TaxTMI 
TaxTMI 
2023 (3) TMI 656
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....e assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act dated 12.08.2013 was issued and served on the assessee. During the course of assessment proceedings, it was noticed that international transaction with the AEs exceeded the prescribed limit, therefore, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the said transactions. The TPO u/s 92CA of the I.T.Act vide order dated 28.01.2016 proposed TP adjustment of Rs.29,03,35,855. Pursuant to the TPO's order, draft assessment order was passed on 28.03.2016 u/s 143(3) r.w.s. 144C(1) of the I.T.Act incorporating the above said TP adjustment proposed by the TPO. The Assessing Officer also made certain additions / disallowances on the corporate tax front. Aggrieved by the draft assessment order, the assessee preferred objections before the Dispute Resolution Penal (DRP). The DRP vide its directions dated 26.12.2016 rejected the objections of the assessee and confirmed the TP adjustment proposed by the TPO. In corporate tax front, partial relief was given to the assessee by deleting the disallowance of excess depreciation on motor vehicles. Pursuant to the direc....
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....ducts Limited - Honorable Delhi High Court ITA 346/2015 and other judicial precedents that the Appellant relied upon. Furthermore, the learned TPO has erred in applying bright line method which is not one of the prescribed methods under section 92C of the Act, in determining the existence of an international transaction. 1.4. The learned AO, TPO and Honourable DRP erred in law and in fact by exceeding their jurisdictions by determining the ALP of a transaction with third parties that is not an international transaction as def0ined in Section 92B and with flagrant disregard to the rulings of Maruti Suzuki India Limited vs Commissioner of Income-tax ITA 110/2014 & 710/2015 Honorable Delhi High Court, and the jurisdictional tribunal ruling in the case of Essilor India Private Limited vs Dcrr. IT(TP} A No.29/Bang/2014 and IT (TP}A. No. 227/Bang/2015. 1.5. The Honorable DRP, learned AO and TPO have erred in law and on facts in holding that the appellant promoted the brand of the AE merely on the ground that the AMP expenses incurred by the Appellant are more than the AMP expenses incurred by the comparable entities. Thereby, the Honorable DRP, learned TPO and AO have alleged that ....
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....ppellant craves to raise following grounds of appeal on merits. 1.12. The Honorable DRP, learned AO and TPO have erred in law and on facts in concluding that the distribution and AMP are two distinctive functions and requires to be remunerated separately. 1.13. The Honorable DRP have erred in upholding the approach of the learned AO and TPO of carrying out separate benchmarking analysis for AMP and making an adjustment without considering and appreciating the fact that aggregation approach followed by the Appellant using Transactional Net Margin Method ("TNMM") would have already factored in all operating expenses (which includes the AMP expenditure) and proving it at arm's length to the satisfaction of the Honorable DRP, learned AO and TPO. 1.14. The Honorable DRP, learned AO and TPO have erred in law and on facts in not appreciating that the Appellant has not provided any value added / brand building services to its AE by incurring AMP expenses, and therefore, no mark-up could have been charged / levied on such expenses, even if the same was to be characterized as an 'international transaction'. 1.15. Notwithstanding the fact that the Appellant did not add any....
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....the learned TPO as listed below, in relation to determining the mark-up on excess AMP expenditure without giving concrete reasons: a)Asian Business Exhibition & Conference Limited; b)I C C International Agencies Limited; c)Cyber Media (India) Limited; d)Killick Agencies & Marketing Limited; and e)Marketing Consultants & Agencies Limited 1.22. The Honorable DRP, learned AO and TPO have erred in law and on facts by not granting the benefit of quantitative adjustments (such as non-payment of royalty, etc.) while computing the transfer pricing adjustment for the alleged excessive AMP expenditure incurred by the Appellant. 1.23. The Honorable DRP, learned AO and TPO have erred in not granting appropriate favourable economic adjustments (including the working capital adjustment) when assessing the arm's length nature of alleged international transaction of provision of AMP services. 1.24. The Honorable DRP have erred in law and on facts in not giving specific direction for the following grounds of objection raised before the Honorable DRP. In this regard the Appellant relies on the Honorable Delhi High Court in Vodafone Essar Limited vs Dispute Resolution Pane....
