2016 (5) TMI 72 - AT - Income Tax

Tribunal partially allows assessee's appeals for AYs 2008-11, adjusts TP expenses, disallows Section 14A, restores Section 80IC.

M/s. Heinz India Private Limited, Dy. CIT, Circle-7 (1) (2), Mumbai Versus Addl. CIT, Range-6 (3) Mumbai, M/s. Heinz India Private Limited, Dy. CIT, Circle-7 (1) (2), Mumbai

The Tribunal partly allowed the assessee's appeals for AYs 2008-09 and 2010-11 and fully allowed the appeal for AY 2009-10. The adjustments proposed by ... Transfer pricing adjustment - sharing AMP expenses - Held that:- The fact-that the license agreements between the assessee and its AE. s were on principal to principal basis for payment of royalty for use of brands of the AE's was not challenged by the TPO. In our, opinion, observation of the DRP that royalty payment was not a relevant point to decide the issue is not proper. Because, royalty payment is one of the criterias to hold that the assessee is an independent unit. It is also not denied that the assessee is having a fully operational manufacturing, marketing and distribution system in India. The manufacturing unit of the assessee had shown a huge turnover(Rs. 631. 24 crores). Thus, we do not find force in the arguments of the TPO /DRP that AMP expenses incurred by the assessee were primarily or secondarily aimed to benefit the AE. s. and that it was entitled to a reasonable compensation for such AMP expenses. The expenses were incurred by the assessee to promote its own business interests. TPO has not brought on record any evidence to prove that the assessee had rendered any services to its AE. s under the head AMP. On the contrary, payment on account of advertisements etc. (Rs. 71. 04 crores)was made to unrelated domestic third parties. In our opinion, these basic facts compelled the TPO to hold that in the case under consideration the international transaction was not the actual AMP expenditure, but the benefit conferred by it to its AE. s in form of promotion and brand value augmentation of the brands owned by them. So, the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses to the AE. s can it be held that there was an international transaction only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AE. s. , who owned the brands used by the assessee. In our opinion, the arguments suffers from the very basic flaw that an assessee does not incurs AMP to increase its sales, but to benefit the AE. s. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AE's. and not to promote its own business. The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business, as state earlier. The resultant profit was offered for taxation in India. Therefore, transferring of profit from India, the basic ingredient to invoke the provisions of section 92 of the Act, remains unproved. The transaction in question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. - Decided in favour of assessee Disallowance u/s 14A - Held that:- We find that the assessee the AO had made disallowance of ₹ 45. 67 lakhs invoking the provisions of section 14 A of the Act, that it on its own, the assessee had made a disallowance of ₹ 5. 56 lakhs, that the DRP reduced the disallowance to ₹ 42. 11 lakhs. We find that the AO had applied the provisions of Rule 8D of the Rules in a mechanical manner. In each and every case disallowance @ half a percent of the average investment for that year cannot be applied. But, it is also a fact that the assessee itself had admitted that certain disallowance had to be made u/s. 14 of the Act. As an ad hoc disallowance is to be made, so, we are of the opinion that interest of just will meet if the disallowance is restricted to ₹ 10 lakhs - Decided in favour of assessee in part. Issues Involved:1. Transfer Pricing Adjustments2. Disallowance under Section 14A of the Income Tax Act3. Deduction under Section 80IC of the Income Tax ActIssue-wise Detailed Analysis:1. Transfer Pricing Adjustments:The primary issue was the adjustment of Transfer Pricing (TP) concerning the Arm's Length Price (ALP) for transactions between the assessee and its associated enterprises (AEs). The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO), who proposed substantial adjustments for brand value promotion. The TPO found the Transactional Net Margin Method (TNMM) adopted by the assessee inappropriate and instead suggested the Profit Split Method (PSM) and the Bright Line Test (BLT) to determine the ALP. The TPO computed an upward adjustment of Rs. 153.99 crores using PSM and Rs. 47.07 crores using BLT.The assessee contested this, arguing that AMP expenses were not international transactions and were incurred for its own business promotion in India. The Dispute Resolution Panel (DRP) partly upheld the TPO's order but rejected the PSM, directing the AO to recompute adjustments using BLT.The Tribunal found that the assessee had incurred the expenses to promote its own business interests, and there was no evidence that the expenses were aimed at benefiting the AEs. Citing the Delhi High Court's judgments in Maruti Suzuki and other cases, the Tribunal concluded that the transaction in question was not an international transaction under Chapter X of the Act. Consequently, the adjustments proposed by the TPO were deleted.2. Disallowance under Section 14A:The AO disallowed Rs. 45.67 lakhs under Section 14A, attributing it to the assessee's exempt dividend income of Rs. 8.98 crores. The AO applied Rule 8D mechanically, which the DRP reduced to Rs. 42.11 lakhs. The Tribunal noted that the AO had applied Rule 8D in a mechanical manner and found that the assessee had admitted some disallowance was necessary. Therefore, the Tribunal restricted the disallowance to Rs. 10 lakhs, partially in favor of the assessee.3. Deduction under Section 80IC:In the appeal for the AY 2010-11, the assessee raised an additional ground regarding the deduction claimed under Section 80IC. Both parties agreed that the issue required further investigation. The Tribunal restored the issue to the AO for fresh adjudication, directing the AO to provide a reasonable opportunity for hearing the assessee.Conclusion:The appeals filed by the assessee for AYs 2008-09 and 2010-11 were partly allowed, while the appeal for AY 2009-10 was fully allowed. The appeal filed by the AO for AY 2009-10 was dismissed. The Tribunal pronounced the order in the open court on 27th April 2016.