2019 (10) TMI 1070 - AT - Income Tax

Tribunal Decision: Partial Appeal Success, Reconsideration on Transfer Pricing, Compliance Emphasized

Akzo Nobel India Limited Versus Deputy Commissioner of Income-tax, Circle-10 (1), Kolkata.

The Tribunal partially allowed the appeal, directing the deletion of Transfer Pricing adjustments related to Advertising, Marketing, and Promotion (AMP) ... TP adjustments - advertising, marketing and promotion expenses (AMP Expenses) - international transaction - HELD THAT:- The issue in hand is squarely covered by the decision of this Tribunal, in assessee’s own case [2019 (9) TMI 1065 - ITAT KOLKATA] wherein the Tribunal by order dated 28.08.2019 has held that that the AMP expenses cannot be regarded as an international transaction as per section 92 B of the Act in the case of the assessee, so as to invoke provisions of section 92 of the Act. And since the AMP expenditure is not an international transaction, the TP adjustment made in this regard need to be deleted - Thus we hold that the AMP expenditure in question is not an international transaction, therefore, the TP adjustment made in this regard is hereby directed to be deleted and this ground of appeal of assessee is allowed. TP adjustment with respect to research and training expenditure (R&T Expenditure) - HELD THAT:- As in assessee’s own case [2019 (9) TMI 1065 - ITAT KOLKATA] held that the expenses in question covered under R&T Expenses relate to, service fee paid by the company for R&T Services obtained by the company, from another group company of the assessee i.e., ICT India Research & Technology Centre (ICI). ICT is a company registered u/s 25 of the Act as a “not for profit” organization. ICT provides manufacturing and training support services to the assessee on cost to cost basis. Accordingly, the expenses covered under the head ‘R&T expenses’ pertain to the fee paid to ICT. ICT provides technical support and training to the manufacturing and marketing operations of Paints Business Division. The Tribunal after examining the services rendered by the ICT has given a factual finding that the assessee has not carried out any R&T activities. The expenditure in question is incurred only for its manufacturing operations and local environmental compliance from HSE perspective. The assessee submitted that ICT also does not carry out any research and development activities for development of any new project/technology. It is primarily a captive support centre for the local India operation of the assessee. Thus, considering these facts, the Tribunal held that the expenditure on research and training does not constitute any international transaction, therefore, the TP adjustment made in this regard is hereby directed to be deleted and this ground of appeal of assessee is allowed. Determining arm’s length price of intra-group services in respect of support services received from its AEs as nil - Enhancement of income - HELD THAT:- As in assessee’s own case [2019 (9) TMI 1065 - ITAT KOLKATA] though the DRP observes that nature of service provided by ANCR are in the nature of service for strategic and operations and helps in achieving corporate objectives by aligning workforce and organizational objectives in the field of marketing HR, Finance, Management Services, Purchases etc., held it as stewardship services. We note that TPO has not carried out any exercise to determined the arms length price of benefit, service etc. as per the most appropriate method as envisaged in sec. 92C(1) of the Act. Since the TPO has not carried out the exercise which he ought to have carried out as envisaged by the Act on the erroneous plea that agreement between assessee and ANCR was not placed before him, we set aside the order of ld. DRP/AO & TPO and remand the matter back to TPO for fresh consideration - we restore this issue back to the file of the AO for fresh adjudication in accordance to law. Accordingly, this ground of appeal of assessee is allowed for statistical purposes. Adjustment towards contract research and development services rendered to AE - HELD THAT:- Adjustment made by TPO towards contract Research & Development Service (Contract R&D) rendered to the AE is erroneous for not taking into consideration the Tribunal’s decision in assessee’s sister concern M/s. Akzo Novel Car Refinishes India Pvt. Ltd. wherein the Tribunal while adjudicating similar issue has excluded Pharma Companies from the list of comparables and which action of Tribunal has been followed by the Ld. DRP in assessee’s own case for AY 2014-15. If that is the case, then we are inclined to set aside the impugned order and remand the issue back to the Ld. TPO for fresh consideration Disallowance of cash discount on sales and disallowance of publicity and advertisement expenses - assessee failed to produce enough documentary evidence to substantiate the same - non rejection of books of accounts - HELD THAT:- AO has resorted to ad hoc disallowance of expenditure claimed by the assessee without rejecting the books of account which is undisputedly statutorily audited. According to us, the AO cannot resort to estimation of