Interest-Free Loans to AE Attract Transfer Pricing Adjustments While Ongoing Marketing Costs Remain Revenue Expenditure

ORDER

M. Balaganesh, Accountant Member.- The Assessee Microsoft Corporation India Pvt. Ltd. (hereinafter referred to as ‘assessee) by filing the present appeal sought to set aside the impugned assessment order dated 29.09.2017 for AY 2013-14, 27.07.2018 for AY 2014-15, 28.09.2019 and 26.03.2021 for AY 2016-17 passed by the Assessing Officer (AO) u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A) of the Income-tax Act, 1961 (for short ‘the Act’) inconsonance with the order passed by the Dispute Resolution Panel (DRP)-2, New Delhi dated 25.05.2018, 30.08.2017, 16.08.2019, 02.06.2020 u/s 144C(5).

1. Ground Nos. 1, 2, and 9 are general nature and does not require any specific adjudication.

2. Ground No. 3 raised by the assessee is challenging the transfer pricing adjustment of Rs. 13,88,751/- on account of corporate guarantee given by the assessee to its wholly owned step down subsidiary.

3. We have heard the rival submission and perused the materials available on record. Luminous Power Technologies Private Limited (‘LPTPL’) is engaged in manufacturing of inverters, batteries and Un-interrupted Power Supply (‘UPS’) equipment. The manufacturing function is carried out from its eligible and non-eligible units which operates as separate undertakings. The eligible units were availing income linked deductions under Section 80-IC of the Act. The company is also engaged in trading function of Home Electrical (‘HE’) and other products termed as non-eligible business. The Company is engaged in trading of range of electronic goods including inverters, batteries, UPS, home electricals etc. Its businesses include power backup, power storage, solution for diversified power generation, renewable and alternate energy solutions and physical infrastructure solutions for Information Technology (‘IT’) and Telecom.

4. The company has a wholly owned subsidiary by the name of Luminous Telelnfra Limited (‘LTL’) which was incorporated in 2008. LTL was engaged in manufacturing of batteries for inverters, DG Sets, and inverter parts. These are sold directly to the market and to the assessee on a need basis. The manufacturing is carried out from its two units in Gagret in the state of Himachal Pradesh. Both these units operate as separate undertakings and are eligible for income linked deductions under Section 80-IC of the Act. Subsequently, LTL has been merged with the assessee company.

5. Brief overview of all the units of the company (including units of LTL) along with year wise details of deduction claimed under section 80IC of the Act are as under:-

6. The return of income for assessment year 2013-14 was filed by the assessee company on 30.11.2013, declaring total income of Rs.7,01,23,160 under normal provisions of the Act and book profit of Rs.91,67,60,786 u/s 115JB of the Act. The case of the assessee was selected for scrutiny and in the course of scrutiny assessment proceedings, reference was made to the ld Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for benchmarking the international transaction carried out by the assessee. One such transaction noticed by the ld TPO was issuance of corporate guarantee of USD 21 lakhs by the assessee during FY 2008-09 to HSBC Bank, which continued till 30.09.2013 to facilitate credit facilities/ overdraft to its wholly owned step down subsidiary i.e. Lang Ming Power Technologies, (Shenzhen) Ltd (Lang Ming China). The assessee did not charge corporate guarantee fee from Lang Ming China [Associated Enterprise (AE)] on the ground that the same was provided in the capacity of shareholder for promoting/protecting its interest in AE. This transaction was duly disclosed in the audit report, in Form 3CEB vide reply to Question No. 15 thereon by the assessee while filing the return. The stand taken by the assessee is that the corporate guarantee issued to the bank on behalf of the AE is not an international transaction per se on the following grounds: –

7. The ld TPO however, disregarded the various contentions of the assessee and observed that the definition of international transaction has been amended by the Finance Act 2012 with retrospective effect from 01.04.2002 wherein Clause (C) of the Explanation was inserted in Section 92B of the Act, which reads as under: –

“Explanation.—For the removal of doubts, it is hereby clarified that—

(i) the expression “international transaction” shall include—

(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;”

8. The ld TPO observed that issuance of corporate guarantee would indeed fall within the definition of international transaction and proceeded to benchmark the same. The ld TPO applied the guarantee commission rate of 1.3% based on basic rate of SBI for inland bank guarantee charges and proposed an adjustment of Rs. 13,88,751/- on the value of corporate guarantee of Rs. 10,68,27,000/-. This action of the ld AO was upheld by the ld DRP.

