The Commissioner Of Income Tax, Alwar v. M/S Gillette India Ltd., E-31, Okhla Industrial Area, Phase-Ii, Newdelhi

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 134 / 2014 The Commissioner of Income Tax, Alwar. ----Appellant Versus M/S Gillette India Ltd., E-31, Okhla Industrial Area, Phase-II, NewDelhi-110020. ----Respondent _____________________________________________________ For Appellant(s) : Mrs. Parinitoo Jain with Mr. Mukesh MeenaFor Respondent(s) : Mr. Sanjay Jhanwar with Mr. Prakul Khurana & Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE DR. JUSTICE VIRENDRA KUMAR MATHURJudgment Per Hon’ble Jhaveri, J. 23/05/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal preferred by the assessee. 2.This Court while admitting the appeal on 31.05.2016 hasframed the following substantial questions of law: “(i)Whether the Tribunal was legallyjustified in holding that the adjustment forRs.15.75 cross made in the Arms LengthPrice of international transaction by takinginto account TNMM at entity level was to berestricted to be international transactionand the entire turn-over was not to beconsidered?(ii) Whether the Tribunal was legallyjustified in deleting the addition ofRs.8,28,35,757/- made on account ofinventories written off specifically whenneither any details were furnished by the company and nor there was any supportingevidence to justify and establish that theinventories were actually destroyed? (iii) Whether the Tribunal was legallyjustified in deleting the addition ofRs.50,00,000/- made on account oftraveling and conveyance expensesspecifically when the company neitherspecified the nature and purpose ofexpenses nor any supporting evidence wasfiled to justify the claim? (iv) Whether the Tribunal was legallyjustified in deleting the addition ofRs.36,70,04,056/- and allowing deductionu/s 37 on account of advertisement andsales promotion expenses specifically whenthe payment was made to a foreigncompany which was liable to deduction oftax at source in view of section 195, thefailure of which attracted section 40(a)(ia)? (v) Whether the Tribunal was legallyjustified in deleting the addition ofRs.16,17,24,306/- and allowing deductionu/s37, on account of gifts and tradeincentives and holding that section 194Hwould not apply specifically when neitheranysatisfactorysupportingevidence/documents were available nor thesame were incurred wholly and exclusivelyfor the purpose of business? (vi) Whether the Tribunal was legallyjustified in deleting the addition ofRs.50,00,000/- made on account of misc.expenses which were neither verifiable asno supporting evidence was available andalso the same could not be established tohave been incurred wholly and exclusivelyfor the purpose of business?” 3.Counsel for the appellant has contended that the Tribunalhas committed serious error in following the decision of BombayHigh Court and though the matter which was first preferred by theRevenue in case of DCIT vs. Starlite 133 TTJ 425 (Mum.)(Trib.) which was remanded back and the other two appeals inthe case of DCIT vs. Ankit Diamond 8 ITR (Trib.) 487 and CITvs. Super Diamonds IT Appeal No.298/2013, both were admitted before the Bombay High Court. In that view of thematter, the view taken by the Tribunal is to be viewed veryseriously and is required to be reversed and the view taken by theAssessing Officer is required to be affirmed. 3.1In this regard the counsel has relied upon para 3.10 and3.11 which reads as under: 3.Counsel for the appellant has contended that the Tribunalhas committed serious error in following the decision of BombayHigh Court and though the matter which was first preferred by theRevenue in case of DCIT vs. Starlite 133 TTJ 425 (Mum.)(Trib.) which was remanded back and the other two appeals inthe case of DCIT vs. Ankit Diamond 8 ITR (Trib.) 487 and CITvs. Super Diamonds IT Appeal No.298/2013, both were admitted before the Bombay High Court. In that view of thematter, the view taken by the Tribunal is to be viewed veryseriously and is required to be reversed and the view taken by theAssessing Officer is required to be affirmed. 