AMP expense can’t be disallowed, Merely because Excess amount has been spent on Advertisement

Gillatte India Ltd. Vs ACIT (ITAT Jaipur)

The issue under consideration is Whether the TPO was legally justified in holding that Advertisement marketing and Promotion (AMP) expenditure was not an international transaction even though the assessee was performing Development, Enhancement, maintenance, protection and Exploitation (DEMPE) functions for its AE and doing activity of brand building?

ITAT states that, the expenses of the associated enterprise (AE) for creating marketing intangibles and promoting the brand name of its AE, it is for the marketing people to look new products which has competition in the national level or grass route level and International level. It is always for the Company to decide on what ratio the expenses are to be incurred at grass route and on that ratio for promoting their product. In that view of the matter, unless the amount which was found to be not genuine merely because excess amount has been spent on advertisement, will not be a ground for disallowing the expenses. Therefore, respectfully following the decision of Hon’ble Rajasthan High Court in assessee’s own case, the adjustment on account of AMP expenses is hereby directed to be deleted.

FULL TEXT OF THE ITAT JUDGEMENT

This is an appeal filed by the assessee against the order of ACIT Circle 2, Alwar under section 143(3) r/w 144C(13) of the Act dated 23.10.2018 for Assessment Year 2014-15.

2. Ground No. 1 of assessee’s appeal is general in nature against the order passed by the Assessing officer pursuant to directions of the DRP. It does not require any separate adjudication as each of the issues are being dealt with while disposing off specific grounds of appeal in subsequent paragraphs. The ground of appeal is thus dismissed.

3. In Ground No. 2.1 to 2.5, the assessee has effectively challenged the action of the lower authorities in making a transfer pricing adjustment in relation to AMP expenses to the tune of Rs 59,70,96,832/- to the returned

4. During the course of hearing, the ld AR, referring to the proceedings before the Transfer Pricing officer, submitted that the TPO alleged that the appellant was undertaking development, enhancement, maintenance, protection and exploitation (‘DEMPE’) function for its AE. According to the TPO, by incurring excessive AMP spend, the appellant was creating/ adding value to the intangibles legally owned by its AE and therefore he concluded that such excessive/ non-routine AMP expense constituted an ‘international transaction’ in terms of Section 92B r.w.s 92F (v) of the Act. To support his case, the TPO has placed reliance on the Hon’ble Delhi High Court decision in the case of Sony Ericsson Mobile Communications I. Pvt. Ltd. vs. CIT (ITA No. 16/2014). Thereafter, applying Bright Line Test, the TPO compared the AMP spend of the appellant (as a percentage of sales) with that of the comparable companies and concluded that difference between ratio of AMP/ Sales of the appellant and that of the comparable companies (i.e. 14.87% minus 11.46%) was excessive/ non-routine. Such excess, according to the TPO, should have been reimbursed by the AE holding legal ownership in the brand name i.e. The Gillette Company, USA (TGC, USA). Further, the TPO also erroneously inferred that the appellant has rendered services to its overseas AEs by incurring additional AMP expenses and applied a mark-up of 17.89% (based on margins earned by comparable companies providing marketing support services) on the incremental AMP spend and proposed an adjustment to the appellant’s income by Rs. 66.91 crore. Aggrieved by the aforesaid TP Adjustment, the appellant approached the DRP which has completely disregarded the submissions of the appellant and has held that issue of AMP was pending before the Hon’ble Supreme Court (as Department has filed SLP in several cases against the favourable decisions of Hon’ble Delhi High Court) and therefore, the adjustment made by the TPO was to be upheld. However, the DRP directed the TPO to exclude a few companies selected by the TPO for computation of markup on the AMP adjustment. Accordingly, the adjustment has reduced from Rs. 66,91,23,056 (as per the TPO’s Order) to Rs. 59,70,96,832. Aggrieved by the DRP’s directions, the appellant has now approached the Tribunal for seeking necessary relief.

5. It was submitted by the ld AR that the Tribunal, in the appellant’s own case for the previous four assessment years (A.Y 2009-10, A.Y 2010-11, A.Y 2011-12 and A.Y 2012-13) has deleted the adjustment on account of AMP expenses by holding that incurrence of AMP per sedoes not constitute an international transaction unless the Revenue was able to prove the existence of any arrangement/ agreement de hors the application of Bright Line Test (‘BLT’). The Tribunal further held that the application of Bright Line Test to ascertain the existence of the alleged international transaction was not permissible under the Indian Transfer Pricing Regulations. To hold the aforesaid, the Tribunal relied on the on’ble Delhi High Court decision in the case of Maruti Suzuki India (ITA 110/2014). Since de hors the application of Bright Line Test, the Revenue had failed to demonstrate the existence of an international transaction, the Tribunal had deleted the entire AMP adjustment. The elevant extract of the order for the lead assessment year i.e. AY 2009- 10 (ITA No. 01/ JP/2013) reads as under:

