2025 (5) TMI 429 - AT - Income Tax

TP Adjustment - upward adjustment made for advertisement marketing and publicity expenses (AMP) - international transaction or not? - HELD THAT - As per assessee s own case for the preceding two years we are in agreement that AMP is not an International Transaction and thus delete the ALP adjustment made. Accordingly these grounds taken by the assessee in this respect are allowed. ALP adjustment made on account of payment of royalty - Considering the facts of the present case and the applicable law as well as the recent decision in assessee s own case 2023 (8) TMI 1061 - ITAT KOLKATA for the Assessment Year 2012-13 as extracted above we are in agreement that we delete the upward adjustment in respect of payment of royalty. Upward adjustment for R D services - HELD THAT - As decided in assessee s own case 2023 (8) TMI 1061 - ITAT KOLKATA we find it proper to remit the matter back to the file of Ld. TPO to undertake comparability test based on correct functionality of the comparables by considering the material on record and arrive at the benchmarking in accordance with the provisions of law. Assessee is at liberty to furnish any further details in this respect to justify its benchmarking of ALP of the transaction. Adjustment made towards IT support services adjustment towards allocation of expenses And Adjustment made for mark-up of recovery and expenses - HELD THAT - As decided in assessee s own case 2023 (8) TMI 1061 - ITAT KOLKATA remit this issue also to the file of Ld. TPO to undertake afresh comparability test by capturing the correct functionality as the assessee has described the IT support services which it has provided to its AEs. Assessee is at liberty to furnish any further details in this respect to justify its benchmarking of ALP of the transaction. Disallowance of deduction u/s 80IB and 80IC - HELD THAT - As decided in own case 2020 (6) TMI 474 - ITAT KOLKATA held units for which deduction u/s 80-IB and 80-IC were claimed by the assessee came into existence only in F.Y. 2004-05. Thus it is clear that the bad debts written off which was claimed as deduction did not pertain to any of the units for which the assessee claimed deduction u/s 80-IB and 80-IC of the Act. Therefore apportionment of bad debt written off to the eligible units and registering profit of those eligible units for the purpose of allowing deduction u/s 80-IB and 80-IC as done by the revenue authorities is unsustainable. The apportionment is directed to be deleted. Ground No.3 raised by the assessee is allowed. Non-granting of benefit of Double Tax Avoidance Agreement (DTAA) between India-UK and India- Spain respectively qua the right of tax towards payment of dividend - HELD THAT - As in assessee s own case 2023 (8) TMI 1061 - ITAT KOLKATA has dealt with this identical issue has remanded back to the file of Ld. TPO. Disallowance u/s 14A r.w.r 8D whilst computing the book profits u/s 115JB - HELD THAT - Tribunal in the case of DCIT vs. Century Plyboards (L) Ltd. 2020 (12) TMI 55 - ITAT KOLKATA we hold that the disallowance made by the AO u/s 14A read with Rule 8D of the Rules could not be added back whilst computing book profits under section 115JB since the same does not fall within the purview of explanation section 115JB of the Act.

Summary

The core legal questions considered by the Tribunal in these consolidated appeals primarily revolve around the application of transfer pricing provisions under the Income-tax Act, 1961 (the Act) for multiple assessment years. The principal issues include:

1. Whether advertisement, marketing, and promotion (AMP) expenses incurred unilaterally by the assessee constitute an international transaction under section 92B of the Act, and whether adjustments on account of such expenses are justified.

2. The appropriateness of the transfer pricing methods applied by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) in benchmarking royalty payments, including the applicability of Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM).

3. The validity of upward adjustments made in respect of payments for Research & Development (R&D) services and IT support services, including the selection and rejection of comparable companies and the use of multiple year data.

4. The correctness of transfer pricing adjustments related to import purchases of finished goods from Associated Enterprises (AEs), including the application of the Resale Price Method (RPM) and product comparability considerations.

5. The legitimacy of mark-up adjustments on reimbursements and expenses incurred on behalf of AEs, specifically relating to market support services.

6. The treatment of allocation of expenses and whether such allocations constitute intra-group stewardship services subject to transfer pricing adjustments.

7. The correctness of disallowance of deductions under sections 80-IB and 80-IC of the Act, particularly in relation to apportionment of residual costs and eligibility of income from scrap sales.

8. The validity of penalty proceedings initiated under section 271(1)(c) of the Act.

9. The applicability of Double Tax Avoidance Agreement (DTAA) benefits concerning dividend taxation between India-UK and India-Spain.

