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2024 (2) TMI 1484
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.... case was selected for scrutiny through CASS and statutory notices were served on the assessee. The assessee had international transactions with its AE and the case was referred to the TPO after approval from the competent authority. The TPO passed order on 28.01.2021 and accordingly the AO passed the final assessment order on 24.05.2021. 3. The ld. CIT(TP) on examination of records noted that the assessee has recognized the expense on account of share based compensation transactions and the TPO allowed exclusion of share based compensation(SBC) in the form of ESOP cost from the operating cost and also excluded depreciation and amortization from the operating cost without due inquiry/verification. It was noted that while delivery charges and related warranty charges are to be considered in AMP expenses, the TPO has excluded delivery charges and warranty charges from the AMP expenses without due inquiry/verification while determining the AMP adjustment. Therefore, the ld. CIT(TP) considered the TPO's order dated 28.01.2021 as erroneous and prejudicial to the interests of revenue and issued show cause notice for revision of the order u/s. 263 of the Act. After considering the subm....
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....g expense whilst computing operating cost of Marketing Support Service Segment (MSS Segment); and (b) excluding delivery charges and warranty expenses from AMP Expenses, without making necessary/proper enquiries and verification. 12. It is submitted that in the transfer pricing report for the relevant assessment year 2017-18, the segmental operating margin of the appellant for MSS Segment was determined at 14.86% by considering total operating cost at Rs. 7,103.14 million, after inter-alia excluding SBC cost of Rs. 27 million. Refer page 262 of the paperbook. 13. In the present case, CIT(TP) has sought to invoke revisionary jurisdiction qua MSS Segment and inter-alia contended that SBC in the form of ESOP was erroneously considered as non-operating expense by the TPO. 14. It is at the outset submitted that SBC / ESOP attributable to MSS Segment amounted to INR 27 million only as against INR 1,760 million erroneously considered by the CIT(TP). Furter, the CIT(TP) has failed to appreciate that since the aforesaid expense was notional and non-operating in nature, the same was excluded from operating cost for the purpose of computation of segmental o....
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....ax Act read with rules 10D(1)and (3)of Income-tax Rules, along with a copy of transfer pricing study report. c. Copies of orders of CIT (Appeals) and ITAT for earlier years involving adjudication of transfer pricing issues. d. Copies of relevant agreements in respect of international transactions. e. Copy of Form No.3CEB. f. Copy of TPO's order for the last assessment year .................................. k. Details of all international transactions along with segment- wise break- up of such transactions. ................................. p. Fact sheet showing business description, total turnover, Gross Operating Net profit, Method applied, value of International Transaction, PLI etc. of three year including the relevant year" Reply dated 17.01.2020 In response to notice dated 06.01.2020, the appellant vide reply dated 17.01.2020, submitted all the requested information/ documents, inter alia, enclosing: - Audited Financial accounts and auditors report (@ Pg. 35 - 85 of the PB. SBC @ pg. 63,67 of the PB) [Copy enclosed at pages 31 to 222 of paperbook] -Transfer Pricing Study (@ Pg. 86 - 166 of the PB) -Inter-company agreements, as ame....
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.... reported by the appellant was accepted and no adverse inference was drawn by the TPO. 21. In so far as AMP expense too, it may be pertinent to note that the TPO raised specific query vide SCN directing the appellant to justify why delivery and warranty expense should not be included as part of AMP Expense. However, on considering the detailed response dated 11.01.2021 filed by the appellant, the same was not considered relevant for inclusion in the AMP Expense by the TPO and adjustment was made only qua advertisement and promotion expenses in the TP order dated 28.01.2021 (Refer page 50 of TP order). 22. In the impugned revisionary order, the CIT(TP) though categorically accepted the fact that specific query was raised by the TPO qua delivery and warranty expense, but has referred to para 13 of the TPO order dated 28.1.2021 to contend, merely on the basis of presumption, that the entire submission dated 11.01.2021 filed by the appellant was rejected by the TPO, which included the issue of delivery and warranty expense as well. However, the CIT(TP) failed to appreciate that the submissions, to the extent not accepted/rejected by the TPO was specifically dealt with....