“4.17 Applying the above legal proposition to the facts of the present case, it is not a case of the Revenue that there existed an understanding or an arrangement or an action in concert between the assessee-company and its foreign AE to incur AMP expenditure to promote the brand value of the products manufactured and distributed by the assessee company. Merely because the assessee-company incurred excessive AMP expenditure compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. As held in the case of Sony Ericsson case, application of Bright Line Test as a tool to ascertain an alleged international transaction is not permissible under the Indian TP regulations. The onus is on the Revenue to demonstrate that de hors the BLT an AMP expense incurred by the taxpayer constitutes an international transaction which has not been discharged in the instant case. The Revenue has failed to demonstrate the existence of an international transaction. Therefore, the question of determination of ALP on such transaction does not arise. Respectfully following the ratio decidendi of the Hon’ble Delhi High Court in the case of Maruti Suzuki and subsequent Hon’ble Delhi High Court decisions referred supra, we hold that AMP expenditure incurred by the assessee cannot be treated and categorised as an international transaction under section 92B of the Act. In light of the above, the additional ground no. 7 raised by the assessee company is allowed in favour of the assessee company. In view of additional ground decided in favour of the assessee-company, ground no. 2 doesn’t arise for consideration. The AO is directed to delete the adjustment on account of AMP spend by the Appellant.”

6. It was further submitted by the ld AR that the aforesaid ratio of the Tribunal decision has been followed by the Tribunal in subsequent assessment years i.e, AY 2010-11, AY 2011-12 and AY 2012-13. It was submitted that the Revenue’s appeal against the aforesaid orders for AY 2009-10 (ITA no. 40/2017), AY 2010-11 (ITA no. 39/2017) and AY 2011-12 (ITA no. 341/2017) have since been dismissed by the Hon’ble Rajasthan High Court on merits.

7. It was submitted that similar to the factual matrix for the previous years, in the year under consideration also, the TPO has arrived at the cost/ value of the international transaction by application of Bright Line Test. De hors the application of Bright Line Test, the TPO has not been able to demonstrate that the appellant was obliged to incur AMP expenses on behalf of its AE or that the AMP expenses were incurred at the behest of its AE. Nowhere in the TP assessment order, the TPO has been able to show that there exists an arrangement or an agreement for incurrence of AMP expenses by the appellant on behalf of its AE. Accordingly, it was submitted that the issue is wholly covered in favour of the appellant by various Tribunal and High Court orders in the appellants’ own case and therefore, the adjustment on account of AMP may be

8. Per contra, the ld CIT/DR relied upon and supported the order of the lower authorities. Regarding the order passed by the Hon’ble Rajasthan High Court for A.Y 2009-10 and 2010-11, it was submitted that the Department has not accepted the said decisions and has filed an SLP against the said decisions before the Hon’ble Supreme Court.

9. We have heard the rival contentions and perused the material available on record. Undisputedly, there are no changes in the facts and circumstances of the case as compared to the earlier years wherein the matter has been consistently decided in favour of the assessee by the Coordinate Benches and which has since been upheld by the Hon’ble Rajasthan High Court. In DB ITA No. 40/2017 & 39/2017 dated 18.07.2017 for A.Y. 2009-10 & 2010-11, the substantial questions of law framed for consideration before the Hon’ble Rajasthan High Court read asunder:-

“3. Counsel for the department has framed following substantial question of law no. 1,2, & 3 which are common in both these appeal and the same reads as under:-

“1. Whether the Tribunal was illegally justified in deleting the addition of Rs. 87,12,49,257/- (in appeal no. 39/2017) and Rs. 1,10,87,46,190/- (in appeal no . 40/2017) being adjustment on account of compensation to be received by the assessee from its Associated Enterprise (AE) for creating marketing intangibles and promoting the brand name of its AE, specially when the assessee company was promoting marketing intangibles of its AE though the brand belongs to the AE and not to the assessee and the products manufactured by the assessee are also manufactured by the AE and its other subsidiaries in different countries with the same name?

2. Whether the Tribunal was legally justified in holding that Advertisement marketing and Promotion (AMP) expenditure was not an international transaction even though the assessee was performing Development, Enhancement, maintenance, protection and Exploitation (DEMPE) functions for its AE and doing activity of brand building?”

And the relevant findings of the Hon’ble Rajasthan High Court wherein the matter has been decided in favour of the assessee reads as under:-

“6.1 Regarding issue no. 1, 2 &3, tribunal while considering the expenses of the associated enterprise (AE) for creating marketing intangibles and promoting the brand name of its AE, it is for the marketing people to look new products which has competition in the national level or grass route level and International level. It is always for the Company to decide on what ratio the expenses are to be incurred at grass route and on that ratio for promoting their product.

