE APPEALS WERE TO BE FILED BEFORE LD. CIT(A). IN VIEW OF ABOVE, A QU ERY WAS RAISED TO LD. DR IF THE APPEAL FOR ASSESSMENT YEAR 2006-07 IS DECIDED BY THE TRIB UNAL, IT MAY BE POSSIBLE THAT THE APPEALS FOR EARLIER ASSESSMENT YEARS I.E. ASSESSMEN T YEARS 2003-04 TO 2005-06 PENDING BEFORE LD. CIT(A) ON SIMILAR ISSUES AND ON IDENTI CAL FACTS MAY BECOME INFRUCTUOUS. THEREFORE, WHETHER, IT WOULD BE ADVISABLE TO ADJU DICATE THIS APPEAL FOR ASSESSMENT YEAR 2006-07, PENDING APPEALS FOR ASSESSMENT YEARS 2003-04 TO2005-06 BEFORE LD. CIT(A). LD. DR SOUGHT TIME TO SEEK CLARIFICATIONS F ROM THE DEPARTMENT AND THE MATTER WAS ADJOURNED. FINALLY, ON THE 2.12.2013, LD. DR F ILED A COPY OF LETTER DATED 27.11.2013 FROM COMMISSIONER OF INCOME TAX (LTU), MUMBAI STAT ING THAT DEPARTMENT HAS NO OBJECTION THAT APPEAL FOR ASSESSMENT YEAR 2006-07 BEING PROCEEDED WITH, WHILE THE APPEALS FOR ASSESSMENT YEARS 2003-04 TO 2005-06 AR E PENDING WITH CIT(A). A COPY OF THE SAID LETTER WAS FILED BEFORE US BY LD. DR AT T HE TIME OF HEARING ON 02.12.2013 ALONG WITH LETTER DATED 27.11.2013. PURSUANT THERETO WE COMPLETED THE HEARING AFTER SEEKING CERTAIN CLARIFICATIONS FROM THE LD. REPRESENTATIVES OF THE PARTIES. IT IS ALSO RELEVANT TO STATE THAT THE LD. AR ALSO FILED A WRITTEN NOTE IN RESPECT OF HIS SUBMISSIONS MADE. 4. IN GROUND NO.1 OF THE APPEAL, THE ASSESSEE HAS DISPUTED THE ORDER OF ASSESSING OFFICER TO DISALLOW AN EXPENDITURE OF R S.45,520,504/- INCURRED ON PRODUCTION OF ADVERTISEMENT FILMS COMPRISING OF EXPENDITURE ON PURCHASE COST OF FILMS AND OTHER PRODUCTION MATERIALS ON THE GROUND THAT THE EXPENDI TURE IS CAPITAL IN NATURE. 4.1 DURING THE YEAR, THE ASSESSEE COMPANY DEBITED A SUM OF RS.116.90 CRORES TOWARDS PUBLICITY EXPENSES. AO HAS STATED THAT ON EXAMINATION OF PUBLICITY EXPENSES CLAIMED BY ASSESSEE, IT IS SEEN THAT IT INCLUDES E XPENSES TOWARDS PURCHASE COST OF FILMS AND OTHER PRODUCTION EXPENSES FOR PRODUCING ADVERTI SEMENT FILMS AND COMMERCIALS TO BE USED AS TV SPOTS FOR ADVERTISEMENT. THE ASSES SEE FURNISHED DETAILS OF THESE EXPENSES VIDE LETTER DATED 3.11.2009, THE TOTAL OF WHICH COMES TO RS.4,55,20,504/-. I.T.A. NO.83/MUM/2011 3 AO HAS STATED THAT SIMILAR ISSUE WAS INVOLVED IN A SSESSMENT YEARS 1993-94 AND 1995-96 TO 2003-04 AND THE AO CONSIDERED THE SAID EXPENSES AS CAPITAL IN NATURE. HE HAS STATED THAT CIT(A) HAD DELETED THE ADDITION FOR AS SESSMENT YEARS 1993-94 AND 1995-96 TO 2001-02 AND THE DEPARTMENT HAD NOT ACCEPTED THE DECISION OF LD. CIT(A) AND THE APPEAL FILED BEFORE TRIBUNAL IS PENDING. HE HAS ST ATED THAT IN ORDER TO KEEP THE ISSUE ALIVE THE EXPENSES ARE BEING TREATED AS CAPITAL EXP ENSES. DRP ALSO CONFIRMED THE ACTION OF AO ON THE GROUND THAT THE ISSUE HAS NOT A TTAINED FINALITY. HENCE, THIS APPEAL BY THE ASSESSEE. 4.2 AT THE TIME OF HEARING, THE LD.AR SUBMITTED TH AT THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1997-98, 1998-99 AND 199 9-2000 IN ITA NOS.145/MUM/2001, 2054/MUM/2003 AND 2055/MUM/2003, RESPECTIVELY, BY A COMMON ORDER DATED 18.1.2013 BY RELYING ON ITS OWN DECISI ON IN THE CASE OF ASSESSEE ITSELF FOR ASSESSMENT YEAR 1991-92 IN ITA NO.1146/MUM/1997 HAS HELD THAT THE SAID EXPENDITURE IS REVENUE EXPENDITURE. HE SUBMITTED THAT SIMILAR ISSUE ON IDENTICAL FACTS AGAIN CAME BEFORE TRIBUNAL FOR ASSESSMENT YEARS 2000-01 AND 2001-02 IN ITA NOS.2774/MUM/2004 AND 9106/MUM/2004 AND THE TRIBU NAL BY ITS ORDER DATED 15.2.2013 DECIDED THE ISSUE IN FAVOUR OF THE ASSES SEE BY FOLLOWING ITS EARLIER ORDER IN ASSESSEES OWN CASE. HE SUBMITTED THAT THE SAME IS SUE AGAIN CAME UP BEFORE THE TRIBUNAL ON IDENTICAL FACTS FOR ASSESSMENT YEAR 200 2-03 IN ITA NO.4070/MUM/2007 AND THE TRIBUNAL BY ORDER DATED 28.8.2013 HELD THAT THE SAID EXPENDITURE IS REVENUE IN NATURE BY FOLLOWING ORDERS IN ASSESSEES OWN CASE F OR EARLIER YEARS. LD. AR PLACED COPIES OF SAID ORDERS BEFORE THE TRIBUNAL TO SUBS TANTIATE HIS SUBMISSIONS. LD. DR HAS NOT DISPUTED ABOVE SUBMISSIONS OF LD. AR. HE HA S ALSO NOT BROUGHT ANY OTHER DISTINGUISHING FACTS ON RECORDS. 4.3 WE HAVE CONSIDERED ABOVE SUBMISSIONS OF LD. RE PRESENTATIVES AND HAVE PERUSED EARLIER ORDERS OF THE TRIBUNAL (SUPRA) IN ASSESSEES OWN CASE AND OBSERVE THAT SIMILAR EXPENDITURES HAVE BEEN CONSIDERED BY TRIBU NAL AND HELD THAT THEY ARE REVENUE IN NATURE. SINCE NO DISTINGUISHING FACTS HAVE BE EN BROUGHT ON RECORD AND THE AO HAS ALSO FOLLOWED ONLY THE EARLIER ASSESSMENT ORDERS T O CONSIDER THE SAID EXPENDITURE AS CAPITAL IN NATURE, WE RESPECTFULLY FOLLOWING DECIS IONS OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA) HOLD THAT THE SAID EXPENDITURE ON PRO DUCTION OF ADVERTISEMENT FILMS AGGREGATING TO RS.45,520,504/- IS REVENUE IN NATU RE. HENCE GROUND NO.1 OF THE APPEAL TAKEN BY ASSESSEE IS ALLOWED BY REVERSING TH E ORDER OF AO. I.T.A. NO.83/MUM/2011 4 5. GROUND NO.2 OF APPEAL OF ASSESSEE READS AS UNDE R : 2. THE AO ERRED IN LAW AND IN FACTS BY MAKING AN A DDITION OF RS.38,815,192/- BEING THE PROPORTIONATE MODVAT CRE DIT ATTRIBUTABLE TO THE CLOSING STOCK AS ON 31 MARCH 2006. WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP HAS ERRED IN LAW AND IN FACTS BY NOT PASSING A REASONED ORDER WITH RESPECT TO THE A BOVE GROUND AND ACCORDINGLY, THE ORDER SHOULD BE QUASHED. 5.1 AO HAS STATED THAT ASSESSEE HAS NOT INCREASED CLOSING STOCK BY VALUE OF MODVAT CREDIT AVAILABLE AT CLOSE OF ACCOUNTING YEAR RELEV ANT TO ASSESSMENT YEAR 2006-07. ASSESSEE STATED BEFORE THE AO THAT THE VALUATION O F CLOSING STOCK AS ADOPTED IS IN ACCORDANCE WITH ACCOUNTING STANDARDS AS PRESCRIB ED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND THE SAME IS CONSISTENTLY BEING FOLLOWED BY THE ASSESSEE SINCE INTRODUCTION OF MODVAT CREDIT AVAILABLE ON PURCHAS E OF MATERIALS. ASSESSEE STATED THAT IF THE VALUE OF CLOSING STOCK IS INCREASED, THEN CO ST OF MATERIAL DEBITED SHOULD ALSO BE INCREASED BY CORRESPONDING EXCISE DUTY . AO STA TED THAT IN ASSESSMENT YEAR 2001-02, THE MODVAT CREDIT OF RS.1,16,58,282/- AVAILABLE FOR AY 2001-02 WAS ADDED TO THE CLOSING STOCK AND ACCORDINGLY THE INCOME DECLARED B Y ASSESSEE WAS INCREASED BY THE SAID AMOUNT AND THE LD. CIT(A) ALSO CONFIRMED THE SAID ADDITION. THE DRP IN ITS DIRECTION GIVEN TO THE AO STATED THAT THE ISSUE I S SETTLED BY THE DECISION OF VARIOUS COURTS AND THE AO IS DIRECTED TO ADJUST OPENING ST OCK OF PURCHASE AND CLOSING STOCK BY INCLUDING VARIOUS DUTIES AND RE-WORK OUT THE DISALL OWANCE. AO WHILE PASSING ASSESSMENT ORDER ADDED AN AMOUNT OF RS.3,88,15,1 92/- TO THE TOTAL INCOME OF THE ASSESSEE-COMPANY. HENCE, ASSESSEE IS IN APPEAL BEF ORE THE TRIBUNAL. 5.2 DURING THE COURSE OF HEARING, LD. AR SUBMITTED THAT THE ASSESSEE FOLLOWS EXCLUSIVE METHOD OF ACCOUNTING TO DETERMINE THE V ALUE OF COST OF GOODS SOLD. HENCE, EXCISE DUTY PAID ON CLOSING STOCK IS A PART OF IN VENTORIES IN THE BALANCE SHEET. THE AR SUBMITTED THAT SIMILAR ISSUE WAS CONSIDERED BY TR IBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2000-01 AND 2001-02 VIDE ORDER DA TED 15.2.2013 (SUPRA) AND THE TRIBUNAL BY CONSIDERING ITS OWN ORDER FOR AY 1999-2 000 IN ITA NO.2680/MUM/2003 DATED 18.1.2013 RESTORED THE MATTER TO AO. HE SU BMITTED THAT THE ISSUE FOR THIS ASSESSMENT YEAR BE RESTORED TO THE AO TO DECIDE I T AFRESH AS PER DIRECTION OF THE TRIBUNAL IN RESPECT OF ASSESSMENT YEAR 1999-2000. LD. DR HAS NOT DISPUTED THE ABOVE SUBMISSION OF LD. AR. 5.3 WE HAVE CONSIDERED THE SUBMISSION OF LD. REPRES ENTATIVES OF THE PARTIES AND THE ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO CONSIDER ED TRIBUNAL ORDER DATED 18.1.2013 I.T.A. NO.83/MUM/2011 5 PLACED AT PAGES 643A TO 643BV OF THE PAPER BOOK IN ITA NO.2680/MUM/2003. WE OBSERVE THAT VIDE PARA 96, THE TRIBUNAL HAS HELD A S UNDER : RIVAL CONTENTIONS HEARD. AFTER HEARING BOTH THE PA RTIES, WE FIND THAT THOUGH THIS ISSUE IS SIMILAR TO THE ISSUE RAISED IN EARLIER YEA RS, HOWEVER, PROVISIONS OF SECTION 145A, HAS BEEN BROUGHT ON STATUTE W.E.F. 1 ST APRIL 1999. THEREFORE, THE SAME WILL BE APPLICABLE IN THE ASSESSMENT YEAR 1999-2000 . CONSEQUENTLY, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LD. COMMISSIONER (APPEALS) AND RESTORE THE ISSUE BACK TO THE FILE OF THE AO FOR DENOVO ADJUDI CATION IN THE LIGHT OF THE PROVISIONS OF SECTION 145A. THE AO IS ALSO DIRECTE D TO GIVE CORRESPONDING BENEFIT IN THE OPENING STOCK IN VIEW OF THE JUDGMENT OF JUR ISDICTIONAL HIGH COURT IN CIT V/S MAHALAXMI GLASS WORKS P.LTD (2009) 318 ITR 11 6(BOM) AND THE JUDGMENT OF DELHI HIGH COURT IN MAHAVIR ALLUMINIUM LTD. (20 08) 297 ITR 077 (DEL). THUS, GROUND NO.2 IS ALLOWED FOR STATISTICAL PURPOSES. WE RESPECTFULLY FOLLOWING THE ABOVE ORDER OF TRIBU NAL, RESTORE THIS ISSUE TO THE FILE OF AO WITH A DIRECTION TO DECIDE THE SAME AFRESH AFTER G IVING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. HENCE GROUND NO.2 OF THE APPEAL TAKEN BY ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 6. GROUND NO.3 OF APPEAL OF ASSESSEE READS AS UNDE R : 3. THE AO ERRED IN LAW AND IN FACTS BY DISALLOWING THE AMOUNT OF RESERVE FOR CASH DISCOUNT AGGREGATING TO RS.1,815,938/-. WITHOUT PREJUDICE TO THE ABOVE, THE LD.AO ERRED IN LAW AND IN FACTS IN NOT GIVING RELIEF IN RESPECT OF RESERVE FOR CASH DISCOUNT DISA LLOWED FOR THE PREVIOUS AY 2005-06 AND WRITTEN BACK DURING THE YEAR. 6.1 ASSESSEE MADE PROVISIONS FOR CASH DISCOUNT OF RS.1,815,938/- IN ITS BOOKS DURING THE RELEVANT PREVIOUS YEAR. AO STATED THAT THE RESERVE FOR CASH DISCOUNT IS AN UNASCERTAINED CONTINGENT LIABILITY, WHICH IS DEPEND ENT UPON THE HAPPENING OF CERTAIN CONTINGENCIES IN FUTURE. HENCE, THE SAME CANNOT B E ALLOWED AS DEDUCTION FROM THE BUSINESS OF THE CURRENT YEAR. AO AFTER CONSIDERING THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 1999-2000 DISALLOWED THE SAID CLAIM OF RS.1,8 15,938/-. HOWEVER, DRP DIRECTED THE AO THAT ACTUAL CASH DISCOUNT ALLOWED BY THE A SSESSEE SHOULD BE ALLOWED. ACCORDINGLY, AO FINALLY, DISALLOWED THE SUM OF RS. 3,69,230/-. HENCE, THIS APPEAL BY THE ASSESSEE. 6.2 AT THE TIME OF HEARING, LD. AR CONCEDED THAT TH E ABOVE ISSUE IS COVERED AGAINST THE ASSESSEE AND THE AMOUNT OF CASH DISCOUNT IS ALL OWED TO THE ASSESSEE ON ACTUAL BASIS I.T.A. NO.83/MUM/2011 6 BY THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEARS. IN VIEW OF ABOVE SUBMISSIONS OF LD. AR, GROUND NO.3 OF THE APPEAL TAKEN BY ASSESSEE IS REJECTED. 