10. The appropriateness of disallowance under section 14A read with Rule 8D while computing book profits under section 115JB.

Issue-wise Detailed Analysis

1. Advertisement, Marketing, and Promotion (AMP) Expenses as International Transaction

The legal framework involves section 92B of the Act, which defines international transactions, and the transfer pricing provisions under Chapter X (sections 92 to 92F). The Tribunal examined whether AMP expenses incurred unilaterally by the assessee qualify as an international transaction requiring arm's length price (ALP) adjustment.

Precedents relied upon include the Special Bench ruling in LG Electronics India Pvt. Ltd. and the Delhi High Court decision in Maruti Suzuki India Ltd. vs. CIT. The Tribunal noted that unlike LG Electronics, where the Indian entity acted under obligation and control of the foreign AE, the assessee had autonomy over AMP expenditure decisions with no binding obligation or contract with AEs to incur such expenses.

The Tribunal emphasized that a unilateral action without any bilateral arrangement or contract does not constitute a 'transaction' under section 92F(v). It further highlighted that the transfer pricing adjustment mechanism under Chapter X contemplates substitution of transaction price with ALP, not a quantitative adjustment based on presumed transactions.

The Tribunal rejected the application of the 'Bright Line Test' (BLT) as it is not a prescribed method under section 92C or Rule 10B and held that AMP expenses are routine business expenses incurred exclusively for the assessee's benefit. It observed that the Revenue failed to establish the existence of an international transaction involving AMP expenses and that the ALP adjustment made by the TPO and confirmed by the DRP was unjustified.

In conclusion, the Tribunal held that AMP expenses do not constitute an international transaction and deleted the ALP adjustment of approximately Rs. 938 crore for the relevant assessment year. This position was fortified by consistent earlier decisions of the Tribunal and High Courts.

2. Royalty Payments and Transfer Pricing Methodology

The issues here relate to the benchmarking of royalty payments made by the assessee to its AEs, including the choice of CUP method over TNMM, and the treatment of royalty on imported goods.

The Tribunal noted that the assessee had entered into valid license agreements granting rights to use intellectual property, including trademarks and know-how, with clearly stipulated royalty payment terms based on net sales. The Tribunal observed that the TPO's presumption that royalty was embedded in import prices lacked evidentiary basis and was merely speculative.

The Tribunal relied on the principle of consistency, citing the Supreme Court's decision in Radhasoami Satsang vs. CIT, noting that the assessee's royalty payments had been accepted in prior years without challenge. It also referred to a Customs Authority order which found that royalty was not included in the invoice value of imported goods.

The Tribunal held that the TPO lacked jurisdiction to test commercial expediency or apply the benefit test to negate the royalty payments. The adjustment of approximately Rs. 150 million was deleted, affirming the appropriateness of the license agreements and royalty payments.

3. Research & Development (R&D) and IT Support Services

The Tribunal addressed transfer pricing adjustments relating to R&D and IT support services provided by the assessee to AEs. The TPO had rejected certain comparables and made upward adjustments.

The Tribunal observed that the functional and economic analyses (FAR analysis) and detailed charts submitted by the assessee were not appropriately considered. It emphasized the need for correct functional profiling and comparability assessment.

Accordingly, the Tribunal remitted these issues to the TPO for fresh examination with directions to consider the material provided by the assessee and undertake proper benchmarking, including the use of multiple year data. This approach aligns with the principle that transfer pricing adjustments must be based on accurate comparability and functional analysis.

4. Import Purchases of Finished Goods

The TPO made an upward adjustment of Rs. 121 million on import purchases from AEs, applying the Resale Price Method (RPM) and holding that close product comparability was not essential.

The Tribunal noted the assessee's objection regarding functional differences in comparables and product dissimilarities. It underscored the importance of product comparability in transfer pricing benchmarking.

The Tribunal remitted the matter to the TPO for reassessment considering the functional profiles and product comparability, allowing the assessee to furnish further details. This reflects the legal requirement that transfer pricing adjustments must be founded on reliable comparables.

5. Mark-up on Reimbursements and Market Support Services

The TPO imposed a mark-up of 9.23% on reimbursements and expenses incurred by the assessee on behalf of AEs, treating them as market support services.

The Tribunal found that the nature of expenses was primarily cost-to-cost reimbursements without any element of service income. It criticized the TPO and DRP for lacking specific adjudication on the nature of services rendered and for not applying any benchmarking method.

