2020 (1) TMI 1591 - AT - Income Tax

Tribunal rules in favor of assessee, deletes Transfer Pricing adjustments, emphasizes on appropriate ALP method

The Tribunal ruled in favor of the assessee, directing the deletion of Transfer Pricing (TP) adjustments made by the Transfer Pricing Officer (TPO) and ... TP Adjustment - adjustment on account of AMP expenses in manufacturing segment - HELD THAT:- ITAT has decided the issue in favour of the assessee as in assessee own case [2019 (3) TMI 459 - ITAT MUMBAI] wherein held 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 adjustment in respect of AMP expenses cannot be sustained and is liable to be vacated. AMP adjustment of distribution segment of international transaction of import of finished goods - The aforesaid adjustment was carried out by the TPO as per the adjusted RPM in order to align the functions, assets and risks profile of the assessee with that of the comparable companies. 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 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. Alternative adjustment on the manufacturing segment - international transaction on account of payment for availing of marketing support services to AEs - In this case the emails provided by the assessee are not supported any with documentary evidence such as cost allocation sheet, confirmation from parties and the assessee has not demonstrated the benefit provided by the AE from the services. Accordingly, the ALP is taken at NIL and the arm’s length value of payment made towards availing the said consulting services is considered as NIL. However, it is important to note that the said services are forming part of the AMP adjustment done by the undersigned above. Accordingly, it would only be fair to consider this adjustment as an alternative adjustment and to be considered only if the primary adjustment of AMP spend is not upheld by the appellate authorities. Benefit aspect u/s. 37(1) - As per TPO has not examined whether the method adopted by the assessee to determine the ALP is correct or not but instead concluded that the payment are excessive - We note that the reference to the excessive nature/benefit derived by the assessee by the TPO is not at all sustainable in the light of Hon'ble Jurisdictional High Court decision in the case of Lever India Exports Ltd. (supra). In the said decision it was expounded by Hon'ble Jurisdictional High Court that it is not for the TPO to apply benefit test. Hence, this limb of TPO’s reasoning is not sustainable. Further it is clear that the assessee has submitted enormous additional evidence before the DRP and they have been remanded to the TPO also. The TPO has not made any adverse comment rather he has again reiterated that expenses are excessive and has justification aspect in third party situation. In other words, TPO’s has again reiterated the issue of benefit test which has been held by Hon'ble Jurisdictional High Court to be not applied by TPO in his adjudication. Transfer pricing adjustment at nil fails on both counts. Firstly on the account of benefit test which is not to be applied by the TPO and secondly none of the method of benchmarking the international transaction as specified in section 92C has been applied. Furthermore as rightly contended by the learned counsel of the assessee the ITAT in earlier year had remanded the issue as the issue of additional evidences was there, However ITAT was in principle of the view that application of benefit test by the TPO is not at all sustainable on the touchstone of honourable jurisdictional High Court decision in the case of Lever India Exports Ltd. [2017 (2) TMI 120 - BOMBAY HIGH COURT] In the present case we note that detailed evidences has been submitted before the DRP and the same have been examined by the TPO in remand proceedings, who has reiterated his reservations on the need and benefit to the assessee instead of applying any method of determining the arms length price - we direct that these alternative adjustments as above are liable to be deleted. We order accordingly. Issues Involved:1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses.2. Alternate adjustment on manufacturing segment on account of payment of royalty for use of technical know-how and trademark.3. Payment made to AEs for use of trademark.4. Alternate adjustment on the distribution segment – international transaction of import of finished goods from AEs for resale.5. Alternate adjustment on the manufacturing segment – international transaction of payment for availing of marketing support services to AEs.6. Alternate adjustment on the manufacturing segment – international transaction of payment for availing of consulting services.Detailed Analysis:A) Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses:The Tribunal found that the AMP expenses incurred by the assessee were not for brand building of its Associated Enterprises (AEs) and thus should not be considered as an international transaction. The Tribunal referred to its own previous judgments in the assessee's case for earlier years, where it was consistently held that without any 'understanding' or 'arrangement' for incurring AMP expenses for the AE's brand building, the provisions of Chapter-X could not be invoked for TP adjustment. Consequently, the TP adjustment of Rs. 198.18 crores was directed to be deleted.B1) Alternate adjustment on manufacturing segment on account of payment of royalty for use of technical know-how and trademark:The Tribunal noted that the TPO did not examine whether the method adopted by the assessee to determine the Arm's Length Price (ALP) was the most appropriate method. Instead, the TPO concluded that the payments for trademark and technical know-how royalty were excessive. The Tribunal referenced the Bombay High Court's judgment in CIT Vs. Lever India Exports Ltd., which stated that the TPO should not apply the benefit test. The Tribunal directed that the adjustment on account of royalty should be deleted.B2) Payment made to AEs for use of trademark:This issue was subsumed under the broader category of royalty payments for use of technical know-how and trademark. The Tribunal's decision to delete the adjustment on account of royalty payments also applied to payments made for the use of the trademark.C) Alternate adjustment on the distribution segment – international transaction of import of finished goods from AEs for resale:The Tribunal found that this issue was also covered in favor of the assessee by its previous orders. The Tribunal held that since the revenue failed to establish any 'understanding' or 'arrangement' for incurring AMP expenses for the AE's brand building, the TP adjustment of Rs. 125.78 crores for the distribution segment could not be sustained and was directed to be deleted.D) Alternate adjustment on the manufacturing segment – international transaction of payment for availing of marketing support services to AEs:The Tribunal noted that the TPO and DRP had not properly examined whether the method adopted by the assessee to determine the ALP was appropriate. Instead, they focused on the need, proof of rendition, and commercial expediency of the services, which is beyond the TPO's jurisdiction. The Tribunal referenced the Bombay High Court's judgment in CIT Vs. Lever India Exports Ltd., which stated that the TPO should not apply the benefit test. The Tribunal directed that the adjustment for marketing support services should be deleted.E) Alternate adjustment on the manufacturing segment – international transaction of payment for availing of consulting services:Similar to the marketing support services, the Tribunal found that the TPO and DRP had not properly examined the method adopted by the assessee to determine the ALP. The TPO's focus on the need and benefit of the services was beyond his jurisdiction. The Tribunal referenced the Bombay High Court's judgments in CIT Vs. Lever India Exports Ltd. and CIT vs. Johnson & Johnson Ltd., which stated that the TPO should not apply the benefit test. The Tribunal directed that the adjustment for consulting services should be deleted.Conclusion:The Tribunal allowed the assessee's appeal, directing that all the TP adjustments made by the TPO and upheld by the DRP should be deleted. The Tribunal emphasized that the TPO should not apply the benefit test and should instead focus on whether the method adopted by the assessee to determine the ALP was appropriate.