7. GROUND NO.4 OF APPEAL OF ASSESSEE READS AS UNDE R : 4. THE AO ERRED IN LAW AND IN FACTS BY DISALLOWING 10% OF THE PAYMENTS MADE TO CRAWFORD BAILEY & CO. AGGREGATING TO RS.10 7,373 UNDER SECTION 40A(2)(B) OF THE ACT ON THE GROUND THAT THEY ARE EXCESSIVE AND UNREASONABLE. WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP HAS ERRED IN LAW AND IN FACTS IN BY NOT PASSING A REASONED ORDER WITH RESPECT TO TH E ABOVE GROUND AND ACCORDINGLY, THE ORDER SHOULD BE QUASHED. 7.1 AO, ON PERUSAL OF TAX AUDIT REPORT, OBSERVED THAT THE ASSESSEE COMPANY PAID TO CRAWFORD BAILEY & CO. AGGREGATING TO RS.10,73,7 28/- AND STATED THAT IT FALLS WITHIN THE DEFINITION OF PERSONS REFERRED TO UNDER SECTION 40A(2)(B) OF THE ACT. AO BY FOLLOWING THE ASSESSMENT ORDER OF PREVIOUS YEAR, DISALLOWED 10% OF THE SAID AMOUNT WHICH COMES TO RS.1,07,373/- U/S 40A(2)(B) OF THE ACT. HE HAS STATED THAT DRP HAS ALSO CONFIRMED THE DISALLOWANCE IN ITS DIRECTION. HENCE , THIS APPEAL BY THE ASSESSEE. 7.2 AT THE TIME OF HEARING, THE LD.AR SUBMITTED TH AT SIMILAR ISSUE CAME UP FOR HEARING BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 200 1-02 IN ITA NO.9106/MUM/2004, AND THE TRIBUNAL BY ITS ORDER DATED 15.2.2013 DELET ED THE DISALLOWANCE MADE U/S 40A(2)(B) OF THE ACT AFTER OBSERVING THAT IT IS FO R THE AO TO BRING ON RECORD SOME MATERIAL TO INDICATE THAT THE PAYMENT WAS IN FACT EXCESSIVE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS OR SERVICES FOR THE LEGITIMA TE NEEDS OF THE BUSINESS. HE SUBMITTED THAT SIMILAR DISALLOWANCE MADE IN ASSESS MENT YEAR 2002-03 BY AO WAS DELETED BY LD. CIT(A) AND THE TRIBUNAL IN THE APPEA L FILED BY DEPARTMENT IN ITA NO.4070/MUM/2007 BY ITS ORDER DATED 28.8.2013 CONFI RMED THE ORDER OF LD. CIT(A) BY FOLLOWING ITS ORDER FOR ASSESSMENT YEAR 2001-02. HE SUBMITTED THAT THE FACTS AND ISSUE ARE IDENTICAL TO THE ASSESSMENT YEAR UNDER CONSIDE RATION AND THE SAID DISALLOWANCE IS NOT JUSTIFIED. LD. DR HAS NOT DISPUTED ABOVE SUBMI SSIONS OF LD. AR, SAVE AND EXCEPT RELYING ON THE ORDER OF AO. 7.3 WE HAVE CONSIDERED THE ORDERS OF AUTHORITIES B ELOW AND THE SUBMISSION OF LD. REPRESENTATIVES OF THE PARTIES AS ALSO ORDERS OF TR IBUNAL IN ASSESSEES OWN CASE (SUPRA). WE FIND THAT DURING THE YEAR UNDER CONSIDERATION, AO HAS DISALLOWED 10% OF THE PAYMENT I.E. RS.1,07,373/- BY INVOKING PROVISIONS OF SECTION 40A(2)(B) OF THE ACT ON FEE PAID FOR LEGAL COUNSEL. WE OBSERVE THAT IN T HE EARLIER ASSESSMENT YEAR, LD. CIT(A) I.T.A. NO.83/MUM/2011 7 DELETED THE ADDITION HOLDING THAT FOR THE PAYMENTS FOR LEGAL COUNSELING, IT IS FUTILE TO THINK OF COMPARABLES BECAUSE COUNSELS MAY NOT CHARG E STANDARD FEE BUT MAY CHARGE ACCORDING TO THE ISSUE INVOLVED. HOWEVER, IT WAS O BSERVED, IF THE AO WANTED TO DISALLOW ON THE GROUND OF EXCESSIVE PAYMENT, HE OU GHT TO HAVE ESTABLISHED EXCESSIVENESS OF THE PAYMENT. THE SAME HAS NOT BEE N DONE. 7.4 CONSIDERING THE DECISION OF TRIBUNAL IN THE ASS ESSEES OWN CASE AND IN THE ABSENCE OF ANY DISTINGUISHING FACTS BROUGHT ON RECO RD, WE DELETE THE DISALLOWANCE OF RS.1,07,373/- MADE BY AO BY ALLOWING GROUND NO.4 OF THE APPEAL TAKEN BY ASSESSEE. 8. GROUND NO.5 OF APPEAL OF ASSESSEE READS AS UNDE R : 5. THE LEARNED AO ERRED IN LAW AND IN FACTS BY DI SALLOWING ON AD-HOC BASIS AN AMOUNT OF RS.32,750,973, BEING 5% /10% OF TOTAL TRA VELING EXPENDITURE ON THE GROUND THAT THE SAME HAVE NOT BEEN INCURRED FOR PUR POSES OF BUSINESS. WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP HA S ERRED IN LAW AND IN FACTS BY NOT PASSING A REASONED ORDER WITH RESPECT TO THE ABOVE GROUND AND ACCORDINGLY, THE ORDER SHOULD BE QUASHED. 8.1 AO HAS STATED THAT THE ASSESSEE HAD DEBITED TO PROFIT AND LOSS ACCOUNT A SUM OF RS.42,46,34,000/- UNDER THE HEAD TRAVELLING EXPEN SES. ASSESSEE WAS ASKED TO GIVE PROOF OF PAYMENTS MADE. THAT ASSESSEE FILED ITS R EPLY VIDE LETTER DATED 18.12.2009, THE DETAILS OF WHICH ARE GIVEN BY AO AT PAGE 20 OF THE ASSESSMENT ORDER. AO, DISALLOWED ENTIRE EXPENDITURE ON THE GROUND THAT TH E ASSESSEE HAS NOT PROVIDED COMPLETE DETAILS OF THE EXPENDITURE TO FIND OUT T HE PERSONAL ELEMENT AND THE GENUINENESS OF EXPENDITURE. IN THE OBJECTION FILED BEFORE DRP, THE ASSESSEE CONTENDED THAT AO NEVER DEMANDED BILLS AND VOUCHERS, WHICH WERE AVAILABLE WITH THE ASSESSEE. THAT SAME WERE PRODUCED BEFORE DRP. DRP AFTER C ONSIDERING THE DETAILS, FILED BY ASSESSEE, OBSERVED THAT ELEMENT OF PERSONAL USE A ND THAT SOME EXPENSES NOT HAVING ANY CONNECTION WITH THE BUSINESS ACTIVITY OF THE A SSESSEE COULD NOT BE RULED OUT AND ACCORDINGLY DIRECTED THE AO TO SUSTAIN THE DISAL LOWANCE UNDER DIFFERENT HEADS AS UNDER : S. NO. PARTICULARS AMOUNT (RS.) % OF DISALLOWANCE CONFIRMED 1 BUSINESS MEALS 15,828 5% 2 CONFERENCE TRAVEL & CONVEYANCE 3,59,971 5% 3 HOTEL EXPENSES 1,21,34,598 10% 4 HOTEL EXPENSES-VISITORS 78,764 10% 5 LOCAL CONVEYANCE 1,94,44,629 5% 6 TRAVEL FARE INTERNAL 20,15,91,808 10% 7 TRAVEL OVERSEAS 10,37,94,355 10% I.T.A. NO.83/MUM/2011 8 IN VIEW OF ABOVE, THE AO WORKED OUT DISALLOWANCE A GGREGATING TO RS.3,27,50,973/-. HENCE THIS APPEAL BY THE ASSESSEE. 8.2 LD.AR STATED THAT SIMILAR DISALLOWANCES WERE MA DE BY AO IN ASSESSMENT YEAR 2001-02 BUT LD. CIT(A) DELETED THE SAID ADDITION B Y CONSIDERING THAT IT WAS A CASE OF COMPANY AND NO DISALLOWANCE WAS CALLED FOR BY PLACI NG RELIANCE ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON & ENGG. CO.(253 ITR 749). HE SUBMITTED THAT THE TRIBUNAL BY ITS ORDER DATED 15. 2.2013 IN ITA NO.9106/MUM/2004 CONFIRMED THE ACTION OF LD. CIT(A). HE SUBMITTED THAT SIMILAR DISALLOWANCE MADE BY AO IN ASSESSMENT YEAR 2002-03 WERE ALSO DELETED BY LD. CIT(A) AND THE TRIBUNAL BY ITS ORDER DATED 28.8.2013 CONFIRMED THE ACTION OF LD. C IT(A) IN ITA NO.4070/MUM/2007. HE SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR O F THE ASSESSEE AND THE ASSESSEE BEING A COMPANY, THE DISALLOWANCE AS MADE BY AO ON ADHOC BASIS BY CONSIDERING THAT POSSIBILITY OF PERSONAL ELEMENT AND SOME EXPENSES N OT IN CONNECTION WITH BUSINESS ACTIVITY CANNOT BE JUSTIFIED. LD DR HAS NOT DISP UTED ABOVE SUBMISSIONS OF LD. AR, SAVE AND EXCEPT RELYING ON THE ORDER OF AO. 8.3 THE CASE WAS FIXED FOR CLARIFICATION ON 2.12.20 13 AND THE ASSESSEE STATED THAT IN THE SUBSEQUENT ASSESSMENT YEARS TO THE ASSESSMENT YEARS UNDER CONSIDERATION, I.E. ASSESSMENT YEARS 2007-08 AND 2008-09, THE DISALLOWA NCE HAS BEEN MADE AT THE RATE OF 1% AND THE APPEALS ARE PENDING BEFORE THE LD. CI T(A) FOR ASSESSMENT YEAR 2007-08 AND BEFORE THE TRIBUNAL FOR ASSESSMENT YEAR 2008-0 9, INSPITE OF THE FACT THAT THE EXPENDITURE CLAIMED UNDER THE HEAD TRADING EXPENS ES WERE MORE THAN THE EXPENDITURE INCURRED IN THE ASSESSMENT YEAR UNDER C ONSIDERATIONS. 8.4 WE HAVE CONSIDERED THE SUBMISSIONS OF LD. REPRE SENTATIVES OF THE PARTIES AND ORDERS OF AUTHORITIES BELOW AS WELL AS EARLIER ORDE RS OF THE TRIBUNALS (SUPRA). WE AGREE THAT THE DISALLOWANCE ON THE GROUND THAT THE EXPEN DITURE BEING PERSONAL IN NATURE CANNOT BE MADE IN THE CASE OF A COMPANY, IN VIEW O F THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON & E NGG. CO (SUPRA) AND ALSO IN THE CASE OF DINESH MILLS LTD. V/S VIT (2004) 268 ITR 502 (G UJ). HOWEVER, WE OBSERVE THAT DRP HAS ALSO STATED THAT SOME OF THE EXPENDITURE CLAIM ED ARE NOT CONNECTED WITH BUSINESS ACTIVITY OF THE ASSESSEE. HOWEVER, DRP HAS NOT POI NTED OUT THE EXPENSES WHICH ARE NOT IN CONNECTION WITH BUSINESS ACTIVITY OF THE ASS ESSEE INSPITE OF FACTS THAT THE DETAILS WERE FILED BY ASSESSEE BEFORE DRP, AS MENTIONED IN THE ORDER OF DRP ITSELF. IN VIEW OF ABOVE SAID ADHOC DISALLOWANCE OF RS.3,27,50,973/- OUT OF TRAVELLING EXPENSES CLAIMED I.T.A. NO.83/MUM/2011 9 BY ASSESSEE IS NOT JUSTIFIED. ACCORDINGLY, WE DELE TE THE SAME BY ALLOWING GROUND NO.5 TAKEN BY ASSESSEE. 9. GROUND NO.6 OF APPEAL OF ASSESSEE READS AS UNDE R : 6. THE LEARNED AO ERRED IN LAW AND IN FACTS BY DI SALLOWING ON AD-HOC BASIS 50% OF THE EXPENDITURE INCURRED TOWARDS PROFESSIONA L SPONSORSHIP AMOUNTING TO RS 115,563,298 ON THE GROUND THAT THE SAME HAVE NOT BEEN INCURRED FOR THE PURPOSE OF BUSINESS. 10. AO HAS STATED THAT ON SCRUTINIZING THE DETAILS OF MISCELLANEOUS EXPENSES, IT IS SEEN THAT ASSESSEE-COMPANY INCURRED EXPENSE OF RS. 23,11,26,595/- TOWARDS PROFESSIONAL SPONSORSHIP. THE ASSESSEE WAS ASKED TO PROVIDE DETAILS AND NATURE OF THE EXPENSES. THE ASSESSEE VIDE LETTER DATED 18.12.200 9 FURNISHED THE DETAILS. AO HAS STATED THAT THE ASSESSEE HAS GIVEN DETAILS OF EXP ENDITURES STATING THE NAME OF ORGANIZERS WITHOUT THEIR ADDRESSES. THE ASSESSEE S TATED VIDE LETTER DATED 24.12.2009 THAT THE SAID EXPENSES WERE INCURRED FOR SPONSORING EMINENT DOCTORS TO ATTEND INTERNATIONAL CONFERENCES SO THAT THEY COULD PARTI CIPATE IN THE LECTURES AND SEMINARS COVERING RECENT DEVELOPMENTS IN THE AREAS OF MEDIC INES AND SURGERY; THAT THEY COULD ACQUAINT THEMSELVES WITH THE USAGES OF PRODUCTS MAR KETED BY ASSESSEE-COMPANY; THAT ASSESSEE SPONSORED REPUTED SURGEONS TO VARIOUS INT ERNATIONAL CONFERENCES WHERE THEY COULD GET FIRST HAND INFORMATION AND ALSO TO GET THE OPPORTUNITY TO WITNESSES LIVE SURGERIES. THE ASSESSEE ALSO STATED THAT IT FOLLOW S STRICT GUIDELINES FOR SELECTION OF DOCTORS/SURGEONS. HOWEVER, THE AO HAS STATED THA T ASSESSEE HAS NOT GIVEN PURPOSE OF THEIR SPONSORSHIP AND HOW THE EXPENSES ARE RELA TED TO BUSINESS OF THE ASSESSEE. HE HAS FURTHER STATED THAT ASSESSEE-COMPANY INDULGED I N TACTICS WHICH HAS BEEN OBJECTED BY MEDICAL COUNSEL OF INDIA. THE ASSESSEE HAS N OT BEEN ABLE TO DISCHARGE THE ONUS THAT LIES UPON IT TO PROVE GENUINENESS OF EXPENSE S INCURRED AND ALSO TO PROVE THAT EXPENSES ARE INCURRED DUE TO BUSINESS EXIGENCY. THAT THE ASSESSEE IS NOT IN A POSITION TO PROVE THAT THE PROFESSIONAL SPONSORSHIP HAS INC REASED ITS BUSINESS, AND ASSESSEE COMPANY IS TOTALLY RELYING ON A STATEMENT, WHICH IT COULD NOT CORROBORATE. IN VIEW OF ABOVE, THE AO HAS STATED THAT THE ASSESSEE TOTALLY FAILED TO FULFILL PRIME RESPONSIBILITY AND SUGGESTED IN THE DRAFT ASSESSMENT ORDER TO DISA LLOW THE ENTIRE EXPENDITURE OF RS.23,11,26,595/- CLAIMED BY ASSESSEE UNDER THE HEA D PROFESSIONAL SPONSORSHIP. 