2025 (4) TMI 1786 - AT - Income Tax

Transfer pricing on AMP, receivables, and warranty provisions: tangible evidence, working capital effects, and scientific estimation controlled the outcome.

Advertising, marketing and promotion expenditure could not be treated as an international transaction for transfer pricing purposes without tangible ... AMP expenditure as international transaction - Arm's length price of management service fee - Interest on outstanding receivables - Royalty benchmarking - Warranty provision under book profit - Duty drawback reconciliation - Interest under sections 234B and 234C AMP expenditure as international transaction - Bright Line Test - Residual Profit Split Method - Transfer pricing adjustment on account of AMP expenditure and the related substantive and protective additions made - HELD THAT: - The Tribunal followed its coordinate Bench decision in the assessee's own case on identical facts for AY 2015-16 and And 2016-17 [2025 (3) TMI 989 - ITAT DELHI] and treatment by the Revenue authorities. On that basis, it accepted that AMP expenditure could not be separately subjected to transfer pricing adjustment in the absence of material establishing the requisite international transaction, and the additions made on substantive as well as protective basis were not maintainable. [Paras 8, 9, 36] The AMP adjustment was deleted and the corresponding grounds were allowed. Transfer pricing adjustment on account of management service fee - HELD THAT: - Following the earlier order in the assessee's own case [2025 (3) TMI 989 - ITAT DELHI], the Tribunal noted that the matter had already been restored for examination of the supporting material regarding actual rendition of services and benefit derived. As the facts were stated to be unchanged and the lower authorities had only reiterated the earlier position, the issue was again restored for adjudication in accordance with the earlier directions. [Paras 12, 13] The issue of management service fee was remanded to the Assessing Officer for fresh decision, and the grounds were allowed for statistical purposes. TP Adjustment on Interest on outstanding receivables for delayed realisation from the AE beyond the stipulated period - treating it as separate international transaction falling under the category of capital financing - HELD THAT: - The Tribunal found that the assessee had benchmarked the principal transaction under TNMM, that the method had been accepted, and that once working capital adjustment was considered, the assessee's margin remained higher than that of the comparable companies. In those circumstances, a separate adjustment on account of delayed receivables was not called for. [Paras 14] The addition on account of interest on outstanding receivables was deleted. Disallowances of Warranty provision expenses - AO in the draft assessment order considered it as a unascertained liability and disallowed the same - HELD THAT: - The Tribunal held that warranty obligation formed part of the sale transaction and the liability accrued on sale, though quantification depended upon estimation. Since the provision was made on a scientific basis by applying past trends and actual experience, and the actual warranty expenses had consistently exceeded the provision, it could not be treated as a contingent or unascertained liability. Hence, we hold that the said provision made for warranty is duly allowable as deduction both under normal provision also computation of books u/s 115JB of the Act. [Paras 19,] The disallowance of warranty provision, including the adjustment made in book profit computation, was deleted. TP adjustment on account of payment of royalty - Brand and marketing royalty - Technical know-how royalty - assessee adopted CUP method for benchmarking the payment of royalty using royalty State data base to find the comparable agreement - HELD THAT: - The Tribunal found that the lower authorities had not returned any finding on the technical know-how royalty, which had arisen for the first time in the year under consideration, and therefore restored that component for de novo examination. As regards royalty for brand and marketing rights, it followed the earlier order in the assessee's own case, which had already been approved by the jurisdictional High Court, and held that no transfer pricing adjustment was required on that part. [Paras 32, 33, 34] Royalty on brand and marketing rights was allowed, while the technical know-how royalty issue was remanded; the ground was allowed for statistical purposes. Duty drawback Addition - Reconciliation of receipt - assessee was sanctioned duty drawback of Rs. 1,30,41,802/- according to data available with the ld AO, whereas the assessee submitted that it received duty drawback of Rs. 31,18,880/- only - HELD THAT: - The Tribunal noted that the addition had been made on the basis of data available with the Assessing Officer, whereas the assessee had produced supporting documents, pointed out duplication and inclusion of figures pertaining to other years, and furnished a reconciliation. In view of these discrepancies, the matter required a fresh examination of the actual receipt and supporting material. [Paras 40, 41] The duty drawback addition was set aside to the Assessing Officer for de novo adjudication, with liberty to the assessee to furnish fresh evidence. Credit for dividend distribution tax - Interest under section 115P - Factual verification - Claim for proper credit of dividend