The Tribunal remitted the issue to the TPO for fresh adjudication considering the evidence placed on record. It highlighted that mark-ups are not warranted on mere reimbursement of expenses incurred for facilitation purposes.

6. Allocation of Expenses and Stewardship Services

The TPO treated certain allocated expenses as stewardship services, applying the CUP method and taking the transactional value as nil, resulting in an upward adjustment.

The Tribunal noted the assessee's submission that these were cost-to-cost reimbursements with no income element and that the TPO lacked jurisdiction to question commercial expediency.

It remitted the issue for fresh consideration with directions to consider the detailed evidence and invoices submitted by the assessee.

7. Deduction under Sections 80-IB and 80-IC and Scrap Sales

The Tribunal considered the disallowance of deductions claimed under sections 80-IB and 80-IC, focusing on the apportionment of residual costs and eligibility of income from scrap sales.

The Tribunal relied on earlier decisions in the assessee's own case and authoritative rulings, including from the Calcutta High Court, which held that scrap sales have a direct nexus with eligible industrial undertakings and are eligible for deduction.

It upheld the assessee's method of apportioning residual costs based on the number of employees directly linked to factory operations and sales ratio, finding it logical and consistent with prior accepted practices.

Accordingly, the Tribunal allowed the grounds relating to deductions and scrap sales.

8. Penalty Proceedings under Section 271(1)(c)

The Tribunal noted the assessee's contention that penalty proceedings were erroneously initiated. However, no detailed adjudication on penalty was recorded in the order, indicating the issue was not pressed or was subsumed under other grounds.

9. Double Tax Avoidance Agreement (DTAA) Benefits on Dividend Taxation

The assessee raised additional grounds regarding the applicability of DTAA benefits between India-UK and India-Spain concerning dividend taxation.

The Tribunal observed that a Special Bench had ruled against the assessee on a similar issue. However, given distinguishing facts and the assessee not being party to that decision, the Tribunal remitted the matter to the Assessing Officer for fresh consideration after affording the assessee an opportunity to make submissions.

10. Disallowance under Section 14A read with Rule 8D and Book Profits under Section 115JB

The Tribunal dealt with the disallowance of Rs. 54.37 million made under section 14A read with Rule 8D while computing book profits under section 115JB.

It relied on recent High Court and Tribunal decisions holding that Rule 8D disallowance cannot be imported into the computation of book profits under section 115JB, as the provisions must be strictly construed.

The Tribunal confirmed the deletion of the disallowance, aligning with the principle that only expenditure relatable to exempt income under specified sections can be disallowed while computing book profits.

Significant Holdings

On the AMP expenses issue, the Tribunal preserved the following crucial reasoning verbatim from the Delhi High Court in Maruti Suzuki India Ltd.:

"The existence of an international transaction will have to be established de hors the BLT. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned... 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 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... In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise."

Core principles established include:

• Unilateral AMP expenses without any binding obligation or contract with AEs do not constitute an international transaction under section 92B.
• Transfer pricing adjustments under Chapter X require existence of an international transaction with ascertainable price; mere presumption or quantitative adjustments are impermissible.
• Selection of comparables and benchmarking must be based on accurate functional and economic analysis; remand is appropriate where these are deficient.
• Royalty payments governed by valid license agreements and accepted in prior years cannot be disturbed without change in facts or law.
• Cost-to-cost reimbursements without income element do not warrant mark-up or transfer pricing adjustment.
• Income from scrap sales linked to eligible industrial undertakings is eligible for deduction under sections 80-IB and 80-IC.
• Disallowance under Rule 8D cannot be imported into book profit computation under section 115JB.

Final determinations on each issue were as follows:

• AMP expenses do not constitute an international transaction; ALP adjustment deleted.
• Royalty payment adjustments deleted; license agreements upheld.
• R&D and IT support service adjustments remanded for fresh benchmarking.
• Import purchase adjustments remanded for reassessment considering product comparability.
• Mark-up on reimbursements and stewardship expenses remanded for fresh adjudication.
• Deductions under sections 80-IB and 80-IC allowed as per accepted apportionment and scrap sales treatment.
• Penalty proceedings issue not adjudicated substantively.
• DTAA benefit issue remanded for fresh consideration.
• Disallowance under section 14A read with Rule 8D deleted for book profit computation.