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 Tax Act. The matter was remanded to the Assessing Officer/Transfer Pricing Officer for further determination. The challenge to penalty proceedings under section 271(1)(c) was dismissed as premature. The order was pronounced on March 23, 2021.

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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.

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