TaxTMI 
TaxTMI 
TaxTMI 
2019 (5) TMI 1541
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....assessment order passed, i.e., according to the assessee, the assessment order is barred by limitation. (b) Validity of T.P adjustment made in respect of AMP expenses (c) Addition made u/s 40(a)(i) of the Act. In the corporate tax grounds urged by the assessee, the assessee has challenged the levy of interest u/s 234B of the Act. At the time of hearing, the Ld A.R agreed that the same is consequential in nature. The ground relating to levy of penalty u/s 271(1)(c) is premature. 4. With regard to the legal issue relating to validity of the assessment order, the Ld A.R submitted that the impugned assessment order has been passed by the AO beyond the time limit prescribed in sec.153 of the Act. We notice that though the assessing officer has passed the assessment order in terms of sec.144C(13) within one month from the end of the month in which the direction from Ld Dispute Resolution Panel was received. However, it is the contention of Ld A.R that the provisions of sec.144C(13) do not extend the time limit prescribed in sec.153 of the Act and in the instant case, the assessment order though was passed within one month from the receipt of direction given by Ld DRP, the same ....
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.... assessments and reassessments. 153. (1) No order of assessment shall be made under section 143 or section 144 at any time after the expiry of- (a) two years from the end of the assessment year in which the income was first assessable ; or (b) one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, is filed under sub-section (4) or subsection (5) of section 139, whichever is later : Provided that in case the assessment year in which the income was first assessable is the assessment year commencing on or after the 1st day of April, 2004 but before the 1st day of April, 2010, the provisions of clause (a) shall have effect as if for the words "two years", the words "twenty-one months" had been substituted : Provided further that in case the assessment year in which the income was first assessable is the assessment year commencing on or after the 1st day of April, 2005 but before the 1st day of April, 2009 and during the course of the proceeding for the assessment of total income, a reference under sub-section (1) of section 92CA- (i) ....
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.... (b) the period of filing of objections under sub-section (2) expires. (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),- (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations p....
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....or this purpose; (b) "eligible assessee" means,- (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and (ii) any foreign company. 6. It is not in dispute that the Assessee is an eligible Assessee and therefore the Assessment in the case of the Assessee is to be completed keeping in mind the statutory provisions of Sec.143(3), 144C and Sec.153 of the Act. 7. In so far as an eligible Assessee is concerned, the third proviso to Sec.153(1) lays down the period of limitation and it lays down a period of 3 years from the end of the relevant Assessment year as the time within which Assessment has to be completed. As per the third proviso the period of limitation in the case of the Assessee would end on 31.3.2012 i.e., three years from the end of the relevant AY, which is AY 2008-09 in this case. The order of assessment has however been passed in this case only on 18.10.2012. 8. It is the plea of the Revenue that in the case of an eligible Assessee the procedure to be followed is first to pass a draft assessment order as per the provisi....
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....levant assessment year. The said limit was enhanced to 3 years in case of an assessee wherein reference was made to the TPO (i.e., in the case of eligible assessee). It was submitted that the enhanced time limit of 3 years is provided in the statute in order to take care of the time that would be taken, inter alia, in the TPO passing the order, passing of draft assessment order, objections being filed before the DRP, disposal of objections by DRP and passing of assessment order. It was submitted that the provisions of section 144C do not, give a go bye to the limitation enshrined in section 153 of the Act and provisions of section 153 are not made subject to provisions of section 144C of the Act nor do provisions of the latter section override the former, notwithstanding the non-obstante clause in subsections (4) and (13) thereof. It was submitted that the non-obstante clause in Sec.144C(1) of the Act, is only with regard to the procedure to be followed in the case of eligible assessee requiring passing of a draft assessment order in case of an eligible assessee and should be read limited to the context, i.e., exception to the ordinary rule that there will be only one assessment or....
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..../ 144C(13) of the Act is interpreted as allowing the assessing officer additional time over and above the limit provided under section 153(1) third proviso, of the Act, the same would defeat the entire purpose of expediting the dispute resolution process, by enlarging the time available for completion of assessment to almost five years from the end of the relevant previous year (four years from the end of the relevant assessment year). 13. We have considered the submissions of the learned counsel for the Assessee. We however find similar issue has already been considered and decided against the Assessee by the ITAT Delhi Bench in the case of Honda Trading Corporation vs. CIT : (2015) 61 taxmann.com 233 wherein it was held that the provisions of section 144C override the provisions of section 153 of the Act. While rejecting the assessee's contention that the limitation in section 153 referred to passing of draft assessment order, the Tribunal held that: (i) Section 144C gives a complete go bye to section 153; and (ii) The Act does not contemplate any limitation for passing of draft assessment order, which can be passed within a reasonable time. 14. Though arguments were ....