9. The ld AR before us vehemently placed reliance on the decision of the Hon’ble Bombay High Court in the case of DP Jain and Co Infrastructure Private Limited referred supra wherein it has been held that where no consideration was received for issuance of corporate guarantee, the same would not be a taxable service under new CGST law. The AR also drew our attention to the relevant observation of the Hon’ble Bombay High Court in this regard wherein reliance was also placed on the decision of the Hon’ble Supreme Court rendered under service tax law referred supra. The ld AR vehemently argued that since no expense in the form of guarantee fee was incurred by the assessee for issuance of corporate guarantee, the said transaction would not have bearing on the profit or loss of the assessee. At this point in time, the Bench posed a query to the ld AR that the said transaction may not have bearing on the profit and loss of the assessee, but would certainly have a bearing on the assets of the enterprise, which is also included in Section 92B(1) of the Act while explaining the meaning of international transaction. To this, the ld AR replied that the transaction would have bearing on the assets of the company only in the event of default committed by the borrower to the bank and corporate guarantee getting devolved on the assessee. He submitted that admittedly no such guarantee got devolved on the assessee and there is no evidence brought on record by the revenue that the borrower (AE of the assessee) had defaulted payment to HSBC bank. The ld AR apart from reiterating the contentions raised before the ld TPO, which are narrated supra, placed reliance on the decision of the Hon’ble Rajasthan High Court in the case of CIT v. Vaibhav Gems Ltd.  (SC), in support of his contentions. He also submitted that the Special Leave Petition (SLP) preferred by the revenue against this decision was dismissed by the Hon’ble Supreme Court, which is reported in CIT, Jaipur v. Vaibhav Gems Ltd. [2018]   (SC). Further the ld AR placed reliance on the decision of the coordinate bench of Kolkata Tribunal in the case of Tega Industries Ltd. v. Dy. CIT [2016]   (Kolkata – Trib.) wherein it was held that issuance of corporate guarantee to ICICI Bank on behalf of its AE was part of shareholder function and hence there was no need to recover any corporate guarantee fee from the AE. It was also held that the provision of guarantee is to protect its investment interest.

10. Per contra, the ld DR vehemently relied on the amendment brought in the definition of international transaction by way of Explanation to Section 92B of the Act by the Finance Act 2012 with retrospective effect 01.04.2002. The ld DR submitted that the assessee had indeed extended a benefit to its AE by providing corporate guarantee to the lender of AE, which had enabled the AE to obtain loan at lesser rate of interest. He also submitted that the assessee also extended interest free loan to its AE in order to enable the AE to repay the bank loans, in order to avoid the situation of corporate guarantee not getting devolved on the assessee. With regard to rule of consistency argued by the ld AR, that the corporate guarantee was extended in FY 2008-09 and that it is only a continuing corporate guarantee and no TP adjustment was made up to AY 2012-13, the ld DR submitted that in earlier years, no reference at all was made by the ld AO to ld TPO and hence there is no occasion for the revenue to consider whether issuance of corporate guarantee per se is an international transaction or not requiring consequential benchmarking. The ld DR vehemently relied on the decision of the Hon’ble Allahabad High Court in case of Jubilant Pharmova Ltd. v. Addl. CIT 452 ITR 39 (Allahabad), wherein it held that pursuant to amendment brought in Section 92B of the Act, issuance of corporate guarantee would have to be construed as an international transaction. He stated that the SLP by the assessee against this decision was dismissed by the Hon’ble Supreme Court, which is reported in Jubilant Pharmova Ltd. v. Addl. CIT 452 ITR 226 (SC). He also placed reliance on the decision of Hon’ble Madras High Court in the case of Pr. CIT v. Redington (India) Ltd [2021] 430 ITR 298 (Madras), wherein it was held that even though there might not be immediate charge on profit and loss account in respect of issuance of corporate guarantee on behalf of subsidiary company for which no recovery of guarantee commission is made by the assessee, the inherent risk involved in providing guarantee could not be ruled out and hence assessee need to be compensated for the same.