6.2 In that view of the matter, unless the amount which was found to be not genuine merely because excess amount has been spent on advertisement, will not be a ground for disallowing the expenses.

6.3 In that view of the matter, on issue 1 & 2, we are of the view that the tribunal has not committed any error. The issue are answered in favour of the assessee.”

10. The aforesaid decision has been followed by the Hon’ble Rajasthan High Court while disposing off the department’s subsequent appeal in DB Appeal no. 341/2017 dated 6.02.2018 for A.Y 2011-12. Further, mere filing an SLP before the Hon’ble Supreme Court against the aforesaid decision of the Hon’ble jurisdictional High Court in asseseee’s own case cannot be a reason for not following the said decision. The decision of the jurisdictional High Court is binding on this Tribunal as well as on the DRP. Nothing has been brought on record which suggests that the said decision of the Hon’ble Rajasthan High Court has been stayed, therefore, respectfully following the decision of Hon’ble Rajasthan High Court in assessee’s own case, the adjustment on account of AMP expenses is hereby directed to be deleted. In the result, ground no. 2 of the assessee’s appeal is allowed.

11. In Ground No.3, the assessee has challenged the transfer pricing adjustment on account of Business Support services amounting to Rs.4,03,72,348/-.

12. During the course of hearing, the ld AR submitted that the DRP has given substantial relief and directed the Assessing Officer to compute the adjustment on account of business support services availed by the appellant from its AEs at a cost plus 5% instead of cost plus 7% claimed by the appellant. However, while giving effect to the directions of the DRP, the AO incorrectly computed the amount of adjustment. The appellant has filed a rectification application on 11 September 2019 under section 154 of the Act before the AO for rectifying the said mistake apparent from record. On disposal of the same, the amount of adjustment shall stand at Rs. 26,41,182 instead of Rs. 4,03,72,348 as currently computed in the final assessment order. Accordingly, the appellant does not wish to press this ground of appeal on account of smallness of amount and the same should however, not be construed against the appellant in any manner whatsoever.

13. The ground of appeal no. 3 is thus dismissed as not pressed by the ld AR during the course of

14. In Ground No. 4, the assessee has challenged the transfer pricing adjustment to the tune of Rs. 16,49,06,644/- in relation to payment of royalty.

15. The ld AR submitted that the appellant is a listed company engagedin the manufacturing of personal care products which includes blades, razors and cartridges, shaving system and brushes. During the year, the appellant, inter-alia, entered into the transaction for payment of royalty, as per the Intellectual Property license agreement in respect of Gillette grooming products entered into with The Gillette Company, USA with effect from 1 April 2010. As per the said license agreement, the appellant has been granted a non-exclusive license to manufacture, process and package ‘Gillette’ products and an exclusive right to distribute and sell the said products within the territory of India under the applicable Trademarks using the Proprietary Information and under any applicable Patents and Patent application. In consideration of the rights and licenses granted to the appellant, it has agreed to pay Gillette USA, royalty equal to 4.5% of the Net Outside Sales. The said royalty is paid to Gillette USA for the licensed technology and trademarks of Gillette USA.

16. It was submitted by the ld AR that while bench marking the aforesaid royalty transaction, the appellant applied external CUP in the form of royalty rates from Royalty Stat database thereby arriving at a set of 10 comparables with an average royalty rate of 5.56% as against the royalty rate of 4.5% paid by the appellant. Accordingly, the transaction was considered to be at arms’ length in the TP Study bench marking

17. It was submitted by the ld AR that during the course of TP assessment proceedings, the TPO required the appellant to justify the payment for royalty to its AE. Accordingly, the appellant vide submission dated 6 September 2017, filed detailed submissions justifying the payment for royalty, benefits derived from payment of royalty along with the various documentary evidences in the form of License Agreement and bench marking analysis. However, as per the TPO, the appellant failed to prove that it had obtained consequential benefit of economic or commercial value against the said payment of royalty and therefore, such royalty payments were not justified/ required to be made. Further, without providing any show-cause to the appellant, the TPO concluded that royalty agreements used by the appellant for bench marking purposes were not comparable. The TPO also identified two agreements as comparable searched on worldwide basis in Royal Stat database and held the arms’ length rate of royalty payment to be 1%. Despite the aforesaid, the TPO determined the arms’ length price of such royalty payment to be ‘NIL’.