disallowance without satisfying the condition laid down under sec. 145 of the Act. And, we do not countenance the ad hoc disallowance which action itself is per-se arbitrary in nature and has no sanction of law. Having said so, we are of the opinion that the AO is empowered to disallow the expenditure claimed by the assessee if there is deficiency in the vouchers or the bills supporting the incurrence of expenditure. AO atleast on test-check basis can verify the veracity of the expenditure and examine whether the claim made are allowable as per law, and the assessee to produce supporting bills/vouchers/proof of the expenditure, which the AO calls specifically for examination. Thus as discussed, once the assessee submits the details before the AO, then he can verify the veracity of the expenditure and if allowable by law, then it should be allowed in accordance to law. So, we set aside the impugned action of Ld. DRP/AO on this issue and remand the issue back to the file of AO for de novo adjudication - Appeal of the assessee is partly allowed for statistical purposes. Issues Involved:1. General Grounds2. Transfer Pricing Adjustments - Advertising, Marketing, and Promotion (AMP) Expenses3. Transfer Pricing Adjustments - Research and Training (R&T) Expenditure4. Transfer Pricing Adjustments - Intra-Group Services5. Non-Compliance with DRP Directions on IT-related Services6. Transfer Pricing Adjustments - Contract Research and Development (R&D) Services7. Disallowance of Cash Discount and Advertisement Expenses8. Consequential Penalty and Interest ProceedingsDetailed Analysis:1. General Grounds:The Tribunal dismissed Ground Nos. 1 and 7 as they were general in nature and did not require any adjudication.2. Transfer Pricing Adjustments - Advertising, Marketing, and Promotion (AMP) Expenses:The assessee argued that AMP expenses should not be considered an international transaction. The Tribunal noted that this issue was previously decided in favor of the assessee in its own case (ITA No. 560/Kol/2016 & ITA No. 315/Kol/2016) where it was held that AMP expenses do not constitute international transactions as per section 92B of the Income Tax Act. The Tribunal followed this precedent and directed the deletion of the TP adjustment related to AMP expenses.3. Transfer Pricing Adjustments - Research and Training (R&T) Expenditure:The assessee contended that R&T expenses were not international transactions. The Tribunal referenced its earlier decision in the assessee’s case (ITA No. 560/Kol/2016 & ITA No. 315/Kol/2016) which held that R&T expenses incurred for local manufacturing operations and environmental compliance do not constitute international transactions. The Tribunal followed this decision and deleted the TP adjustment related to R&T expenses.4. Transfer Pricing Adjustments - Intra-Group Services:The Tribunal noted that this issue was previously considered in the assessee’s case for AY 2011-12 (ITA No. 560/Kol/2016 & ITA No. 315/Kol/2016). It was decided that the TPO had not properly determined the arm’s length price due to an erroneous assumption. The Tribunal remanded the issue back to the AO for fresh adjudication in accordance with the law.5. Non-Compliance with DRP Directions on IT-related Services:The assessee claimed an addition of Rs. 4,93,09,294 due to the AO not giving appropriate effect to the DRP’s order. The Tribunal noted that the assessee had filed an application under section 154 of the Act for rectification. As this ground was not argued, the Tribunal did not adjudicate it but emphasized that the AO/TPO must comply with the DRP’s directions.6. Transfer Pricing Adjustments - Contract Research and Development (R&D) Services:The assessee argued that the TPO erroneously included pharma companies as comparables. The Tribunal acknowledged the assessee’s reference to a sister concern case (Akzo Novel Car Refinishes India Pvt. Ltd.) where pharma companies were excluded as comparables. The Tribunal remanded the issue back to the TPO for fresh consideration and to pass a speaking order after giving the assessee an opportunity to present its case.7. Disallowance of Cash Discount and Advertisement Expenses:The AO disallowed Rs. 35,50,000 in cash discounts and Rs. 2,73,00,000 in advertisement expenses due to a lack of complete documentary evidence. The Tribunal found that the AO’s ad-hoc disallowance without rejecting the audited books of accounts was arbitrary. It directed the assessee to provide detailed electronic submissions for verification. The AO was instructed to verify the expenses on a test-check basis and allow them if found genuine. The issue was remanded back to the AO for de novo adjudication.8. Consequential Penalty and Interest Proceedings:Ground Nos. 10 and 12 related to penalty and interest proceedings were dismissed as they were consequential in nature.Conclusion:The appeal was partly allowed for statistical purposes, with several issues remanded back to the AO for fresh adjudication. The Tribunal emphasized the need for proper verification and adherence to legal precedents in determining the arm’s length price and the genuineness of claimed expenses.