Dabur India Ltd. Vs ACIT (ITAT Delhi)
We have heard both the parties and perused the relevant material available on record. As regards to agreement with Dabur Nepal Pvt. Ltd. Nepal, it is pertinent to note that the issue stands covered in favour of the assessee by the order of the Tribunal in the asssessee’s own case in ITA No. 3257/Del/2013 for the A.Y. 2006-07, wherein the Tribunal held that no royalty was payable assessee by M/s Dabur Nepal Pvt. Ltd and deleted the addition made by TPO/CIT(A). The relevant findings of the Tribunal is as under:
“36. As regards to the royalty charged from M/s Dabur Nepal Ltd. is concerned, it is not in dispute that earlier the royalty, was @ 7.5% as the assessee was bearing the cost of marketing expenses but later on Ms Dabur Nepal Pvt. Ltd. incurred expenditure in order to penetrate the market and the agreement was amended w.e.f. 1st April, 2004 vide which the royalty has reduced from 7.5% to 3% (copy of the same is placed at page no. 113 of the assessee s paper book). In the preceding year, basis of the said amended agreement, the royalty was charged (a), 3%. Therefore, the TPO was not justified in working royalty @ 7.5% as provided in the original agreement dated 05.11.1992 (copy of which is placed at page nos. 111& 112 assessee’s paper book). For the year under consideration, M/s Dabur Nepal Pvt. Ltd has not paid any royalty to the asses the reasons that it had to incur the expenses to penetrate the market. In this regard, vide letter written in May 2005, it was informed to the assessee that no royally will be payable from Financial Year 2005-06. It was also claimed that as per the Clause 7 of the original agreement dated 05.11.1992, the agreement shall become effective only after the approval by HMG Nepal and shall remain valid for a period of 10 years from the said date, unless renewed by mutual consent in writing and with prior approval of HMG Nepal. In the present case, it is not brought on record that the original agreement dated 05.11.1992 valid for 10 years, was renewed for further period and approval of HMG Nepal was taken. In the present case, the contention of the assessee that 80% products manufactured by M/s Dabur Nepal Pvt. Ltd. were purchased by the assessee has not been rebutted. It is also not in dispute that the royalty was payable earlier on the sales, therefore, it is unbelievable that the assessee charged the royalty on the purchases made by it from M/s Dabur Nepal Pvt. Ltd. to increase the cost of purchases. Even if it is presumed that the royalty was to be charged by the assessee then same amount was to be added in the purchases thus the impact will be revenue neutral i.e. on the one hand, income will be increased by crediting the royalty and on the other hand, the cost of purchases will be increased by that amount, since the sale was made by M/s Dabur Nepal Pvt. Ltd. to the assessee. In the present case, it is an admitted fact that there was no agreement in existence between the assessee and the AE i.e. M/s Dabur Nepal Pvt. Ltd. and nothing is brought on record to substantiate that the assessee incurred any expenditure which benefited M/s Dabur Nepal Pvt. Ltd. in any manner. Therefore, no royalty was payable to the assessee by M/s Dabur Nepal Pvt. Ltd. By considering the totality of the facts as discussed herein above, we are of the view that the royalty @ 2% directed to be charged by the ld. CIT(A) was not justified, therefore, the addition made on the said basis is deleted. “
FULL TEXT OF THE ORDER OF ITAT DELHI
These two appeals are filed by the assessee and the Revenue against the order 26/03/2013 order passed by 144C(1)(3) read with Section 143 (3) of the Income Tax Act, 1961 for Assessment Year 2009-10.
2. The grounds of appeal are as under:-
I.T.A. No. 3423/DEL/2015 (A.Y 2009-10)
1. That there is no international transaction as contemplated u/s 92CA of the Income-tax Act, 1961 (the Act) in respect of the alleged royalty chargeable from three Associated Enterprises (AEs) and consequently the order of the CIT (Appeals) upholding the chargeability of royalty from three AEs, as alleged by TPO, is arbitrary, unjust and bad in law.
2. That in the absence of any contract as existing during the year between the assessee and three AEs, neither any royalty accrued during the year nor can it be presumed to be receivable and consequently the order of the TPO and sustained by the CIT (Appeals) are without any basis/material and are based on surmises and conjectures not permissible under the law.
3. That the TPO and CIT (Appeals) failed to consider the geographical conditions of working of Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd., having no substantial awareness about the Dabur brand in the area and consequently the presumption and assumption about the chargeability of royalty by invoking the provision of Section 92CA of the Act from Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. is arbitrary, unjust and without any basis.