18. It was further submitted by the ld AR that before the DRP, the appellant vide letter dated 2 July 2018 filed additional evidence in the form of internal comparable agreements wherein third parties have been paying royalty to Procter & Gamble group entities for similar products. It was explained before the DRP that the TPO did not confront the appellant with the details of the alleged comparable agreements used by him for bench marking the royalty transaction. Further, the agreements considered by the TPO pertained to a transaction between the Appellants’ AEs and third parties. Accordingly, after the receipt of the TPO order, the Appellant approached its AEs in order to verify the comparability of the proposed agreements. Upon scrutiny, it was found that those agreements (used by the TPO) were prima facie not comparable. Accordingly, in order to provide a better comparability, the appellant submitted a set of internal comparables before the DRP as additional evidence. Pursuant to filing of additional evidence, the DRP called for a remand report from the TPO. The TPO, vide his reply dated 26 July 2018 in the remand proceedings, submitted that the additional evidence in the form of bench marking analysis has to be rejected since the appellant had failed to justify the payment for royalty. Thereafter, the DRP simply agreed with the reasoning given by the TPO in the remand report and thereby upheld the adjustment proposed by the TPO and against the said findings, the appellant is in appeal before the Tribunal.

19. Firstly, regarding justification and commercial expediency for payment of Royalty, it was submitted that during FY 2010-11, Appellant introduced the following two new products and paid royalty in respect of the same:

a) Gillette Guard shaving system,and

b) Gillette Mach3Razors:

20. It was submitted that the manufacturing facility set up at Baddi, Himachal Pradesh for both the above mentioned products were as per supervision and direction of Gillette USA. The technical assistance/ know-how provided comprised of plant design, manufacturing process, selection of capital equipment, and their sourcing. For example, technology for Cartridge Assembly machines, extruded over cap machine, Red Pack packing machines were all provided by Gillette USA. The formula cards for the said products and material specifications for raw materials/packing materials, various packaging standards to be maintained, and designs are all as specified by Gillette USA. In respect of the above technology, trademark and technical know how provided by the Gillette USA for the products introduced, the appellant commenced payment of royalty. It was submitted that the DRP/ TPO observed that, Mach3 razors were introduced long ago in India and when no royalty has been made in the earlier years, royalty payment in the current year was not justified. Further, the DRP/ TPO also observed that Gillette Guard was only an adaption of Gillette’s existing products and therefore, royalty payments with respect to this product also was not justified. However, it may be noted that Gillette Guard was introduced only in the year 2010. Gillette Guard is the first razor exclusively developed for low-income consumers in India where traditionally men have been using double-edged razors. The Gillette Company, USA has invested substantial time, effort, resources and money, thereby undertaking substantial research & development activities in order to develop the product and manufacturing process technology required to manufacture a product specifically required for the Indian market. Further, Gillette Mach3 has been in market since 1998 but the manufacturing of the same started only in 2010. Prior to manufacturing the same, Gillette Mach3 was imported by the Appellant from its AEs for the purpose of distribution in India. The royalty for the know-how and license to manufacture these products was thus paid by the appellant to Gillette USA in from AY 2011-12 onwards and was also paid during the year under consideration. It was accordingly submitted that from the above submission, it can clearly be concluded that the payment for royalty was justified in the case of the appellant and in the absence of such an agreement, the appellant would not have been able to manufacture and sell its products in the Indian market. In fact, the TPO was unjustified to question the commerciality or the necessity of making a payment of royalty. It is a trite law that, TPO cannot determine the ALP of the transaction at NIL on the basis that it was not prudent for the assessee to have incurred the same.

21. It was further submitted by the ld AR that the Tribunal in the appellant’s own case for AY 2011-12 has very categorically held that the factthat the specified products (Gillette Mach3 and Gillette Guard) were manufactured by the appellant itself indicated that technology and know-how received was utilised and employed and therefore, the payment of royalty was justified. It was further held that it was not appropriate for the Revenue to enter into the realm of examining the commerciality or necessity of entering into a licensing arrangement and payment of royalty in terms of such arrangement.

22. It was further submitted that while the Revenue has preferred an appeal before the Hon’ble Rajasthan High Court against other issues/ adjustments, the decision of the Tribunal on Royalty was not appealed against. It was further submitted that even during the course of Transfer Pricing assessment for A.Y 2012-13, the TPO accepted the arms’ length price determined by the appellant for the international transaction of payment of royalty. Given the fact that, there is no change in the facts of the case, it was submitted that the payment of royalty is commercially expedient and justified for the year under consideration.