10.1 HOWEVER, DRP AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE, WHICH ARE STATED AT PAGES 19-20, OF ITS ORDER, HAS STATED THAT DE TAILS FURNISHED BY ASSESSEE TO JUSTIFY THE SAID EXPENDITURE AGGREGATING TO RS.23,11,26,595 /- DO NOT REVEAL THE COMPLETE I.T.A. NO.83/MUM/2011 10 DETAILS OF THE EXPENSES AND PURPOSE OF EXPENSES. T HAT THE ASSESSEE HAS NOT PRODUCED ANY PROOF FROM THE DOCTORS AND VARIOUS OTHER PERSON S SPONSORED BY THE ASSESSEE FOR FOREIGN VISITS AS TO HOW IT WAS RELATED TO ASSESSE ES BUSINESS. DRP HAS STATED THAT KEEPING IN VIEW SCANTY DETAILS PROVIDED BY ASSESSE E BEFORE THE AO AS WELL AS BEFORE THE DRP, DRP IS OF THE VIEW THAT UNPROVED EXPENSE S CANNOT BE CONSIDERED FOR BUSINESS PURPOSES. HOWEVER, DRP HAS STATED THAT IT CANNOT BE DENIED THAT SOME OF THE EXPENSES ARE NECESSARY FOR THE PURPOSES OF BUSINESS AND ACCORDINGLY SUGGESTED TO MAKE DISALLOWANCE OF 50% OF SUCH EXPENSES. THEREF ORE, THE AO WAS DIRECTED TO ALLOW 50% OF THE EXPENSES CLAIMED BY ASSESSEE. ACCORDING LY, AO INCONFIRMITY WITH THE DIRECTION OF DRP ADDED RS.11,55,63,298/- TO THE TOT AL INCOME OF THE ASSESSEE. HENCE, ASSESSEE IS IN FURTHER APPEAL BEFORE US. 11. DURING THE COURSE OF HEARING, LD. AR REFERRED P AGES 754 TO 787 OF THE PAPER BOOK AND SUBMITTED THAT DIVISION WISE DETAILED BREAK-UP OF EXPENDITURE INCURRED FOR PROFESSIONAL SPONSORSHIP WAS FURNISHED BEFORE THE AO. THE LD. AR FURTHER SUBMITTED THAT THERE ARE GUIDELINES FOR SPONSORING THE DOCTO RS TO ATTEND THE CONFERENCES ETC AND REFERRED PAGES 788 TO 800 OF THE PAPER BOOK WHICH I S A COPY FROM THE EXTRACT OF HEALTH CARE BUSINESS INTEGRITY GUIDE. LD. AR SUBMITTED TH AT SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ADDL.CIT V /S JOHNSON & JOHNSON LIMITED IN ITA NO.9106/MUM/2004 (AY-2001-02) DATED 15.2.2013 AND T HE TRIBUNAL VIDE PARAS 44-45 ALLOWED THE EXPENDITURE INCURRED BY ASSESSEE AND E VEN 10% CLAIM OF EXPENSES DISALLOWED BY AO WAS DELETED BY CIT(A) AND THE ORD ER OF LD. CIT(A) WAS CONFIRMED BY THE TRIBUNAL. HE FURTHER SUBMITTED THAT SIMILAR EXPENDITURES INCURRED BY THE ASSESSEE IN THE ASSESSMENT YEAR 2002-03 WAS ALLOWED BY LD. CIT(A) AND THE APPEAL FILED BY THE DEPARTMENT BEFORE THE TRIBUNAL BEING ITA NO.4070/M UM/2007, DATED 28.8.2013, WAS REJECTED BY FOLLOWING ITS ORDER FOR THE ASSESSMENT YEAR 2001-02. HE FURTHER SUBMITTED THAT THE SAID EXPENDITURE WAS INCURRED FOR COMMERCI AL EXIGENCY AND THE SAME CANNOT BE DISALLOWED BY AO. HE FURTHER SUBMITTED THAT THE ASSESSEE ALSO PAID FRINGE BENEFIT TAX ON THE TRAVELLING EXPENDITURE INCURRED AND ACCORD INGLY THE EXPENDITURE CANNOT BE DISALLOWED. THE ASSESSEE ALSO REFERRED THE FOLLOWI NG DECISIONS : I) CIT V/S PANIPAT WOOLEN AND GENERAL MILLS CO.LT D. (1976) 103 ITR 66(SC) II) CIT V/S DHANRAJGIRJI RAJA NARASINGIRJI. [1973] 91 ITR 544 (SC) III) CIT V/S SALES MAGNESITE (P.) LTD. [1995] 214 I TR 1 (BOM.) IV) CIT V/S RAMAN AND RAMAN LTD., [1969] 71 ITR 345 (MAD) V) CIT V/S GOBALD MOTOR SERVICES PVT.LTD 100 ITR 242(MAD) VI) CIT V/S CHANDULAL KESHAVLAL & CO. [1960] 38 I TR 601 (SC) VII) BOMBAY STEAM NAVIGATION CO. V/S CIT [1965] 5 6 ITR 52 (SC) VIII) OM INTERNATIONAL (ITA NO.2310/M/2012) DATED 25.4.2013 I.T.A. NO.83/MUM/2011 11 (MUMBAI TRIBUNAL) IX) HANSRAJ MATHURADAS (ITA NO.2397/MUM/2010) DATED 16.9.2010 X) J.K.H.EXPORTS (35 CCH 108) (MUMBAI). 11.1 IN REPLY TO A CLARIFICATION, WHEN THE MATTER W AS FIXED ON 2.12.2013, LD.AR SUBMITTED THAT IN SUBSEQUENT ASSESSMENT YEARS TO TH E ASSESSMENT YEARS UNDER CONSIDERATION, THE EXPENDITURE IN ASSESSMENT YEARS 2007-08 AND 2008-09 WERE DISALLOWED AT THE RATE OF 1% AND THE APPEALS FOR AS SESSMENT YEAR 2007-08 IS PENDING BEFORE THE LD. CIT(A) AND THE APPEAL FOR THE ASSESS MENT YEAR 2008-09 IS PENDING BEFORE THE TRIBUNAL DISPUTING THE DISALLOWANCE MADE UNDER THE ABOVE HEAD. 12. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDER OF AO. HE SUBMITTED THAT THE ASSESSEE COULD NOT FILE DETAILS OF THE EXPENDITURE AND ACCORDINGLY THE DISALLOWANCE MADE BY AO BE CONFIRMED. HE ALSO RELIED ON DECISI ON OF ITAT IN ITA NO.925/MUM/2007 DATED 19.7.2013 IN THE CASE OF MERCK LTD V/S DY.CI T. 13. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF AUTH ORITIES BELOW AND ALSO THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTI ES. WE HAVE ALSO CONSIDERED THE EARLIER ORDERS OF THE TRIBUNAL DATED 15.2.2013 REL ATING TO ASSESSMENT YEAR 2001-02 AND DATED 28.8.2013 RELATING TO ASSESSMENT YEAR 2002-03 (SUPRA). WE HAVE ALSO CONSIDERED THE CASES REFERRED TO BY ASSESSEE IN ITS NOTE. TH ERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE COULD NOT FILE REQUISITE DETAILS TO JUSTIF Y THAT EXPENDITURE INCURRED BY THE ASSESSEE AGGREGATING TO RS.23,11,26,595/- WAS WHOLL Y AND EXCLUSIVELY FOR BUSINESS PURPOSES OF THE ASSESSEE. WE OBSERVE THAT THE ASS ESSEE HAS PLACED RELIANCE ON THE EARLIER ORDERS OF THE TRIBUNAL THAT SIMILAR EXPEN SES WERE ALLOWED BY TRIBUNAL BY CONFIRMING THE DELETION OF 10% DISALLOWANCE MADE B Y AO AND DELETED BY LD. CIT(A). HOWEVER, WE OBSERVE THAT IN THE ASSESSMENT YEAR 2 001-02 THE TOTAL EXPENSES INCURRED BY ASSESSEE WAS RS.2.23 CRORES AND IN ASSESSMENT YE AR 2002-03 IT WAS RS.4.36 CRORES UNDER THE HEAD PROFESSIONAL SPONSORSHIP; AND WH EREAS IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE TOTAL EXPENDITURE INCURRED IS OF RS.23,11,26,595/-. WE OBSERVE THAT DRP HAS ALSO STATED THAT ASSESSEE FILED ONLY SCANT Y DETAILS OF THE FOREIGN VISITS OF DOCTORS ETC. IT IS ALSO NOT IN DISPUTE THAT THE ADD RESSES OF DOCTORS AND THE ORGANIZERS HAVE NOT BEEN GIVEN IN THE DETAILS FILED BY ASSESSE E EVEN BEFORE US. ON PERUSAL OF DETAILS, WE AGREE WITH DRP THAT THE ASSESSEE WAS NOT ABLE TO JUSTIFY WITH DOCUMENTARY EVIDENCE THAT ENTIRE EXPENDITURES HAD BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS. THEREFORE, THE EARLIER ORDERS (SU PRA) AS REFERRED TO BY LD. AR COULD NOT BE CONSIDERED AS PRECEDENT IN THE ASSESSMENT YEAR U NDER CONSIDERATION. SINCE THE I.T.A. NO.83/MUM/2011 12 ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THAT ENTIR E EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF BUSINESS AND DUE TO COMMERCIAL EXPED IENCY, WE ARE OF THE CONSIDERED VIEW THAT IT WILL BE FAIR AND REASONABLE TO MAKE AN ADHOC DISALLOWANCE OF 2% OF THE EXPENDITURE CLAIMED BY ASSESSEE WHICH COMES TO RS. 46,22,500/- AS AGAINST RS.11,55,63,298/- DISALLOWED BY AO. WE MAY ALSO STATE THAT THE CASES REFERRED TO BY THE ASSESSEE (SUPRA) ARE ALSO NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AS IN THOSE CASES IT WAS HELD THAT EXPENDITURE INCURRED WAS FOR BUSINESS PURPOSES AND/OR WAS INCURRED DUE TO BUSINESS EXIGENCY. FURTHER, PAYME NT OF FRINGE BENEFIT TAX DOES NOT ESTABLISH THE FACT THAT THE EXPENDITURE HAS BEEN IN CURRED BY ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES ASSESSEES OF BUSINES S AND THEREFORE THE SAID CONTENTION OF LD.AR HAS NO MERIT. HENCE PAYMENT OF FBT DOES NO T ESTABLISH THAT EXPENDITURE WAS FOR BUSINESS PURPOSE. IN VIEW OF ABOVE GROUND NO.6 OF THE APPEAL TAKEN BY ASSESSEE IS ALLOWED IN PART BY RESTRICTING THE DISALLOWANCE OF RS.46,22,500/-. 14. GROUND NO.7 OF THE APPEAL TAKEN BY ASSESSEE REL ATES TO DISALLOWANCE OF BONUS PROVISION OF RS.24,26,021/-. 15. AT THE TIME OF HEARING, LD. AR SUBMITTED THAT ABOVE GROUND IS NOT PRESS FOR. HENCE, GROUND NO.7 OF THE APPEAL TAKEN BY ASSESSE E IS REJECTED AS NOT PRESSED FOR. 16. GROUND NO.8 OF THE APPEAL TAKEN BY ASSESSEE IS AS UNDER : THE LD. AO ERRED IN LAW AND IN FACTS BY DISALLOWI NG THE DEPRECIATION CLAIMED ON TESTING EQUIPMENT UNDER SECTION 32 OF THE ACT AMOUN TING TO RS.63,69,962/- ON THE GROUND THAT THE SAID FIXED ASSETS ARE NOT USED BY THE APPELLANT FOR THE PURPOSE OF THEIR BUSINESS AS THEY ARE LOCATED AT DIFFERENT PATHOLOGICAL LABORATORIES, HOSPITALS ETC ACROSS THE COUNTRY 17. WE HAVE HEARD LD. REPRESENTATIVES OF THE PARTIE S AND HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW. WE OBSERVE THAT THE ASSESSEE CL AIMED DEPRECIATION IN RESPECT OF TESTING EQUIPMENTS INSTALLED AT VARIOUS LABORATORI ES, DOCTORS CLINICS AND HOSPITALS ETC FOR THE PURPOSE OF THEIR OWN BUSINESS / PROFESSION. A O HAS STATED THAT THE SAID EQUIPMENTS INSTALLED BY ASSESSEE AT THE CLINICS OF DOCTORS, LA BORATORIES ETC COULD NOT BE CONSIDERED BEING USED BY ASSESSEE FOR THE PURPOSE OF ITS BUSI NESS AND ACCORDINGLY DISALLOWED THE CLAIM OF DEPRECIATION OF RS.63,69,962/-, WHICH WAS ALSO CONFIRMED BY DRP IN ITS DIRECTION. 18. AT THE TIME OF HEARING, THE LD. AR REFERRED THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2000-01 A ND 2001-02, ORDER DATED I.T.A. NO.83/MUM/2011 13 15.2.2013 (SUPRA), AND ALSO TRIBUNAL DECISION FOR ASSESSMENT YEAR 2002-03 DATED 28.8.2013 (SUPRA), WHEREIN THE TRIBUNAL CONSIDERED SIMILAR ISSUE ON IDENTICAL FACTS AND BY FOLLOWING THE DECISION IN THE CASE OF N R JET EN TERPRISES LTD IN ITA NO.4474/MUM/2004, MUMBAI TRIBUNAL, DATED 28.5.2008 , A SISTER CONCERN OF THE ASSESSEE, WHEREIN THE DEPRECIATION WAS ALLOWED ON THE TESTING EQUIPMENTS PROVIDED TO LABORATORY AND HOSPITALS AS IN THE CASE OF ASSESSEE . LD. DR HAS NOT DISPUTED THE CONTENTION OF LD. AR THAT THE FACTS IN THE ASSESSME NT YEAR UNDER CONSIDERATION ARE IDENTICAL AND SIMILAR ISSUE HAS BEEN DECIDED BY TH E TRIBUNAL IN FAVOUR OF ASSESSEE IN THE EARLIER ASSESSMENT YEARS. IN VIEW OF ABOVE, AND R ESPECTFULLY FOLLOWING EARLIER ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA), WE AL LOW DEPRECIATION OF RS.63,69,962/- ON THE TESTING EQUIPMENT BY SETTING ASIDE ORDERS OF AUTHORITIES BELOW. HENCE, GROUND NO.8 OF THE APPEAL TAKEN BY ASSESSEE IS ALLOWED. 