2021 (4) TMI 442 - AT - Income Tax

Appeal allowed in tax case, remanded for further determination. Penalty challenge dismissed as premature.

The Tribunal partly allowed the assessee's appeal, setting aside the findings on transfer pricing adjustment and addition under section 145A of the Income ... TP adjustment on account of international marketing expenses - benchmarking the transaction in line with the provisions of section 92C - HELD THAT:- In view of the law expounded by Hon'ble High Courts in M/S. LEVER INDIA EXPORTS LTD. [2017 (2) TMI 120 - BOMBAY HIGH COURT and EKL APPLIANCES LTD [2012 (4) TMI 346 - DELHI HIGH COURT], OECD guidelines and the provisions of the Act, we are of considered view that in the instant case objections raised by the TPO for making adjustment in international marketing expense and upheld by the CIT(A) are without any legal rational and thus, liable to be set aside. On merits, we observe that per se payment for the marketing services are not disputed by the Assessing Officer, however, the TPO has not carried out necessary exercise of benchmarking ALP of the international transaction in question, ergo, we deem it appropriate to restore this issue to the file of Assessing Officer/TPO for determination of arm's length price of the transactions, as per the provisions of section 92C of the Act. Needless to say that reasonable opportunity of hearing be afforded to the assessee, in accordance with law. The findings of the CIT(A) on the issue of transfer pricing adjustment of international marketing expenses are set aside and ground no. 1 of the appeal is allowed for statistical purpose. Addition u/s 145A on account of alleged unutilized CENVAT credit - assessee is following exclusive method for accounting excise duty of purchases - AO insisted that inclusive method of accounting should have been followed - whether inclusive method or exclusive method of accounting is adopted, both would give same result? - HELD THAT:- We find that the dispute with regard to CENVAT credit in the case of assessee is perennial since AY 2002-03. The assessee has been following exclusive method of accounting as against inclusive method as required under section 145A of the Act. Under excusive method the amount of CENVAT credit is not added to the sales and purchases, but is shown separately. The assessee has filed the copies of order passed by the CIT(A) from AY 2002-03 onwards (except for AY 2003-04 when no addition was made on account of unutilised CENVAT Credit) alongwith order giving effect. The CIT(A) has been consistently allowing the benefit of CENVAT credit to the assessee. The Assessing Officer has been giving effect to the order of CIT(A), accordingly. In the impugned assessment year position is no different. We find merit in the contentions raised by the assessee. The Assessing Officer is directed to delete the addition u/s. 145A of the Act. The findings of CIT(A) in the impugned order are set aside and ground no. 2 of the appeal is allowed. Issues Involved:1. Transfer pricing adjustment on international marketing expenses.2. Addition under section 145A of the Income Tax Act concerning unutilized CENVAT credit.3. Penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Transfer Pricing Adjustment on International Marketing Expenses:The assessee, a subsidiary of L'Oreal SA, France, engaged in manufacturing and distribution operations in India, challenged the transfer pricing adjustment of Rs. 5,72,99,914/- made by the Transfer Pricing Officer (TPO) concerning international marketing expenses. The TPO's adjustment was based on the following reasons:- The assessee paid royalty for a bundle of service rights, which included marketing and advertisement services.- There was an overlap of services/rights in various agreements.- The services rendered under international marketing services were already covered under the license agreement.- The brand promotion expenses benefited the overseas associated enterprise (AE), as the brands were owned by the AE.The assessee argued that the CIT(A) erred in upholding the TPO's adjustment by determining the arm's length price (ALP) of the transaction as nil using the Comparable Uncontrolled Price (CUP) method. The assessee contended that the services under the license and service agreements were distinct, with no overlap, and the marketing services were essential for sales within and outside India. The assessee also asserted that the TPO lacked the authority to disallow expenditure or question its necessity, as per the jurisdiction limited to determining the ALP.The Tribunal observed that the TPO's role is limited to determining the ALP of international transactions and cannot question the commercial expediency or necessity of the transaction. The Tribunal cited the Bombay High Court's decision in CIT vs. Lever India Exports Ltd., which emphasized that the TPO's jurisdiction is confined to examining the appropriateness of the method and comparables selected for determining the ALP, not the genuineness of the expenditure.The Tribunal set aside the CIT(A)'s findings and restored the issue to the Assessing Officer/TPO to determine the ALP of the transactions as per the provisions of section 92C of the Act, allowing ground no. 1 for statistical purposes.2. Addition under Section 145A of the Income Tax Act Concerning Unutilized CENVAT Credit:The assessee contested the addition of Rs. 1,28,74,878/- under section 145A, arguing that it followed the exclusive method for accounting excise duty on purchases, which should not warrant any adjustment. The assessee pointed out that the unutilized CENVAT credit was carried forward under 'Loans & Advances' and that the exclusive method of accounting did not result in any double deduction.The Tribunal referred to the Bombay High Court's decision in CIT vs. Diamond Dye Chem. Ltd., which upheld the exclusive method of accounting, stating that the net result would be the same regardless of the method adopted. Additionally, the Tribunal noted that the CIT(A) had consistently allowed the assessee's claim in previous years, and the Assessing Officer had given effect to these orders.The Tribunal directed the Assessing Officer to delete the addition under section 145A, setting aside the CIT(A)'s findings and allowing ground no. 2 of the appeal.3. Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:The assessee challenged the initiation of penalty proceedings under section 271(1)(c). The Tribunal dismissed this ground as premature, stating that the challenge to penalty proceedings at this stage was not appropriate.Conclusion:The appeal by the assessee was partly allowed, with the Tribunal setting aside the findings on transfer pricing adjustment and addition under section 145A, and restoring the matter to the Assessing Officer/TPO for further determination. The challenge to penalty proceedings was dismissed as premature. The order was pronounced on March 23, 2021.