Brief of the Case
ITAT Jaipur held In the case of M/s. Gillette India Ltd. vs. ACIT that the services availed are intra-group services in the nature of Accounting and Financial Reporting Services, Employee services etc. . These are routinely outsourced by no. of companies in India and other countries because of their economic and commercial needs and availing of Intra group services are recognized by global business practices and OECD guidelines. The TPO also mentioned in his report that assessee has provided all the evidences that assessee has received the intra group services and economic and commercial benefit derived by the assessee from these services by way of reduction in cost as compared to the last year vis a vis the increase in sales. Also there is a mechanism in place to identify the cost incurred by the AE in providing the intra group services and basis of allocation of cost to various AE’s.
Facts of the Case
The assessee is a public limited listed company and is engaged in the business of manufacturing and distribution of products for personal care and use including blades, razors, shaving preparations, oral care products, hair epilating devices, electric shavers and other appliances. 75.90 percent shares of Gillette India Limited (GIL) are held by The Procter & Gamble Company, USA (P&G US) and its subsidiaries. Out of these 41.02 % shares are held by Procter & Gamble India Holding BV, Netherlands. The balance capital is held by institutional investors and the public. Various international transactions entered by the assessee with its associated enterprises during the year including payment made for business services received amounting Rs. 25,197,157 and reimbursement of advertisement expenses by AEs.
The AO referred the issue of determination of Arm’s length price in respect of international transaction to the TPO along with assessee’s TP report. TPO vide order dated 27 October 2010 accepted the ALP of all the other international transactions except the payment towards “Business Services” received and reimbursement of advertisement expenses from the AE and proposed to make adjustments. Assessee filed its objections in this behalf u/s 144(C) to the Dispute Resolution Panel; assessee claims that DRP without considering the detail submission and independent examination of facts summarily upheld the action of AO/TPO.
Expenditure on restructuring
Assessee Company restructured its business activities with a view to have better market penetration and improve its overall sales. In view of this, the assessee moved its corporate office from Gurgaon to Mumbai and also moved to better and efficient distribution system during the year 2006. The additional expenses incurred for achieving the business efficiencies, as detailed above, were grouped under ‘restructuring cost’ and approval was sought from the Hon’ble High Court of Rajasthan for charging of these expenses against amalgamation reserves forming part of the capital reserves of the company in its books of account.
Expenditure incurred during F Y 2006-07 (A Y 2007-08) were Rs. 45,16,19,901/-, out of which VRS Cost of Rs. 35,66,09,685/- and loss on sale of fixed assets of Rs. 75,36,323/- were added back in the statement of computation of total income. Balance Rs. 8,74,73,893/- includes expenditure under various heads which is claimed as business expenditure in the return of income. The AO proposed the disallowance of these expenditure by holding that these are one time expenditure for enduring benefit, hence, are capital in nature and cannot be regarded as revenue expenditure.
Contention of the Assessee
The ld counsel of the assessee submitted that business support services were received from P & G Asia PTE Ltd. i.e AE as per agreement dated 1.7.2006. AE rendered various services to its assessee, which are narrated in form 35A and also finds mention TPO order. Based on audited accounts, P & G Singapore identify and finalise the cost and expenses incurred in providing the Business Support Services. This is allocated to each of the service recipients on the basis of charge as agreed in the agreement. Monthly payment is determined on the basis of annual budget of service provider. At the year end service provider would make allocation based on actual cost and expenses for first eleven months of the fiscal year and estimated cost and expenses for the last month of the said fiscal year. The differences in actual cost vis-a-vis the budgeted cost would be charged / credited to the service recipient accordingly.
Methodology of performance services at various places is narrated in Form 35A. For these services AE was compensated at cost plus 7% margin and the Debit notes in this behalf are also on the record, which are not disputed. Besides TPO in assessee’s own case for AY 2011-12 has accepted the very same payments to AE and has not even proposed any ALP adjustment in this behalf. Revenue on the same facts cannot apply such variable treatment. In view of above observation of TPO as to non furnishing of evidence of cost incurred by AE for rendering the various services or basis of allocation of cost to various entities or basis of billing is incorrect.
Ld. Counsel counters the TPO’s remarks on cost benefits by contending that by this arrangement other cost has reduced drastically and at the same time sales has increased significantly which amounts to demonstrative cost benefit. Ld. Counsel further contends that detailed explanation is offered in Form 35A explaining the commercial rationale and expediency for availing these services and the details of actual receipt of services, which has not been controverted. The decision to outsource the service is a business decision of the assessee and it’s prudence ought not be questioned by the revenue authorities. The nature of services availed and benefits received by the assessee have been substantiated. The cost have been allocated by the AEs using appropriate and logical allocation keys and the methodology of charging of cost is followed consistently while providing services to all group companies. Similar business services provided by P & G Asia PTE Ltd. to other associated companies in India have been accepted by the department. Copy of TPO Order along with transfer pricing audit report in case of Gillette Diversified Operations Pvt. Ltd. and Procter & Gamble Home Products Ltd. in this connection is also submitted.