19. GROUND NOS.9 AND 10 OF THE APPEAL TAKEN BY ASS ESSEE IS AS UNDER : 9. THE LD. AO ERRED IN LAW AND IN FACTS BY MAKING AN ADDITION OF THE PROFITS ATTRIBUTABLE TO THE ASSESSEES SRI LANKA B RANCH AG GREGATING RS.65,995,771/- IN VIEW OF THE ARTICLE 7 OF THE DOUBLE TAXATION AVOI DANCE AGREEMENT BETWEEN INDIA AND SRI LANKA (INDIA-SRI LANKA TAX TREATY); WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP HA S ERRED IN LAW AND IN FACTS BY NOT PASSING A REASONED ORDER WITH RESPECT TO THE ABOVE GROUND AND ACCORDINGLY, THE ORDER SHOULD BE QUASHED; 10. THE LD. AO ERRED IN LAW AND IN FACTS BY MAKIN G AN ADDITION OF THE PROFITS ATTRIBUTABLE TO THE ASSESSEES BANGLADESH BRANCH AG GREGATING TO RS.5,29,555/- IN VIEW OF THE ARTICLE 7 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND BANGLADESH (INDIA-BANGLADESH TAX TREATY ); WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP HA S ERRED IN LAW AND IN FACTS BY NOT PASSING A REASONED ORDER WITH RESPECT TO THE ABOVE GROUND AND ACCORDINGLY, THE ORDER SHOULD BE QUASHED; 20. AT THE TIME OF HEARING, LD. AR SUBMITTED THAT A BOVE GROUNDS OF APPEAL VIZ GROUND NOS.9 AND 10 ARE NOT PRESSED FOR AS THE ASSESSEE I S SATISFIED WITH THE DIRECTION OF DRP THAT THE TAX PAID BY ASSESSEE IN SRI LANKA AND BA NGLADESH WILL BE ALLOWED CREDIT AS PER TAX TREATIES. IN VIEW OF ABOVE, GROUND NOS.9 AND 10 OF THE APPEAL TAKEN BY ASSESSEE ARE REJECTED. 21. GROUND NO.11 OF THE APPEAL TAKEN BY ASSESSEE I S AS UNDER : 11. THE LD. AO ERRED IN LAW AND IN FACTS BY DISA LLOWING ON ADHOC BASIC 75% OF THE EXPENDITURE INCURRED TOWARDS FREE SAMPLES DISTRIBUTED AMOUNTING TO RS.118,503,996/- BY TREATING IT AS NON BUSINESS E XPENDITURE. I.T.A. NO.83/MUM/2011 14 WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP HA S ERRED IN LAW AND IN FACTS BY NOT PASSING A REASONED ORDER WITH RESPECT TO THE ABOVE GROUND AND ACCORDINGLY, THE ORDER SHOULD BE QUASHED; 22. THE AO HAS STATED THAT THE ASSESSEE WAS ASKED T O FURNISH DETAILS OF PRODUCTION AND SALE OF ITEMS MANUFACTURED BY THE ASSESSEE COMP ANY. IT WAS NOTICED THAT THERE IS A VARIATION IN ACTUAL AMOUNT OF PRODUCTION, ITS SAL ES AND CLOSING STOCK. THAT ON BEING ASKED TO FURNISH REASONS FOR SHORT FALL, THE ASSESS EE STATED THAT IT WAS DUE TO DISTRIBUTION OF VARIOUS TYPES OF SAMPLES. THE AO HAS STATED TH AT THE REPLY OF THE ASSESSEE WAS EVASIVE AND TO INVESTIGATE THE MATTER FURTHER, FURT HER DETAILS/EXPLANATIONS WERE ASKED FROM THE ASSESSEE. THE AO HAS STATED THAT THE ASSE SSEE VIDE LETTER DATED 18.12.2009 FURNISHED THE DETAILS BUT THEY WERE NOT FILED DIVIS ION-WISE, NOR THE DETAILS OF THE PERSONS, INSTITUTION, AGENTS WITH ADDRESS, SAMPLES AND AMOU NT WERE FILED. THE AO HAS STATED THAT GENUINENESS OF DISTRIBUTION OF SAMPLES WAS N OT ESTABLISHED. THEREFORE, THE ASSESSEE WAS ASKED TO SUBMIT DETAILS OF TOTAL SALES , FREE SAMPLES AND LINK WITH PURCHASE OR PRODUCTION TO ESTABLISH THE DIFFERENCE. THE AO HAS STATED THAT THE ASSESSEE FILED ITS REPLY VIDE LETTER DATED 24.10.2009; WHICH HAS BEE N STATED BY AO AT PAGES 33 TO 36 OF THE ASSESSMENT ORDER. IT IS OBSERVED THAT THE ASSES SEE INTERALIA STATED THAT FREE SAMPLES WERE DISTRIBUTED TO PROMOTE SALES AND IT IS AN AC CEPTED COMMERCIAL PRACTICE. THAT THE EXPENSES ON ACCOUNT OF IT SHOULD BE ALLOWED AS BUS INESS EXPENDITURE. THE ASSESSEE ALSO PLACED ITS RELIANCE ON THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF BRIHAN MAHARASHTRA SUGAR SYNDICATE LTD. V/S DCIT (2 26 CTR 160)(BOM) , WHEREIN THE HONBLE HIGH COURT HAS HELD AS UNDER : IT IS AN ACCEPTED COMMERCIAL PRACTICE THAT THE SAL E OF ANY PRODUCT WOULD NOT INCREASE UNLESS THE CONSUMERS ARE MADE AWARE ABOUT ITS QUALITIES OR SPECIALITIES EITHER BY DISSEMINATION OF INFORMATION REGARDING TH E PRODUCT BY ADVERTISEMENT OR ACTUALLY ALLOWING THEM THE USE OF THE PRODUCTS BY W AY OF FREE SAMPLES. THE ASSESSEE ALSO REFERRED THE DECISION OF THE HON BLE APEX COURT IN THE CASE OF SMITHKLINE BEECHAM PHARMACEUTICALS (INDIA) LTD. V/S CIT (2000) 245 ITR 116 (SC) WHEREIN THEIR LORDSHIPS HAS HELD AS UNDER : THE OBJECT, WE HAVE NO DOUBT, OF DISTRIBUTION OF T HE SAMPLES OF THE DRUGS TO THE DOCTORS IS TO MAKE THEM AWARE THAT SUCH DRUGS ARE A VAILABLE IN THE MARKET IN RELATION TO THE CURE OF A PARTICULAR AFFLICTION AND , THEREFORE, TO PERSUADE THEM TO PRESCRIBE THE SAME IN APPROPRIATE CASES. SO DOING I S, TANTAMOUNT TO PUBLICITY AND SALES PROMOTION. 22.1 THE ASSESSEE ALSO STATED THAT THE SAID EXPEND ITURE OF FREE SAMPLES IS ALLOWABLE U/S 37(1) OF THE ACT AS THE EXPENDITURE WAS INCURR ED DUE TO COMMERCIAL EXPEDIENCY AND FOR BUSINESS PURPOSES. I.T.A. NO.83/MUM/2011 15 22.2 HOWEVER, THE AO HAS STATED THAT THE ASSESSEE IS CLAIMING DISTRIBUTION OF SAMPLES WHICH HAS RESULTED IN SHORT FALL IN PRODUCTION AND SALE OF ITEMS BUT THE ASSESSEE IS NOT IN A POSITION TO CORROBORATE ITS CONTENTION BY PRODUCI NG ANY CONVINCING DOCUMENTS/RECORDS. THE DETAILS FILED BY ASSESSEE IS VERY INCOMPREHENS IVE AND GENERAL IN NATURE. THE AO HAS STATED THAT ONUS LIES ON THE ASSESSEE TO PROV E THE GENUINENESS OF ITS CLAIM. SINCE THE ASSESSEE HAS FAILED TO DISCHARGE THE ONUS, AO S TATED THAT EXPENDITURE CLAIMED ON ACCOUNT OF DISTRIBUTION OF FREE SAMPLES IS NOT ACC EPTABLE. THE AO PROPOSED IN DRAFT ASSESSMENT ORDER, THE DISALLOWANCE OF THE ENTIRE CL AIM OF THE ASSESSEE OF RS.15,80,05,328/-. HOWEVER, DRP AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE STATED THAT SOME OF THE SAMPLES HAVE BEEN GIVEN BY ASSESSE E AS PART OF VARIOUS SALES PROMOTION SCHEMES, WHICH HAS CERTAINLY HELPED IN INCREASING THE SALES. THEREFORE, DRP RESTRICTED THE DISALLOWANCES TO 75% OF THE EX PENDITURE CLAIMED BY ASSESSEE AND DIRECTED THE AO ACCORDINGLY. 23. IN VIEW OF ABOVE, AO MADE DISALLOWANCE OF RS. 11,85,03,996/- BEING 75% OF THE CLAIM OF THE ASSESSEE OF RS.15,80,05,328/-. HENCE , ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 24. LD. AR SUBMITTED THAT THE ASSESSEE FILED DIVI SION-WISE BREAK-UP OF FREE SAMPLES DISTRIBUTED AND THE DETAILS OF WHICH ARE ALSO PLACE D AT PAGES 806 TO 1014 OF THE PAPER BOOK. HE SUBMITTED THAT DISTRIBUTION OF FREE SAMP LES IS ONE OF THE PROMOTIONAL AVENUES TO PROMOTE THE PRODUCT. THAT IT IS A NORM AL TRADE PRACTICE. HE SUBMITTED THAT THERE IS A SUFFICIENT CONTROL IN REGARD TO DISTRI BUTION OF FREE SAMPLES. LD. AR REFERRED THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE C ASE OF BRIHAN MAHARASHTRA SUGAR SYNDICATE LTD.(SUPRA) AND THE DECISION OF HONBLE A PEX COURT IN THE CASE OF IN THE CASE OF SMITHKLINE BEECHAM PHARMACEUTICALS (INDIA) LTD. (SUPRA) AND SUBMITTED THAT FREE SAMPLES WERE GIVEN DUE TO COMMERCIAL EXIGENCY. HE SUBMITTED THAT THE ASSESSEE HAS ALSO PAID FRINGE BENEFIT TAX IN RESPECT OF THE SAI D EXPENDITURE INCURRED AND THEREFORE THE EXPENDITURE CANNOT BE DISALLOWED. THE LD. AR PLACED RELIANCE ON THE FOLLOWING DECISIONS : I) OM INTERNATIONAL (ITA NO.2310/M/2012) DATED 25.4 .2013 (MUMBAI ITAT) II) HANSRAJ MATHURADAS (ITA NO.2397/MUM/2010) DATED 16.9.2010 III) J.K.H.EXPORTS (35 CCH 108) (MUMBAI). HE SUBMITTED THAT IN THE SUBSEQUENT ASSESSMENT YEAR S I.E. ASSESSMENT YEARS 2007-08 AND 2008-09 THE DISALLOWANCE WAS MADE AT THE RATE OF 1% OF THE EXPENSES CLAIMED BY I.T.A. NO.83/MUM/2011 16 ASSESSEE. LD. AR FILED A CHART STATING THAT FOR A SSESSMENT YEAR 2008-09 DRP ITSELF RESTRICTED THE DISALLOWANCE OF 1% OF THE EXPENSES C LAIMED BY ASSESSEE OF RS.24,48,20,332/-. THEREFORE, THE DISALLOWANCE MADE IN THE ASSESSMENT YEAR UNDER CONSIDERATION OF 75% OF THE CLAIM OF THE ASSESSEE IS EXCESSIVE AND THE SAME MAY BE DELETED. 24.1 HOWEVER, THE LD. DR SUPPORTED THE ORDER OF AO. HE FURTHER SUBMITTED THAT IN THE CASE OF MERCK LIMITED V/S DCIT IN ITA NO.925/MUM/2007 (AY-200 3-04), THE TRIBUNAL VIDE ORDER DATED 19.7.2013 WHILE CONSIDERIN G SIMILAR ISSUE RESTORED THE MATTER TO THE AO FOR DETAILED EXAMINATION AND TO V ERIFY THE DETAILS ABOUT NAMES, ADDRESSES OF THE DOCTORS ETC TO WHOM FREE SAMPLES WERE G IVEN. HE SUBMITTED THAT SINCE THE ASSESSEE FAILED TO FURNISH THE REQUISITE DETAI LS, AO AS PER DIRECTION OF DRP HAS RESTRICTED DISALLOWANCE TO 75% OF THE CLAIM OF A SSESSEE WHICH IS REASONABLE. HE SUBMITTED THAT THE ORDER OF AO BE CO NFIRMED. 25. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF AO AS WELL AS THE ORDER OF DRP AND HAVE ALSO CONSIDERED THE CASES RELIED UPON BY THE LD. REPRESENTATIVES OF BOTH PARTIES. THERE IS NO DISPUTE TO THE FACT THAT IN ORDER TO CLAIM EXPENDITURE, THE ASSESSEE IS REQUIRED TO FURNISH REQUISITE DETAILS TO THE SAT ISFACTION OF AO TO JUSTIFY THAT THE EXPENDITURE HAS BEEN INCURRED FOR BUSINESS PURPO SE. THE HONBLE DELHI HIGH COURT HAS ALSO HELD IN THE CASE OF GOODYEAR INDIA LTD. V/S CIT (2000) 246 ITR 116 (DELHI) THAT THE DETAILS OF EXPENDITURES, WHICH ARE NOT SUBSTANT IATED BY VOUCHERS AND ASSESSEE WAS UNABLE TO FURNISH THE DETAIL TO J USTIFY THE CLAIM, THE DISALLOWANCE MADE BY AO IS JUSTIFIED AND AVAILABILITY OF TAX AU DIT REPORT DOES NOT PRECLUDE AO FROM CALLING FOR SUPPORTING MATERIALS. THE HONBLE MADRAS HIGH COURT HAS ALSO HELD IN THE CASE OF CIT V/S SOUTHERN SEA FOODS LTD. [1995] 215 ITR 176 (MAD.) THAT A PERSON WHO CLAIMS THAT HE HAS MADE CERTAIN EXPENDITURES IN CURRED, IS EXPECTED TO HAVE DOCUMENTARY EVIDENCE. IN THE ABSENCE OF ABOVE, HE IS EXPECTED TO SAY HOW HE INCURRED THE EXPENDITURE AND WHY THERE IS NO DOCUMENTARY PRO OF FOR SUCH EXPENDITURE. WE AGREE WITH THE LD. AR THAT IT IS A COMMERCIAL PRACT ICE IN THE LINE OF BUSINESS OF THE ASSESSEE, TO GIVE FREE SAMPLES TO PROMOTE ITS PRODU CT. HOWEVER, THE ASSESSEE IS EXPECTED TO MAINTAIN DETAILS TO ENABLE THE AO TO VE RIFY AS TO WHETHER THE SAID SAMPLES HAD BEEN GIVEN BY ASSESSEE WHOLLY AND EXCLUSIVELY IN CONNECTION WITH ITS BUSINESS. ON PERUSAL OF THE DETAILS PLACED AT PAGES 805 TO 1014 OF THE PAPER BOOK, WE OBSERVE THAT THE NAMES WITH ADDRESS ARE NOT GIVEN AND THEREFOR E ON THE BASIS OF DETAILS PLACED, AO COULD NOT VERIFY GENUINENESS OF CLAIM OF THE AS SESSEE. FURTHER THE CONTENTION OF I.T.A. NO.83/MUM/2011 17 THE ASSESSEE THAT IT HAS PAID FRINGE BENEFIT TAX (F BT) AND THEREFORE NO DISALLOWANCE BE MADE, HAS NO MERITS. PAYMENT OF FRINGE BENEFIT T AX (FBT) DOES NOT ESTABLISH THAT EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR I TS BUSINESS PURPOSE. IN VIEW OF ABOVE AND CONSIDERING THE DETAILS PLACED BEFORE U S AND THE DECISIONS RELIED UPON BY LD. AR, WE ARE OF THE CONSIDERED VIEW THAT ON THE FAC TS AND IN THE CIRCUMSTANCES IT WILL BE FAIR AND REASONABLE TO RESTRICT DISALLOWANCE TO 2 % OF THE CLAIM OF ASSESSEE WHICH COMES TO RS.31,61,000/-AS AGAINST RS. RS.11,85,03, 996/- DISALLOWED BY