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....issue the TPO conducted extensive enquires during the course of proceedings, such order cannot, it is submitted, be regarded as erroneous so as to warrant exercise of revisionary jurisdiction under section 263 of the Act. Issue squarely covered by order of Tribunal in case of Group Concern 26. Specific reliance in this regard is placed on the recent decision of the Bangalore Tribunal in the case of Amazon Development Centre (India) Pvt Ltd in IT(TP)A No. 417/Bang/ 2023, order dated 25.10.2023, group concern of the appellant, wherein revisionary jurisdiction invoked under section 263 of the Act by the CIT(TP) (same incumbent as in the case of the appellant) on almost similar facts, was quashed by the Tribunal by observing as under: "8. After considering the rival submissions, we note that the ld. CIT has exercised is power as per section 263 and observed that the TPO has wrongly calculated the total operating expenses ignoring the ESOP expenses issued by the parent company to the employees of the subsidiary company and debited expenses to the P&L account of Rs. 4,054 million. He further noted that the foreign exchange fluctuation loss of Rs. 110 million an....
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.... the assessing officer (in this case, TPO) has adopted one of the courses permissible in law which has resulted in loss of revenue, or where two views are possible and the assessing officer (in this case, TPO) has taken one view with which the Commissioner does not agree, the exercise of revisionary power under section 263 of the Act would be without jurisdiction. 31. Reference, in this regard, may be made to the following decisions: -Malabar Industrial Co. Ltd: 243 ITR 83 (SC) -CIT vs. Max India Limited: 268 ITR 128 (P&H) [affirmed by SC in 295 ITR 282 (SC)] -CIT V. Gabriel India Limited: 203 ITR 108 (Bom) -CIT V. Ganpat Ram Bishnoi: 198 CTR 546/ 152 Taxman 242 (Raj.) -Paul Mathew & Sons v. CIT: 263 ITR 101 (Ker.) -Vimgi Investment (P) Limited: 290 ITR 505 (Del.) -CIT V. Mepco Industries Limited: 294 ITR 121 (Mad.) 32. In the present case, it is submitted that: (i) SBC cost, being notional in nature was rightly treated as non-operating expenses; (ii) Depreciation and amortisation cost was already included as part of operating cost base; and (iii) Delivery and Warranty expenses, being post sales expens....
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.... computation). 37. It may also be pertinent to note that relevant inter-company agreements were also filed by the appellant vide letter dated 20.01.202, wherein SBC cost has been specifically excluded from cost, which were duly examined by the TPO and thus the allegation of the CIT(TP) that the TPO failed to examine agreements is factually incorrect. Re: (ii) Depreciation and Amortization cost as part of cost base 38. The observation made by the CIT(TP) is factually incorrect inasmuch as the appellant as well as the TPO, while computing the operating margin in the MSS segment has considered the expenditure on account of depreciation/ amortization as operating expenditure and the same has been included in the operating cost base for the purpose of computing the operating margins [Refer page 262 of PB and pages 5 to 7 of the TP Order]. 39. It may also be pertinent to note that the operating margin of the appellant in respect of MSS segment has been determined at 14.86% (Refer TP study @ page 165 of PB) after including depreciation and amortization as part of the cost base, which has been accepted to be at arms' length by the TPO, being within +/- 3....
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....t and only after considering the same, warranty and delivery costs was excluded from the ambit of AMP expenses in the TP order. Being so, the order passed by TPO cannot be treated as erroneous on this account. 46. Even otherwise, expenditure on account of warranty and delivery costs cannot be regarded as having been incurred for the purpose of development of brand. The said expenditure is not incurred for publicity or promotion of brand and at best can be regarded as having been incurred after effecting the sales of goods. 47. Reliance in this regard is placed on the decision of the Delhi High Court in the case of Sony Ericson Mobile communication India Pvt. Ltd. v. CIT: 374 ITR 118 (Del.), wherein the Hon'ble Delhi High Court held that selling expenses are not in the nature and character of 'brand promotion' and thus cannot be construed as part of AMP expense. Relevant observation of the Court is extracted as under: "176. The aforesaid argument, when AMP expenses are segregated from the composite transaction including distribution and marketing function, is flawed and has to be rejected. The respondent-appellants engaged in distribution and marketing of ....
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....es India Pvt. Ltd.: ITA No 1515/Del/2014 (Del. Trib.) wherein the Tribunal held that selling expenses cannot be regarded as having been incurred for development of brand. The decision of the Tribunal was approved by the Delhi High Court vide decision dated 30.07.2019 in ITA No. 709/2019. 50. Reliance is also placed in this regard on the following decisions where the Benches of the Tribunal have directed for the exclusion of selling expenses from the ambit of AMP expenses: -Stanley Black & Decker India Pvt. Ltd. (TS-89-ITAT-2016 (Bang) -Panasonic Consumer India Pvt. Ltd. (TS-338-ITAT-2015(DEL)-TP) -Yamaha Motor India Sales Pvt. Ltd. (TS-162-ITAT-2014(DEL)-TP) -RayBan Sun Optics India Ltd. (TS-122-ITAT-2014(DEL)-TP) -Perfetti Van Melle India Pvt. Ltd. (TS-119-ITAT-2014(DEL)-TP) -LG Electronics India Pvt. Ltd. Vs. ACIT (TS-11-ITAT-2013(DEL)-TP) 51. In the case of the appellant, it is respectfully submitted that the TPO accepted the claims of the appellant only after examining the issue thoroughly and considering the legal position as submitted by the appellant vide reply dated 11.01.2021, filed during the course o....