3.1In this regard the counsel has relied upon para 3.10 and3.11 which reads as under: “3.10.In Ground No. 1(iii), theassessee has challenged the re-computation of ALP of internationaltransaction in relation to import of finishedgoodsbydisregardingtheTPdocumentation, segmental analysis etc.and instead evaluating the operation atentity level and thereby makingadjustment of Rs.15,75,28,786/-. Afterconsidering the rival submission, we notedthat the TPO has accepted the ALP of allother international transactions except inrespect of import of goods for resale/forpackaging and sale. The TPO by rejectingthe segmental analysis and thecomparables selected by the assessee hasdetermined the operating margin at entitylevel by considering 5 other comparables.On this basis, he has determined thedifference between the operating margin ofthe assessee and the comparable cases at3.83% (16.50% - 12.67%) and appliedthis difference to total turnover ofRs.412.14 crores to make adjustment of15.75 crores in the ALP of the finishedgoods imported by the assessee. Theadjustment so made by considering theentire turnover is incorrect as the TPO hasno authority to determine the total incomeof the assessee but only the ALP of theinternationaltransactions.Therefore,adjustment is to be restricted to theinternational transaction and not to theentire turnover of the assessee. In case ofDCIT Vs. Starlite 133 TTJ 425 (Mum.)(Trib.), it was held that adjustments, if any,arising due to computation of ALP shouldbe restricted only to the internationaltransactions & not to the entire turn overof the assessee company. No addition canbe made to total transactions underChapter X. Such things are done only when AO invokes section 144. Therefore, AO wasdirected to restrict adjustments, if any,only to international transactions, whichare found by him to have taken place at aprice other than ALP. In case of DCIT Vs.Ankit Diamonds 8 ITR (Trib.) 487 (Mum.),it was held that Determination of ALP of aninternational transaction has to be only atthe transaction level or at the level of aclass of transactions. TPO is not authorizedto determine the net operational profits atthe enterprise level but he shall determineonly ALP of international transaction.Therefore, transfer pricing adjustmentssuggested by TPO is illegal & against thelaw. In case of Huntsman AdvancedMaterials (India) (P.) Ltd. Vs. DCIT (Mum.)(Trib.), it was held that adjustment forarm's length price is to be made only inrespect of assessee's transactions withassociated enterprises instead of its entireturnover of trading segment. The othercasesrelied by the assessee are also to thesame effect. Therefore, if the operatingmargin difference of 3.83% is applied tothe transaction with the AE of Rs.64.68crores, the adjustment would be of Rs.2.47crores which is within the permissiblerange of 5% (5% of Rs.64.08 crores is3.23 crores) as provided in proviso to sec.92C(2). Hence, the adjustment made bythe TPO is not sustainable. 3.11 We are also convinced with the otherarguments of Ld. AR that out of the 5companies selected by the TPO, 2companies namely, Procter and GambelHygiene and Healthcare Ltd. andInternational Flavours and Fragrances(India) Ltd. cannot be considered as propercomparables as their manufacturing andtrading ratio of 99:1 whereas theassessee’s manufacturing and trading ratiois 82:18. Further, Procter and GambelHygiene and Healthcare Ltd. is associateconcern of the assessee. The objection ofthe Ld. DR that assessee is only cherrypicking i.e. rejection of companies withhigh profit margin is not acceptable sinceas per Rule 10B(2), comparability of aninternationaltransactionwithanuncontrolled transaction is to be judgedwith reference to functions performed,asset employed and the risk assumed bythe respective parties of the transaction. Therefore, for comparison, the results of amanufacturing company or a relatedconcern cannot be compared with acompany who is both in trading andmanufacturing. In case of TCL Holdings (P.)Ltd. Vs. ACIT (2013) 35 taxmann.com 147(Mum.) (Trib.), it was held that under TNMmethod, comparables selected should befunctionally similar and therefore, wherethe assessee was a trading concern,manufacturing concerns could not be takenas comparable. Similarly, Emami Ltd. isaltogether in a different business segmentof female care where traditionally themargins are higher. Dabur India Ltd. is inpharmaceuticals and healthcare productwhich is again an altogether differentsegment as against male grooming andpersonal care products in which theassessee is engaged. After excluding thesefour companies, only Colgate PalmoliveIndia Ltd. remains as a comparablecompany where the net operating marginis 13.43% as against operating margin of12.67% of the assessee as determined bythe TPO. Even the determination ofoperating margin of 12.67% by the TPOwithout excluding the other unrelatedexpenses of Rs.2.37 crores comprising ofdepreciation on let out building Rs.99.7lacs, write off of fixed assets of Rs.17.24lacs and VRS expenses of Rs.119.95 lacs isnot correct. If these expenses areexcluded, the operating margin of assesseebecame 13.25%. This margin iscomparable with the margin of 13.43% ofColgate Palmolive India Ltd. Considering allthese factors and also the fact that the TPOhimself has admitted that assessee is amarket leader and it will be extremelydifficult to identify the comparables and thefact that neither in earlier years nor insubsequent years any adjustment has beenmade by comparing the results at entitylevel, we hold that the internationaltransaction entered by the assessee withthe AE even at entity level is at arm’slength and therefore the adjustment madeby the AO is not justified. Hence, theaddition of Rs.15,75,28,786/- made by theAO is deleted. Ground No. 1(iii) of theassessee is therefore allowed.” 3.2Identical view was taken by this Court in the case of CIT vs. M/s Sakata Inx. Ltd. in DB Income Tax Appeal No.63/2012,decided on 18.05.2017 along with other connected appeals. 3.3In that view of the matter, in our considered opinion the viewtaken by the Tribunal is required to be accepted. 4.In so far as the issue No.(ii) is concerned, the Tribunal whileconsidering the case in para 4.1 has observed as under: “4.1. After considering the rivalsubmission, we noted that the details ofinventory written off as well as procedurefor written off is explained before the AOand the same is also placed before us at PBPage 421-664. We also find that similarissue is decided by this Bench in A.Y. 03-04in ITA No. 188/JP/07 dated 09.08.2010 inassessee’s favour and followed in A.Y. 04-05 in ITA No. 180/JP/09 dated 27.05.2011and in A.Y. 05-06 in ITA No. 1234/JP/2010dated 11.02.2011. The relevant portion ofthe decision of Tribunal in Para 16 in A.Y.03-04 is reproduced as under:- 3.3In that view of the matter, in our considered opinion the viewtaken by the Tribunal is required to be accepted. 4.In so far as the issue No.(ii) is concerned, the Tribunal whileconsidering the case in para 4.1 has observed as under: “4.1. After considering the rivalsubmission, we noted that the details ofinventory written off as well as procedurefor written off is explained before the AOand the same is also placed before us at PBPage 421-664. We also find that similarissue is decided by this Bench in A.Y. 03-04in ITA No. 188/JP/07 dated 09.08.2010 inassessee’s favour and followed in A.Y. 04-05 in ITA No. 180/JP/09 dated 27.05.2011and in A.Y. 05-06 in ITA No. 1234/JP/2010dated 11.02.2011. The relevant portion ofthe decision of Tribunal in Para 16 in A.Y.03-04 is reproduced as under:- “As regard to the disallowance of Rs8,37,10,704/- in respect of damaged goodsretail and Rs 3,64,71,703/- in respect ofprovision for obsolesce made by the AO forwant of item wise details and theprocedure thereof, the Ld. CIT(A) afterconsidering the item wise details andconsidering the procedure adopted fordisposal and destruction of such stock,copy of which is placed in the paper bookhas rightly deleted the disallowance of Rs8,37,10,704/- but at the same time he didnot allowed the claim of Rs.3,64,71,703/-on the ground that it is only a provisionand not actually destroyed. We find that inrespect of both these amounts item wisedetails is filed. The procedure adopted andthe recommendation of appropriateauthorities is placed on record. Thedisallowance of Rs 3,64,71,703/- confirmedby the ld. CIT(A) only for the reason thatthese items are not actually destroyed andis only a provision can’t be upheld for thereason that item wise details of the same isfiled, these are the identified items and have been subsequently destroyed as perthe regular procedure followed. The writeoff for obsolesce of such identified items isallow able deduction as per the case lawsrelied by the Ld. AR. In fact no provision iscreated in books of accounts but only thenomenclature of provision for obsolesce isused. In the balance sheet also no suchprovision is appearing either in theliabilities side or as reduction from assetside not the Ld. D/R could point out anysuch provision in the balance sheet.Therefore the disallowance of Rs3,64,71,703/- confirmed by the Ld. CIT(A)is deleted.” Following the orders of the Tribunals incase of the assessee, the claim of theinventory written off of Rs. 8,28,35,757/-is allowed and hence the addition made bythe AO is deleted. This ground is thereforeallowed.” 4.1The observations made by the Tribunal in the earlier yearwhere appeal was preferred but this question was not admittedand today an application was also moved for amending or addingquestion of law which has been rejected by us. 4.2In that view of the matter, the view taken by the Tribunal isrequired to be accepted in favour of the assessee. 4.4In that view of the matter, the issue is answered in favour ofthe assessee and against the department. 5.In so far as issue No.(iii) with regard to travelling expensesis concerned, counsel for the appellant has contended that theexpenses which were made out of which the substantial amountwas allowed, however, Rs.50,00,000/- was disallowed by theAssessing Officer was required to be upheld in view of the factthat the same was not allowable in view of the circular of CBDT.However, the Tribunal in para 5 & 5.1 has specifically observed as under: 4.2In that view of the matter, the view taken by the Tribunal isrequired to be accepted in favour of the assessee. 4.4In that view of the matter, the issue is answered in favour ofthe assessee and against the department. 5.In so far as issue No.(iii) with regard to travelling expensesis concerned, counsel for the appellant has contended that theexpenses which were made out of which the substantial amountwas allowed, however, Rs.50,00,000/- was disallowed by theAssessing Officer was required to be upheld in view of the factthat the same was not allowable in view of the circular of CBDT.However, the Tribunal in para 5 & 5.1 has specifically observed as under: “5. The third ground of appeal is againstdisallowance of Rs. 50 lacs out of travellingand conveyance expenses. We noted thatAO made lumpsum disallowance out ofexpenses of Rs.9,94,33,712/- on theground that assessee has not filedsupporting evidence to justify the claimwhich is approved by the DRP. The Ld. ARcontended that the AO has wrongly statedthat assessee has not filed supportingevidence to justify the claim and failed toexplain the nature and purpose of expensesand therefore it lacks verification. Thesystem of internal control is such that noexpenses are booked without appropriateapproval and evidence of expenses. Toproduce the voluminous files of vouchersserves no purpose. There is no adversecomment from the auditors on theexpenses incurred under this head. The AOhas not required assessee to producevouchers for any specific expenditure. Inthe past, no disallowance out of theseexpenses were made by AO. In A.Y. 07-08,the DRP has also deleted such adhocdisallowance. It isfurther contended that ontraveling and conveyance expenses, fringebenefit tax has been paid by the assesseeand accepted by the department. The CBDTin Circular No. 8/2005 dated 29.8.2005 inreply to question no. 35 & 36 has clarifiedthat if any expenditure is not allowed u/s37, then the same cannot be considered forfringe benefit tax. Conversely if anyexpenditure is considered for fringe benefittax, it cannot be disallowed u/s 37. For thisproposition, reliance is placed on thedecision of Jaipur ITAT in case of ACIT Vs.Natural Slate and Stand Stone Pvt. Ltd. inITA No. 1090/JP/10 dt. 04.02.2011. On theother hand, the Ld. DR supported the orderof the AO. 5.1 After considering the rival submission,we found that AO at Page 2 of its order hasstated that assessee has produced entiremodule, bill and vouchers of expenses forverification as desired. However, in makingdisallowance out of the above expensesafter submission of month wise details ofthe expenses by the assessee,AO has notrequired assessee to furnish the details ofany specific expenses. We also note that on these expenses, FBT is paid and that suchadhoc disallowance is not made in the pastand in A.Y. 07-08, the DRP has directed theAO not to make such adhoc disallowance. Inthese facts and circumstances, we directthe AO to delete the disallowance of Rs. 50lacs made by him.” 5.1Counsel for the appellant has contended that the expenseswhich were paid as Fright Benefit Tax (FBT) and the dispute wasreferred to the Dispute Resolution Penal (DRP) where the disputewas for the assessment year 2007-08. 