Tribunal sets aside assessment order due to invalid TPO rectification

The Tribunal allowed the appeal, setting aside the assessment order, as the TPO's rectification order was deemed invalid and void ab initio. The AMP expenditure was not considered an international transaction, and the adjustments made by the TPO were found to be unjustified.

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Issues Involved:
1. Assessment of total income under section 143(3) read with sections 144C and 254.
2. Adjustment to the arm’s length price (ALP) of Advertisement, Marketing, and Promotion (AMP) expenditure.
3. Validity of the TPO's order dated May 16, 2017.
4. Existence of an 'international transaction' concerning AMP expenditure.
5. Computation of ALP of AMP expenditure on substantive and protective bases.
6. Application of Bright Line Test (BLT) for transfer pricing adjustment.
7. Non-allowance of the benefit of (+/-) 5% as per the second proviso to section 92C(2).
8. Non-granting of quantitative/economic adjustments while quantifying ALP.
9. Levying/charging interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Assessment of Total Income:
The appellant contested the assessment of total income at INR 16,66,11,280 as against the returned income of INR 12,35,25,748. The Tribunal noted that the initial assessment was based on adjustments made by the TPO concerning AMP expenditure.

2. Adjustment to ALP of AMP Expenditure:
The TPO made an adjustment of INR 4,30,85,529 to the ALP of AMP expenditure, holding it to be not at ALP by applying the intensity approach. The Tribunal found that the TPO's adjustment was not justified as the AMP expenditure was not proven to be an international transaction.

3. Validity of the TPO's Order Dated May 16, 2017:
The appellant argued that the TPO's order dated May 16, 2017, was non-est and invalid as it rectified the earlier order dated November 10, 2016, without specifying the mistakes apparent from the record. The Tribunal held that the TPO's rectification was beyond the purview of section 154 as it involved debatable issues, making the order void ab initio.

4. Existence of 'International Transaction' Concerning AMP Expenditure:
The Tribunal examined whether the AMP expenditure constituted an international transaction. It was held that the AMP expenditure incurred by the appellant was solely for its own benefit and any incidental benefit to the AE was not sufficient to constitute an international transaction. The TPO failed to prove any arrangement or agreement between the appellant and its AE concerning AMP expenditure.

5. Computation of ALP of AMP Expenditure on Substantive and Protective Bases:
The TPO computed the ALP of AMP expenditure on a substantive basis using the intensity adjustment method and on a protective basis using the BLT method. The Tribunal found this approach flawed as the AMP expenditure was not an international transaction, rendering the adjustments invalid.

6. Application of Bright Line Test (BLT):
The TPO applied the BLT to propose a transfer pricing adjustment of INR 30,99,61,631 on a protective basis. The Tribunal noted that the BLT had been rejected by higher judicial authorities, making the application of BLT invalid in this case.

7. Non-Allowance of the Benefit of (+/-) 5%:
The appellant argued that the TPO erred in not allowing the benefit of (+/-) 5% as per the second proviso to section 92C(2). The Tribunal did not specifically address this issue as the primary ground concerning the validity of the TPO's order was sufficient to decide the appeal.

8. Non-Granting of Quantitative/Economic Adjustments:
The appellant contended that the TPO failed to grant quantitative/economic adjustments while quantifying the ALP of the AMP expenditure. The Tribunal did not delve into this issue due to the primary ground of the invalidity of the TPO's order.

9. Levying/Charging Interest Under Sections 234B and 234C:
The appellant challenged the levying/charging of interest under sections 234B and 234C. The Tribunal's decision to set aside the assessment order rendered this issue moot.

Conclusion:
The Tribunal allowed the appeal, setting aside the assessment order dated July 10, 2017, as the TPO's rectification order dated May 16, 2017, was found to be invalid and void ab initio. The AMP expenditure was not considered an international transaction, and the adjustments made by the TPO were held to be unjustified.

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