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.... Assessing Officer drafted a proposed assessment order and the assessee accepted the variation made by the Assessing Officer in the draft order, then the Assessing Officer has to pass the assessment order within one month from the end of the month in which the acceptance of the assessee is received by the Assessing Officer. This period of limitation provided in section 144C(4) of the Act. Whenever the assessee objects to the proposed assessment order drafted by the Assessing Officer, the DRP should issue directions as provided in section 144C(5) of the Act. Subsection (12) of section 144C prohibits the DRP from issuing any direction after 9 months from the end of the month in which the draft assessment order is forwarded to the eligible assessee. Sub-section (13) of section 144C mandates the Assessing Officer to pass assessment order within one month from the end of the month in which such direction from the DRP was received. Therefore, it is obvious that section 153 provides for limitation of 3 years prior to the end of the assessment year in which the income was first assessable. Section 144C(5) provides for limitation of one month in the end of the month from which the acceptanc....
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....te of receipt of direction of DRP by the Assessing Officer becomes crucial......" 8. We notice that various benches of Tribunal are taking the view that the provisions of sec.144C(13) give extension of further period of one month from the end of month in which the direction of DRP was received. In the instant case, there is no dispute that the assessing officer has passed the assessment order within one month from the end of the month in which direction of DRP was received. Accordingly, consistent with the view taken by various benches of Tribunal, we reject the legal ground urged by the assessee. 9. We shall now take up the issue relating to disallowance made u/s 40(a)(i) of the Act. We notice that the AO has treated the payments made by the assessee for purchase of softwares as "Royalty" by following the decision rendered by Hon'ble jurisdictional Karnataka High Court in the case of CIT, International Taxation vs. Samsung Electronics Co Ltd (2012)(345 ITR 494)(Kar). Since the assessee did not deduct tax at source from the payments so made, the AO disallowed the value of software purchases amounting to Rs. 5306.25 lakhs u/s 40(a)(i) of the Act. 10. Before us, the Ld A.R submit....
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....made for purchase of software, we are of the view that the decision rendered by Hon'ble jurisdictional Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) is applicable to the facts of the present case. 13. The Ld A.R has raised an alternative contention that the disallowance u/s 40(a)(i) should be restricted to the portion of payment which is chargeable to tax in India. Since this alternative contention was not raised before the AO, the same requires examination at his end. Accordingly we restore this alternative contention to the file of the AO for examining the same in accordance with law. 14. We shall now take up the issue relating to the Transfer Pricing adjustment made by the AO/TPO in respect of Advertisement and Market promotion (AMP) expenses. In its T.P Study, the assessee reported that it had received "reimbursement towards advertisement expenses" of an amount of Rs. 3357.28 lakhs. The TPO noticed that the assessee has incurred following expenses towards AMP:- Sales Promotion and Advertisement expenses - 4506.65 lakhs Sales Schemes and Trade discounts - 16480.68 lakhs Sales Commission - 1353.22 lakhs The assessee had received re....
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....nderstanding between the parties or they acted in concert so as to constitute an international transaction. Accordingly he contended that the AO/TPO cannot reach his conclusions on mere presumptions that the parties have acted in concert or they had an understanding or arrangement between them so as to construe existence of a transaction, which can be termed as international transaction. 18. The Ld A.R submitted that the TPO has followed Bright Line Test (BLT) in order to determine the alleged excess expenses incurred by the assessee towards AMP expenses. He submitted that the Hon'ble Delhi High Court has rejected the BLT as means for determining the ALP of an international transaction in the case of Sony Ericsson Mobile Communications India P Ltd vs. CIT (374 ITR 118). He submitted that the above said decision has been followed by the Tribunal in various case laws. He further placed his reliance on the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (381 ITR 117) and submitted that the TPO cannot make TP adjustment without proving existence of international transaction. He submitted that the assessee has only disclosed the reimbursement recei....