4. That the CIT (Appeals) and TPO have failed to consider that in the absence of any expenditure incurred by the assessee for the establishment of brand in the geographical area of working of Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd., no royalty can be said to have accrued to the assessee when Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. have incurred expenses on advertisement and sales promotion in their respective area for promotion of the brand different product which amounts to the services provided by the AEs to the assessee for establishing the brand and consequently the addition as made by the TPO and sustained by the CIT (Appeals) in respect of the alleged royalty chargeable from Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. is arbitrary, unjust, not based on FAR involved and at any rate very excessive.
5. That CIT (Appeals) and TPO have failed to consider that in the absence of any expenditure incurred by the assessee for the establishment of brand in the geographical area of working of Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd., no royalty can be said to have accrued to the assessee when Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. have incurred expenses on advertisement and sales promotion in their respective area for promotion of the brand and became the economic owner of the brand. Consequently the addition as made by the TPO and sustained by the CIT (Appeals) in respect of the alleged royalty chargeable from Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. is arbitrary, unjust , not based on FAR involved and at any rate very excessive.
6. That the TPO and CIT (Appeals) failed to appreciate the relevant clause of the agreement as existed in earlier years wherein as per the agreement, Dabur India Ltd. failed to incur the expenses for the promotion of the brand and marketing expenses in Dabur Nepal Pvt. Ltd., which ultimately and actually were incurred by Dabur Nepal Pvt. Ltd., which resulted into termination of the royalty chargeable under the then contract and consequently the CIT (Appeals) has erred on facts and under the law in upholding the chargeability of the royalty from Dabur Nepal Pvt. Ltd.
7. That the TPO and CIT (Appeals) failed to consider that most of the manufactured products by Dabur Nepal Pvt. Ltd. had been sold to Dabur India Ltd. which cannot be the basis for charging royally having no connection with the brand used by Dabur Nepal Pvt. Ltd. in Nepal.
8. That the CIT (Appeals) has erred in sustaining the alleged service fee on account of the corporate guarantee in the case Dabur Egypt Ltd on the loans availed from HSBC and NSGB bank @ 0.50% is arbitrary, unjust, without any basis and at any rate very excessive.
9. That the CIT (Appeals) has erred in sustaining the alleged service fee on account of the corporate guarantee in the case of Naturelle LLC on the loans availed from Royal Bank of Scotland @0.513 % is arbitrary, unjust, without any basis and at any rate very excessive.
10 That without prejudice to grounds no 8 & 9 above the assessee submit that CIT(A) and AO erred in holding corporate guarantee as International Transaction.
11. That the above grounds of appeal are independent and without prejudice to one another.
I.T.A. No. 3790/DEL/2015 (A.Y 2009-10)
1.”Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) has erred in reducing, the addition of Rs. 2,76,02,250/- on account of corporate guarantee by applying rate or 0.5% as against the rate of 4.71% applied by the JPO.
2. Whether on the facts and in the circumstances of the case and in law, Ld.CIT(A) has erred in reducing the addition of Rs. 17.77 crores, made by the TP’O on account of adjustment in the arm ‘s length price of royalty.
3. Whether on the facts and in the circumstances- of the case and in law, Ld.CIT(A) has erred in allowing appeal of the assesses and directing the AO to recomputed the deduction u/s 80IB and 80IC of the Act without further allocation of the Head. Office expenses to various units.
4. Whether on the facts and in the circumstances- of the case and in law, Ld.CIT(A) has erred in deleting the addition made by the A.O on account of disallowance of expenses of Rs. 5,22,33,000/- made u/s 14A read with Rule 8D of Income Tax Rules.”
3. The assessee company is engaged in the business of manufacturing and trading of herbal products of health & personal care, cosmetics & veterinary products and FMCG product. The assessee company filed return of income declaring an income of Rs. 70,30,55,310/- on 26.09.2009. The assessee company paid tax under MAT provisions u/s 115JB of the Income Tax Act, 1961. The Transfer Pricing Officer made adjustment of Rs. 20,53,69,250/-(adjustment on account of Guarantee Rs. 2,76,02,250/- and adjustment on account of Royalty Rs. 17,77,67,000). The Assessing Officer passed the Assessment Order dated 26.03.2013 determining the total income at Rs. 1,07,61,15,860/- as against the total income of Rs. 70,30,55,310. The MAT adjustment was reduced by Rs. 12,68,03,280/- thereby making following additions:
