vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj lquokbZ dh rkjh[k ... - | Taxsutra

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj

IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR

Jh fot; iky jko] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM

vk;dj vihy la-@IT (TP) A. No. 04/JP/2018

fu/kZkj.k o"kZ@Assessment Year : 2014-2015

M/s Gillette India Ltd. SPA-65-A, Industrial Area, Bhiwadi.

Alwar.

cuke Vs.

The ACIT, Circle-2

Alwar.

LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACI 3924 J vihykFkhZ@Appellant izR;FkhZ@Respondent

fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (C.A.) &

Shri Dhanesh Bafna (CA) jktLo dh vksj ls@ Revenue by : Shri B. K. Gupta (CIT)

lquokbZ dh rkjh[k@ Date of Hearing : 05/06/2020

mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 08/06/2020

vkns'k@ ORDER

PER: SHRI VIKRAM SINGH YADAV, A.M.

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.

IT (TP) A. 04/JP/2018

Gillette India Limited vs. ACIT, Alwar

2

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 income.

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

IT (TP) A. 04/JP/2018


3

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 se does

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

Hon’ble Delhi High Court decision in the case of Maruti Suzuki India Ltd.

(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

IT (TP) A. 04/JP/2018


4

relevant 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

IT (TP) A. 04/JP/2018


5

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 deleted.

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

IT (TP) A. 04/JP/2018


6

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 as under:-

“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?”

IT (TP) A. 04/JP/2018


7

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 no. 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.

IT (TP) A. 04/JP/2018


8

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 hearing.

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

engaged in the manufacturing of personal care products which includes

IT (TP) A. 04/JP/2018


9

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 benchmarking 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

benchmarking analysis.

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

IT (TP) A. 04/JP/2018


10

with the various documentary evidences in the form of License

Agreement and benchmarking 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

benchmarking 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 benchmarking 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

IT (TP) A. 04/JP/2018


11

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 benchmarking 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 Mach3 Razors:

20. It was submitted that the manufacturing facility set up at Baddi,

Himachal Pradesh for both the abovementioned 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 knowhow provided by

IT (TP) A. 04/JP/2018


12

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

IT (TP) A. 04/JP/2018


13

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

fact that 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

IT (TP) A. 04/JP/2018


14

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’ license.

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 as under:

IT (TP) A. 04/JP/2018


15

Licensor Licensee Geography Technology

Description

Trademark/

Tradename

Product

description

Valid

for CY

Rate

of

royalty

Assessee:

The Gillette

Company

Gilletee

India Ltd.

India Formulae

(know-how)

Gillette

Guard and

Gillette

Mach3

Blades and Razors Yes 4.5% of

NOS

Comparables:

1. The Procter

& Gamble

Company

Universal

Razor

Industries

US and

Canada

Formulae

(know-how)

Noxzema Women Razors,

Shaving creams and

gels, Pre & Post shave

care

Yes 5.5% of

NOS

2. The Procter

& Gamble

Company

Universal

Razor

Industries

US and

Canada

Formulae

(know-how)

Noxzema Shaving cream & gel Yes 11.67%

of NOS

3. The Procter

& Gamble

Company

Universal

Razor

Industries

US and

Canada

Formulae

(know-how)

Old Spice Blades, Razors,

Shaving care

products

Yes 5.5% of

NOS

Arithmetic Mean 7.56%

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 deleted.

IT (TP) A. 04/JP/2018


16

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

which states 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 similar...”

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.

IT (TP) A. 04/JP/2018


17

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

IT (TP) A. 04/JP/2018


18

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

filed by the appellant, where it has been stated that an inadvertent

IT (TP) A. 04/JP/2018


19

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.

IT (TP) A. 04/JP/2018


20


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 as under:

“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

IT (TP) A. 04/JP/2018


21

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

IT (TP) A. 04/JP/2018


22

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, unlike in

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

IT (TP) A. 04/JP/2018


23

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

IT (TP) A. 04/JP/2018


24

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 DRP.

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.

IT (TP) A. 04/JP/2018


25


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 as under:-

“(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

IT (TP) A. 04/JP/2018


26

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

IT (TP) A. 04/JP/2018


27

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 us.

4.2 In that view of the matter, the view taken by the Tribunal is

required to be accepted in favour of the assessee.”

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’ble Supreme Court against the decisions of the Hon’ble Rajasthan

IT (TP) A. 04/JP/2018


28

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 dismissed.

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.

Sd/- Sd/-

¼fot; iky jko½ ¼foØe flag ;kno½ (Vijay Pal Rao) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur

fnukad@Dated:- 08/06/2020. Ganesh Kumar vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. vihykFkhZ@The Appellant- M/s Gillette India Ltd., Bhiwadi, Alwar. 2. izR;FkhZ@ The Respondent- ACIT, Circle-2, Alwar.

3. vk;dj vk;qDr@ CIT

IT (TP) A. 04/JP/2018


29

4. vk;dj vk;qDr@ CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur. 6. xkMZ QkbZy@ Guard File {ITA No. IT (TP) A. 04/JP/2018}

vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar

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