11. The ld AR on rebuttal pointed out the decision of the Hon’ble Jurisdictional Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. v. CIT [2015]  377 ITR 533 (Delhi), wherein it was observed that the object of chapter X of the Act is not to tax any notional income and ensure that only real income is brought to tax under the Act. The ld AR on rebuttal pointed that the decision of the Hon’ble Allahabad High Court cannot be taken as binding precedent in view of the fact that in that case, there was no dispute as to whether the provision of corporate guarantee falls within the definition of international transaction u/s 92B of the Act or not. In this regard, he drew our attention to para 9.3 of the order of the tribunal reproduced in the said High Court order wherein the concession given by the ld counsel for the assessee have been duly recorded. He argued that any decision based on concession given by either side could not be construed as a binding precedent as there is no law laid down by the Court in that regard. He argued that the amendment in Explanation 1(c) of Section 92B of the Act would apply only when an assessee actually incur guarantee charges while issuing corporate guarantee on behalf of its AE and chose not to recover anything from the AE. He also submitted that it being part of shareholder activity as no other outsider would come forward to help the subsidiary company of the assessee and that the assessee alone in the capacity of holding company and shareholder had to protect the interest of the subsidiary by extending the requisite corporate guarantee. Hence, when an activity is carried out as part of shareholder function, the assessee cannot be expected to recover any money from the subsidiary company on account of guarantee fee.

12. Without prejudice to all the aforesaid arguments, the ld AR submitted that in any event, adoption of guarantee commission rate of 1.3% is on the higher side and that Hon’ble Bombay High Court in the case of CIT v. Everest Kento Cylinders Ltd. 378 ITR 57 (Bombay) had determined guarantee commission rate of 0.5% to be at Arm’s length price. He requested to adopt the said rate in the present appeal on without prejudice basis.

13. Considering the aforesaid rival submissions, we hold that the assessee in the instant case had indeed furnished corporate guarantee to HSBC Bank to enable its AE to avail credit facilities from the said bank. It is not in dispute that the AE is a step-down subsidiary of assessee company. Hence, it is all the more necessary for the assessee company in the capacity of company of being a holding company and 100% shareholder to extend corporate guarantee to enable the subsidiary company to avail credit facility and also enable the subsidiary company to run its business. This is more from the angle of a promoter promoting his investment interest in the company where he had invested. Hence, we hold that issuance of corporate guarantee on behalf of AE (subsidiary company) is predominantly a shareholder activity of the assessee. The ld DR in this regard vehemently argued that assessee would not have extended similar corporate guarantee to outsiders who are in AEs. This argument is to be dismissed in view of the fact that only the holding company could come forward to assist the subsidiary company and obviously no outsider would come forward to help the subsidiary company. Hence, the assessee company in the capacity of promoter share holder and holding company had extended the corporate guarantee on behalf of its AE as part of shareholding activity. Having carried out a transaction as part of shareholding activity there cannot be any expectation of receipt of any compensation from the AE in that regard, more so when no expenditure per se in the form of guarantee fees has been incurred by the assessee for extending a corporate guarantee in the normal parlance. The ld AR argued that corporate guarantee was extended in FY 2008-09 and had continued till 30-9-2013 and that no transfer pricing adjustment has been made by the ld TPO on this transaction from FY 2008-09 to FY 2011-12. In this regard, we find that no reference was made to the ld TPO by the ld AO for benchmarking the international transaction of issuance of corporate guarantee. Now in view of the amendment brought in section 92B vide Explanation 1 (c) of the Act by the Finance Act 2012 with retrospective effect from 1-4-2002, where in capital financing or funding in the form of guarantee is also included within the definition of international transaction, in our considered opinion, issuance of corporate guarantee tantamounts to indirect long-term financing by the assessee to its AE. Hence certainly the same would fall within the ambit of an international transaction warranting benchmarking of the same. Hence, the various arguments advanced by the ld AR that the same would not fall within the ambit of an international transaction are hereby rejected. However, the alternative argument of the ld AR made on without prejudice basis, that the transfer pricing adjustment proposed by the ld TPO on account of corporate guarantee should be capped at 0.5 percent per annum of the value of corporate guarantee in the light of the decision of Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd. (supra) would be applied in the instant case. Further, we are in agreement with the argument advanced by the ld. DR that the assessee had indeed extended benefit to the AE by providing corporate guarantee to HSBC Bank, which alone enabled the AE to avail the credit facilities from HSBC Bank. Further, by issuance of corporate guarantee by the assessee herein, the AE would have had the benefit of leveraging effect on the rate of interest. All these factors collectively contribute to hold that assessee had indeed resorted to indirect capital financing on long term basis by extending corporate guarantee on behalf of the AE, which amounts to international transaction pursuant to the amendment made with retrospective effect from 1-4-2002 by the Finance Act 2012. For the purpose of benchmarking the same, respectively following the decision of Hon’ble Bombay High Court in the case of Everest Kento Cylinders Limited referred supra, we hold that guarantee commission at the rate of 0.5 percent of value of corporate guarantee would have to be determined as ALP. Accordingly, the Ground No. 3 raised by the assessee is partly allowed.