distribution tax and the consequential challenge to interest under section 115P required factual verification. - HELD THAT: - The Tribunal treated the matter as factual in nature and therefore unsuitable for final adjudication on the existing record. It directed fresh verification by the Assessing Officer in accordance with law. [Paras 43] The issue was restored to the Assessing Officer for de novo adjudication and the ground was allowed for statistical purposes. Interest u/s 234B and 234C - HELD THAT:- Interest u/s 234B was consequential, and interest under section 234C was chargeable only on the returned income and not on the assessed income. Final Conclusion: For AY 2017-18, the Tribunal deleted the AMP adjustment, the receivables adjustment and the disallowance of warranty provision, restored the management service fee issue and the technical know-how royalty component, and allowed the royalty claim relating to brand and marketing rights. For AY 2018-19, it applied the same decision on the common issues, restored the duty drawback and dividend distribution tax credit matters for fresh verification, and held that interest under section 234C could be charged only on the returned income; both appeals were partly allowed for statistical purposes. Issues: (i) Whether advertising, marketing and promotion expenses could be treated as an international transaction warranting transfer pricing adjustment. (ii) Whether the adjustment on account of royalty and management service fee was sustainable. (iii) Whether interest on receivables required a separate adjustment. (iv) Whether the provision for warranty was allowable in the computation of book profit and taxable income. (v) Whether the duty drawback and dividend distribution tax related issues required fresh adjudication.Issue (i): Whether advertising, marketing and promotion expenses could be treated as an international transaction warranting transfer pricing adjustment.Analysis: The transfer pricing adjustment was examined against the statutory requirement that an international transaction must be shown by tangible material, arrangement, understanding, or action in concert. The adoption of the bright line test and a purely quantum-based inference of brand promotion was found insufficient. The record did not establish any agreement or concerted arrangement between the assessee and its associated enterprise to incur AMP expenditure for the latter's benefit.Conclusion: The AMP adjustment was not sustainable and the issue was decided in favour of the assessee.Issue (ii): Whether the adjustment on account of royalty and management service fee was sustainable.Analysis: For royalty on brand and marketing rights, the CUP approach adopted by the assessee was accepted as the proper method on the facts, and the comparables accepted in earlier proceedings supported the arm's length nature of the payment. For technical know-how royalty, no conclusive finding had been recorded below, so that part required de novo examination. For management service fee, the issue turned on whether the services were actually rendered and whether benefit accrued, and the matter had been remitted in earlier years on the same factual pattern.Conclusion: Royalty on brand and marketing was held not to warrant transfer pricing adjustment in favour of the assessee, while the technical know-how royalty and management service fee issues were restored for fresh adjudication.Issue (iii): Whether interest on receivables required a separate adjustment.Analysis: Where the assessee's margins after working capital adjustment exceeded those of the comparables, outstanding receivables could not be isolated and separately benchmarked as an independent international transaction. The credit period effect was already embedded in the working capital analysis.Conclusion: No separate adjustment for interest on receivables was warranted and the issue was decided in favour of the assessee.Issue (iv): Whether the provision for warranty was allowable in the computation of book profit and taxable income.Analysis: The warranty provision was backed by a scientific estimation method based on historical trends and actual warranty claims. It related to an existing sales-linked obligation and was not a mere contingent liability. The provision was therefore not to be treated as an unascertained liability.Conclusion: The warranty provision was allowable and the issue was decided in favour of the assessee.Issue (v): Whether the duty drawback and dividend distribution tax related issues required fresh adjudication.Analysis: The duty drawback matter depended on reconciliation of the figures from the departmental data with the assessee's records, and the dividend distribution tax credit issue was factual in nature. Both required verification by the assessing authority.Conclusion: These issues were restored for de novo consideration and no final merits finding was recorded.Final Conclusion: The appeals were partly allowed overall, with major transfer pricing relief on AMP and receivables, allowance of the warranty provision, and remand of certain royalty and other factual issues for fresh adjudication.Ratio Decidendi: An AMP adjustment cannot be sustained unless the Revenue first establishes by tangible material the existence of an international transaction through an arrangement or concerted action, and a separate receivables adjustment is unwarranted where working capital adjustment already captures the credit-period effect.