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....e Industries Limited and Anr vs UOI and Ors (292 ITR 470), wherein it was held that even a provision made for leave encashment is a liability and the same must be allowed as a deduction in computing the taxable income since the same is not in the nature of a contingent liability; 2.3 The Honorable DRP and the learned AO have erred in law and on facts, in making the subject disallowance after having noted that the Honorable Supreme Court (SLP Civil Appeal - 12060/2008) had allowed for claim of deduction towards provision for leave encashment in the return of income, after discharging applicable taxes. 3. Disallowance of depreciation on intangibles - Rs.2,873,837 3.1 The Honorable DRP and the learned AO have erred in law and on facts in disallowing the depreciation claim of Rs.2,873,837 on intangible assets claimed by the Appellant. 3.2 The Honorable DRP and the learned AO have further, erred in law and on facts in not following the jurisdictional Bangalore Tribunal and the Commissioner of Income-tax (Appeals) ["CIT(A)"] decision in Appellant's own case for AY 2000-01, AY 2004-05, AY 2005-06, AY 2006-07, AY 2007- 08 and AY 2008-09, on identical issues, which has been ....
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....der of earlier AY's and on the other hand not granting the credit in respect of income recognized by the Appellant in AY 2012-13 5.4 The learned AO and the Honorable DRP has erred in law and facts in not appreciating the fact that non-grant of relief in respect of negative movement of Deferred Revenue results in double taxation of same income in different years which is not permissible under the taxation laws. 6. Other grounds 6.1 The Honorable DRP and the learned AO have erred in law and on facts in making adjustments of Rs. 746,941,286 to the returned income of the Appellant. 6.2 The learned AO has erred in law and on facts in proposing to initiate penalty proceedings under section 271(1) (c) of the Act. Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the learned members of the Honorable Tribunal to issue orders." Ground A is a general ground and no specific adjudication is called for, hence, we dismiss the sa....
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.... addition of Rs.29,03,35,855. The relevant finding of the DRP reads as follows:- "Having considered the submission, on perusal of paragraph 4 of the order of the TPO, it is noticed by us that under TNMM the assess selected 9 comparable out of which 6 not found suitable by TPO, by application of trading sales less than 75%, by application of different financial filter, and 4 due to non-availability of data for the financial year relevant to assessment year. The TPO subsequently carried out an independent search and selected 8 companies which include 3 companies selected by the taxpayer. The OP/OC means margin with respect to these comparable arrived at 3.89% as against the margin in respect of the assessee company computed by TPO at 1O.14%.However it is noticed by us that there is a contradiction in the finding of TPO in paragraph 4 and 14.6 of the order of the TPO. However the final outcome remain the same that, margin of assessee company, at the entity level under TNMM, is at arm's length. However the same does not help the assessee considering the fact that the decision of Delhi High court in the case of Sony Erricson Mobile Communication India Private Limited and others Vs....
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....ers of the TPO and the DRP. 8. We have heard rival submissions and perused the material on record. The issue as to whether AMP expenditure is an international transaction or not was considered by the Delhi High Court in Maruti Suzuki India Ltd. 381 ITR 117 and it was held as under:- "Step wise analysis of statutory provisions 62. If a step by step analysis is undertaken of Sections 92B to 92F, the sine qua non for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with the ALP and make the transfer pricing adjustment by substituting the ALP for the contract price. 63. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, Section 92C (1) which sets....
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....efit. According to the Revenue, "the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same." It is asserted: "An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand & market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same." 67. Reference is made by Mr. Srivastava to some sample agreements between Reebok (UK) and Reebok (South Africa) and IC Issacs & Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC is engaged in AMP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. Absence ....
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.... can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantit....
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....' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a)....