14. Ground Nos. 4 to 7 raised by the assessee are with regard to transfer pricing adjustment made in respect of Specified Domestic Transaction (SDT) on the ground that there is excess expenditure for purchase of goods.

15. We have heard the rival submission and perused the materials available on record. Without going into the merits of the disallowance, at the outset we find the Specified Domestic Transaction is explained in Section 92BA of the Act. It had categorised 6 types of transactions to fall within the ambit of SDT. We find from 01.04.2017, the first category of transaction in Clause (i) i.e. “any expenditure in respect of which payment has been made or is to be made to a person referred to any clause (b) of Sub-section (2) of Section 40A” has been omitted from the statute. Now the moot legal question that arises is when a particular provision has been omitted from the statute without saving clause, whether the same could be construed as never to have been introduced in the statute. This issue is no longer res integra in view of the decision of the Hon’ble Karnataka High Court in the case of Pr. CIT v. Texport Overseas (P.) Ltd. [2020]   (Karnataka) wherein, it was held that Clause (i) of Section 92BA of the Act having been omitted by Finance Act, 2017 w.e.f. 01.04.2017, the resultant effect is that it had never been passed to be considered as a law never been existed and hence decision taken by the Assessing Officer to make a reference of benchmarking the SDT to the TPO would have to be declared invalid and bad in law. The relevant operative portion of the order of the Hon’ble High Court is reproduced hereunder:-

“6. In fact, Coordinate Bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of Section 10B. In the matter of GENERAL FINANCE CO. v. ACII, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectively of Section 92BA(1) of the Act. Thus, when clause (1) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.07.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of Section 92B1 and reference made to the order of Transfer Pricing Officer TOP under Section 92CA could be invalid and bad in law.

7. It is for this precise reason, tribunal has rightly held that order passed by the IPO and DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon’ble Supreme Court in Kolhapur Canesugar Works Ltd referred to herein supra which has been flowed by Co-ordinate Bench of this Court in the matter of M/s GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not arise for consideration particularly when the said issue being no more res integra.

16. The ld DR before us argued that though Section 92BA(i) has been omitted. The fact of such omission has not been stated in the Explanatory Memorandum for Finance Bill 2017 issued by CBDT and that the fact of omission is mentioned only by   Publication of the Income Tax Act which cannot be relied upon in the instant case. Further, the ld DR argued that either way, it is only a decision of non-jurisdictional High court which is not binding on this Tribunal. In our considered view, both the arguments advanced by the ld DR deserve to be dismissed in limine. The entire country including the office of the Income Tax Department are following the publication of   Income Tax Act and Income Tax Rules.   Publication Agency is an approved agency by the Govt. of India. As far as Tribunal is concerned, every decision of a higher authority namely the Hon’ble High Court and Hon’ble Supreme Court are binding. Hence, judicial discipline mandates this Tribunal being subordinate authority to Hon’ble High Court to follow the decision of Hon’ble Karnataka High Court. Hence, we have no hesitation to delete the transfer pricing adjustment made in respect of SDT in the facts and circumstances of the instant case.

