2020 (4) TMI 26 - AT - Income Tax

TP Adjustment - AMP expenses - HELD THAT - The authorities below have failed to brought on record any documents or evidence showing the existence of the agreement between the assessee and it s AE by virtue of which the assessee was under no obligation to incur the marketing expenditure for the brand building of the brand owned by the assessee. No such finding of fact recorded by the lower authority was brought to our notice by the DR for the revenue. In the light of the above we deem appropriate to reproduce the finding recorded by the tribunal for the earlier assessment year in the case of the assessee while dealing with the AMP issue. Merely because there is an incidental benefit to the foreign AE it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. Following the decision of the coordinate bench for the assessment year 2008 09 to assessment year 2012 13 2018 (3) TMI 1665 - ITAT MUMBAI the issue of AMP is allowed in favour of the assessee and against the revenue. Adjustment on import of finished goods - suitability of foreign AE as a tested party - HELD THAT - TPO for the assessment year under consideration had recorded the finding that the assessee did not provide the requisite information. However during the course of argument AR had drawn our attention to the annual accounts of the comparables which are provided by the assessee before the TPO. However despite providing the requisite information TPO had recorded that the said information s were not provided to TPO. Further we also noticed that the annual reports of the comparables was not considered as comparables were having different calendar years other than the financial year of the tested party. Assessee is carrying out the distribution function with respect to goods imported from its AE. Therefore foreign AE of the assessee cannot be considered as a tested party for benchmarking the international transaction. On perusal of the paper book and documents submitted by the assessee it is abundantly clear that the assessee had provided requisite necessary data of the foreign AE of the assessee as well as the comparables to the TPO this fact was duly acknowledged by the DRP in the order reproduced hereinabove. Both the lower authorities had rejected the contention of the assessee for considering the foreign AE as a tested party by following the reasons given by the DRP for the assessment year 2009-2010. Order passed by the lower authorities is required to be set aside as the order passed by the lower authorities were cryptic orders as authorities have failed to consider the documentary evidence produced before it while passing the order on the submissions of the assessee. Further the lower authorities have failed to pass reasoned speaking order dealing with the submissions/documentary evidence of the assessee. Therefore we remand these grounds back to the file of the Dispute Resolution Panel (DRP) for denovo examination and passing the reasoned speaking order without influencing with the order passed by the DRP for the assessment year 2009-10. DRP is directed to pass a detailed speaking order after considering the documents/ evidence already on record - Whether the foreign AE of the assessee can be considered as tested party for the purpose of benchmarking the international transaction subject matter of the present dispute and If on examination of the above parameters the DRP comes to the conclusion that the foreign AE can be considered as tested party then the DRP will examine the suitability of comparable provided by the assessee in the TP study on the basis of the parameter laid down in Chapter 10 and the rule framed therein for said purpose. DRP shall also find out whether the comparables provided by the assessee are into the same line of business or not. DRP shall also find out whether these comparables are from the same country or from the same region having the similar economic geographical and political condition or not which may affect the profitability of these comparable. The DRP shall apply appropriate filters for the purpose of including and excluding the comparables. If the DRP comes to the conclusion that the foreign AE of the assessee can be considered as a tested party and thereafter DRP rejects the comparables selected by the assessee then the DRP may include any other suitable comparable which satisfy the various filters applied by the DRP for that purposes after following the procedure as laid down in chapter 10 of the income tax act read with rule framed there under.

Summary

Issues Involved:

1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses.
2. Adjustment on import of finished goods.
3. Levying interest under section 234B of the Act.
4. Set-off of assessed loss of AY 2007-08.
5. Taxation of reversal of provision for royalty.
6. Short credit of TDS.
7. Recovery of refund allegedly granted.

Detailed Analysis:

I. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses:

1. The Tribunal examined whether the AMP expenses incurred by the appellant in India constituted an international transaction under Section 92B of the Income-tax Act, 1963. The appellant argued that there was no agreement or understanding with its Associated Enterprises (AEs) for incurring AMP expenses to enhance marketing intangibles owned by the AE. The Tribunal found that the lower authorities did not provide evidence of such an agreement and concluded that the AMP expenses were incurred solely for the appellant's business in India. Consequently, the Tribunal ruled in favor of the appellant, stating that no TP adjustment could be made in the absence of such an agreement.

2. The Tribunal also addressed the application of the bright line method by the TPO to determine excessive AMP spend. It was noted that the bright line method is not prescribed under the Act and the Income-tax Rules, 1962. The Tribunal followed the Delhi High Court's decision, which rejected the application of the bright line test for benchmarking AMP expenses. Hence, the Tribunal deleted the adjustment towards AMP expenses.

II. Adjustment on import of finished goods:

1. The Tribunal considered the appellant's argument that the overseas AEs should be treated as the tested party for benchmarking analysis. The TPO had previously rejected this approach, arguing that the appellant had consistently taken itself as the tested party in prior years and had not provided adequate justification for changing this stance.

2. The Tribunal remanded the matter back to the Dispute Resolution Panel (DRP) for a de novo examination. The DRP was directed to consider whether the foreign AE could be the tested party based on the functions performed, assets deployed, and risks assumed. The DRP was also instructed to examine the comparables provided by the appellant and apply appropriate filters to ensure comparability.

III. Levying interest under section 234B of the Act:

1. The Tribunal did not provide a detailed discussion on this issue in the provided text. However, it is implied that the matter would be reconsidered in light of the Tribunal's directions on other issues.

IV. Set-off of assessed loss of AY 2007-08:

1. The appellant claimed that the assessed loss of AY 2007-08 should be set off against the income assessed for AY 2008-09. The Tribunal remanded this issue back to the DRP for reconsideration, directing them to re-compute the taxable income and consequential tax liability accordingly.

V. Taxation of reversal of provision for royalty:

1. The appellant argued that the reversal of the provision for royalty in the year under consideration should not be taxed since it was already disallowed in AY 2007-08. The Tribunal remanded this issue back to the DRP for fresh consideration, instructing them to not tax the reversal of the provision for royalty if it was already disallowed in the previous year.

VI. Short credit of TDS:

1. The appellant claimed a short credit of TDS due to an inadvertent lower claim in its return of income. The Tribunal remanded this issue back to the DRP, directing them to verify the records and allow the additional TDS credit if justified.

VII. Recovery of refund allegedly granted:

1. The appellant contended that the refund allegedly granted through intimation under section 143(1) was never received. The Tribunal remanded this issue back to the DRP, instructing them to verify the records and delete the recovery of the refund if it was never received by the appellant.

Separate Judgments:

- The Tribunal's decisions were consistent across different assessment years, and the issues were remanded back to the DRP for de novo examination and passing reasoned speaking orders based on the provided directions. The Tribunal emphasized the need for the DRP to consider the documentary evidence and submissions provided by the appellant and to apply appropriate filters for comparability analysis.