2019 (4) TMI 1774 - AT - Income Tax

Tribunal allows appeal, rejects Transfer Pricing Adjustment on AMP expenses, affirms deduction for STP unit.

The Tribunal allowed the assessee's appeal, deleting the Transfer Pricing Adjustment on Advertisement, Marketing, and Promotion (AMP) expenses and the ... TP Adjustment - addition of advertisement, marketing and promotion (AMP expenses) - as argued from the side of the assessee that assessee-company had incurred expenditure on AMP to cater to the needs of the customers in the local market and such an expenditure was neither incurred at the instance or behest of overseas AE nor there was any mutual understanding or arrangement or allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by it for the purpose of its business - HELD THAT:- In this case, the assessee undisputedly is an independent distributor whereby it was purchasing finished goods and spare parts from its AE and selling the same in India on its own risk and the profit derived from such sales has been offered to tax in India. Legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by MNE group from exploiting the intangibles, even though such returns is initially accruing to the legal owner as a result of its legal /contractual right to exploit the intangible. The return depends upon the functions performed by the legal owner, assets it uses, and the risks assumed; and if the legal owner does not perform any relevant function, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, then the legal owner of the intangible will not be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than the Arm’s Length compensation if any for holding the title. It would be very difficult to treat AMP as separate international transaction and any attempt to benchmark such a presume transaction in any manner would be a very difficult exercise. The entire finding and approach of the TPO and DRP has been purely based on hypothesis and one of the agreement entered in the earlier year for a limited period of six months and this has been stated to be a material so as to determine that there was an international transaction qua AMP expenditure in this year. Such a presumption based on said agreement cannot be inferred in this year at all as, firstly, it was for a very limited period in one of the earlier year as stated above; and secondly, each year has to be seen independently and if no such material act is permeating then presumption cannot be drawn for perpetuity. Thus, Revenue has failed to bring on record any material or any kind of arrangement existing between the AE and Assessee Company that there was separate international transaction with regard to AMP expenditure. Thus, on the facts and circumstances of the case, we hold that AMP expenditure cannot be treated as separate international transaction which needs separate benchmarking and accordingly we delete the entire AMP adjustment made by the Assessing Officer. Addition of bad debts - All the conditions laid down for claiming of bad debt in accordance with Section 36(1)(vii) stands duly satisfied; and we find no reason as to why the Assessing Officer has made the disallowance, when assessee has produced all the copy of ledger account which contains amount taken as sales in the earlier years and same has been written off in this year. Accordingly, the addition on account of bad debt is directed to be deleted. Deduction u/s.10A - HELD THAT:- Deduction shall not be allowed after 1st day of April, 2010. Later on, by Finance Act, 2010, there was an amendment in the proviso to Section 10A (1), whereby the sunset clause was extended by one more year, i.e., Assessment Year 2011-12. The impact of said amendment would be that the unit set up in financial year 2001-02 will get full tenure of deduction, whereas any STP unit set up later on will get a limited tenure. Thus, assessee was entitled for deduction u/s.10A (1) wherein there was no such limit on claim of deduction. It was only in Section 10A (1A) which is applicable to SEZ, that such limit of time period for claim of deduction of 100%, 50% and 30% has been laid down. Since here in this case assessee is having a STP unit and not SEZ therefore, ld. DRP was correct in holding that provision of Section 10A (1A) will not apply, but Section 10A (1) only. Accordingly, the direction of the DRP is affirmed and Revenue’s appeal is dismissed. Issues Involved:1. Transfer pricing adjustment on Advertisement, Marketing, and Promotion (AMP) expenses.2. Addition on account of bad debts.3. Deduction under Section 10A for STP unit.Detailed Analysis:1. Transfer Pricing Adjustment on AMP Expenses:The assessee, a wholly-owned subsidiary of CASIO Japan, engaged in marketing CASIO products in India, reported several international transactions in its Transfer Pricing (TP) study report. The Transfer Pricing Officer (TPO) noted that the assessee incurred AMP expenses of Rs. 7,49,01,076/- which were not separately benchmarked. The TPO argued that these expenses benefited the parent company, CASIO Japan, by building brand value. The TPO issued a show-cause notice for making a transfer pricing adjustment on AMP expenditure, relying on the ITAT Special Bench decision in LG Electronics India Ltd. vs. ACIT, concluding that AMP expenditure is an international transaction requiring separate benchmarking. The TPO applied the Bright Line Test (BLT) to determine the Arm's Length Price (ALP) and made an adjustment of Rs. 3,19,16,124/-.The Dispute Resolution Panel (DRP) upheld the TPO's findings, noting that AMP expenditure leads to the development of intangibles for the AE. The DRP also rejected the assessee's contention that AMP expenses were covered by the overall Transactional Net Margin Method (TNMM) and did not require separate benchmarking.Upon appeal, it was argued that the AMP expenditure was incurred independently by the assessee for its own business purposes and not at the behest of the AE. The assessee contended that the BLT was not a valid test as per the Delhi High Court's decisions in Sony Ericsson Mobile Communication India Ltd. and Maruti Suzuki India Ltd., which rejected the BLT for determining ALP.The Tribunal found that the TPO and DRP's reliance on the BLT was misplaced, as the Delhi High Court had categorically held that BLT was not statutorily mandated. The Tribunal noted that the assessee was an independent distributor bearing all business risks and performing all marketing functions independently. The Tribunal held that the Revenue failed to demonstrate any arrangement or understanding between the assessee and the AE obliging the assessee to incur AMP expenses for the AE's benefit. Consequently, the Tribunal deleted the entire AMP adjustment made by the Assessing Officer.2. Addition on Account of Bad Debts:The assessee claimed a deduction of Rs. 3,86,63,023/- on account of bad debts, which were outstanding dues from its discontinued pager business. The DRP directed the Assessing Officer to verify that the debts were actually written off as irrecoverable and had been taken into account in computing the assessee's income. The Assessing Officer, however, summarily rejected the assessee's claim.The Tribunal found that the assessee had written off the bad debts in its books of account and had provided all necessary details, including ledger accounts of the debtors. The Tribunal held that the conditions for claiming bad debts under Section 36(1)(vii) were satisfied and directed the deletion of the addition made by the Assessing Officer.3. Deduction under Section 10A for STP Unit:The assessee claimed a deduction of Rs. 32,17,591/- under Section 10A for its Software Technology Park (STP) unit. The Assessing Officer restricted the deduction to 50%, interpreting that the assessee was entitled to 50% deduction after the initial five years. The DRP, however, held that the assessee was entitled to 100% deduction for the entire ten-year period, as the unit was set up in the financial year 2001-02, and the sunset clause was extended by one year by the Finance Act, 2010.The Tribunal affirmed the DRP's findings, noting that the assessee's STP unit was entitled to the full tenure of deduction under Section 10A(1), and the provisions of Section 10A(1A) applicable to SEZ units did not apply to the assessee's STP unit. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.Decision:The Tribunal allowed the assessee's appeal, deleting the AMP adjustment and the addition on account of bad debts. The Tribunal dismissed the Revenue's appeal, affirming the DRP's direction to allow the full deduction under Section 10A for the assessee's STP unit.