17. The assessee had filed certain additional evidences in support of ground Nos. 4 to 7 for which a separate interim order dated 30.05.2024 had indeed been passed by this Tribunal admitting the additional evidences. The merits of such additional evidences need not be gone into in view of our aforesaid decision. Accordingly, ground Nos. 4 to 7 raised by the assessee are partly allowed.

18. Ground No. 8 raised by the assessee is challenging the addition made on account of allocation of head office cost as an independent service by invoking the provision of Section 80IA(8) of the Act and proposing transfer pricing adjustment for the same.

19. We have heard the rival submission and perused the materials available on record. During the year under consideration, the head office of the assessee had undertaken managerial, administrative, strategic and corporate functions for their respective business operations as under:-

20. All these expenses are incurred at the head office level and are allocated to all the respective units of the assessee on the basis of turnover of the respective units without any mark-up. The ld TPO characterised the common costs incurred by the head office for corporate functions as business support services and made an adjustment by allocating the head office expenses on cost plus mark up basis. The ld TPO alleged the head office as a separate business unit in itself involved in trading activities and providing business support services to its units. The main allegation of the ld TPO is that the assessee is diverting the cost from the eligible units to HO to increase the profitability of tax exempt unit and reduce the overall income of the tax paying HO.

21. The ld DRP upheld the action of the ld TPO by treating the head office as a separate profit centre. The ld DRP upheld the action of the ld TPO wherein the mark up has been computed on the basis of comparable selected by the ld TPO following Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) by computing the mark up at 2.53%.

22. We find that the Head Office had been performing the functions for the entity as a whole and the same does not pertain either to tax paying unit or the tax exempt unit and instead it applies to the company as a whole. Hence, the head office cost need to be allocated to various units comprising of tax paying unit as well as tax exempt units. This activity of the head office cannot be considered as a service rendered by the head office to all of its units. The ld DR before us vehemently argued that assessee had furnished the segmental results before the ld TPO which contained trading activities being carried out in head office. The ld DR argued that all inter unit sale transactions are done between eligible units and non eligible units with a mark up of 10% thereby claiming excess deduction u/s 80IC of the Act in respect of tax exempt unit, but when it comes to allocation to head office expenses, the same is done at cost without any mark up. There is no parity applied by the assessee in this regard. We find that in respect of inter units sales made by eligible units to non eligible units, the same would tantamount to provision of services by one unit to another unit and hence there was need for a mark up which has been rightly done by the assessee in the instant case. But from the aforesaid functions performed by head office, it could be seen that they are not rendering any provision of services to other units. Only the common cost that are incurred for the company as a whole are being allocated to various units at cost irrespective of whether the units are tax exempt unit or not. Hence, the head office cannot be construed as an independent business unit in the instant case. Accordingly, applying the provisions Section 80IA(8) of the Act for the same would not be in order. The head office herein is pure cost centre and not a profit centre. Further, we find that the assessee has been allocating the cost in a similar manner in the past and no adverse inference has been drawn by the ld AO or ld TPO in the past going by the principle of consistency, there is no reason for the ld AO/ TPO to take a divergent view for the year under consideration. Accordingly, ground No. 8 raised by the assessee is hereby allowed.

23. Ground No. 9 raised by the assessee is general in nature and does not require any specific adjudication.

24. Ground No. 10 raised by the assessee is challenging the initiation of penalty proceedings u/s 271(1)(c) of the Act which would be premature for adjudication at this stage and hence dismissed.

25. In the result, the appeal of the assessee for AY 2013-14 is partly allowed.

26. Ground No. 1, 2 and 8.1 raised by the assessee are general nature and does not require any specific adjudication.

27. The grounds are the raised for AY 2014-15 are identical to those raised for AY 2013-14:-

28. In respect of identical grounds as tabulated supra, the decision rendered by us in AY 2013-14 shall apply mutatis mutandis for AY 2014-15 also.

29. Ground Nos. 4 to 4.3 raised by the assessee are challenging the transfer pricing adjustment made on account of interest in respect of advance extended to AE.

