TMI Blog2023 (3) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... of payment made towards provision for leave encashment in subsequent years. The direction to allow deduction for subsequent years is not pertaining to the year under consideration and hence we refrain from giving such directions. However, we direct the AO to verify the actual payments made during the previous year relevant to the assessment year under consideration towards leave encashment and allow the same as deduction under section 43B(f). The AO shall also ensure that the assessee does not get double deduction on provision basis and payment basis. Disallowance of depreciation on intangibles - AO has disallowed the same following the earlier years assessment orders - HELD THAT:- The Kamataka High Court in assessee's own case for AY 2000-01 [ 2020 (12) TMI 672 - KARNATAKA HIGH COURT ] has decided this issue in favour of the assessee. Disallowance of interest on customs duty - AO disallowed the same for the reason that interest on customs duty is allowable on actual payment basis u/s 43B - HELD THAT:- In the instant case, the AO has not examined the nature of levy of interest on customs duty. If the interest on customs duty is payable for keeping the imported good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.08.2013 was issued and served on the assessee. During the course of assessment proceedings, it was noticed that international transaction with the AEs exceeded the prescribed limit, therefore, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm s Length Price (ALP) of the said transactions. The TPO u/s 92CA of the I.T.Act vide order dated 28.01.2016 proposed TP adjustment of Rs.29,03,35,855. Pursuant to the TPO s order, draft assessment order was passed on 28.03.2016 u/s 143(3) r.w.s. 144C(1) of the I.T.Act incorporating the above said TP adjustment proposed by the TPO. The Assessing Officer also made certain additions / disallowances on the corporate tax front. Aggrieved by the draft assessment order, the assessee preferred objections before the Dispute Resolution Penal (DRP). The DRP vide its directions dated 26.12.2016 rejected the objections of the assessee and confirmed the TP adjustment proposed by the TPO. In corporate tax front, partial relief was given to the assessee by deleting the disallowance of excess depreciation on motor vehicles. Pursuant to the directions of the DRP, the impugned final assessment order was passed. Aggrieved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her judicial precedents that the Appellant relied upon. Furthermore, the learned TPO has erred in applying bright line method which is not one of the prescribed methods under section 92C of the Act, in determining the existence of an international transaction. 1.4. The learned AO, TPO and Honourable DRP erred in law and in fact by exceeding their jurisdictions by determining the ALP of a transaction with third parties that is not an international transaction as def0ined in Section 92B and with flagrant disregard to the rulings of Maruti Suzuki India Limited vs Commissioner of Income-tax ITA 110/2014 710/2015 Honorable Delhi High Court, and the jurisdictional tribunal ruling in the case of Essilor India Private Limited vs Dcrr. IT(TP} A No.29/Bang/2014 and IT (TP}A. No. 227/Bang/2015. 1.5. The Honorable DRP, learned AO and TPO have erred in law and on facts in holding that the appellant promoted the brand of the AE merely on the ground that the AMP expenses incurred by the Appellant are more than the AMP expenses incurred by the comparable entities. Thereby, the Honorable DRP, learned TPO and AO have alleged that the Appellant has put in its efforts / finances for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal on merits. 1.12. The Honorable DRP, learned AO and TPO have erred in law and on facts in concluding that the distribution and AMP are two distinctive functions and requires to be remunerated separately. 1.13. The Honorable DRP have erred in upholding the approach of the learned AO and TPO of carrying out separate benchmarking analysis for AMP and making an adjustment without considering and appreciating the fact that aggregation approach followed by the Appellant using Transactional Net Margin Method ( TNMM ) would have already factored in all operating expenses (which includes the AMP expenditure) and proving it at arm's length to the satisfaction of the Honorable DRP, learned AO and TPO. 1.14. The Honorable DRP, learned AO and TPO have erred in law and on facts in not appreciating that the Appellant has not provided any value added / brand building services to its AE by incurring AMP expenses, and therefore, no mark-up could have been charged / levied on such expenses, even if the same was to be characterized as an 'international transaction . 1.15. Notwithstanding the fact that the Appellant did not add any value to its AE by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned TPO as listed below, in relation to determining the mark-up on excess AMP expenditure without giving concrete reasons: a)Asian Business Exhibition Conference Limited; b)I C C International Agencies Limited; c)Cyber Media (India) Limited; d)Killick Agencies Marketing Limited; and e)Marketing Consultants Agencies Limited 1.22. The Honorable DRP, learned AO and TPO have erred in law and on facts by not granting the benefit of quantitative adjustments (such as non-payment of royalty, etc.) while computing the transfer pricing adjustment for the alleged excessive AMP expenditure incurred by the Appellant. 