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....uki Ltd (supra) that the revenue needs to establish the existence of international transaction before undertaking benchmarking of AMP expenses. In the instant case, we notice that the TPO has entertained the belief on the basis of presumptions that the assessee's AMP expenses have promoted the brand value of its AE, i.e., no material has been brought on record to show the existence of International transaction. Before us, the Ld A.R placed his reliance on various case laws. We notice that the decision rendered by Delhi bench of ITAT in the case of L.G. Electronics India P Ltd vs. ACIT (ITA No.6253/DEL/2012 dated 14-01-2019) is applicable to the facts of the present case, wherein also identical T.P adjustment had been made. For the sake of convenience, we extract below the relevant observations made and decision taken by the Delhi bench of Tribunal:- "8. The TPO observed that since AMP expenses incurred by the assessee as percentage of sales was more than similar percentage for comparable companies, the assessee had incurred such AMP expenditure on brand promotion and development of marketing intangibles for the AE. The TPO further added a mark-up of 15%, which was subsequently r....
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....and the AE. 12. In our considered opinion, while dealing with the issue of bench marking of AMP expenses, the Revenue needs to establish the existence of international transaction before undertaking bench marking of AMP expenses and such transaction cannot be inferred merely on the basis of BLT. For this proposition, we draw support from the judgment of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117. 13. In this case, the Hon'ble High Court held that existence of an international transaction needs to be established de hors the Bright Line Test. The relevant finding of the Hon'ble High Court reads as under: "43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustm....
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....c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 61. The submission of the Revenue in this regard is: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', &....
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....hown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. XXX 34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concert". XXX 37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all ....
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....ubsidiary amounts to rendering of a service to its foreign AE for which arm's length compensation was payable by foreign AE to its Indian subsidiary. 17. It is the say of the ld. DR that the functions carried out by the assessee are in the nature of development, enhancement, maintenance, protection and exploitation of the relevant intangibles and thus, the assessee deserves compensation. 18. The case of the ld. DR is that the act of incurring of AMP expenses by the assessee is not a unilateral act and is an international transaction for following reasons:- i) Though, the AMP expenditure may be for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the foreign AE, and hence there is a transaction of rendering of service of market development to the AE. ii) The short term benefit of the transaction accrues both to assessee and AE in terms of higher sales but long term benefit accrues only to the AE. iii) The benefit to the AE is not incidental but significant. Once, it is established that the act of incurring of AMP exp....
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....se. In our considered opinion, for assumption of jurisdiction u/s 92 of the Act, the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an 'agreement' or 'arrangement' for incurring such AMP expenses. 22. The aforesaid view that existence of an international transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis ofsection 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm's length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian ent....
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....on'ble High Court with regard to existence of international transaction was only with respect to the case of three limited risk distributors namely, Sony Ericsson, Canon and Reebok etc., wherein the existence of international transaction was admitted and not in dispute. The Court accordingly held that such findings in the case of Sony Ericsson cannot be applied to the case of the manufacturers. 26. The Hon'ble High Court held as under: "43. Secondly, the cases which were disposed of by the Sony Ericsson judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. XXX 45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case....
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....hat the economic benefit arising out of the alleged promotion of the AE's logo is being enjoyed by the assessee. There is a clear opportunity and reasonable anticipation for the assessee to benefit from the marketing activities undertaken by it. This is clearly evidenced by the significantly higher profits made by assessee compared to its industry peers and also the very sizeable year on year increase in its turnover. In view of the aforesaid, it is respectfully submitted that the economic ownership of the trademark 'LG' rests with the assessee. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. The relevant observations in paras 151 to 154 of the judgement are reproduced hereunder: "151. Economic ownership of a trade name or trade mark is accepted in international taxation as one of the components or aspects for determining transfer pricing. Economic ownership would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership when....
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....d be warranted. The aforesaid test is fully satisfied in the case of the assessee and the Transfer Pricing adjustment on account of AMP expenses made by the TPO is liable to be deleted. 30. The assessee being a full-fledged manufacturer, entire AMP expenditure is incurred at its own discretion and for its own benefit for sale of LG products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark 'LG' manufactured by the assessee and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE. 31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the Revenue, the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of advertisement expenditure and the other transactions in the distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. Ac....