Most assessee claims allowed; royalty to associated enterprises upheld, AMP not international, scrap profits deductible under section 80IC

ITAT KOLKATA - AT allowed most of the assessee's claims. Royalty payments to AEs were upheld as previously accepted, and disallowance for two brands was deleted. AMP expenses were held not to be international transactions. The comparable-party mark-up issue was remitted to the TPO for fresh adjudication with documents on record, and the TPO was directed to implement rectified DRP directions on export adjustments. Allocation of residual overheads by employee-and-sales metrics was upheld. Profits from scrap sales qualify for deduction under section 80IC. Quantification of excess interest disallowance and refund of DDT to non-resident shareholders were remitted for factual verification. Education cess on income tax was allowed as expenditure.

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Issues Involved:
1. Transfer Pricing adjustment in relation to payment of royalty.
2. Transfer pricing adjustment in relation to advertisement, marketing, and promotion expenses (AMP).
3. Comparable companies arbitrarily chosen by the TPO for computation of markup percentage over the alleged ‘Agency Cost’ incurred by the assessee.
4. Overall adjustment made to the transaction of “Export of raw materials and finished products”.
5. Apportionment of expenses between fiscal units, non-fiscal units, and head office.
6. Eligibility of income from the sale of scraps whilst calculating deduction u/s 80IC.
7. Excess disallowance of interest income allocated to eligible units.
8. Refund of dividend distribution tax (DDT) paid in respect of non-resident shareholders.
9. Deduction of education cess on income tax paid by the assessee.

Detailed Analysis:

1. Transfer Pricing Adjustment in Relation to Payment of Royalty:
The Tribunal noted that the TPO had applied the CUP method and restricted the royalty to 1.5% of net sales. The DRP deleted the adjustment, observing that the royalties were paid for a basket of services and were at arm’s length. The Tribunal upheld the DRP's decision, emphasizing consistency with previous years and the lack of any change in facts or law. The Tribunal also relied on judicial precedents such as CIT v. EKL Appliances Ltd. and Frigoglass India Pvt Ltd v. DCIT, which supported the assessee's method of using TNMM for benchmarking royalty payments.

2. Transfer Pricing Adjustment in Relation to Advertisement, Marketing, and Promotion Expenses (AMP):
The TPO applied the Bright Line Test (BLT) and made an ALP adjustment, which the DRP confirmed. However, the Tribunal noted that the facts of the assessee’s case were different from the LG Electronics case and that the AMP expenses were not international transactions. The Tribunal relied on the Delhi High Court’s decision in Maruti Suzuki India Ltd v. CIT, which held that AMP expenses cannot be presumed to involve an international transaction. The Tribunal deleted the ALP adjustment made by the TPO.

3. Comparable Companies Arbitrarily Chosen by the TPO for Computation of Markup Percentage Over the Alleged ‘Agency Cost’:
The TPO applied a markup of 22.34% on the agency cost, which the DRP confirmed. The Tribunal found that there was no adjudication by the TPO or DRP on the nature of services rendered. The Tribunal remitted the issue back to the TPO for adjudication, emphasizing the need for factual verification.

4. Overall Adjustment Made to the Transaction of “Export of Raw Materials and Finished Products”:
The TPO rejected the external TNMM applied by the assessee and used internal TNMM instead. The DRP’s rectified directions rejected the TPO’s approach, but the TPO had yet to give effect to these directions. The Tribunal directed the TPO to give effect to the rectified DRP directions.

5. Apportionment of Expenses Between Fiscal Units, Non-Fiscal Units, and Head Office:
The Tribunal followed its previous decision in the assessee’s case for AY 2005-06, which accepted the assessee’s method of apportioning residual costs based on the number of employees directly involved in the management of eligible units. The Tribunal dismissed the Revenue’s appeal on this issue.

6. Eligibility of Income from the Sale of Scraps Whilst Calculating Deduction u/s 80IC:
The Tribunal followed the Calcutta High Court’s decision in the assessee’s case, which held that profits from the sale of scrap materials are eligible for deduction under section 80IC. The Tribunal dismissed the Revenue’s appeal on this issue.

7. Excess Disallowance of Interest Income Allocated to Eligible Units:
The Tribunal followed its previous decision in the assessee’s case for AY 2009-10, which remanded the issue back to the AO for factual verification. The Tribunal directed the AO to verify the facts and adjudicate the issue accordingly.

8. Refund of Dividend Distribution Tax (DDT) Paid in Respect of Non-Resident Shareholders:
The Tribunal remitted the issue back to the AO for factual verification and directed the AO to examine the relevant Double Taxation Avoidance Agreements between India and the respective countries.

9. Deduction of Education Cess on Income Tax Paid by the Assessee:
The Tribunal allowed the deduction of education cess, relying on the Rajasthan High Court’s decision in Chambal Fertilizers and Chemicals Ltd. v. JCIT and various decisions of the Kolkata Tribunal, which held that education cess is not a tax and is allowable as a deduction under section 37(1).

Conclusion:
The Tribunal provided a detailed analysis of each issue, emphasizing consistency with previous years, reliance on judicial precedents, and the need for factual verification where necessary. The Tribunal allowed the appeals of the assessee on several grounds, remanded some issues back to the AO/TPO for factual verification, and dismissed the appeals of the Revenue on other grounds.

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