Taxpayer's Appeal Allowed, Transfer Pricing Adjustment Deemed Unsubstantiated

The Tribunal allowed the taxpayer's appeal, setting aside the lower authorities' orders and directing the AO to pass a fresh order. The Tribunal deemed the transfer pricing adjustment related to AMP expenses unsustainable, rejecting the use of the Bright Line Test. The disallowance under Section 37 was also considered unsustainable due to the earlier TP adjustment decision. The levy of interest under Sections 234B and 234C was not specifically addressed. The appeal was allowed pro tanto, with the order pronounced on November 26, 2018.

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Issues Involved:
1. Validity of the assessment order.
2. Transfer pricing adjustment related to AMP expenses.
3. Benchmarking analysis and the use of BLT.
4. Disallowance under Section 37 of the Act.
5. Levy of interest under Section 234B and 234C.

Detailed Analysis:

1. Validity of the Assessment Order:
The taxpayer challenged the validity of the assessment order framed by the AO under Section 143(3) read with Section 144C of the Income-tax Act, 1961, alleging it to be bad in law, violative of principles of natural justice, and void ab initio. This ground was general in nature and did not require adjudication.

2. Transfer Pricing Adjustment Related to AMP Expenses:
The taxpayer contested the transfer pricing adjustment of Rs. 1,29,44,62,939 made by the TPO/DRP concerning AMP expenses. The TPO had applied the Bright Line Test (BLT) to determine the ALP of AMP expenses, which was subsequently rejected by the Hon’ble Delhi High Court in multiple cases, including Sony Ericsson India Pvt. Ltd. v. CIT. The court held that BLT is not an appropriate method for determining the existence of an international transaction or calculating the ALP of such transactions. The taxpayer argued that the AMP expenses were incurred wholly and exclusively for its business purposes and not for the benefit of the AE. The Tribunal agreed with the taxpayer, stating that there was no tangible material to demonstrate an international transaction involving AMP expenses between the taxpayer and its AE. Consequently, the TP adjustment of Rs. 1,29,44,62,939 was deemed unsustainable.

3. Benchmarking Analysis and the Use of BLT:
The TPO had used BLT to conclude that the taxpayer incurred non-routine AMP expenses to develop marketing intangibles for its AE. The taxpayer argued that BLT had been discarded by the Hon’ble Delhi High Court and that the AMP expenses were incurred for its business purposes. The Tribunal noted that the taxpayer's TP study and the TPO's analysis did not provide any material evidence of an international transaction involving AMP expenses. The Tribunal ruled that the adjustment made by the TPO/DRP/AO was not sustainable, following the decision of the Hon’ble Delhi High Court in the taxpayer’s own case for AY 2008-09.

4. Disallowance Under Section 37 of the Act:
The AO had alternatively disallowed Rs. 1,29,44,62,939 under Section 37 of the Act, arguing that the expenses were not incurred wholly and exclusively for the taxpayer’s business. The Tribunal referred to the coordinate Bench’s decision in the taxpayer’s own case for AY 2008-09, which was affirmed by the Hon’ble Delhi High Court. It was held that when the ALP adjustment of AMP expenses is found to be unsustainable, the same expenses cannot be disallowed under Section 37 of the Act as it would amount to double addition. Therefore, the disallowance under Section 37 was also deemed unsustainable.

5. Levy of Interest Under Section 234B and 234C:
The taxpayer contested the levy of interest under Sections 234B and 234C of the Act. The Tribunal noted that this ground was consequential in nature and did not require specific findings.

Conclusion:
The Tribunal allowed the taxpayer’s appeal, setting aside the orders of the authorities below and restoring the matter to the AO. The AO was directed to pass a fresh order considering the decision of the Hon’ble Apex Court if there were any modifications or reversals of the Hon’ble Delhi High Court’s decisions. The appeal was allowed pro tanto, and the order was pronounced in open court on November 26, 2018.

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