AO. HENCE, GROUND NO.11 OF THE APPEAL TAKEN BY ASSESSEE IS ALL OWED IN PART. 26. WE PROPOSE TO CONSIDER GROUND NOS.12 TO 17 OF T HE APPEAL TAKEN BY ASSESSEE TOGETHER WHICH ARE AS UNDER: 12. THE LD. AO/TPO (LEARNED ADDITIONAL COMMISSIONE R OF INCOME-TAX(TRANSFER PRICING) -1(4) (HEREINAFTER REFERRED TO AS THE LD .TPO) HAS ERRED IN LAW AND IN FACTS BY DISALLOWING THE TAXES BORNE BY THE APPEL LANT IN RESPECT OF BRAND USAGE ROYALTY PAID TO JOHNSON & JOHNSON, USA (J&J US) ON THE GROUND THAT THE APPELLANT IS REQUIRED TO DEDUCT TAX OUT OF THE PAYM ENT OF BRAND USAGE ROYALTY MADE TO J&J US AND NOT BEAR THE SAME AS PER THE AGR EEMENT ENTERED INTO BETWEEN THE APPELLANT AND J&J US. 13. THE LD. AO/TPO HAS ERRED IN LAW AND IN FACTS BY DISALLOWING THE SERVICE TAX PAID BY THE APPELLANT ON BRAND USAGE ROYALTY; 14. THE LD. AO/TPO HAS ERRED IN LAW AND IN FACTS BY DISALLOWING THE KNOW- HOW ROYALTY PAID BY THE APPELLANT ON SALE OF TRADED FINISHED GOODS; 15. THE LD. AO/TPO HAS ERRED IN LAW AND IN FACTS B Y HOLDING THAT THE KNOW- HOW ROYALTY PAID BY THE APPELLANT ON MANUFACTURED PRODUCTS BE RESTRICTED TO 1% ON NET SALES; 16. THE LD. AO/TPO HAS ERRED IN LAW AND IN FACTS BY DISALLOWING THE CORRESPONDING WITHHOLDING TAX AND R&D CESS ON DIS ALLOWED KNOW-HOW ROYALTY ON TRADED FINISHED GOODS AND MANUFACTURED PRODUCTS; AND 17. THE LD. AO/TPO HAS ERRED IN LAW AND IN FACTS B Y DISALLOWING THE SERVICE TAX PAID BY THE APPELLANT ON KNOW-HOW ROYALTY WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO/TPO HAS ERRED IN LAW AND IN FACTS BY NOT RESTRICTING THE DISALLOWANCE TO THE AMOUNT PROP ORTIONATE TO DISALLOWED KNOW- HOW ROYALTY AND HAVE DISALLOWED THE ENTIRE SERVICE TAX 27. SINCE FACTS GIVING RISE TO ABOVE GROUNDS ARE IN TERCONNECTED, WE DEAL WITH THESE GROUNDS TOGETHER. AO MADE A REFERENCE U/S 92CA( 1) OF THE ACT TO TRANSFER PRICING OFFICER (TPO) TO DETERMINE ARMS LENGTH PRICE (HER EINAFTER TO BE REFERRED AS ALP) IN RELATION TO THE INTERNATIONAL TRANSACTIONS. I.T.A. NO.83/MUM/2011 18 27.1 ASSESSEE IS A MULTI-DIVISIONAL COMPANY AND TPO HAS SEGMENTED ITS OPERATION INTO THREE DIVISIONS VIZ CUSTOMER CARE, PHARMACEUTI CALS AND MEDICAL PRODUCTS. ASSESSEE COMPANY IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE), COMPUTED ARMS LENGTH PRICE (ALP) BY USING TRANSAC TIONAL NET MARGIN METHOD (TNMM). ASSESSEE HAS PAID TECHNICAL KNOW-HOW-ROYALTY AT THE RATE OF 4% AND BRAND ROYALTY AT THE RATE OF 2%, NET OF TAXES ON NET SALES. 27.2 THE TPO HAS STATED THAT THE ASSESSEE COMPANY SET UP ITS OPERATION IN INDIA IN THE YEAR 1957. TPO HAS STATED THAT THE ASSESSEE HAS PAID TECHNICAL KNOW-HOW ROYALTY AT THE RATE OF 4% FOR ITS PRODUCT, IN SPITE OF THE FACT THAT SOME OF THE PRODUCTS WERE INTRODUCED BY THE ASSESSEE COMPANY LONG AGO AND THE TECHNOLOGY IS FULLY ADAPTED FOR SUCH PRODUCTS. THAT ONLY UPDATING TO TECHNOLOGY, I F AVAILABLE WITH ITS AE JOHNSON AND JOHNSON, USA (HEREINAFTER TO BE REFERRED AS J&JUS) WOULD BE REQUIRED. HE HAS STATED THAT THE ASSESSEE COMPANY IS HAVING FULL-FLEDGED GOVERNMENT APPROVED RESEARCH AND DEVELOPMENT FACILITIES (R&D) WHICH ARE NOT ONLY BE ING USED FOR ADOPTING THE TECHNOLOGY BUT THE IMPROVEMENT OF PRODUCTS AND ALS O FOR DEVELOPING THE PROCESS, WHICH RESULTED INTO MAKING PRODUCTS SUITABLE IN THE INDI AN CLIMATE/CONDITIONS. THAT R AND D FACILITIES OF THE ASSESSEE-COMPANY ARE SO ADVANCED THAT THE SAME ARE BEING SHARED WITH GROUP ENTITIES. HE HAS STATED THAT THE ASSESSEE COMPANY HAD ENTERED INTO AN AGREEMENT WITH ITS AE, J&J US TO PAY ROYALTY FOR KNOW-HOW RECEIVED FROM ITS AE J&J US AT THE RATE OF 2% ON SALES VIDE AGREEMENT ENT ERED INTO ON NOVEMBER 21, 1994 AND IT COVERED ONLY CERTAIN SPECIFIC DRUGS AND PHA RMACEUTICALS. THE ROYALTY UNDER THIS AGREEMENT WAS PAID BY THE ASSESSEE TO ITS AE, J&J US FROM JUNE 1, 1994 TO MAY 31, 2001. THEREAFTER AND PURSUANT TO LIBERALIZATION OF FOREIGN EXCHANGE REGULATIONS, THE ASSESSEE COMPANY STARTED PAYING TECHNICAL KNOW-HOW FEE FOR THE CONSUMER SEGMENT ALSO FROM JULY 1, 2001 AT THE RATE OF 2% AND THIS WAS ENHANCED TO 4% WITH EFFECT FROM 1 ST JULY, 2002 ONWARDS. HE HAS STATED THAT THE ASSESS EE IS ALSO BEARING TAX ON THE SAID PAYMENT AT THE RATE OF 15%. THEREFORE, ON NET SALE S, THE EFFECTIVE RATE OF ROYALTY WOULD BE MORE THAN WHAT THE ASSESSEE HAS REPORTED OSTENSI BLY. HE HAS FURTHER STATED THAT ASSESSEE COMPANY IS PAYING TECHNICAL KNOW-HOW FEE N OT ONLY ON THE PRODUCTS MANUFACTURED BY IT IN ITS FACILITIES BUT ALSO ON TH E PRODUCTS GOT CONTRACT MANUFACTURED BY IT. HE HAS STATED THAT IF THE PRODUCTS CAN BE GOT CONTRACT MANUFACTURED, IT INDICATES THAT, THE TECHNOLOGY AVAILABLE WITH THE ASSESSEE CO MPANY ONLY WOULD BE PASSED ON TO CONTRACT MANUFACTURERS. HE HAS FURTHER STATED THAT THE ASSESSEE COMPANY IS PAYING TECHNICAL KNOW-HOW ROYALTY NOT ONLY ON MANUFACTURED PRODUCTS BUT ALSO ON TRADED I.T.A. NO.83/MUM/2011 19 PRODUCTS , WHICH IS NOT REQUIRED TO BE PAID AT ALL . THAT THE ASSESSEE COMPANY IS PAYING TECHNICAL KNOW-HOW ROYALTY ON TRADED PRODUCTS IN AN UNAUTHORIZED MANNER. 27.3 THE TPO HAS FURTHER STATED THAT THE ASSESSEE COMPANY IS USING TRADE-MARK SINCE 1957. THE ASSESSEE IS A PART OF J&J US SINC E INCEPTION. THEREFORE, THE GROUP BRANDS COULD BE USED FREELY BY ASSESSEE EVEN IN TH E ABSENCE OF LICENSE CONTRACTS AND DUE TO THIS ONLY COMPANY WAS USING THE BRAND/TRAD EMARK WITHOUT PAYING ROYALTY. THAT J&J PRODUCTS HAVE ACQUIRED A REPUTATION FOR QUALIT Y BEFORE THE CONCLUSION OF THE ROYALTY AGREEMENT. THAT THE ROYALTY AGREEMENT DID NOT MAKE ANYTHING AVAILABLE TO ASSESSEE- COMPANY THAT IT DID NOT ALREADY HAVE OR HAD NOT BRO UGHT ABOUT ON ITS OWN IN THE PAST. IT IS RELEVANT TO STATE THAT THE ASSESSEE-COMPANY PAI D BRAND USAGE ROYALTY AT THE RATE OF 1% NET OF TAXES TO ITS AE J&J US. THE TPO HAS STA TED THAT BY ENTERING INTO AN AGREEMENT BY ASSESSEE COMPANY WITH J&J US FOR PAYM ENT OF BRAND ROYALTY, IT DID NOT GET ANY ECONOMIC BENEFIT. THAT THE VALUE OF BRAND/ TRADE MARK HAVE NOT BEEN CREATED OR MANUFACTURED BY J&J US. HE HAS STATED THAT THE ASSESSEE COMPANY BEARING ALL THE EXPENSES FOR MARKING AND PROMOTION OF BRANDED PROD UCTS WHICH ARE MORE THAN 10% OF SALE VALUE. THE BUSINESS POWER OF BRAND NAME/TRA DE MARK IS NOT ONLY BECAUSE OF OWNERSHIP OF THESE WITH J&J US, BUT THE ACTUAL EFF ORTS OF THE ASSESSEE-COMPANY. 27.4 THE TPO HAS STATED THAT IF THE EXPENSES ON TEC HNICAL SERVICES FEE, TRADE MARK FEE, R&D FACILITIES AND SALES PROMOTION EXPENSES A RE CONSIDERED TOGETHER, THE ASSESSEE COMPANY VIZ J&J INDIA IS SPENDING ABOUT 15% OF THE TURNOVER TOWARDS THESE EXPENSES. THE TPO RELYING ON HIS ORDERS FOR ASSESSMENT YEAR S, 2003,04, 2004-05 AND 2005-06 HAS STATED THAT IF THESE EXPENSES ARE CONSIDERED TO GETHER, THE ASSESSEE IS NOT REQUIRED TO MAKE ANY PAYMENT FOR THE USE OF TRADE MARK/ BRAN D NAME. 27.5 FURTHER, TPO HAS STATED THAT THE ASSESSEE-COM PANY DID NOT SUBMIT THE INFORMATIONS REGARDING TECHNICAL SERVICES FEES AN D TRADE MARK FEE CHARGED BY J&J US TO OTHER MANUFACTURING/TRADING ENTITIES OF THE GRO UP IN THE ASIA PACIFIC AND EUROPEAN COUNTRIES. THAT IN THE ABSENCE OF THESE DETAILS, IT IS NOT POSSIBLE TO FACTUALLY VERIFY WHETHER THE ROYALTIES PAID BY ASSESSEE-COMPANY ARE IN LINE WITH WHAT IS PAID BY OTHER ENTITIES. HE HAS STATED IT IS NOT KNOWN WH ETHER OTHER ENTITIES EVEN IF THOSE ARE PAYING ROYALTIES ARE INCURRING ANY EXPENSES ON THE R&D FACILITIES. HE HAS STATED THAT THE ASSESSEE STARTED PAYING ROYALTY AT THE RATE PER MITTED UNDER AUTOMATIC ROUTE OF THE GOVERNMENT OF INDIA. THE ROYALTY IS PRESCRIBED IN THE AUTOMATIC ROUTE ARE FOR THE USE OF FRESH TECHNOLOGY AND ALSO FOR THE USE OF TRADEMA RKS FOR THE FIRST TIME. SINCE THE I.T.A. NO.83/MUM/2011 20 ASSESSEE COMPANY IS NOT GETTING ANY FRESH TECHNOLO GY IN RELATION TO OLD PRODUCTS BEING MANUFACTURED BY IT SINCE YEARS WHICH HAVE BEEN ADAP TED TO THE INDIAN CIRCUMSTANCES BY USE OF TECHNOLOGY DEVELOPED BY IT, ROYALTY RATES SHOULD CERTAINLY BE LESS THAN PRESCRIBED UNDER THE AUTOMATIC ROUTE. HE HAS STAT ED THAT AUTOMATIC ROUTE MEANS NO PERMISSION REGARDING PAYMENTS IS REQUIRED BY THE GO VERNMENT BUT THE QUANTUM/APPROPRIATENESS OF THE AMOUNTS PAID AS ROYA LTY SHOULD CERTAINLY SATISFY THE PRINCIPLES OF ARMS LENGTH. THE TPO HAS STATED TH AT HE HAS CONSIDERED THIS ISSUE IN THE ASSESSMENT YEARS 2003-04, 2004-05 AND RELIED UPON THE ORDER FOR ASSESSMENT YEAR 2005-06 WHICH HE HAS STATED AT PAGE 9 OF HIS ORDER AS UNDER : IN THE FMCG SECTOR, MOST OF THE BIG COMPANIES IN I NDIA, ARE PART OF MULTI- NATIONAL ENTERPRISES, AND THEIR TRANSACTIONS WOULD CERTAINLY BE THE CONTROLLED TRANSACTIONS. THERE WOULD BE VERY FEW COMPANIES, IN THE FMCG SECTOR OTHER THAN MULTI NATIONAL COMPANIES, WHEREIN, ANY ROYALTY IS PAID BY THEM TO UNRELATED PARTIES. THE DETAILS REGARDING ANY SUCH COMPANY COU LD NOT BE FOUND ON THE WEBSITE OF SIA/RBI WWW.SIADIPP.NIC.IN/PUBLICAT/NEWSLTR MEANING THEREBY IN FMCG SECTOR, SUCH ROYALTY PAYMENTS ARE NOT APPROVED . FROM THE DETAILS AVAILABLE ON THIS WEBSITE, IN THE PHARMACEUTICAL SECTOR, THE UNRELATED PARTIES HAVE PAID ROYALTY @1.5% TO THE FOREIGN COLLABORATORS FOR WHIC H APPROVALS WERE RECEIVED IN FY 1999-2000, MONTAN HYDRAULIK INDIA PVT. LTD, C ADLAND PHARMA PVT LTD. A.S.R. PHARMATECH (INDIA) LTD, SUDMAN LABORATORIES LTD, GOT APPROVAL FROM SIA FOR PAYMENT OF ROYALTY @ 1.5% OF DOMESTIC SALES FO R A PERIOD OF 5 YEARS FOR MANUFACTURING DRUGS AND MEDICINES. THE ROYALTY WAS PAYABLE TO THE FOREIGN COLLABORATORS IN GERMANY, NETHERLANDS, USA AND GIB RALTOR RESPECTIVELY. THEREFORE, IT CAN BE SAID THAT THE ROYALTY RATES IN THE PHARMA SECTOR ARE 1.5% 27.6 THE TPO HAS STATED THAT IF THE RESULTS AT SEG MENT LEVEL ARE COMPARED, IT IS DIFFICULT TO JUSTIFY THAT A PAYMENT OF ROYALTY WHIC H IS RS.58.37 CRORES IS AT ARMS LENGTH CONSIDERING THE VOLUME OF THE TRANSACTIONS OF THE A SSESSEE. THAT THE TOTAL SALES OF THE ASSESSEE ARE RS.1381.46 CRORES AND THE EXPENSES AR E RS.1271.53 CRORES. THE CONTRIBUTION OF ROYALTY IN THE TOTAL EXPENSES IS AB OUT 4.21%. THE ASSESSEE COMPANY HAS PAID TRADEMARK LICENSE FEE AND TECHNICAL SERVIC E FEE FOR ALL THE BUSINESS DIVISIONS WHICH HAVE INTERNATIONAL TRANSACTIONS. IN THE TN MM, IF THE