30. We have heard the rival submission and perused the materials available on record. The assessee provided an advance of Rs. 13,17,33,000/- to its subsidiary LABH holding on 21.09.2013 with a view to provide financial assistance for repayment of loans and other obligations taken by its step-down subsidiary Lang Ming China which wound up its operation in October 2014, to enable Lang Ming China to pay the outstanding loan to HSBC Bank for which the assessee has provided corporate guarantee. The assessee pleaded that this lending was made as part of shareholder activity. No interest was charged on this advance by the assessee from its AE and no security has been provided by the AE to the assessee. The assessee pleaded that it is having sufficient own funds in its kitty to make this interest free advance to the AE. The assessee pleaded that it had Rs. 288.69 crores of own funds as on 31.03.2013 and Rs. 390.35 crores as on 31.03.2014 which is several times more than the interest free advance given in the sum of Rs. 13.17 crores. Accordingly, it was pleaded that borrowed funds were not utilized for the purpose of advancing interest free loan to the AE. Moreover, the AE was also under the obligation to protect its subsidiary to bail out from the category of loan default to HSBC Bank. Hence, the assessee was forced to advance money to its subsidiary which in turn had advanced money to its subsidiary and in that process, the corporate guarantee given by the assessee to HSBC Bank on behalf of AE would not get devolved on the assessee. All these transactions were stated to be carried out as part of share holder activity of the assessee and hence, there is no need to recover any interest from the AE. The ld TPO however disregarded these contentions and proceeded to benchmark the interest free advance given to the AE by imputing notional interest considering the Comparable Uncontrolled Price Method (CUP) as the Most Appropriate Method (MAM) and adopted the interest rate of 6 months LIBOR plus 400 basis points as an appropriate CUP and accordingly applied 4.331 % rate of interest on notional basis on the interest free funds given by way of transfer pricing adjustment for the whole year. The ld DRP upheld in principle the entire observation of the ld TPO but modified the transfer pricing adjustment partially by charging interest only from the date of lending from 21.09.2013 to 31.03.2014.

31. The ld AR before us, reiterated the contentions raised before the ld TPO and on without prejudice basis, made an argument that notional interest should be restricted only to LIBOR without adding any basis points and placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT v. Cotton Naturals (I) (P.) Ltd. (Delhi). Per contra, the ld DR vehemently argued that for the purpose of Chapter X of the Act, the theory of availability of own funds with the assessee would not apply at all in view of the fact that there is complete base erosion from one country to another country. The decisions rendered by Hon’ble Supreme Court on the availability of own funds were rendered in the context of domestic tax law where the borrower as well as the lender are Indian assessees and hence, there would be no base erosion effectively even though there would be some element of profit shifting. Whereas, when the borrower and lender are in two different tax jurisdictions, then the base erosion happens to Indian tax jurisdiction if something that is otherwise legitimately due to the sovereign is not given, due to assessee advancing funds to person in other country’s tax jurisdiction. We are in complete agreement with this argument of the ld DR. Hence, we hold that the availability of own funds with the assessee company and the principles of commercial expediency cannot be applied for the purpose of Chapter X which deals with determination of arm’s length price for international transactions carried out by the assessee.

32. We have gone through the decision of the Hon’ble Delhi High Court in the case of Cotton Naturals and on perusal of the decision, we find that the said decision does not speak anything about non inclusion of basis points with LIBOR while imputing the interest on lending/ borrowing transaction. The lending rates are determined based on the credit rating of the borrower. Hence, adding basis point with LIBOR is not prohibited in the said decision relied upon by the ld AR. No other evidence was produced by the ld AR as to why adoption of 400 basis points is incorrect. Hence, we hold that the lower authorities were justified in adoption of 400 basis points with LIBOR and applying total interest rate of 4.331%. It is pertinent to note that the lending has been brought within the definition of international transaction vide Explanation (1) to Section 92B of the Act. Hence, looking the same from the point of view of Chapter X of the Act that assessee would not have resorted to give interest free advance or loans to non AEs merely because it was having sufficient own funds, we hold that advancing interest free funds to its AE would have to be construed as an independent international transaction warranting benchmarking, which has been rightly applied in the instant case by applying interest @ 4.331%. Hence, we do not deem it fit to interfere in the final order passed by the ld AO in this regard. Accordingly, Ground Nos. 4 to 4.3 raised by the assessee are dismissed.