5.2Therefore, we accept the observations made by the Tribunalin para 5.1 and in that view of the matter the issue is answered infavour of the assessee. 6.Regarding issue No.(iv) & (v) counsel has relied upon thedecision of the Supreme Court in the case of Commissioner of Income Tax. vs. Alfa Laval (India) Ltd. [2007] 295 ITR0451 and the decision of Bombay High Court in the case ofCommissioner of Income Tax vs. Retilal Becharlal & Sonsand Commissioner of Income Tax vs. General Atlantic (P)Ltd. [2016] 384 ITR 0271 (Bom). 6.1Counsel for the appellant has contended that the expensesmade were not admissible under Section 37 of the Act, where theincome was disproportionate to the turn-over. 5.2Therefore, we accept the observations made by the Tribunalin para 5.1 and in that view of the matter the issue is answered infavour of the assessee. 6.Regarding issue No.(iv) & (v) counsel has relied upon thedecision of the Supreme Court in the case of Commissioner of Income Tax. vs. Alfa Laval (India) Ltd. [2007] 295 ITR0451 and the decision of Bombay High Court in the case ofCommissioner of Income Tax vs. Retilal Becharlal & Sonsand Commissioner of Income Tax vs. General Atlantic (P)Ltd. [2016] 384 ITR 0271 (Bom). 6.1Counsel for the appellant has contended that the expensesmade were not admissible under Section 37 of the Act, where theincome was disproportionate to the turn-over. 6.2In that view of the matter, the Tribunal has seriouslycommitted an error in allowing expenses. 6.3However, counsel for the respondent has taken us to para6.3 where the Tribunal summarizing the same observed as under: “6.3 After considering the rival submission,we find that Group M Media India Pvt. Ltd. isan Indian Co. as is evident from thecompany master details placed at PaperBook Page 17. From the same, it is notedthat this company is incorporated on29.11.2001 having registered office atMumbai. Therefore, it is an Indian Co. asdefined u/s 2(26) and is a company residentin India u/s 6(3). All payment made to thiscompany towards advertisement charges isin Indian currency. Tax is deducted at sourceon such payment u/s 194C. Sec. 195 isapplicable when payment is made to a nonresident. Admittedly, payment to Group MMedia India Pvt. Ltd. is a payment toresident and not a non resident. Therefore,section 195 is not attracted. The AO has notdisputed the genuineness of the paymentand therefore only because there is noagreement for the advertisement work withthis company cannot be viewed adversely.Therefore,thedisallowanceofRs.36,70,04,056/- made by the AO isincorrect, against law and the same isdeleted. So far as expenses on tradeincentive is concerned, we find that similarincentives given as per various schemes inearlier years has been allowed. The AO atPage 2 of the order has admitted that billsand vouchers of expenses, as desired, wereproduced for verification which was testchecked. The observation of AO thatservices has been received by the assesseeagainst these payment and therefore heshould have deducted tax at source on thevalue of the gift is ill founded in as much asthe payment is not against the services butagainst the sale of goods to the distributorsand therefore TDS provisions are notapplicable. Therefore, the disallowance ofRs.16,17,24,303/- made by the AO on thisaccount is deleted.” 6.4In our considered view, the view taken by the Tribunal isrequired to be accepted on facts. 7.Regarding issue No.(vi) counsel for the appellant hascontended that the miscellaneous expenses were not permissible and vouchers and everything were not properly found. However, Tribunal in para 9.2 has observed as under: “9.2 After considering the rival submissionand perusing the material on record, we findthat AO has made the disallowance withoutspecifying any particular expenses which isnot verifiable or not incurred wholly andexclusively for the purpose of business whenhe has given a finding at Page 2 of the orderthat bills and vouchers of expenses asdesired were produced for verification andexamined on test check basis. We also notedthat such adhoc disallowance is notapproved by the DRP in A.Y. 07-08.Considering the same, the adhocdisallowance made by AO is deleted. Thisground of assessee is therefore allowed.” 7.1In that view of the matter, the issue is answered in favour ofthe assessee and against the department. 8.The appeal stands disposed of. (VIRENDRA KUMAR MATHUR),J. (K.S. JHAVERI),J. Asheesh Kr. Yadav/186