CONTROLLED TRANSACTIONS ARE NOT BENCHMARKED SEPARATELY, IT WILL BE DIFFICULT TO SAY THAT THE TRANSACTIONS ARE AT ARMS LENGTH OR NOT. THE TPO HAS SUMMARIZED THE DISCUSS IONS ON THE ISSUE OF PAYMENT OF ROYALTY IN PARA 6.1.1 AND THEREAFTER HE HAS STATED THAT ON THE BASIS OF ORDER FOR ASSESSMENT YEAR 2005-06, THE PAYMENT OF TECHNICAL KNOW HOW FEE AT THE RATE OF 1% FOR ALL THE MANUFACTURED PRODUCT FOR THE CONSUMER SEGME NT, PHARMACEUTICAL SEGMENT AND MEDICAL DEVICES AND BRAND ROYALTY AT THE RATE OF 1 % WOULD BE THE ARMS LENGTH ROYALTY PAYABLE BY ASSESSEE COMPANY. HE HAS STATED THAT T HIS VIEW IS SUPPORTED FROM THE FACT THAT FROM 1.6.1994 TO 30.6.2002, THE ASSESSEE HAD B EEN PAYING TECHNICAL KNOW-HOW I.T.A. NO.83/MUM/2011 21 ROYALTY AT THE RATE OF 2% ONLY AND NO BRAND ROYALT Y WAS BEING PAID THOUGH THE ASSESSEE WAS USING THE BRAND NAME ALL THROUGH SINCE 1957. HE HAS STATED THAT ROYALTY FOR THE USE OF TECHNICAL KNOW-HOW SUBSUMES ROYALTY FOR US E OF BRAND NAME ALSO. IN THIS REGARD, HE HAS STATED THAT THIS HAS BEEN CLARIFIED BY THE GOVERNMENT OF INDIA, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION, SEC RETARIAT FOR INDUSTRIAL ASSISTANCES PRESS RELEASE NO. 8(2) 2001-FC-I DATED 3.1.2002. HE HAS FURTHER STATED THAT, THE ASSESSEE COMPANY IS NOT REQUIRED TO BEAR TAX AT TH E RATE 15% (AND THE CORRESPONDING CESS/SUR-CHARGE) ON THE ROYALTY WHICH THE ASSESSEE HAS BORN AND MADE PAYMENT TO J&J US ON NET OF TAXES. THE TPO HAS FURTHER DISCUSSED THE RELEVANT ARTICLE OF THE AGREEMENT AND HAS STATED THAT EVEN ARTICLE 13 OF T HE TECHNICAL SERVICES FEES AGREEMENT AND ROYALTY FOR TRADEMARK, IF ARE COMPA RED WITH THE ROYALTY FOR TRADEMARK, THE TECHNICAL SERVICES FEES AGREEMENT PROVIDE FOR PAYMENT NET OF TAXES BUT DOES NOT SO PROVIDE IN THE BRAND NAMES/TRADEMARKS ROYALTY AGREEMENT. THE TPO HAS STATED THAT RESERVE BANK OF INDIA APPROVAL IS RELEVANT O NLY FOR LIMITED PURPOSE OF FOREIGN EXCHANGE IN FLOW/OUTFLOW. THE RESERVE BANK OF IND IA DOES NOT COME INTO EXAMINING WHETHER INTERNATIONAL TRANSACTIONS ARE TAKING PLACE AT ARMS LENGTH. HE HAS STATED THAT IT FAILS TO LOGIC THAT TECHNICAL SERVICE FEE SHOUL D BE PAID FOR TRADED GOODS, THAT TOO, WHEN BRAND ROYALTY IS ALSO BEING PAID . TECHNICAL KNOW -HOW ROYALTY IS NOT REQUIRED TO BE PAID FOR THE TRADED PRODUCTS. TECHNICAL KNOW-HOW FEE IS PAID FOR USING TECHNOLOGY FOR MANUFACTURING PRODUCT. 27.7 IN VIEW OF ABOVE, THE TPO HAS CALCULATED TEC HNICAL KNOW HOW ROYALTY AS WELL AS BRAND ROYALTY PAID BY ASSESSEE WHICH IS TO BE DI SALLOWED, DETAILS OF WHICH HE HAS GIVEN AT PAGE 21 OF THE IMPUGNED ORDER. THE TPO HA S STATED THAT AT ARMS LENGTH PRICE PAYMENT OF ROYALTY COMES TO RS.17.10 CRORE S AS AGAINST RS.58.37 CRORES PAID/PAYABLE BY THE ASSESSEE AND SUGGESTED THE DISA LLOWANCE OF RS.41.26 CRORES (INCLUDING DISALLOWANCE OF INCOME TAX, R&D CESS A ND SERVICE TAX BORNE BY ASSESSEE). THE ASSESSEE FILED OBJECTIONS BEFORE DRP. 28. THE DRP AFTER CONSIDERING THE SUBMISSIONS OF AS SESSEE HAS AGREED WITH THE TPO/AO AND ACCORDINGLY THE AO FINALLY DISALLOWED T HE ABOVE AMOUNT. HENCE, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 29. THE LD. AR SUBMITTED THAT ASSESSEE ENTERED INT O AGREEMENT WITH AE J&J US TO PAY ROYALTY FOR TECHNICAL KNOW-HOW, AT THE RATE OF 2% ON SALES VIDE AGREEMENT DATED 21.11.1994. THE SAID AGREEMENT COVERED CERTAIN SPE CIFIC PRODUCTS AS MENTIONED IN THE I.T.A. NO.83/MUM/2011 22 AGREEMENT. SUBSEQUENTLY, THE ASSESSEE ENTERED IN TO A FRESH AGREEMENT ON 14.3.2002 AND AS PER THAT AGREEMENT THE SCOPE WAS ENHANCED TO COVER VARIOUS NEW PRODUCTS DEALT BY ASSESSEE-COMPANY AND ALSO SOME ADDITIONAL TECHNICAL /MARKETING ASSISTANCE WAS INCLUDED. LD. AR SUBMITTED THAT THE ADDITIONAL TECHNICAL /MARKETING ASSISTANCE INCLUDED UNDER THE AGREEMENT DATED 14.3.2002 RELATE S TO MARKETING PLAN AND STRATEGY, THE DISTRIBUTION NET WORK, TECHNOLOGICAL SOLUTION A ND PROGRAMMES FOR INFORMATION MANAGEMENT ETC. HE SUBMITTED THAT COPIES OF AGRE EMENTS DATED 21.11.1994 AND 14.3.2002 ARE PLACED IN THE PAPER BOOK NO.1 AT PA GES 128 TO 149 AND AT PAGES 150 TO 175 RESPECTIVELY. LD. AR SUBMITTED THAT IT WAS PROPOSED TO REVISE TECHNICAL KNOW HOW ROYALTY FROM 2% TO 4% AND RBI ACCORDED ITS AP PROVAL VIDE LETTER DATED 26.6.2002, COPY PLACED AT PAGES 179 OF THE PAPER BOOK. HE SUB MITTED THAT THEREAFTER THE ASSESSEE ENTERED INTO A SUPPLEMENTAL TECHNICAL KNOW-HOW AGR EEMENT ON 29.8.2002 ENHANCING THE ROYALTY PAYABLE TO ITS AE, J&J US FROM 2% TO 4 % ON SALES, AND COPY OF THE SAID AGREEMENT IS PLACED AT PAGES 176 TO 178 OF THE PA PER BOOK. LD.AR SUBMITTED THAT TPO WHILE MAKING TRANSFER PRICING ADJUSTMENT BY DIS ALLOWING TECHNICAL KNOW-HOW ROYALTY RELIED ON ITS OWN TRANSFER PRICING ORDER OF ASSESSM ENT YEARS 2003-04 TO 2005-06 AND THE ASSESSEE HAS FILED APPEALS BEFORE LD. CIT(A) WHICH ARE YET TO BE DECIDED. 29.1 LD. AR SUBMITTED THAT ROYALTY AT THE RATE OF 4% WAS PAID BY ASSESSEE TO J&J US AS PER FORMULA PRESCRIBED BY RBI VIDE ITS LETTER DA TED 29.11.2001, COPY PLACED AT PAGES 172 TO 175 OF THE PAPER BOOK. HE SUBMITTED THAT AS PER RBI FORMULA, LANDED COST OF IMPORTED COMPONENTS INCLUDING OCEAN FREIGHT, INSURA NCE, CUSTOMS DUTIES ETC AND COST OF STANDARD BOUGHT OUT COMPONENTS IS REDUCED FROM THE NET SALES FOR THE PURPOSES OF COMPUTING NET SALES ON WHICH ROYALTY IS PAYABLE. T HE LD. AR SUBMITTED THAT IN THE ASSESSMENT YEAR 2002-03, TPO DISALLOWED MARKETING ROYALTY PAYMENT BUT CIT(A) ALLOWED AND THE TRIBUNAL BY ITS ORDER DATED 28.8. 2013 IN ITA NO.4092/MUM/2007 ALLOWED PAYMENT OF ROYALTY ON BOTH I.E TRADING AS WELL AS MARKETING. HE SUBMITTED THAT COPY OF THE SAID ORDER OF TRIBUNAL IS PLACED AT PA GES 92 TO 119 OF THE PAPER BOOK AND THE RELEVANT PARAS ARE 43 TO 49 THEREOF. HOWEVER , IN REPLY TO A QUERY, THE LD. AR SUBMITTED THAT IN THE SAID ASSESSMENT YEAR VIZ ASS ESSMENT YEAR 2002-03 TECHNICAL KNOW-HOW ROYALTY WAS INCREASED FROM 1% TO 2% AND I N THE ASSESSMENT YEAR UNDER CONSIDERATION IT IS 4%. HE SUBMITTED THAT TPO HA S NOT CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND ALLOWED 1% TECHNICAL KNOW-HOW ROYA LTY AND DRP ALSO CONFIRMED THE ACTION OF AO. LD.AR FURTHER SUBMITTED THAT THE R OYALTY PAYMENT BY THE ASSESSEE MEETS ARMS LENGTH TEXT AND THEREFORE DISALLOWANCE IS N OT JUSTIFIED. I.T.A. NO.83/MUM/2011 23 29.2 LD. AR FURTHER SUBMITTED THAT BESIDES, THE PA YMENT OF TECHNICAL KNOW-HOW ROYALTY THE ASSESSEE ALSO PAID BRAND ROYALTY AND TH E SAID PAYMENT OF BRAND ROYALTY IS PAID AT THE RATE OF 1% NET OF TAXES AND THE SAME HAS BEEN ACCEPTED IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND EVEN IN THE SUBSEQUENT YEARS. HOWEVER, ONLY DISPUTE IS IN REGARD TO TAX BORNE BY ASSESSEE ON BRAND ROYALTY . THE LD. AR SUBMITTED THAT SIMILAR DISALLOWANCE OF TAXES WAS MADE IN THE ASSESSMENT YEAR 2002-03 BUT THE TRIBUNAL IN ITA NO.4092/MUM/2007 VIDE ORDER DATED 28.8.2013, COPY PLACED AT PAGES 92 TO 119 OF THE PAPER BOOK(RELEVANT PARA 34 IS AT PAGES 104 OF PAPER BOOK), AFTER CONSIDERING ITS DECISION IN THE CASE OF DRESSER RAND INDIA P. LTD. V/S DCIT IN ITA NO.3509/MUM/2008 (ASSESSMENT YEAR: 2004-05),ORDER DATED 31.7.2012 HE LD THAT THE ROYALTY IS TO BE REMITTED NET OF TAXES AND DELETED THE DISALLOWANCE MADE BY AO/LD. CIT(A). HE SUBMITTED THAT THE SAID ISSUE IS COVERED IN VIEW OF THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE. 29.3 LD AR FURTHER SUBMITTED THAT THE TPO ALSO SU GGESTED THE DISALLOWANCE OF SERVICE TAX PAID BY ASSESSEE. HE SUBMITTED THAT SE RVICE TAX PAID IS NOT AN INTERNATIONAL TRANSACTION AND THE SAME IS OUT SIDE THE PURVIEW OF INTERNATIONAL TRANSACTION AND THEREFORE, THE TPO WAS NOT JUSTIFIED TO DISALLOW SERVICE TAX PAID BY ASSESSEE ON THE ROYALTY PAID TO J&J US. LD. AR REFERRED THE DECIS ION OF ITAT, MUMBAI BENCH IN THE CASE OF DCIT V/S STARLITE [2010] 40 SOT 421 (MUM.) AND SUBMITTED THAT THE TRIBUNAL HAS HELD THAT ADJUSTMENT IF ANY ARISING DUE TO COM PUTATION OF ALP ARE TO BE RESTRICTED ONLY TO INTERNATIONAL TRANSACTION AND NOT TO BE APPLIED TO ENTIRE TURNOVER OF THE ASSESSEE. HE SUBMITTED THAT THE PAYMENT OF SERVIC E TAX ON THE ROYALTY PAID BY ASSESSEE TO J&J US IS NOT INTERNATIONAL TRANSACTI ON AND THEREFORE, THE SAME IS OUTSIDE THE SCOPE OF TPO TO MAKE ADJUSTMENT BY SUGGESTING DISALLOWANCE. HE FURTHER SUBMITTED THAT ROYALTY IS ALSO TO BE PAID NET OF TA XES, THE PAYMENT OF SERVICE TAX EVEN OTHERWISE IS THE RESPONSIBILITY OF THE ASSESSEE AND NO ADJUSTMENT UNDER ALP IS JUSTIFIED. 29.4 LD. AR FURTHER SUBMITTED THAT IN RESPECT OF D ISALLOWANCE OF TAXES AND R&D CESS PAID ON TECHNICAL KNOW-HOW ROYALTY, SIMILAR ISSUE WAS CONSIDERED BY ITAT, PUNE BENCH IN THE CASE OF KIRLOSKAR EBARA PUMPS LTD. V/S DCIT (2011) 138 TTJ(PUNE)211 AND IT WAS HELD BY TRIBUNAL THAT CESS ON ROYALTY IS PAYABL E TO CENTRAL GOVERNMENT BY AN INDUSTRIAL CONCERN WHICH IMPORTS TECHNOLOGY, AS PER SECTION 3(2) OF RESEARCH AND DEVELOPMENT CESS ACT, 1986. THE TRIBUNAL HELD THA T RESEARCH AND DEVELOPMENT CESS IS PAYABLE BY THE ASSESSEE WHICH IS IMPORTING TECHN OLOGY AND THEREFORE NO ADJUSTMENT I.T.A. NO.83/MUM/2011 24 COULD BE MADE FOR THE SAME IN THE COMPUTATION OF ALP. IT IS ALSO HELD THAT THERE IS NO LEGAL BASIS FOR TPO'S INFERENCE TO THE EFFECT TH AT THE RESEARCH AND DEVELOPMENT CESS IS THE LIABILITY OF THE FOREIGN CONCERN WHO IS RECE IVING ROYALTY. LD. AR FURTHER SUBMITTED THAT SIMILAR ISSUE WAS ALSO CONSIDERED BY ITAT , MUMBAI BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 IN ITA NO.4092/ MUM/2007 VIDE ITS ORDER DATED 28.8.2013 (RELEVANT PARA 42) AND THE TRIBUNAL DELE TED THE DISALLOWANCE MADE BY TPO ON THAT ACCOUNT. HE SUBMITTED THAT THE TRIBUNAL A LSO OBSERVED THAT THE SAID PAYMENT HAD BEEN MADE IN THE LIGHT OF THE AGREEMENT WITH J &J US AND AS PER APPROVAL /GUIDELINES OF RBI. LD. AR SUBMITTED THAT DISA LLOWANCE OF TAX AND R&D CESS PAID ON TECHNICAL KNOW-HOW ROYALTY IS NOT JUSTIFIED. 30. ON THE OTHER HAND, LD. DR SUPPORTED THE DISALL OWANCES MADE ON ACCOUNT OF TAX AND SERVICE TAX PAID ON PAYMENT OF ROYALTY ON BRAND USAGE AS WELL AS ON TECHNICAL KNOW-HOW AND ALSO R&D CESS PAID AND RELIED ON TH E ORDER OF TPO/DRP. HOWEVER, IN RESPECT OF TECHNICAL KNOW-HOW ROYALTY PAID, LD. DR SUBMITTED THAT TPO HAS NOT APPLIED ANY PARTICULAR METHOD WHILE MAKING DISALLOWANCE AND THEREFORE THE MATTER MAY BE SENT BACK TO AO/TPO TO APPLY A PARTICULAR METHOD AS A PPLICABLE TO THE ASSESSEE, AS PER SECTION 92C AND DETERMINE ALP. HE SUBMITTED THAT T HE DISALLOWANCES MADE BY AO BE CONFIRMED. 