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2016 (5) TMI 72 - AT - Income Tax
Transfer pricing adjustment - sharing AMP expenses - Held that:- The fact-that the license agreements between the assessee and its AE. s were on principal to principal basis for payment of royalty for use of brands of the AE's was not challenged by the TPO. In our, opinion, observation of the DRP that royalty payment was not a relevant point to decide the issue is not proper. Because, royalty payment is one of the criterias to hold that the assessee is an independent unit. It is also not denied that the assessee is having a fully operational manufacturing, marketing and distribution system in India. The manufacturing unit of the assessee had shown a huge turnover(Rs. 631. 24 crores). Thus, we do not find force in the arguments of the TPO /DRP that AMP expenses incurred by the assessee were primarily or secondarily aimed to benefit the AE. s. and that it was entitled to a reasonable compensation for such AMP expenses. The expenses were incurred by the assessee to promote its own business interests.
TPO has not brought on record any evidence to prove that the assessee had rendered any services to its AE. s under the head AMP. On the contrary, payment on account of advertisements etc. (Rs. 71. 04 crores)was made to unrelated domestic third parties. In our opinion, these basic facts compelled the TPO to hold that in the case under consideration the international transaction was not the actual AMP expenditure, but the benefit conferred by it to its AE. s in form of promotion and brand value augmentation of the brands owned by them. So, the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses to the AE. s can it be held that there was an international transaction only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AE. s. , who owned the brands used by the assessee. In our opinion, the arguments suffers from the very basic flaw that an assessee does not incurs AMP to increase its sales, but to benefit the AE. s. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AE's. and not to promote its own business. The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business, as state earlier. The resultant profit was offered for taxation in India. Therefore, transferring of profit from India, the basic ingredient to invoke the provisions of section 92 of the Act, remains unproved. The transaction in question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. - Decided in favour of assessee
Disallowance u/s 14A - Held that:- We find that the assessee the AO had made disallowance of ₹ 45. 67 lakhs invoking the provisions of section 14 A of the Act, that it on its own, the assessee had made a disallowance of ₹ 5. 56 lakhs, that the DRP reduced the disallowance to ₹ 42. 11 lakhs. We find that the AO had applied the provisions of Rule 8D of the Rules in a mechanical manner. In each and every case disallowance @ half a percent of the average investment for that year cannot be applied. But, it is also a fact that the assessee itself had admitted that certain disallowance had to be made u/s. 14 of the Act. As an ad hoc disallowance is to be made, so, we are of the opinion that interest of just will meet if the disallowance is restricted to ₹ 10 lakhs - Decided in favour of assessee in part.