ITAT allows trade advances as business losses, rejects AMP as international transactions, permits lease expenses as immediate deductions

The ITAT DELHI upheld several taxpayer contentions in this transfer pricing and business expense case. The Tribunal ruled that AMP expenses do not constitute international transactions, directing the AO to reconsider based on precedent. For IT support services, the Tribunal rejected the TPO's re-characterization of the assessee as a software development provider, confirming it as an ITES segment company requiring appropriate comparables. The Tribunal allowed trade advances written off as business losses rather than bad debts under section 36(2). Additionally, brokerage and stamp duty expenses for office lease were permitted as deductions in the year incurred rather than spread over the lease period.

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Issues Involved:
1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses.
2. Adjustment to the Arm's Length Price (ALP) of Information Technology (IT) support services.
3. Deletion of addition made on account of advance written off.
4. Deduction for payment of stamp duty and brokerage for office lease.

Summary:

1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses:
The first common issue in the appeals pertains to the adjustment made for AMP expenses, alleged to have been incurred on behalf of the Associated Enterprises (AEs). The Tribunal noted that the Transfer Pricing Officer (TPO) made adjustments by treating AMP expenses as an international transaction under section 92B of the Act, using the Bright Line Test (BLT) method. However, referencing the Tribunal's decision in the assessee's case for the assessment year 2008-09, it was held that AMP expenses do not fall under international transactions. The Tribunal restored the issue to the Assessing Officer to decide afresh, in line with the pending decision of the Hon'ble Supreme Court on similar matters. The Tribunal reiterated that the alleged excessive AMP expenditure does not qualify as an international transaction, thus the adjustment made by the Revenue is unsustainable. The matter was restored to the Assessing Officer to act in accordance with the Supreme Court's findings.

2. Adjustment to the Arm's Length Price (ALP) of Information Technology (IT) support services:
The second common issue relates to the adjustment made to the ALP of IT support services provided by the assessee to its AEs. The assessee benchmarked the transaction using the Transactional Net Margin Method (TNMM), which the TPO rejected, re-characterizing the assessee as a software development service provider and selecting new comparables from the software development services segment. The Tribunal found the TPO's re-characterization erroneous, noting that the assessee provides ITES and not software development services. The Tribunal referenced its decision in the assessee's case for the assessment year 2011-12, upheld by the Hon'ble Jurisdictional High Court, which confirmed the assessee as an ITES segment company. Consequently, the Tribunal directed the Assessing Officer to delete the additions.

3. Deletion of addition made on account of advance written off:
The first common issue in the Revenue's appeal concerns the deletion of addition made on account of advances written off. The Assessing Officer disallowed the deduction, believing it did not satisfy the conditions of section 36(2) of the Act. However, the learned Commissioner (Appeals) deleted the disallowance, relying on the Tribunal's decision in the assessee's case for assessment years 2004-05 and 2005-06. The Tribunal upheld the decision, noting that the trade advances were related to business operations and their non-recovery constituted a business loss, thus allowable.

4. Deduction for payment of stamp duty and brokerage for office lease:
The next issue involves the deduction for payment of stamp duty and brokerage for office lease. The Assessing Officer spread the brokerage expenditure over the lease period, allowing only a part. The learned Commissioner (Appeals) deleted the disallowance, considering the expenditure incurred in the year under consideration. The Tribunal found no infirmity in this decision, stating that the expenditure should be allowed in the year it was incurred, irrespective of the lease period.

Conclusion:
In conclusion, the Tribunal partly allowed the assessee's appeals and dismissed the Revenue's appeals. The Tribunal restored the AMP expenses issue to the Assessing Officer with specific directions and directed the deletion of additions related to IT support services, advances written off, and brokerage expenditure. The order was pronounced on 27th March 2023.

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