31. IN THE NOTE SUBMITTED ON 2.12.2013 LD. AR HA S STATED THAT THE ASSESSEE HAS ADOPTED CUP METHOD TO BENCHMARK ITS INTERNATIONAL T RANSACTION OF PAYMENT OF KNOW- HOW ROYALTY. FOR ANALYZING THE COMPARABILITY OF RO YALTY PAYMENTS MADE BY THE ASSESSEE TO J&J US, A REFERENCE WAS MADE TO THE WEBSITE HTTP://DIPP.NIC.IN/ (THE WEBSITE), A WEBSITE OF THE SECRETARIAT OF INDUSTRIAL ASSISTANC E(SIA). THE WEBSITE CONTAINS DETAILS OF ROYALTY APPROVALS GRANTED BY THE SIA AND THE RBI . A SEARCH WAS CONDUCTED ON THE WEBSITE TO IDENTIFY APPROVAL GRANTED BY THE SIA/RBI IN RESPECT OF ROYALTY PAYMENTS MADE BETWEEN THIRD PARTIES IN CONSIDERATION FOR PROVISIO N OF TECHNICAL KNOW-HOW/MARKETING KNOW-HOW FOR CONSUMER HEALTHCARE PRODUCTS, PHARMACE UTICAL PRODUCTS AND MEDICAL DEVICES. BASED ON THE ANALYSIS, THE AVERAGE ROYALT Y RATE FOR THE COMPARABLE TECHNICAL KNOW-HOW/MARKETING KNOW-HOW APPROVALS WORKED OUT TO 4.84% ON SALES. BASED ON SUCH ANALYSIS AND THE FACT THAT ROYALTY OF 4% PAID BY ASSESSEE TO J&J US WAS LOWER THAN THE ARMS LENGTH RATE OF 4.84%. HENCE ROYAL TY PAID BY THE ASSESSEE TO J&J US MEETS THE ARMS LENGTH TEXT. I.T.A. NO.83/MUM/2011 25 32. WE HAVE CONSIDERED THE SUBMISSIONS OF LD REPR ESENTATIVES OF THE PARTIES AND THE ORDERS OF AUTHORITIES BELOW AS WELL AS THE MAT ERIAL PLACED ON RECORD. WE HAVE ALSO CAREFULLY CONSIDERED EARLIER ORDER OF TRIBUNAL IN A SSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03(SUPRA) AND ALSO THE CASES PLACED ON PAPER B OOK. 33. WE OBSERVE THAT THE ASSESSEE IS A SUBSIDIARY OF JOHNSON & JOHNSON INC. US WHO IS HOLDING 75% SHARES AND THE BALANCE 25% ARE HELD BY DEPUY MEDICAL PRIVATE LIMITED, INDIA. THE ASSESSEE HAS COMPUTED ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS BY USING TNMM. THE ASSESSEE PAID RO YALTY NET OF TAXES ON NET SALES FOR THE USE OF BRANDS TRADE MARK AND FOR THE TECHNICAL /MARKETING KNOW-HOW AS PER TERMS OF AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND J&J US. THE ASSESSEE STATED BEFORE THE TPO THAT IT PAID ROYALTY IN RESPECT OF I TS THREE SEGMENTS I.E. CONSUMER, PHARMACEUTICALS AND MEDICAL DEVICE AS APPROVED BY R BI. WE OBSERVE THAT THE TPO STATED THAT THERE WAS NO BASIS FOR PAYMENT OF ROYAL TY FOR USE OF TRADE MARK/BRAND NAME AS THE PRODUCTS SOLD BY THE ASSESSEE-COMPANY HAD AL READY ACQUIRED A REPUTATION OF QUALITY BEFORE THE CONCLUSION OF THE ROYALTY AGREEM ENT. HE HAS FURTHER STATED THAT RESERVE BANK OF INDIA APPROVAL CANNOT BE CONSIDERE D TO BE ARMS LENGTH BENCH MARK AS THE SAME IS MERELY AN APPROVAL IN THE EXCHANGE C ONTROL POLICY OF THE GOVERNMENT OF INDIA FOR IN-FLOW/OUT-FLOW OF FOREIGN EXCHANGE. HE HAS FURTHER STATED THAT TECHNICAL KNOW-HOW ROYALTY PAID BY ASSESSEE AT THE RATE OF 4 % ON THE BASIS OF AGREEMENT DATED 29.08.2002 FOR ALL THE PRODUCTS AND THAT TOO NET OF TAXES IS NOT AT ARMS LENGTH. TO SUBSTANTIATE HIS FINDING, THE TPO STATED THAT SOM E OF THE PRODUCTS WERE INTRODUCED BY THE ASSESSEE LONG AGO AND TECHNOLOGY IS FULLY AD APTED AND FOR SUCH PRODUCTS ONLY UPDATED TECHNOLOGY AVAILABLE WITH J&J US IS RE QUIRED AND FOR GETTING SUCH UPDATED TECHNOLOGY IT WOULD REQUIRE PAYMENT OF ROYALTY AT A REDUCED RATE. HE HAS FURTHER STATED THAT THERE WAS NO NECESSITY TO PAY ROYALTY ON TR ADED PRODUCTS AND THE SAME IS REQUIRED TO BE ONLY ON MANUFACTURED PRODUCTS. AS MENTIONED HEREINABOVE TPO ALLOWED PAYMENT OF TECHNICAL KNOW-HOW FEE AT THE RA TE OF 1% FOR ALL THE PRODUCTS MANUFACTURED BY ASSESSEE COMPANY AND TRADEMARK/BRAN D NAME PRODUCT AT 1% CONSIDERING IT TO BE AT ARMS LENGTH. DURING THE COURSE OF HEARING, LD. AR SUBMITTED THAT THERE WAS UNDERSTANDING BETWEEN THE ASSESSEE- COMPANY AND J&J US THAT THE ASSESSEE COMPANY IS REQUIRED TO PAY NET OF TAXES TE CHNICAL KNOW-HOW ROYALTY ON MANUFACTURED AND TRADING GOODS AS PER TECHNICAL KN OW-HOW AND SERVICE AGREEMENT AND TO SUBSTANTIATE HIS SUBMISSIONS REFER PAGE 230 OF THE PAPER BOOK WHICH IS A COPY OF LETTER FROM J&J US DATED 3.1.2007. DURING THE HEAR ING, IT WAS POINTED OUT THAT TPO CANNOT DICTATE TO THE ASSESSEE AS TO HOW ASSESSEE SHOULD CONDUCT ITS BUSINESS AND THE I.T.A. NO.83/MUM/2011 26 ASSESSEE CAN INCUR EXPENDITURE. IT IS A FACT THAT A SIMILAR ISSUE WAS CONSIDERED BY ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 VIDE ORDER DATED 28.8.2013 (SUPRA) AND THE TRIBUNAL HELD (VIDE PARA 49) THA T THE AGREEMENT BETWEEN THE ASSESSEE-COMPANY AND J&J US FOR PAYMENT OF ROYALTY IS TO BE CONSIDERED IN THE LIGHT OF APPROVAL OF RBI. THE TRIBUNAL HAS ALSO OBSERVED THAT THERE IS NO SUBSTANCE IN THE FINDINGS OF THE TPO THAT THERE IS NO NEED FOR PAYIN G ROYALTY FOR TECHNICAL/MARKETING KNOW-HOW AND ACCORDINGLY CONFIRMED THE ORDER OF LD. CIT(A) BY DISMISSING THE GROUND OF APPEAL TAKEN BY DEPARTMENT BEFORE TRIBUNAL ON SIMI LAR FACTS EXCEPT THAT TECHNICAL KNOW-HOW ROYALTY PAID IN THE ASSESSMENT YEAR 2002-0 3 WAS AT THE RATE OF 2% WHEREAS IN THE ASSESSMENT YEAR UNDER CONSIDERATION IT IS AT THE RATE OF 4% ON SALES. HOWEVER, IT WAS CONTENDED THAT PAYMENT OF ROYALTY AT THE E NHANCED RATE OF 4% IS PAID AS PER AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE-COMPANY AND J&J US DATED 29.8.2002, COPY PLACED AT PAGES 176 TO 178 OF THE PAPER BOOK . THAT IT WAS SUBMITTED THAT PAYMENT OF ROYALTY AT THE RATE OF 4% IS AS PER R BI FORMULA AND THE AVERAGE ROYALTY RATE FOR COMPARABLE TECHNICAL KNOW-HOW /MARKETING K NOW-HOW APPROVAL WORKED OUT TO 4.84% ON SALES AND THEREFORE ROYALTY OF 4% PAID B Y ASSESSEE TO J&J US IS LESSER THAN ARMS LENGTH OF 4.84%. THE SAID FACT HAS NOT BEEN D ISPUTED BY LD. DR AT THE TIME OF HEARING EXCEPT THAT THE TPO WHILE MAKING THE DISAL LOWANCE AND CONSIDERING THE ARMS LENGTH ADJUSTMENT DID NOT APPLY ANY PARTICULAR ME THOD AND THEREFORE IT BE SENT BACK TO TPO TO APPLY A PARTICULAR METHOD TO DETERMINE ARMS LENGTH PRICE. SINCE ASSESSEE HAS PLACED RELEVANT MATERIAL ON RECORD AND THE SAM E HAS NOT BEEN DISPUTED BY LD. DR THAT THE PAYMENT OF TECHNICAL KNOW-HOW ROYALTY BY ASSESSEE IS AS PER RBI FORMULA AND THE SAME IS LOWER THAN THE AVERAGE ROYALTY RATE FOR THE COMPARABLE TECHNICAL KNOW- HOW/MARKETING KNOW-HOW ROYALTY FOR CONSUMER, HEALTH CARE PRODUCTS, PHARMACEUTICAL PRODUCTS AND MEDICAL DEVICE, WE ARE OF THE CONSIDER ED VIEW THAT NO DISALLOWANCE CAN BE MADE BY TPO THE BASIS THAT THERE WAS NO NECESSITY BY THE ASSESSEE TO PA Y ROYALTY AT THE ENHANCED RATE OF 4% AS IT WAS EXCESSIVE AND UN NECESSARY. WE ARE OF THE CONSIDERED VIEW THAT RULE 10B(1) OF INCOME TAX RULE S, 1962 DOES NOT AUTHORIZE THE TPO TO MAKE DISALLOWANCE OF ANY EXPENDITURE ON THE GROU ND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF REVENUE, THE EXPENDITURE WAS UN-REMUNERATIVE. SUCH KIND OF OBSERVATIONS AND THEREAFTER TO MAKE DISALLOWANCE BY TPO WHILE CONSIDERING THE PRIC E AT ARMS LENGTH ARE OUTSIDE HIS PURVIEW. WHETHER OR NOT TO ENTER IN TO THE TRANS ACTIONS FOR MAKING A PARTICULAR PAYMENT IS FOR THE ASSESSEE TO DECIDE. THERE IS N O DOUBT THAT THE QUANTUM OF EXPENDITURE CAN BE EXAMINED BY TPO AS PER LAW BUT IN JUDGING THE ALLOWBILITY THEREOF AS BUSINESS EXPENDITURE, TPO HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR I.T.A. NO.83/MUM/2011 27 PART THEREOF ON THE GROUND THAT THE SAID EXPENDITUR E IS EXCESSIVE. WE OBSERVE THAT WHAT THE TPO HAS DONE IS TO HOLD THAT THE ASSESSEE NEED NOT PAY THE ROYALTY ON THE TRADED PRODUCTS OR AT THE RATE AS AGREED TO BETWEE N THE ASSESSEE AND J&J US ON THE BASIS OF HIS PRESUMPTIONS AND ASSUMPTIONS. THE TPO HAS TO EXAMINE WHETHER PRICE PAID OR THE AMOUNT PAID WAS AT ARMS LENGTH UNDER THE PROVISIONS OF TRANSFER PRICING AND ITS RULES. THE RULES DO NOT AUTHORIZE THE TPO T O DISALLOW THE EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME. IT IS RELEVANT TO STATE THAT THE LD.AR STATED THAT THE AVERAGE ROYALTY PAID BY ASSESSEE IS COMPARABLE AND IT IS LOWER THAN THE ARM S LENGTH RATE OF 4.84% AS PER INFORMATION AVAILABLE ON WEBSITE OF SIA WHICH P ROVIDES RATE WHICH IS APPROVED BY SIA/RBI. WE ARE OF THE CONSIDERED VIEW THAT THE TPO CANNOT SUGGEST THE DISALLOWANCE MERELY BECAUSE AS PER HIS ASSUMPTION I T IS EXCESSIVE THOUGH THE PAYMENT IS AT ARMS LENGTH. IN VIEW OF ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE DISALLOWANCE SUGGESTED BY TPO AND CONFIRMED BY DRP/AO OF THE RO YALTY PAID BY ASSESSEE, WHEN HE HAS NOT FOUND THAT THE PAYMENT IS NOT AT ARMS LENG TH/EXCESSIVE UNDER ANY OF THE METHOD AS PRESCRIBED U/S 92C(1) OF THE ACT, CAN NO T BE MADE UNDER THE TRANSFER PRICING PROVISIONS. THEREFORE, WE DIRECT TO DELET E THE SAME AND CONSEQUENTIAL GROUND NOS.14 AND 15 OF THE APPEAL TAKEN BY ASSESSEE ARE ALLOWED. 34. IN RESPECT OF GROUND TAKEN BY ASSESSEE FOR MAKI NG DISALLOWANCE ON ACCOUNT OF TAX, SERVICE TAX PAID BY ASSESSEE ON THE PAYMENT OF ROYALTY, WE OBSERVE THAT THE SAID ISSUE HAS ALREADY BEEN CONSIDERED BY TRIBUNAL IN AS SESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002-03 (SUPRA) AND THE TRIBUNAL H AS HELD AFTER CONSIDERING THE AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE AND J &J US AND ALSO THE DECISION IN THE CASE OF DRESSER RAND INDIA P. LTD. (SUPRA) THAT THE TAXES WERE LIABILITY OF THE ASSESSEE- COMPANY UNDER THE TERMS OF AGREEMENTS AND ACCORDIN GLY DISALLOWANCE MADE BY AO WERE DELETED. FURTHER, WE ALSO OBSERVE THAT LIA BILITY OF PAYMENT OF SERVICE TAX IS OF RECIPIENT OF SERVICES AND SINCE ASSESSEE IS THE RE CEIVER OF SERVICES, IT IS THE LIABILITY OF THE ASSESSEE COMPANY TO BEAR SERVICE TAX. HENCE WE HOLD THAT TPO WAS NOT JUSTIFIED TO STATE THAT LIABILITY OF BEARING SERVICE TAX WAS O F ASSESSEE-COMPANY. IN VIEW OF ABOVE, WE HOLD THAT DISALLOWANCES MADE BY TPO ON ACCOUNT OF TAXES, SERVICES TAX IS NOT JUSTIFIED AND WE DIRECT TO DELETE THE SAME. HENCE , GROUND NOS.12, 13 AND 17 OF THE APPEAL TAKEN BY ASSESSEE ARE ALLOWED. 