2019 (8) TMI 1534 - AT - Income Tax

Assessee wins appeal on TP adjustments for AMP expenses and distribution. Interest levy deemed consequential. Penalty premature.

The Tribunal allowed the appeal of the assessee, vacating TP adjustments related to AMP expenses and the distribution segment. Matters regarding royalty ... TP Adjustment - AMP expenses - international transaction - absence of any ‘agreement‘ with its AE for incurring of AMP expenses for carrying out DEMPE functions for the intangibles owned by the AE, the AMP expenses incurred by the assessee would not fall within the realm of the meaning of an international transaction envisaged in Sec. 92B - HELD THAT:- As relying on assessee's own case [2019 (3) TMI 459 - ITAT MUMBAI] and being of the considered view that as the revenue had failed to discharge the ‘onus‘ that was cast upon it as regards proving that there was any 'understanding' or an 'arrangement' or 'action in concert' as per which the assessee had agreed for incurring of AMP expenses for brand building of its AE, viz. L‘Oreal S.A., France, the TP adjustmentin respect of AMP expenses cannot be sustained and is liable to be vacated. TP Adjustment in respect of the ‘distribution segment' - differences in intensity of AMP functions performed by the assessee vis a vis the comparable companies - HELD THAT:- As the revenue had failed to establish the existence of any 'understanding' or an 'arrangement' or 'action in concert' as per which the assessee had agreed for incurring of AMP expenses for brand building of its AE, viz. L‘Oreal S.A., France, therefore, the AMP expenses incurred by the assessee had been held by us as not having been incurred by the assessee for brand building of its AE. Accordingly, as no part of the AMP expenses are attributable to rendering of any DEMPE functions for the brands owned by the AE, therefore, the TP adjustment of ₹ 60.03 crore made by the TPO in respect of the ‘distribution segment‘ of the assessee on account of alleged differences in intensity of AMP functions performed by the assessee vis a vis the comparable companies in order to align the functions, assets and risks profile of the assessee with that of the comparable companies, cannot be sustained and are liable to be vacated. Adjustments on account of payment of royalty on trademarks - HELD THAT:- Adhoc disallowance of the royalty payment by the TPO is beyond the realm of his jurisdiction and cannot be sustained. It is also the claim of the assessee that the payment of royalty on trademarks at 1.75% (on sales) had been accepted by the TPO in its case for A.Y 2015-16. We find that the Tribunal while disposing off the appeal of the assessee for the immediately preceding year viz. A.Y 2012-13 [2019 (3) TMI 459 - ITAT MUMBAI] was seized of a similar adhoc disallowance of royalty on trademarks of 1.75% (on sales). After necessary deliberations, the Tribunal had restored the matter to the file of the DRP for fresh adjudication. Accordingly, finding ourselves to be in agreement with the view taken by the Tribunal in the aforementioned preceding year viz. A.Y 2012-13, we thus on similar terms restore the matter to the file of the DRP. The DRP shall in the course of the ‘set aside‘ proceedings readjudicate the issue afresh. Needless to say, the DRP shall in the course of the ‘set aside‘ proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its claim that the payment of royalty on trademarks @1.75% (on sales) was at ALP, and no adjustment was called for in respect of the same. Grounds of appeal allowed for statistical purposes. TP adjustment as regards the royalty payment towards technical know-how - HELD THAT:- The method adopted by the TPO for arriving at a TP adjustment of 2.7% as regards royalty on technical know-how does not inspire any confidence. Be that as it may, we find that the Tribunal while disposing off the appeal of the assessee for the immediately preceding year viz. A.Y 2012-13 had restored the matter pertaining to TP adjustment as regards royalty paid by the assessee towards technical knowhow to its AE, viz. L‘Oreal., S.A, France to the file of the DRP for fresh adjudication. Accordingly, not finding ourselves to be in agreement with the novel method adopted by the TPO for benchmarking the royalty for technical knowhow of 5% (on sales) paid by the assessee (manufacturing segment) to its AE during the year under consideration i.e. A.Y. 2013-14, which we are afraid is neither backed by the mandate of law nor any logical reasoning, therefore, in consistence with the view taken by the Tribunal in the aforementioned preceding year viz. A.Y 2012-13, on similar terms restore the matter to the file of the DRP. The DRP shall in the course of the ‘set aside‘ proceedings readjudicate the issue afresh. DRP shall in the course of the ‘set aside‘ proceedings afford a reasonable opportunity of being heard to the assessee, who shall be at a liberty to substantiate its claim that the payment of royalty on technical knowhow @5% (on sales) was at ALP and no adjustment was called for in respect of the same. Issues Involved:1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses.2. Alternate adjustment on the manufacturing segment on account of payment of royalty for use of technical know-how and trademark.3. Alternate adjustment on the distribution segment for the international transaction of importing finished goods for resale.4. Levy of interest and initiation of penalty proceedings.Detailed Analysis:1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses:The assessee challenged the adjustment of Rs. 354.73 crores made by the TPO, arguing that AMP expenses were not international transactions under Section 92B of the Income Tax Act. The TPO alleged that AMP expenses incurred by the assessee were for brand promotion services to its AE and should be compensated. The assessee contended that there was no agreement with its AE for incurring AMP expenses for brand promotion. The Tribunal found no evidence of any arrangement or agreement obligating the assessee to incur AMP expenses for the AE's benefit and ruled that the AMP expenses were incurred for the assessee's own business. Consequently, the Tribunal vacated the TP adjustment of Rs. 354.73 crores.2. Alternate adjustment on the manufacturing segment on account of payment of royalty for use of technical know-how and trademark:The TPO proposed an adjustment of Rs. 56.37 crores, arguing that the royalty payments for technical know-how and trademarks were excessive. The TPO disallowed the entire royalty payment for trademarks, stating that the assessee had already incurred significant AMP expenses for brand building. For technical know-how, the TPO used a novel method to determine the ALP, which the Tribunal found arbitrary. The Tribunal restored the matter to the DRP for fresh adjudication, allowing the assessee to substantiate its claim that the royalty payments were at arm's length.3. Alternate adjustment on the distribution segment for the international transaction of importing finished goods for resale:The TPO made an adjustment of Rs. 60.03 crores, alleging differences in the intensity of AMP functions performed by the assessee compared to comparable companies. The Tribunal noted that since the AMP expenses were not considered international transactions, no part of the AMP expenses was attributable to the AE's brand building. Consequently, the Tribunal vacated the TP adjustment of Rs. 60.03 crores.4. Levy of interest and initiation of penalty proceedings:The Tribunal ruled that the levy of interest under Sections 234B, 234C, and 234D is consequential, and the initiation of penalty proceedings under Section 271(1)(c) is premature.Conclusion:The Tribunal allowed the appeal of the assessee, vacating the TP adjustments related to AMP expenses and the distribution segment. The matters concerning royalty payments were restored to the DRP for fresh adjudication. The issues of interest levy and penalty initiation were disposed of as consequential and premature, respectively.