Tribunal allows appeal for transfer pricing adjustments & deduction quantification under Sec 80IC

The Tribunal allowed the appeal for statistical purposes, directing fresh determinations on both the transfer pricing adjustment for AMP expenses and the quantification of deduction under section 80IC. The order was pronounced in the open court on 24.05.2017.

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Issues Involved:
1. Addition on account of transfer pricing adjustment related to advertising, marketing, and promotion (AMP) expenses.
2. Denial of deduction under section 80IC of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for AMP Expenses:
The primary issue in this appeal is the addition of Rs. 308.19 crore by the Assessing Officer (AO) on account of transfer pricing adjustment related to AMP expenses. The assessee, a subsidiary engaged in manufacturing confectionary products, reported international transactions, including AMP expenses and royalty payments to its associated enterprises (AE). The Transfer Pricing Officer (TPO) determined that the AMP expenses constituted an international transaction and proposed adjustments using the bright line test and Cost plus method.

The Dispute Resolution Panel (DRP) upheld the TPO’s adjustments but suggested AMP intensity adjustment if higher judicial forums did not approve the TP adjustment. The AO, in the final order, made an addition of Rs. 308.19 crore based on the TPO’s substantive adjustment.

The assessee contended that AMP expenses are not an international transaction, citing judgments from the Delhi High Court in Maruti Suzuki India Ltd. and Whirlpool of India Ltd. Conversely, the Department relied on the Delhi High Court’s judgment in Sony Ericson Mobile Communications (India) Pvt. Ltd., which held AMP expenses as an international transaction.

The Tribunal noted that several judgments on the issue had emerged since the TPO’s order. The Tribunal directed a fresh determination of the ALP of AMP expenses by the TPO/AO, considering the entirety of the judicial position. The Tribunal also highlighted that similar issues were restored to the TPO/AO for fresh consideration in the assessee’s own case for preceding assessment years.

The Tribunal clarified that if AMP expenses are determined to be an international transaction, the ALP should not be computed using the bright line test. If the Cost plus method is applied, selling expenses should be excluded from AMP expenses, and the normal gross profit mark-up of comparable uncontrolled transactions should be used instead of the assessee’s own gross profit rate.

2. Denial of Deduction under Section 80IC:
The second issue involves the denial of deduction under section 80IC, amounting to Rs. 132.95 crore. The AO observed discrepancies in the assessee’s profit declarations from eligible and non-eligible units and opined that profits were shifted to the eligible unit. Consequently, the AO refused the deduction and apportioned the income based on turnover ratios.

The Tribunal noted that the eligibility condition for deduction under section 80IC was not disputed. The Tribunal also observed that the issue of quantification of deduction under section 80IC had not attained finality in the preceding assessment years due to ongoing appeals and revisions.

Given the lack of a final decision on the quantification issue in earlier years, the Tribunal set aside the impugned order and remitted the matter to the AO for a de novo determination of the eligible deduction amount under section 80IC, ensuring a reasonable opportunity of hearing for the assessee.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing fresh determinations on both the transfer pricing adjustment for AMP expenses and the quantification of deduction under section 80IC. The order was pronounced in the open court on 24.05.2017.

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