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....l is brought on record by the TPO to establish the existence of an arrangement, understanding or action in concert with the AE for incurring the AMP expenses for the benefit of the AE. Merely because the AE has a financial interest, it cannot be presumed that AMP expenses incurred by the assessee are at the instance or on behalf of the associated enterprise. In the absence of any international transaction relating to AMP expenses, the impugned TP adjustment cannot be sustained. Moreover, the TPO having accepted the ALP of other international transactions at the entity level, proceeded to make a separate TP adjustment for the AMP expenses. At para 4.2 of the TPOs order, the TPO has given a finding that the net margins earned by the taxpayer from the product segment is 3.82% and that at the entity level is 7.29%. The margin earned by the taxpayer at the entity level as calculated by the TPO is 2.50%. Hence, no adverse inference drawn by the TPO in respect of the distribution segment results. Thus, the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on AMP expenses. The Hon'ble Delhi High Court in Sony Ericsson Mobile Communications....
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....applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure." 11. Respectfully following the above judgment of the Hon'ble Delhi High Court, we delete the AMP TP adjustment of Rs. 25,09,60,200 and the mark up thereon amounting to Rs. 3,93,75,655. Ground Nos 2.1 to 2.3 (Corporate Tax) 12. The above grounds deals with the disallowance of provision for leave encashment of Rs.10,68,47,430. The AO disallowed the said provision under section 43B(f) for the reason that leave encashment can be claimed as deduction only on actual payment basis. The disallowance made by the A.O. was confirmed by the DRP. 13. We have heard rival submissions and perused the material on record. The Calcutta High Court in Exide Industries Ltd v UOI 292 ITR 470 struck down the provisions of section 43B(f). However, the Supreme Court in UOI v Exide Industries Ltd [2020] 425 ITR 1 held that clause (f) of section 43B is constitutionally valid and operative for all purposes. Thus, the provision for leave encashment of Rs.10,68,47,430 was righty disallowed by the AO and we confirm the same. The assessee has taken an alternate plea that AO be directed to gra....
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....ustoms duty amounting to Rs.34,68,84,164. The AO disallowed the same for the reason that interest on customs duty is allowable on actual payment basis under section 43B. As the said sum was not paid during the previous year relevant to assessment year under consideration, he proceeded to disallow the same. The DRP confirmed the action of the AO. 18. Aggrieved, the assessee has raised this issue before the ITAT. The learned AR relies on the decisions in Hindustan Motors Ltd v CIT 218 ITR 450 (Calcutta), CIT v Padmavathi Raje Cotton Mills Ltd 239 ITR 355 (Calcutta) and CIT v India Pistons Ltd [2001] 119 Taxman 384 (Madras) and contends that interest on customs duty is not covered by section 43B, hence deduction should be allowed even if actual payment is not made. 19. On the other hand, the learned DR relies on the decisions in the case of Shri Pipes v DCIT 289 ITR 154 (Rajasthan) and CIT v Andhra Sugars Ltd [2014] 367 ITR 195 (High Court of Telangana and Andhra Pradesh) which have held that interest on customs duty is allowable only on payment basis under section 43B. 20. We have heard rival submissions and perused the material on record. We find that the Hon'ble Calcutta High Co....
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....s customs duty is allowable only on payment basis under section 43B, interest levied on arrears or late payment of customs duty is also allowable on actual payment basis under section 43B. The AO is directed to verify the nature of levy of interest on customs duty and decide the allowability of deduction as per our above direction. It is ordered accordingly. Grounds 5.1 to 5.4 (Corporate Tax) 22. The above grounds deals with the issue of consequential relief on negative movement of deferred revenue for the year under consideration. We note that this issue was considered the ITAT in assessee's own case for AY 2011-12 in IT(TP)A No 779/Bang/2016 and it held as under:- "19. We have heard the rival submissions and perused the material on record. We notice the same issue is pending before the coordinate bench of the Tribunal for adjudication against the order of the CIT(A) for various assessment years from 2009-10 in assessee's own case. The issue can be decided for the year under consideration only based on the outcome of the other appeals pending for the earlier years as the decision will have a cascading effect on the issue for the year under consideration. At this point....