2017 (2) TMI 650 - AT - Income Tax

Appeal partially allowed: deletion of AMP expenses, notional interest & upheld deduction under section 10A

The Tribunal partially allowed the appeal, directing the deletion of the addition on account of AMP expenses and notional interest. The claimed deduction ... Transfer pricing adjustment - addition to AMP expenses - Held that:- Considering the material facts like the absence of an agreement, arrangement or understanding between the appellant and its associated enterprise for sharing the advertisement, marketing and promotion expenses or for incurring the advertisement, marketing and promotion expenses for the sole benefit of the associated enterprise, payments made by the appellant under the head 'advertisement, marketing and promotion' to the domestic parties cannot be termed as an 'international trans action' specifically when the learned Transfer Pricing Officer has not been able to prove that the expenses incurred were not for the business carried out by the appellant in India. We are thus of the opinion that the Transfer Pricing Officer had wrongly invoked the provisions of Chapter X of the Act for the said advertisement, marketing and promotion spent. The addition is, therefore, directed to be deleted. - Decided in favour of assessee. Adjustment on account of notional interest attributable to the delayed payments receivable from the associated enterprise - Held that:- Undisputedly, in the present case the benchmarking of the main international transactions applying the transactional net margin method has been accepted by the Transfer Pricing Officer. Considering this, we find that the ratio laid down by the Mumbai Income-tax Appellate Tribunal in Rusabh Diamonds' case [2016 (4) TMI 400 - ITAT MUMBAI] is clearly applicable to the facts of instant case as held No ALP adjustments can be made, on the facts of this case, in respect of delay in realization of sale proceeds. The amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter. - Decided in favour of assessee. Disallowance of deduction under section 10A - Held that:- Dispute Resolution Panel's action in enhancing the total income in the assessment year 2009-10 and disallowing the claim for deduction under section 10A in the instant case is contrary to the decision of the honourable jurisdictional High Court of Delhi in the case of CIT v. Neo Poly Pack (P.) Ltd [2000 (4) TMI 26 - DELHI High Court ]. Even otherwise on the merits we are unable to sustain the view adopted by the learned Dispute Resolution Panel. The learned authorised representative is justified in submitting that the learned Dispute Resolution Panel has written factually incorrect findings in its order. Moreover, the details, filed by the appellant have also been partially taken into consideration. The learned Dispute Resolution Panel takes note of top 25 employees but omits to take into consideration crucial fact that the director of the appellant-company, Shri Ankur Bhatia, is a software engineer with 16 years of experience. Moreover, the division-wise break up of the total employees strength has also partially been reproduced by the learned Dispute Resolution Panel in its order. We direct the Assessing Officer to allow the claimed deduction under section 10A of the Income-tax Act, 1961, on unit II of the appellant.- Decided in favour of assessee. Issues Involved:1. Legality of the orders passed by the Assessing Officer, Dispute Resolution Panel, and Transfer Pricing Officer.2. Jurisdiction of the Dispute Resolution Panel to enhance total income.3. Addition to total income under Chapter X of the Income-tax Act, 1961.4. Transfer pricing adjustment on account of advertisement, marketing, and sales promotion expenses (AMP).5. Use of comparable companies for benchmarking AMP expenses.6. Applicability of a mark-up on AMP expenses.7. Adjustment on account of notional interest attributable to delayed payments receivable from associated enterprises.8. Disallowance of deduction under section 10A of the Income-tax Act.9. Levy of interest under sections 234B and 234D of the Income-tax Act.10. Assumption of jurisdiction by the Assessing Officer/Transfer Pricing Officer to determine the arm's length price.Detailed Analysis:1. Legality of Orders:The appellant challenged the legality of various additions/disallowances made by the Assessing Officer and upheld by the Dispute Resolution Panel (DRP) and Transfer Pricing Officer (TPO). The Tribunal noted that ground Nos. 1 and 10 are general in nature and rejected them as such.2. Jurisdiction of DRP:The appellant contended that the DRP erred in assuming jurisdiction to enhance the total income assessed by the Assessing Officer. The Tribunal rejected this ground as it was not pressed during the hearing.3. Addition to Total Income:Ground No. 3, being general in nature, challenged the entire addition made under Chapter X of the Act. The Tribunal noted that specific grounds addressed the various disallowances and adjustments.4. Transfer Pricing Adjustment on AMP Expenses:The primary issue was the transfer pricing adjustment of Rs. 75,40,09,515 on account of AMP expenses. The Tribunal analyzed the appellant's business activities and benchmarking of international transactions. The TPO had applied the bright line test (BLT) to determine the arm's length price of AMP expenses, resulting in a proposed adjustment. The Tribunal noted that the DRP upheld the TPO's approach, citing the Special Bench decision in L.G. Electronics India P. Ltd. and the Delhi High Court's decision in Maruti Suzuki India Ltd.The Tribunal concluded that there was no evidence of an agreement, arrangement, or understanding between the appellant and its associated enterprise for incurring AMP expenses. The Tribunal relied on several High Court decisions, including Maruti Suzuki and Whirlpool of India Ltd., which emphasized that the existence of an international transaction must be demonstrated by the Revenue. The Tribunal held that the TPO had wrongly invoked Chapter X provisions and directed the deletion of the Rs. 75,40,09,515 addition.5. Use of Comparable Companies:Ground Nos. 5 and 5.1 challenged the use of certain companies as comparables for benchmarking AMP expenses. The Tribunal did not find it necessary to adjudicate these grounds, given its conclusion on the primary issue.6. Applicability of Mark-Up on AMP Expenses:The Tribunal did not specifically address this issue, as it was moot in light of the primary conclusion on AMP expenses.7. Adjustment on Notional Interest:The Tribunal addressed the adjustment of Rs. 9,786 on account of notional interest attributable to delayed payments receivable from associated enterprises. The Tribunal relied on the Mumbai ITAT decision in Rusabh Diamonds and concluded that no arm's length price adjustment could be made for delay in realization of sale proceeds. The Tribunal directed the deletion of the Rs. 9,786 addition.8. Disallowance of Deduction under Section 10A:The Tribunal examined the disallowance of deduction under section 10A for unit II of the appellant. The DRP had concluded that the appellant was engaged in marketing and distribution activities, not software export. The Tribunal disagreed, noting that the appellant's activities had been consistently recognized as data processing and software export in earlier years. The Tribunal emphasized the principle of consistency and directed the Assessing Officer to allow the claimed deduction under section 10A.9. Levy of Interest:Ground No. 9, concerning the levy of interest under sections 234B and 234D, was agreed by both parties to be consequential in nature. The Tribunal did not specifically adjudicate this issue.10. Assumption of Jurisdiction:Ground No. 11 challenged the assumption of jurisdiction by the Assessing Officer/Transfer Pricing Officer to determine the arm's length price. The Tribunal did not specifically address this issue, as it was subsumed under the broader issues already adjudicated.Conclusion:The Tribunal allowed the appeal in part, directing the deletion of the Rs. 75,40,09,515 addition on account of AMP expenses and the Rs. 9,786 addition for notional interest. The Tribunal also directed the Assessing Officer to allow the claimed deduction under section 10A for unit II. The appeal was partly allowed.