1.23. The Honorable DRP, learned AO and TPO have erred in not granting appropriate favourable economic adjustments (including the working capital adjustment) when assessing the arm's length nature of alleged international transaction of provision of AMP services. 1.24. The Honorable DRP have erred in law and on facts in not giving specific direction for the following grounds of objection raised before the Honorable DRP. In this regard the Appellant relies on the Honorable Delhi High Court in Vodafone Essar Limited vs Disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onorable Calcutta High court in case of Exide Industries Limited and Anr vs UOI and Ors (292 ITR 470), wherein it was held that even a provision made for leave encashment is a liability and the same must be allowed as a deduction in computing the taxable income since the same is not in the nature of a contingent liability; 2.3 The Honorable DRP and the learned AO have erred in law and on facts, in making the subject disallowance after having noted that the Honorable Supreme Court (SLP Civil Appeal - 12060/2008) had allowed for claim of deduction towards provision for leave encashment in the return of income, after discharging applicable taxes. 3. Disallowance of depreciation on intangibles - Rs.2,873,837 3.1 The Honorable DRP and the learned AO have erred in law and on facts in disallowing the depreciation claim of Rs.2,873,837 on intangible assets claimed by the Appellant. 3.2 The Honorable DRP and the learned AO have further, erred in law and on facts in not following the jurisdictional Bangalore Tribunal and the Commissioner of Income-tax (Appeals) [ CIT(A) ] decision in Appellant's own case for AY 2000-01, AY 2004-05, AY 2005-06, AY 2006-07, AY 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples of taxation of amount of deferred revenue pronounced by the erstwhile AO in the assessment order of earlier AY's and on the other hand not granting the credit in respect of income recognized by the Appellant in AY 2012-13 5.4 The learned AO and the Honorable DRP has erred in law and facts in not appreciating the fact that non-grant of relief in respect of negative movement of Deferred Revenue results in double taxation of same income in different years which is not permissible under the taxation laws. 6. Other grounds 6.1 The Honorable DRP and the learned AO have erred in law and on facts in making adjustments of Rs. 746,941,286 to the returned income of the Appellant. 6.2 The learned AO has erred in law and on facts in proposing to initiate penalty proceedings under section 271(1) (c) of the Act. Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the learned members of the Honorable Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to its AE. The mark up percentage was calculated as an average margin earned by uncontrolled comparables selected by the TPO. The total TP addition was thus computed at Rs.29,03,35,855. 5. Aggrieved, the assessee filed objections before the DRP. The DRP vide its directions dated 26.12.2016, rejected the assessee s objections and confirmed the TP addition of Rs.29,03,35,855. The relevant finding of the DRP reads as follows:- Having considered the submission, on perusal of paragraph 4 of the order of the TPO, it is noticed by us that under TNMM the assess selected 9 comparable out of which 6 not found suitable by TPO, by application of trading sales less than 75%, by application of different financial filter, and 4 due to non-availability of data for the financial year relevant to assessment year. The TPO subsequently carried out an independent search and selected 8 companies which include 3 companies selected by the taxpayer. The OP/OC means margin with respect to these comparable arrived at 3.89% as against the margin in respect of the assessee company computed by TPO at 1O.14%.However it is noticed by us that there is a contradiction in the finding of TPO in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MM and if the margins at the entity level are at arm s length, no separate adjustment on account of AMP expenditure is warranted. In this context, reliance was placed on the judgment of the Hon ble Delhi High Court in the case of Magneti Marelli Powertrain India Pvt. Ltd. reported in 389 ITR 469 (Delhi). 