Expenditure on restructuring
The ld counsel of the assesseel contends that these expenses pertaining to shifting of Corporate office from Gurgaon to Mumbai are revenue in nature incurred wholly and exclusively for its business. Besides Hon’ble High Court gave the permission for charging of these expenses against amalgamation reserves. In assessment year 2006-07, similar expenditure of Rs. 11,12,24,780/- were allowed by the AO in assessment framed u/s 143(3) after considering the details of such expenditure reflected in the notes to the accounts.
It is a settled law that treatment of expenditure in the books of account is not relevant for allowance of expenditure. Whether assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can existence or absence of entries in the books of account is decisive or conclusive in the matter as held by Supreme Court in Kedarnath Jute Mills (82 ITR 363) and Sutlej Cotton Mills (116 ITR 1).
Expenditure incurred on ground of commercial expediency to facilitate carrying on of the business is allowable as revenue expenditure. By incurring the above expenditure, the assessee has not derived any enduring benefit. Of course, these are one time expenditure for restructuring to be incurred over a period of 18 to 24 months, they do not result into creation of any asset, but only facilitate in the efficient working of the assessee. Hence such expenditure are allowable as business expenditure u/s 37(1).
Held by ITAT
It has not been disputed that assessee did neither employ the requisite manpower nor incur expenditure for services which are outsourced from AE. TPO did not visualise that without such employment and expenditure how assessee’s business can be operated. This itself proves that outsourced services were actually rendered and paid for. It is wrongly observed that AE was in no position to provide any support service to India, as the knowledge of local conditions can lie with assessee and not the AE. If this is theoretically believed, then BPO/KPO would not have found place in India or Philippines or anywhere else in the world. Therefore, these observations made by TPO are untenable, hypothetical and irrelevant.
The services availed are intra-group services in the nature of Accounting and Financial Reporting Services, Employee services etc. as explained above. These are routinely outsourced by no. of companies in India and other countries because of their economic and commercial needs and availing of Intra group services are recognized by global business practices and OECD guidelines. The TPO also mentioned in his report that assessee has provided all the information in form of evidence is furnished that assessee has received the intra group services and Economic and commercial benefit derived by the assessee from these services by way of reduction in cost as compared to the last year vis a vis the increase in sales. Also there is a mechanism in place to identify the cost incurred by the AE in providing the intra group services and basis of allocation of cost to various AE’s as is evident from the documents placed at. There is no material with the AO to hold that a comparable independent enterprise would not have paid for these services in comparable circumstances. In fact the similar services received by other group concern have been accepted by the TPO in those cases.
Further in the case of Cushman and Wakefield India Pvt. Ltd. (2014) 225 Taxman, it has been held that commercial wisdom of the assessee cannot be called into question. Therefore, we are unable to subscribe the view adopted by authorities below that these services were not required by the assessee. Such commercial decisions are better left to the business acumen of the assessee and not decided by the AO. We have perused the evidence on record, revenue’s own treatment of the same AE and services in associate concern for AY 2007-08 and assessee’s own case for AY 2011-12. We are unable to uphold the finding of TPO and AO that details about rendering of services were not furnished and its benefit on the assessee’s business could not be ascertained. In the entirety of facts and circumstances we hold that the TP adjustment to the ALP as furnished by the assessee is without any justification. The same is deleted.
On the the issue about the reimbursement of business services, an amount of Rs. 31,01,476/- has been disallowed as the assessee could not produce any evidence except ledger account. We find no infirmity in the orders of the lower authorities. Since assessee has failed to provide any corroborative evidence in this behalf, the adjustment of Rs. 31,01,476/- made by the lower authorities cannot be found fault with. The same is upheld.
Expenditure on restructuring
Hon’ble Supreme court in Empire Jute Mills has laid down the proposition that merely because expenditure results in some enduring benefit is not alone decisive of it’s being capital in nature. If the same increases the revenue generating apparatus then it will fall in the category of revenue expenditure despite giving enduring benefit. Besides in Alembic it has been held that merely because once for all payment is made it doesn’t ipso facto amount to capital expenditure.
Assessee incurred these expenses for shifting of corporate office from Gurgaon to Mumbai wholly and exclusively for its business. Besides Hon’ble High Court gave the permission for charging of these expenses against amalgamation reserves. In assessment year 2006-07, similar expenditure of Rs.11,12,24,780/- were allowed by the AO in assessment framed u/s 143(3) after considering the details of such expenditure reflected in the notes to the accounts. In view of the foregoing we are of the considered view that assessee’s claim falls in the category of revenue expenses and deserve to be allowed. This ground succeeds.
Accordingly appeal of the assessee partly allowed.