23. Now, coming to benchmarking analysis of international transaction of payment of royalty, the ld AR submitted that firstly, the TPO, without providing a show cause notice, selected a set of two agreements as comparables for determining the arms’ length price of the international transaction of payment of royalty by the appellant to its AE. It was submitted that the said agreements considered by the TPO are not comparable to that of the royalty arrangement between the appellant and its AE for the following reasons:

• Firstly, the products covered by the agreements considered by the TPO are completely different from that in the appellants’ case. In the agreements considered by the TPO, the license is granted for certain electronic devices which are called as light based devices for hair removal i.e. hair removal through optical radiation whereas the license granted in the case of the appellant is for Gillette Guard and Gillette Mach3 products which broadly can be said to be mechanical devices.
• Secondly, as can be noted, the agreements are only for the purpose of ‘technology’ license. In the case of the Appellant, the royalty is paid for ‘technology’ as well as ‘trademark’

24. It was submitted that it is a trite law that application of CUP requires a close comparability and as can be seen from the above, the agreements considered by the TPO do not satisfy such comparability test. Accordingly, it is the submission of the appellant that the agreements considered by the TPO should be rejected. It was submitted that the set of internal comparable agreements (wherein third parties have been paying royalty to Procter & Gamble group entities) for similar products should instead be considered. The details of such internal comparable agreements have been submitted before the Hon’ble DRP and the TPO. The same are re-iterated asunder:

25. Based on the above, it can be fairly concluded that the internal royalty agreements submitted by the appellant are comparable to the royalty arrangement entered into between the appellant and its AE. Since the rate of royalty paid by the appellant is lower than the arithmetic mean of the royalty paid by third parties, as mentioned above, it was submitted that the international transaction of payment of royalty be treated at arms’ length price. Accordingly, no disallowance of royalty payment is called for and that the adjustment made by the TPO is liable to be

26. Regarding the query raised by the Bench during the course of hearing that aforesaid agreements are not ‘exactly’ comparable to the license agreement entered into by the appellant with AE since, apart from blades and razors, they also cover shaving creams and other shaving care products, it was submitted that it is true that product comparability should be closely examined in applying CUP method. However, to be comparable does not mean that the two transactions are necessarily identical, but that either none of the difference between them could materially affect the arms’ length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. In other words, the use of ‘closely’ comparable products will suffice if CUP method is being applied. Reference in this regard is invited to the UN TP Manual – para B.3.2.2.3 whichstates that “…The CUP Method is appropriate especially in cases where an independent enterprise buys or sells products that are products that are identical or very ..”

27. It was submitted that in the case of the appellant, the agreements used by the TPO are clearly not comparable. Whereas, the agreements used by the appellant for comparability analysis are closely comparable to that of the license agreement entered into by the appellant with the AE. Especially, the agreement stated at Sr. No. 3 is very similar to the royalty agreement of appellant where the royalty rate is 5.50% for all products including razors and blades. Accordingly, it was submitted that the transaction of payment of royalty be treated at arms’ length and that the adjustment made by the TPO be deleted.

28. Regarding the query raised by the ld. DR during the course of hearing as to whether Mach3 razors were manufactured in India and where he referred to the License Agreement entered into by the Appellant with its AE and pointed out that, the trademark “Mach3” was registered in India since 1998. He also pointed out that the TP study also mentioned that the product Mach3 was imported. According to him, if the trademark was registered in 1998 and the TP study itself mentioned that the product Mach3 was imported (and not manufactured), no royalty was payable. In this regard, it was submitted that Gillette Mach3, though introduced in 1998, the manufacturing of the same started only in 2010 at the Baddi plan in Himachal Pradesh. Prior to manufacturing the same, Gillette Mach3 was imported by the Appellant from its AEs for the purpose of distribution in India. The Appellant required access to the necessary technology and also a right to manufacture and distribute Gillette Mach3 products in India. Accordingly,royalty payment for Gillette Mach3 commenced from 2010 i.e. from the time the Appellant obtained license of the said IP and started manufacturing such products locally in India and the same can be evidenced from the annual report of the Appellant for FY 2009-10 (i.e. the year in which the Appellant started to manufacture Gillette Mach3 products). It was submitted that these facts are already on record of the lower authorities. To further prove this point, the Appellant has also annexed a photo of the actual Gillette Mach3 products manufactured during the relevant financial year which conclusively prove that Gillette Mach3 was manufactured at the Baddi plant in India. The appellant would further like to draw attention to the excise return (on a sample basis) for the period January to March 2014 which also clearly indicates that Gillette Mach3 was manufactured in India. It was further submitted that under The Trade Marks Act, 1999, a Trademark may be registered irrespective of the fact whether the goods are traded or manufactured. In terms of Section 28 of the said Act, the registration of a Trademark in India confers upon the owner the exclusive right to use the trademark in relation to goods/ services in respect of which the trademark is registered. While registration of a trademark is not compulsory, it offers better legal protection for action against infringement. In the case of the Appellant, Gillette Mach3 was introduced in India since 1998 and therefore, the related trademark was also registered in India in the year 1998. This point raised by the Ld. DR that the Mach3 trademark was registered since 1998 nowhere goes to point out that the Gillette Mach3 products were not manufactured in India. It was further submitted that as far as the write up in the TP study is concerned, it is the humble submission of the appellant that the appellant has made an inadvertent error. The same has been rectified multiple times at various levels where the appellant has consistently mentioned that Gillette Mach3 was manufactured in India since 2010. Based on the above, it is the humble submission of the appellant that Gillette Mach3 is being manufactured in India since 2010 including the year under consideration and therefore, on this premise, payment of royalty cannot be disallowed. In view of the above discussions and decisions, the appellant humbly submits that the transfer pricing adjustments on account of payment of royalty amounting to Rs. 16,49,06,644 be deleted.