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....) -CIT vs. Development Credit Bank Ltd: 323 ITR 206 (Bom.) 56. The case of the appellant stands on a much better footing since complete and detailed enquiries were made in the case of the appellant as elaborated supra and there was due examination and application of mind on part of the TPO which also stands recorded in the TP Order. Further, the view taken by the TPO is a plausible view as demonstrated above. 57. It is respectfully submitted that, in the aforesaid circumstances, the TP order dated 28.01.2021 for the assessment year 2017-18, is neither 'erroneous' nor' prejudicial to the interests of the Revenue warranting exercise of revisionary jurisdiction under section 263 of the Act. Re (c): Explanation 2 to section 263 relied upon by CIT(TP) 58. In the impugned order passed under section 263 of the Act, the CIT(TP) has harped upon Explanation 2 to section 263 of the Act to hold that non- conduct of proper enquiry by the TPO renders the order erroneous and prejudicial to the interest of the Revenue. 59. In this regard, it is submitted that the aforesaid Explanation cannot, in our respectful submission, be read to provide unf....
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....CIT(TP) to record prima facie finding on merits before setting aside the assessment: 63. That apart, it is further submitted that the CIT(TP) has in the revisionary order, merely set aside the assessment order on the alleged ground that the TPO had incorrectly computed AMP adjustment and also excluded certain expenses as non-operating for MSS segment without making necessary/proper enquiries and verification. The CIT(TP) has, however, not pointed out the error, if any, much less the prejudice caused to the interests of Revenue as a consequence of alleged non-verification, while setting aside the assessment. The CIT(TP) has not, before setting aside the assessment on the said issue, recorded any prima facie finding on the merits thereof. 64. The Courts have in the undermentioned decisions held that the CIT while exercising revisionary powers under section 263 of the Act and setting aside the assessment order, is required to record prima-facie finding on the merits of the matter after conducting necessary enquiry(ies) and is not empowered to blanketly set aside the assessment order on the ground that sufficient enquiries were not conducted by the assessing officer: ....
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....aced on the decision of the Hon'ble Supreme Court in the case of Estate Duty v. M.A. Merchant: 177 ITR 490 (SC), wherein the Court observed as under: "As it stands, there are no specific words either which confer retrospective effect to section 59. To spell out retrospectivity in section 59, then, there must be something in the intent of section 59 from which retrospective operation can be necessarily inferred. We are unable to see such intent. The new section 59 is altogether different from the old section 62 and there is nothing in the new section 59 from which an intent to give retrospective effect to it can be concluded. 6......There is a well settled principle against interference with vested rights by subsequent legislation unless the legislation has been made retrospective expressly or by necessary implication. If an assessment has already been made and completed, the assessee cannot be subjected to reassessment unless the statute permits that to be done. Reference may be made to CED v. Smt. Ila Das [1981] 132 ITR 720 (Cal.) where an attempt to reopen the estate duty assessment consequent upon the insertion of the new section 59 was held infructuous. ....
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....ons and perusing the material on record, we note that in regard to first issue for excluding the SBC as non-operating cost while calculating the OP/OC. This issue is covered in favour of the assessee in its group company as relied by the ld. AR of the assessee noted supra in the case of Amazon Development Centre (India) Pvt. Ltd. in IT(TP)A No. 417/Bang/2023 order dated 25.10.2023 and the other case law relied by the ld. AR of the assessee supports the case of the assessee. In the case cited above the similar issue has been decided by the co-ordinate bench in the proceeding initiated by the ld. CIT u/s 263 in favour of the assessee. In view of this, respectfully following the above judgment we hold that this issue is in favour of the assessee. 8. Further in respect of issue No.2, as observed by the CIT(TP) that while calculating OP/OC by the TPO, the depreciation and amortization expenses of Rs. 3 million have been excluded by the TPO from the operating cost. We note from the TPO order para 3, the total revenue has been considered of Rs. 8159 million and total cost has been calculated of Rs. 7130 million resultantly there is operating profit of Rs. 1029 million. Accordingly, the....