33. Ground No. 7 raised by the assessee is challenging the confirmation of disallowance of advertisement expenses.

34. We have heard the rival submission and perused the materials available on record. During the AY 2014-15, the assessee had claimed deduction for expenses amounting to Rs.61,54,93,483 on account of advertisement, publicity, and sales promotion expenses. Such expenses were incurred towards exhibition, hoardings, road show, wall paintings, newspaper advertisement, TV ads, advertisement on internet, social media, website, dealer meets, etc. to enhance its market presence and to push sales of its products. The ld AO made on adhoc disallowance of advertisement expenses amounting to Rs. 30,77,47,000/- at 50% by holding it to be capital in nature resulting in creation of intangible assets in the form of brand development. In other words, the case of the ld AO was that advertisement expenses were incurred by the assessee company for establishment and promotion of “Luminous” brand in India. The assessee preferred objections before the ld DRP stating that the entire expenses are merely revenue in nature and does not create any enduring benefit in the capital field to the assessee. The details of the entire advertising expenses are as under:-

35. It was submitted that the shelf life of the expenditure incurred by the assessee is more than a year and that in view of heavy competition prevailing in the market and also keeping in mind the recall value of the products, such expenses had to be incurred on a recurring basis by the assessee as upkeep and maintenance, hence there cannot be any enduring benefit in the capital field. However, this plea was not appreciated completely by the ld DRP and ld DRP ultimately held the following expenses to be capital in nature creating enduring benefit to the assessee:-

36. In respect of brand ambassador fees paid to Mr. Sachin Tendulkar, the same is paid based on ‘Endorsement Agreement’ between World Sports Group (WSG) , Luminous Power and Mr. Sachin Tendulkar from 01.04.2010 to 30.06.2013 and thereafter from 01.07.2013 to 30.06.2016. The ld DRP had gone by the period of the agreement of the same ranging for the period 2010 to 2016 so as to treated as capital in nature. In our considered opinion, the very fact that the agreement is for 6 years and payments have to be made regularly to Mr. Sachin Tendulkar itself goes to prove that it is a recurring expenditure and it may create enduring benefit only in the revenue field and not in the capital field. Further, today’s celebrity would be replaced by another celebrity tomorrow. Advertisements given in visual media are short lived and had to be frequently revisited in order to keep the product alive in the mind of the customers. Hence, there cannot be any enduring benefit in the capital field by the incurrence of this expenditure. Accordingly, we hold that the brand ambassador fee paid to Mr. Sachin Tendulkar to be revenue in nature.

37. With regard to fees paid for creating designs on contractual basis amounting to Rs. 2,27,91,119/-, we find that the designs need to be redrawn having regard to the change in consumers’ taste and preference periodically. Hence, there cannot be any fixed design that would prevail in the market. Since, this expenditure which has to be incurred regularly by the assessee, we hold that the same had to be treated as revenue expenditure and not capital.

38. With regard to expenditure incurred on product market research through agencies in the sum of Rs. 37,87,855/-, this expenditure is incurred on engaging agencies to find out tastes and preferences of consumers. As stated earlier, the consumer tastes and preferences keep on changing. Hence, the same reasoning as stated above would apply to this expenditure also to hold the same to be revenue in nature.

39. Further, all the 3 items do not contribute to profit earning apparatus. Further, it does not create any tangible and intangible asset for an indefinite future. Hence, aforesaid 3 expenditures would have to be construed only as revenue in nature. Our view is further fortified by the principles enunciated by the Hon’ble Supreme Court in the recent decision of Sharp Business System v. CIT 484 ITR 509 (SC) and the celebrated decision in the Empire Jute Co. Ltd. v. CIT  124 ITR 1 (SC). Respectfully following the same, we hold that the aforesaid 3 expenditures to be revenue in nature. Accordingly, the Ground Nos. 7 to 7.6 raised by the assessee are allowed.

40. Ground No. 8.1 is general in nature.

41. In the result, the appeal of the assessee for AY 2014-15 is partly allowed.

42. The grounds raised for AYs 2015-16 and 2016-17 are identical to those raised for AY 2014-15 as under:-

43. To sum up, all the appeals of the assessee are partly allowed.