35. IN RESPECT OF DISALLOWANCE OF TAX AND R&D CES S PAID ON TECHNICAL KNOW-HOW ROYALTY ON TRADED FINISHED GOODS AND MANUFACTURED PRODUCTS, WE OBSERVE THAT THE SAID I.T.A. NO.83/MUM/2011 28 ISSUE WAS ALSO CONSIDERED BY TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2002-03 AND THE TRIBUNAL (VIDE PARA 42 OF THE OR DER) HELD THAT SAID PAYMENTS HAVE BEEN MADE BY ASSESSEE IN THE LIGHT OF AGREEMENT WI TH J&J US AND AS PER APPROVAL/GUIDELINES OF RBI AND ACCORDINGLY DIRECTE D THE AO TO DELETE THE DISALLOWANCE/ TAX AND R&D CESS PAID ON TECHNICAL ROYALTY. RESP ECTFULLY FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE AND ALSO CONSID ERING THE ALTERNATIVE CONTENTION OF ASSESSEE THAT R&D CESS AND SERVICE TAX CANNOT BE TR EATED AS INTERNATIONAL TRANSACTION, IN VIEW OF THE DECISION OF ITAT, PUNE BENCH IN THE CASE OF KIRLOSKAR EBARA PUMPS LTD(SUPRA), WE DELETE THE DISALLOWANCE MADE BY AO /DRP OF TAX AND R&D CESS PAID ON TECHNICAL KNOW-HOW ROYALTY ON TRADED GOODS AND MANU FACTURED PRODUCTS BY ALLOWING GROUND NO.16 OF THE APPEAL TAKEN BY THE ASSESSEE. 36. GROUND NO.18 OF APPEAL TAKEN BY ASSESSEE READS AS UNDER : 18. THE LD.AO/TPO HAS ERRED IN LAW AND IN FACTS B Y DISALLOWING PART OF PUBLICITY AND SALES PROMOTION EXPENSES ON THE GROUN D THAT SUCH EXPENSES BENEFITS J&J US IN THE FORM OF HIGHER ROYALTY ON IN CREASED SALES. WITHOUT PREJUDICE TO THE ABOVE, SINCE THE EXPENDI TURE INCURRED ON PRODUCTION OF ADVERTISEMENT FILMS, PROFESSIONAL SPONSORSHIP AND O N FREE SAMPLES HAS BEEN SEPARATELY DISALLOWED BY THE AO, TRANSFER PRICING A DJUSTMENT SHOULD BE MADE ONLY ON THE ALLOWED PUBLICITY AND SALES PROMOTION E XPENSES. 37. RELEVANT FACTS ARE THAT THE TPO HAS STATED THA T THE ASSESSEE INCURRED PUBLICITY AND SALES PROMOTION EXPENSES OF RS.163.27 CRORES D URING THE RELEVANT FINANCIAL YEAR. THE TPO HAS STATED THAT SAID EXPENSES ON PUBLICITY AND SALES PROMOTION HAS RESULTED INTO HIGHER SALES ON WHICH CORRESPONDINGLY HIGHER ROYALTY HAS BEEN PAID TO THE PARENT COMPANY J&J US. THEREFORE, THE BENEFIT OF HIGHER PU BLICITY AND SALES PROMOTION EXPENSES ARE ACCRUED TO THE PARENT COMPANY J&J US B UT THE COST THEREOF IS NOT APPORTIONED TO THE PARENT COMPANY. THE TPO SOUGHT EXPLANATION FROM THE ASSESSEE AS TO WHY THE COST OF ARRANGEMENT AS EMANATING FROM T HE RECORDS, IS RESULTING INTO THE BENEFIT TO THE PARENT AE, BUT NOT APPORTIONED AS PER SECTION 92(2) OF THE ACT. THE TPO STATED THAT THE ASSESSEE AND THE PARENT COMPAN Y J&J US SHOULD HAVE SHARED SALES PROMOTION EXPENSES IN THE RATIO OF ROYALTY TO SALES OR WOULD HAVE RENEGOTIATED A LOWER ROYALTY RATE. THE ASSESSEE FILED ITS REPLY STAT ING INTERALIA THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF DISTRIBUTING THE PRODUCTS IN THE IN DIAN MARKET ON ITS OWN ACCOUNT. IT WAS ALSO CONTENDED THAT THE ADVERTISEMENT AND MARK ETING EXPENSES ARE INCURRED IN INDIA ONLY FOR PROMOTING SALES BY ASSESSEE OF ITS P RODUCTS IN INDIA AND IT IS NOT IN ANY WAY BENEFITED TO J&J US. THAT J&J US IS NOT DIRECT LY INVOLVED IN THE BUSINESS OF I.T.A. NO.83/MUM/2011 29 MANUFACTURING OR TRADING OF SAID GOODS IN INDIA E ITHER OF ITS OWN OR THROUGH ANY OF ITS SUBSIDIARY. HENCE, THE ENTIRE ADVERTISEMENT AND MAR KETING EXPENSES INCURRED ARE PURELY FOR ASSESSEES OWN BENEFIT AND THERE IS NO ELEMEN T OF ANY SERVICE BEING RENDERED TO J&J US. IT WAS ALSO STATED THAT ASSESSEE-COMPANY IS AN INDEPENDENT RISK BEARING ENTITY AND ANY COST INCURRED TOWARDS ADVERTISEMENT AND MARKETING WOULD BE FOR THE SOLE BENEFIT OF ASSESSEE-COMPANY, AS IT ENJOYS TH E INCREASED SALES OF PRODUCTS AS A RESULT OF SUCH MARKETING ACTIVITIES. THE ASSESSEE ALSO FURNISHED DETAILS OF PUBLICITY AND SALES PROMOTION EXPENSES BEFORE TPO. HOWEVER, T PO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND STATED THAT THE SAID GROWTH IN NET SALES SO ACHIEVED THROUGH HIGHER AND HIGHER PUBLICITY AND SALES PROMOTION A ND EXPENSES HAVE RESULTED INTO HIGHER PAYMENT OF ROYALTY WHICH THE ASSESSEE IS PAY ING AT A FIXED PERCENTAGE OF SALES TO ITS PARENT COMPANY. THUS, THERE IS A CO-RELATION BETWEEN THE ROYALTY PAYMENT AND SALES ON THE ONE HAND AND PUBLICITY AND SALES PROMOTION E XPENSES ON THE OTHER HAND AND IT IS NOT A MATTER OF COINCIDENCE. THE TPO AFTER CONSIDE RING THE SUBMISSIONS OF ASSESSEE HAS STATED THAT J&J US, THE PARENT COMPANY OF THE ASSE SSEE IS REAPING THE BENEFIT OF HIGHER ROYALTY YEAR AFTER YEAR AS A RESULT OF HIGH ER SALES REALIZED BY ASSESSEE THROUGH HIGHER AND HIGHER EXPENSES BY WAY OF PUBLICITY AND SALES PROMOTION UNDERTAKEN BY ASSESSEE WITHOUT THE OVERSEAS AE BEARING ANY COS T THERETO HE STATED THAT IT CONSTITUTES ARRANGEMENT BETWEEN THE TWO ENTITIES W HEREIN THE ENTIRE COST IS BORNE BY ASSESSEE, WHEREAS THE PARENT COMPANY J&J US IS GETT ING ITS SHARE OF BENEFIT FROM THOSE INCREASED SALES. THE TPO WORKED OUT THE COS T AT THE RATE OF 4.22 % OF THE PUBLICITY AND SALES PROMOTION EXPENSES WHICH COMES TO RS.6.88 CRORES. HOWEVER, THE TPO STATED THAT THE COST IS RESTRICTED TO 200.82 LAKHS (BEING 1.23% OF RS.163.27 CRORES) IN VIEW OF DISALLOWANCE/ADJUSTMENT IN INC OME MADE ON ACCOUNT OF ROYALTY ON TECHNICAL KNOW-HOW, THE INCOME TAX, R&D CESS AND S ERVICE TAX PAID THEREON AGGREGATING TO RS.41.27 CRORES OUT OF TOTAL PAYMENT OF RS.58.37 CRORES. HENCE, TPO DISALLOWED RS.200.82 LAKHS FROM THE PUBLICITY AND SALES PROMOTION EXPENSES INCURRED TOWARDS COST ALLOCABLE TO PARENT COMPANY. DRP AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE COMPANY CONFIRMED THE ACTION OF THE TPO. ACCORDINGLY THE AO DISALLOWED A SUM OF RS.200.82 LAKHS WHILE MAKING ASSESSMENT. H ENCE, ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 38. DURING THE COURSE OF HEARING, LD. AR SUBMITTED THAT IT WAS AN ADHOC DISALLOWANCE MADE BY TPO AND RELIED ON THE DECISION OF MUMBAI BE NCH OF TRIBUNAL IN THE CASE OF KODAK INDIA PVT. LTD. V/S ADDL. COMMISSIONER OF INC OME TAX IN ITA NO.7349/MUM/2012 (AY 2008-09) DATED 30.04.2013 AND SUBMITTED THAT T HE TRIBUNAL DELETED SIMILAR KIND I.T.A. NO.83/MUM/2011 30 OF ADJUSTMENT SUGGESTED BY TPO ON THE GROUND THAT TPO CANNOT MAKE A DISALLOWANCE WHICH IS NOT WITHIN THE PRECINCT OF SPECIFIC METHOD PRESCRIBED UNDER SECTION 92C(1) OF THE ACT. HE SUBMITTED THAT NO ADHOC DISALLOWANCE CAN BE MADE UNDER THE TRANSFER PRICING PROVISIONS. 39. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDER OF AO/TPO AND SUBMITTED THAT TO CONSIDER MARKETING EXPENSES THE COST PLUS METHOD COULD BE APPLIED. SINCE TPO HAS NOT FOLLOWED ANY SPECIFIC METHOD AS 2006-07 IS THE FIRST YEAR, THE MATTER COULD BE RESTORED TO TPO TO DECIDE IT AFRESH AFTER CONSIDERI NG THE GUIDELINES LAID DOWN BY SPECIAL BENCH (DELHI) IN THE CASE OF L.G. ELECTRONICS INDIA (P.) LTD. V/S ACIT (2013)140 ITD 41(DEL) (SB). HE SUBMITTED THAT THE AE, PARENT CO MPANY OF THE ASSESSEE SHOULD REIMBURSE THE EXPENSES AS ASSESSEE COMPANY HAS CREATED BRAND IN INDIA WHICH IS OWNED BY PARENT COMPANY BY INCURRING THE EXPENDITU RE. 40. WE HAVE CONSIDERED THE ORDER OF THE TPO/AO AN D THE SUBMISSIONS OF LD. REPRESENTATIVES OF THE PARTIES. WE OBSERVE THAT TH E TPO HAS SUGGESTED DISALLOWANCE ON THE GROUND THAT THE AE OF THE ASSESSEE VIZ J&J US IS REAPING THE BENEFIT OF HIGHER ROYALTY AMOUNT AS A RESULT OF HIGHER SALES REALI ZED BY ASSESSEE BY INCURRING HIGHER EXPENSES BY WAY OF PUBLICITY AND SALES PROMOTION UN DERTAKEN BY ASSESSEE AND THEREFORE THE PARENT COMPANY OF THE ASSESSEE-COMPAN Y SHOULD SHARE SOME OF THE EXPENSES. IT IS A FACT THAT TPO WHILE SUGGESTING ANY DISALLOWANCE/ADJUSTMENT HAS TO STATE THAT THE TRANSACTIONS BETWEEN THE ASSESSEE-C OMPANY AND ITS AE IS NOT AT ARMS LENGTH. THE TPO IS TO DETERMINE THE ARMS LENGTH BY FOLLOWING ONE OF THE METHOD AND /OR MOST APPROPRIATE METHOD AS PRESCRIBED IN S ECTION 92C(1) OF THE ACT. THE TPO CANNOT SUGGEST ADJUSTMENT/DISALLOWANCE ON THE BASIS OF HIS ASSUMPTIONS THAT THE PAYMENT IS EXCESSIVE THOUGH IT IS AT ARMS LENGTH. SIMILAR ISSUE WAS ALSO CONSIDERED BY ITAT MUMBAI BENCH IN THE CASE OF KODAK INDIA PVT. LTD.(SUPRA). FURTHER, RULE 10B SPECIFICALLY PROVIDES THE PROCEDURE TO BE FOLLO WED FOR DETERMINING ARMS LENGTH PRICE. WE OBSERVE THAT THE TPO WHILE SUGGESTING THE DISA LLOWANCE OF 200.82 LAKHS OUT OF THE EXPENSES INCURRED BY ASSESSEE ON PUBLICITY AND SALES PROMOTION HAS NOT FOLLOWED ANY OF THE METHOD AND THEREFORE THE SAID ADJUSTMENT /DISALLOWANCE SUGGESTED BY TPO IS OUTSIDE ITS JURISDICTION. DURING THE COURSE OF HE ARING, LD. DR SUBMITTED THAT THE MATTER COULD BE RESTORED TO TPO TO DECIDE AFRESH AFTER CO NSIDERING THE GUIDELINES LAID DOWN BY SPECIAL BENCH (DELHI) IN THE CASE OF L.G. ELECTRONI CS INDIA (P.) LTD. (SUPRA). SINCE NO SPECIFIC SUBMISSIONS WERE MADE AND CONSIDERING TH E FACT THAT THE ASSESSEE JUSTIFIED THE PAYMENT OF TECHNICAL KNOW-HOW ROYALTY AT THE RA TE OF 4% OF NET SALES WHICH IS I.T.A. NO.83/MUM/2011 31 LOWER THAN ARMS LENGTH RATE OF 4.84% AND THE SAID FACT, WE HAVE ALSO DISCUSSED HEREIN ABOVE IN PARA 33 OF THIS ORDER, THAT THE PA YMENT OF ROYALTY BY ASSESSEE TO ITS PARENT COMPANY IS AT ARMS LENGTH, WE DO NOT FIND A NY JUSTIFICATION TO MAKE THE SAID DISALLOWANCE OF RS.200.82 LAKHS AS SUGGESTED BY TP O TOWARDS THE SHARES TO BE CONTRIBUTED BY AE OF THE ASSESSEE-COMPANY. THEREF ORE, WE DELETE THE SAID DISALLOWANCE MADE BY AO BY ALLOWING GROUND NO.18 OF THE APPEAL TAKEN BY ASSESSEE. 41. GROUND NO.19 OF THE APPEAL TAKEN BY ASSESSEE IS IN RESPECT OF CHARGING OF INTEREST U/S 234B AND 234D OF THE ACT. 42. SINCE CHARGING OF INTEREST IS CONSEQUENTIAL ONE NO SPECIFIC ADJUDICATION IS REQUIRED, THEREFORE DISMISSED. 43. IN GROUND NO.20, THE ASSESSEE HAS STATED THAT AO HAS ERRED IN INITIATING THE PENALTY PROCEEDINGS U/S 274 R.W.S. SECTION 271 OF THE ACT. 44. SINCE THE SAID GROUND IS PREMATURE AND HENCE TH E SAME IS REJECTED. 45. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH FEBRU ARY, 2014 ( 0 1 5TH FEBRUARY, 2014 ( SD SD ( . / D. KARUNAKARA RAO) ( . . /B.R.MITTAL) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 1 DATED 5 / 02/2014 . . ./ SRL , SR. PS ! / COPY OF THE ORDER FORWARDED TO : 1. # / THE APPELLANT 2. $# / THE RESPONDENT. 3. 5 ( ) / THE CIT(A)- 4. 5 / CIT 5. 6 $8 , + 8 , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) + 8 , /ITAT, MUMBAI
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