2019 (5) TMI 1798 - AT - Income Tax

TP Adjustment - international transaction be presumed to exist due to excessive AMP expenses incurred by the assessee distributor - Adjustment on protective basis - arms length calculation resorted to by the TPO on the directions of the DRP by applying the intensity adjustment is opposed in principle by the assessee as it is invalid in law and a mirror image to Bright Line Test which does not have any judicial approval - HELD THAT - We are of the view that there is nothing in the conduct of the assessee referred to by the Revenue to show that the incurring of AMP was an international transaction and not a function of the assessee as a distributor. There is no reference to any instance of concerted action or design so as to suggest that the advertising marketing and promotion expenses were not for the benefit of the assessee and were infact for the benefit of the AE. In the facts as they stand the expenses incurred for the benefit of the assessee exploiting the brand of the AE cannot be termed as an international taxation on presumptions where at best benefit to the AE may be incidental. The settled legal position as discussed at length is that the supporting facts have to be brought on record by the Revenue to discharge the onus placed on it and presumption alone that expenses are excessive by way of some arbitrary parameters which lack judicial and statutory support cannot be subscribed to. In the absence of any such fact which has been referred to by the Revenue the presumption drawn has no legal legs to stand on and deserves to fail. Co-ordinate Bench in the immediately preceding assessment year where Joint Venture Agreement existed between Widex A/S Denmark and Mr. T.S. Anand in the ratio of 78.43% and 21.57% wherein a similar issue was considered and the issue was stated to be covered by the assessee and contested by the Revenue. We find that the parties were in agreement that change in shareholding pattern in the year under consideration had no impact is a position which has not been varied despite the fact that the change was pointed out by the Bench. In the facts as they stand we then find that since the said factor is stated to be not a relevant or material fact and when considered in the context of the case laws cited and relied upon it is seen that the assessee s claim stands addressed. There is no material referred to whatsoever on record to show that the AMP expenses were excessive and thus be presumed to be an international transaction. We have also seen that the reliance placed by the assessee in the order passed by the Co-ordinate Bench in the immediately preceding assessment year is not misplaced. Accordingly we hold that the claim of the Revenue fails on the primary threshold itself as we hold AMP expenses incurred by the assessee in the facts as they stand is not an international transaction. - Decided in favour of assessee

Issues Involved:
1. Incorrect interpretation of law by AO/TPO/DRP.
2. Incorrect assessment of total income.
3. Presumption of independent international transaction by way of AMP services.
4. Disregard of principles laid down by higher courts regarding AMP expenditure adjustments.
5. Incorrect further adjustment towards mark-up by AO/TPO/DRP.
6. Ultra vires duplicative approach for AMP expenditure adjustments.
7. Protective adjustments and application of Bright Line Test.
8. Self-contradictory, unlawful, and vitiated decision-making process.
9. Initiation of penalty proceedings under section 271(l)(c).

Detailed Analysis:

1. Incorrect Interpretation of Law by AO/TPO/DRP:
The assessee challenged the correctness of the AO's order, arguing that it was based on an incorrect interpretation of law. The tribunal noted that the AO/TPO/DRP had presumed the existence of an international transaction due to "excessive" AMP expenses without demonstrating any tangible evidence of an arrangement or understanding between the assessee and its AE. The tribunal emphasized that the existence of an international transaction cannot be presumed and must be demonstrated by the Revenue.

2. Incorrect Assessment of Total Income:
The assessee contended that the AO erred in assessing its total income at Rs. 1,75,60,837 against the returned income of ?-4,62,24,541. The tribunal found that the AO/TPO/DRP's calculations were inconsistent and lacked statutory and judicial support, leading to an incorrect assessment of total income.

3. Presumption of Independent International Transaction by Way of AMP Services:
The tribunal found that the AO/TPO/DRP erred in assuming the existence of an independent international transaction by way of AMP services. The tribunal referred to the decisions in Maruti Suzuki and Whirlpool, which clarified that the existence of an international transaction involving AMP expenses cannot be presumed and must be demonstrated by the Revenue.

4. Disregard of Principles Laid Down by Higher Courts Regarding AMP Expenditure Adjustments:
The tribunal noted that the AO/TPO/DRP disregarded the principles laid down by the Delhi High Court and other tribunals, which rejected the Bright Line Test and emphasized the need for tangible evidence to demonstrate the existence of an international transaction. The tribunal held that the AO/TPO/DRP's actions were contrary to the settled legal position.

5. Incorrect Further Adjustment Towards Mark-Up by AO/TPO/DRP:
The tribunal found that the AO/TPO/DRP erred in making a further adjustment towards mark-up without any statutory or judicial support. The tribunal emphasized that such adjustments must be based on clear statutory provisions and judicial approval, which were lacking in this case.

6. Ultra Vires Duplicative Approach for AMP Expenditure Adjustments:
The tribunal held that the AO/TPO/DRP's duplicative approach towards AMP expenditure adjustments was ultra vires under the law. The tribunal noted that the Bright Line Test and its reverse, the intensity approach, lacked judicial sanction and could not be applied.

7. Protective Adjustments and Application of Bright Line Test:
The tribunal noted that the AO/TPO/DRP made protective adjustments and applied the Bright Line Test despite its lack of statutory and judicial support. The tribunal emphasized that the Bright Line Test had been rejected by higher courts and could not be used to determine the existence of an international transaction or its ALP.

8. Self-Contradictory, Unlawful, and Vitiated Decision-Making Process:
The tribunal found that the AO/TPO/DRP's decision-making process was self-contradictory, unlawful, and vitiated. The tribunal noted that the AO/TPO/DRP's varying stands and multiple methods of calculation demonstrated a premeditated determination to make an addition without a clear and consistent basis.

9. Initiation of Penalty Proceedings Under Section 271(l)(c):
The tribunal did not specifically address the initiation of penalty proceedings under section 271(l)(c) in its detailed analysis. However, given the tribunal's findings on the other issues, it is likely that the initiation of penalty proceedings was also found to be unjustified.

Conclusion:
The tribunal allowed the assessee's appeal, holding that the AMP expenses incurred by the assessee were not an international transaction and that the AO/TPO/DRP's actions were contrary to the settled legal position. The tribunal directed the deletion of the addition made on account of AMP expenses and emphasized the need for tangible evidence to demonstrate the existence of an international transaction.

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