29. The ld CIT/DR vehemently argued the matter and taken us through the findings of the TPO. Regarding the written submissions filedby the appellant, where it has been stated that an inadvertent error has been made in the TP Study wherein it has been mentioned wrongly that the product Mach3 was imported, it was submitted that the TP Study is an important document and admittance of ‘inadvertent mistake’ therein by the ld. AR causes a strong shadow of doubt over the correctness of the entire TP Study and therefore, the TP Study may be rejected on this ground alone. It was further submitted that as per License Agreement, the Royalty (CC 292) was to be paid on ‘Gillette March3: Razors’ i.e. only on Mach3 Razors and not on Mach3 Cartridges. The issue was whether these were manufactured in India or not. The ld. AR has filed one page of Excise return in support of its claim that Mach3 razors are being manufactured in India. It may be mentioned that the same was not furnished before the lower authorities and requires verification. Further, it may be noted that the manufactured items are stated to be Mach3, Mach3 CRT (cartridges) and Mach3 Turbo. It is humbly submitted that royalty was to be paid on only Mach3 Razors and no royalty was to be paid on Mach3 Turbo Razors and Mach3 Cartridges. Further, the ld. AR has not furnished the working of royalty, though stated at the time hearing that it would be made available. In the absence of the same, it is not clear whether the royalty on Mach 3 Turbo Razors and Mach3 cartridges was paid or not. Further, the ld. AR has not stated anything about column 35B on page 32 of Tax Audit Report as highlighted during the hearing, wherein large volumes of blades and razors are appearing on account of purchase and manufacturing. It has not been submitted by the ld. AR, which type of blades and razors were purchased as appearing in the said table. He accordingly supported the findings of the lower authorities and submitted that no inference is called for in the said findings and the appellant’s ground of appeal may accordingly be dismissed.

30. We have heard the rival contentions and perused the material available on record. We find that the DRP has rejected the objection of the assessee company against the subject transfer pricing adjustment following its earlier order for assessment year 2011-12. The said findings of the DRP were subject matter of appeal before the Tribunal wherein the Coordinate Bench vide its order dated 4.07.2017 in ITA No. IT(TP)A No. 1/JP/16 & 2/JP/16 has held asunder:

“5.5 We have heard the rival contentions and pursued the material available on record. During the year under consideration, the assessee started manufacture of two new products namely, Gillette Guard System shaving system and Gillette Mach3 Razors at its manufacturing facility set up at Baddi Himachal Pradesh under license and using the technical assistance/know-how provided by Gillette USA in terms of plant design, manufacturing process selection of capital equipment, etc. For the purposes, license agreement was entered into with Gillette USA with effect from April 1, 2010 whereby the assessee was granted a license to manufacture, process and package and an exclusive right to distribute and sell within the territory the products so manufactured under the applicable trademarks using the proprietary information provided by the Gillette USA. As per the agreement, the assessee shall pay 4.5% of net sales of products so manufactured.

5.6 The DRP was of the view that the assessee could not explain why royalty for such an old product should be paid this year, particularly when no such royalty has been paid in the earlier year. It further observed that Mach3 products are imported and even Gillette Guard shaving system is only an adaption of Gillette’s existing products for the low price segment and doesnt represent any latest technology which would justify royalty. In this regard, the Id AR submitted that there is manufacture of specified products during the year is clearly discernible from the financial statements. Further , our attention was drawn to the decision of the Hon’ble Delhi High Court in case of CIT vs EKL Appliances (345 ITR 241) wherein it was held that Rule 10B(1)(a) doesn’t authorise disallowance of any expenditure on the ground that it was not necessary for the assessee to have incurred such expense. It was also observed that though the quantum of expenditure could be examined, the entire expenditure could not be disallowed on the ground that it was not necessary. In our view, the business and commercial expediency of entering into the license agreement and payment of royalty is a matter whether the assessee has to determine taking into consideration business dynamics of manufacturing such products in India, its current demand, future potential and need for technology and technical know-how to carry out such manufacturing operations in India. Therefore, it would not be appropriate for Revenue or the DRP to enter into the realm of examining the commerciality or necessity of entering into such licensing arrangement and payment of royalty in terms of such an arrangement, Further, it is not the case of Revenue that such technology and know-how has not been utilised by the assessee during the year under consideration. The fact that there is production of these specified products during the year shows that such technology and know-how has been utilised and employed in the manufacturing process and for which the royalty has been determined and paid to Gillette USA”.

31. Therefore, as far as business expediency of entering into the licensing agreement is concerned, the same has been examined and dealt with by the Coordinate Bench for the earlier assessment year 2011-12 and we donot see any justifiable basis to deviate from the said position wherein under the same agreement, the royalty has been determined in respect of specific products manufactured in India. During the course of hearing, the ld CIT DR submitted that royalty was payable in respect of Mach3 Razors manufactured in India and no royalty was to be paid on Mach3 Turbo Razors and Mach3 Cartridges in terms of the License agreement, we find that the same is a matter of record and a matter of verification which can be done by the AO/TPO. The assessee is directed to submit the exact working of royalty specifying the products description and its nature which are manufactured in India during the year and in respect of which royalty has been determined as payable in terms of the agreement along with supporting documentation which can then be verified by the AO/TPO.

32. In terms of benchmarking the royalty payment, unlikein A.Y 2011-12 where the assessee has adopted the TNMM method and the DRP has adopted the CUP method, for the year under consideration, the assessee company has itself adopted the CUP method which is thus not in dispute. In its Transfer pricing study, the assessee has selected 10 comparables showing mean royalty of 5.56% thereby justifying its royalty determined at the rate of 4.5%. The TPO has rejected these comparables on account of product differentiation as these comparables were manufacturing skin ointments and snacks which apparently have not been contested by the assessee. The assessee has however contested the comparables selected by the TPO bringing out product differentiation and terms of the licencing agreement. Further during the proceedings before the DRP, the assessee submitted a set of fresh internal comparables showing mean royalty of 7.05% by way of additional evidence. Though the DRP called for a remand report from the TPO, we find it strange that there is no finding either of the TPO or the DRP regarding these additional set of internal comparables so submitted by the assessee. During the course of hearing, the ld AR has tried to justify these comparables and has raised various contentions in support thereof. We find that the comparables so selected and submitted by the assessee also suffer from product differentiation, for instance, shaving cream and gel has been stated as product description in respect of one of the comparables, in terms of agreement entered into between Procter & Gamble with Universal Razor Industries, which cannot be compared with that of the product description of Razors of the assessee company. We therefore find that each of these comparables needs a close examination in terms of product description and terms of licencing agreement. We however, find that there is no finding of the DRP regarding these comparables. Similarly, we find that there is no finding regarding comparables which have been selected by the TPO and contested by the assessee. Therefore, in absence of any findings regarding the appropriateness of the comparables and its applicability in the instant case, we are not inclined to examine these comparables at this stage for the first time and take a view in the matter and are constrained to remand the matter to the file of the AO/TPO to examine these comparables and record a specific finding and determined the arm’s length nature of royalty payment. The contentions so advanced by the ld AR are thus kept open and the assessee, if so advised, is free to raise these contentions before the AO/TPO. In the result, the ground no. 4 is allowed for statistical purposes.

33. In ground no. 5, the assessee has challenged the disallowance of Rs. 8,42,81,834/- on account of ‘inventories written off’ made by the Assessing officer and as sustained by the

34. During the course of hearing, the ld AR submitted that the matter has been decided by the Hon’ble Rajasthan High Court in assessee’s own case for A.Y 2006-07 in DB ITA No. 134/2014 where the issue was decided in favour of the assessee. It was further submitted that following the aforesaid order, appeal for A.Y 2007-08 in DB ITA No. 33/2016 & A.Y 2008-09 in DB ITA No. 125/2016 filed by the Department were also dismissed. Similarly, for A.Y 2009-10 and 2010- 11, the matter is decided in favour of the assessee. Thus, it was submitted that this issue is now settled in favour of the assessee by various decisions of the Hon’ble Rajasthan High Court and given that there is no change in facts and circumstances of the case, the disallowance so made by the AO may be directed to be deleted.

35. The ld CIT DR supported the order of the lower authorities. Regarding the order passed by the Hon’ble Rajasthan High Court for the earlier years, it was submitted that the Department has not accepted the orders so passed by the Hon’ble High Court and has filed an SLP against the said decisions before the Hon’ble Supreme Court.

36. We have heard the rival contentions and perused the material available on record. We find that the Assessing officer, following the order and the reasoning adopted in the earlier years, has disallowed the claim of the inventory written off amounting to Rs 8,42,81,834/-. Undisputedly, there are no changes in the facts and circumstances of the case as compared to the earlier years wherein the matter has been consistently decided in favour of the assessee by the Coordinate Benches and which have been upheld by the Hon’ble Rajasthan High Court. In DB Appeal No. 134/2014 for AY 2006-07 dated 23.05.2017, the substantial question of law before the Hon’ble Rajasthan High Court reads asunder:-

“(ii) Whether the Tribunal was legally justified in deleting the addition of Rs. 8,28,35,757/- made on account of inventories written off specifically when neither any details were furnished by the company and nor there was any supporting evidence to justify and establish that the inventories were actually destroyed?”

And the relevant findings of the Hon’ble Rajasthan High Court wherein the matter has been decided in favour of the assessee reads as under:-

“4 In so far as the issue No. (ii) is concerned, the Tribunal while considering the case in para 4.1 has observed as under:-

“4.1 After considering the rival submission, we noted that the details of inventory written off as well as procedure or written off is explained before the AO and the same is also placed before us at PB Page 421-664. We also find that similar issue is decided by this Bench in A.Y. 03-04 in ITA No. 188/JP/07 dated 09.08.2010 in assessee’s favour and followed in A.Y. 04- 05 in ITA No. 180/JP/09 dated 27.05.2011 and in A.Y. 05-06 in ITA No. 1234/JP/2010 dated 11.02.2011. The relevant portion of the decision of Tribunal in Para 16 in A.Y. 03-04 is reproduced as under:-

“As regard to the disallowance of Rs 8,37,10,704/- in respect of damaged goods retail and Rs 3,64,71,703/- in respect of provision for obsolesce made by the AO for want of item wise details and the procedure thereof, the Ld. CIT(A) after considering the item wise details and considering the procedure adopted for disposal and destruction of such stock, copy of which is placed in the paper book has rightly deleted the disallowance of Rs 8,37,10,704/- but at the same time he did not allowed the claim of Rs. 3,64,71,703/-on the ground that it is only a provision and not actually destroyed. We find that in respect of both these amounts item wise details is filed. The procedure adopted and the recommendation of appropriate authorities is placed on record. The disallowance of Rs 3,64,71,703/- confirmed by the Id. CIT(A) only for the reason that these items are not actually destroyed and is only a provision can’t be upheld for the reason that item wise details of the same is filed, these are the identified items and have been subsequently destroyed as per the regular procedure followed. The write off for obsolesce of such identified items is allow able deduction as per the case laws relied by the Ld. AR. In fact no provisions is created in books of accounts but only the nomenclature of provisions for obsolesce is used. In the balance sheet also no such provision is appearing either in the liabilities side or as reduction from asset side not the ld. D/R could point out any such provision in the balance sheet. Therefore the disallowance of Rs. 3,64,71,703/- confirmed by the Ld. CIT(A) is deleted.”

Following the orders of the Tribunals in case of the assessee, the claim of the inventory written off of Rs. 8,28,35,757/- is allowed and hence the addition made by the AO is deleted. This ground is therefore allowed.”

4.1 The observations made by the Tribunal in the earlier year where appeal was preferred but this question was not admitted and today an application was also moved for amending or adding question of law which has been rejected by

4.2 In that view of the matter, the view taken by the Tribunal is required to be accepted in favour of the ”

37. The aforesaid decision has been followed by the Hon’ble Rajasthan High Court while disposing off the Department’s appeals for subsequent years. Further, mere filing an SLP before the Hon’ble Supreme Court against the aforesaid decision of the Hon’ble jurisdictional High Court in asseseee’s own case cannot be a reason for not following the said decision. The decision of the jurisdictional High Court is binding on this Tribunal as well as on the DRP and we see no reason why the same has not been followed inspite of the fact that the said decisions of the Hon’ble Rajasthan High Court have been brought to the notice of the DRP by the assessee. Therefore, the directions of the DRP that “since the Department has filed an appeal before the Hon’bleSupreme Court against the decisions of the Hon’ble Rajasthan High Court, the AO’s action is upheld” cannot be accepted and is hereby set-aside. Nothing has been brought on record which suggests that the said decision of the Hon’ble Rajasthan High Court has been stayed, therefore, respectfully following the decision of Hon’ble Rajasthan High Court in assessee’s own case, the disallowance of claim of inventory written off is hereby allowed. In the result, ground no. 5 of the assessee’s appeal is allowed.

38. In Ground no. 6, the assessee has challenged the action of the Assessing officer in charging of interest under section 234B and section 234C of the Act. No specific arguments were advanced by the ld AR during the course of hearing and in any case, the charging of interest under section 234B/C is consequential is nature and therefore, doesn’t require any separate adjudication and the ground is thus In the result, the appeal of the assessee is disposed off in light of aforesaid directions.

Order pronounced in the open Court on 08/06/2020.