7. The learned Departmental Representative supported the orders of the TPO and the DRP. 8. We have heard rival submissions and perused the material on record. The issue as to whether AMP expenditure is an international transaction or not was considered by the Delhi High Court in Maruti Suzuki India Ltd. 381 ITR 117 and it was held as under:- Step wise analysis of statutory provisions 62. If a step by step analysis is undertaken of Sections 92B to 92F, the sine qua non for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with the ALP and make the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do not have an explicit arrangement/agreement on this aspect cannot lead to the inference that there is no such arrangement or the entire AMP activity of the Indian entity is unilateral and only for its own benefit. According to the Revenue, the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same. It is asserted: An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same. 67. Reference is made by Mr. Srivastava to some sample agreements between Reebok (UK) and Reebok (South Africa) and IC Issacs Co and BHPC Marketing to urge that the level of AMP spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the safe harbour rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian entity, it also enures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non-routine') ought to be compensated by the foreign AE to whose benefit also such expense enures. The 'non- routine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 74. 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. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise. 9. The decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 was followed and it was held that the bright line test followed by the Revenue in making the AMP TP adjustment cannot be accepted. In the present case also, no material is brought on record by the TPO to establish the existence of an arrangement, understanding or action in concert with the AE for incurring the AMP expenses for the benefit of the AE. Merely because the AE has a financial interest, it cannot be presumed that AMP expenses incurred by the assessee are at the instance or on behalf of the associated enterprise. In the absence of any international transaction relating to AMP expenses, the impugned TP adjustment cannot be sustained. Moreover, the TPO having accepted the ALP of other international transactions at the entity level, proceeded to make a separate TP adjustment for the AMP expenses. At para 4.2 of the TPOs order, the TPO has given a finding that the net margins earned by the taxpayer from the product segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned. its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure. 11. Respectfully following the above judgment of the Hon ble Delhi High Court, we delete the AMP TP adjustment of Rs. 25,09,60,200 and the mark up thereon amounting to Rs. 3,93,75,655. Ground Nos 2.1 to 2.3 (Corporate Tax) 12. The above grounds deals with the disallowance of provision for leave encashment of Rs.10,68,47,430. The AO disallowed the said provision under section 43B(f) for the reason that leave encashment can be claimed as deduction only on actual payment basis. The disallowance made by the A.O. was confirmed by the DRP. 13. We have heard rival submissions and perused the material on record. The Calcutta H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of preceding analysis, the substantial question of law framed by a bench of this court is answered against the revenue and infavour of the assessee. In this result, we do not find any merit in this appeal. The same fails and is hereby dismissed. 16. Following the above, we allow depreciation on intangibles amounting to Rs. 28,73,837 for the year under consideration. Grounds 4.1 to 4.4 17. The above grounds deals with the disallowance of interest on customs duty amounting to Rs.34,68,84,164. The AO disallowed the same for the reason that interest on customs duty is allowable on actual payment basis under section 43B. As the said sum was not paid during the previous year relevant to assessment year under consideration, he proceeded to disallow the same. The DRP confirmed the action of the AO. 18. Aggrieved, the assessee has raised this issue before the ITAT. The learned AR relies on the decisions in Hindustan Motors Ltd v CIT 218 ITR 450 (Calcutta), CIT v Padmavathi Raje Cotton Mills Ltd 239 ITR 355 (Calcutta) and CIT v India Pistons Ltd [2001] 119 Taxman 384 (Madras) and contends that interest on customs duty is not covered by section 43B, hence deduction sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period the said interest would not be covered by section 43B and would be allowable as deduction even if it is not paid. However, if the interest on customs duty is payable for the arrears of customs duty or delayed payment of customs duty then the said interest would be regarded as part and parcel of the customs duty. In such circumstances, the assessee cannot get deduction for interest payable as such interest is directly linked to non-payment or late payment of customs duty. As customs duty is allowable only on payment basis under section 43B, interest levied on arrears or late payment of customs duty is also allowable on actual payment basis under section 43B. The AO is directed to verify the nature of levy of interest on customs duty and decide the allowability of deduction as per our above direction. It is ordered accordingly. Grounds 5.1 to 5.4 (Corporate Tax) 22. The above grounds deals with the issue of consequential relief on negative movement of deferred revenue for the year under consideration. We note that this issue was considered the ITAT in assessee's own case for AY 2011-12 in IT(TP)A No 779/Bang/2016 and it held as under:- 19. We have heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
