2013 (6) TMI 591 - AT - Income Tax

Transfer Pricing Adjustment - Advertisement, marketing and sales promotion expenses (AMP expenses) - Held that - Upon careful consideration the Special Bench decision of LG Electronics 2013 (6) TMI 217 - ITAT DELHI it has been deduced that the selling expenses do not lead to brand promotion and the selling expenses have to be excluded from the AMP expenses for the purpose of bench marking analysis - remit the issue back to the files of the TPO with directions that expenditure in connection with the sales as mentioned above cannot be brought within the ambit of advertisement, marketing and promotions expense for determining the cost / value of the international transactions & after deducting the selling price from the AMP expenses TPO shall decide the issue of AMP expenses by applying the proper comparables after hearing the assessee. In favour of assessee for statistical purposes. Adjustment on account of royalty expenses - Held that - Agreeing with the contention of the assessee that assessee is free to conduct business in the manner that assessee deems fit and the commercial and business expediency of incurring any expenditure is to be seen from the assessee s point of view. It is a settled law that the Revenue cannot sit into the shoe of the assessee and decide what is prudent for the business. See CIT, Bombay Vs. Walchand and Co. Private Ltd. 1967 (3) TMI 2 - SUPREME Court the expenditure has to be adjudged from the point of view of the businessman and not of revenue. It is on the basis of the same agreement the royalty was paid in earlier years wherein the payment has not been held to be non-bonafide expenditure by the TPO. Thus the TPO s conclusion that there is no benefit to the assessee from the payment of royalty is unsustainable. Furthermore, assessee has duly submitted comparable instances to bench mark royalty thus, the observation of the TPO that comparable instances were not given by the assessee does not hold water any more. As assessee has sought to justify the payment of the royalty on the basis that in the case of the assessee the concerned Ministry of Government Of India has scrutinized the payment of royalty and granted the approval, the payment cannot be regarded as non-bonafide so as to hold the arms length price thereof as NIL. The assessee has rightly considered the comparable uncontrolled price method for determining the arms length price. Thus the conclusion of the TPO that the arms length price of the royalty payment should be NIL without specifying any cogent basis is not sustainable TPO s determination is on the basis of assumption and surmises. Hence, the adjustment made by the TPO is liable to be deleted. In favour of assessee. Disallowance u/s. 40(a)(ia) - short deduction of TDS - Held that - As DRP has duly directed the AO to verify the assessee s submissions as to whether the payment in question was subject to the TDS and the TDS amount was paid to the government treasury or not AO has not properly looked into the matter. Thus remit this issue to the files of the AO to verify whether the assessee has deducted and paid tax at source from such payment to ICC which was claimed to be deposited with the Government treasury on 28.9.2007. In favour of assessee for statistical proses.

Issues Involved:
1. Transfer Pricing Issue
2. Corporate Tax Issue
3. Levying Interest under Sections 234B and 234C

Detailed Analysis:

1. Transfer Pricing Issue:
The primary contention is the addition of Rs. 65,00,83,653/- to the income of the assessee due to differences in the arm's length price of international transactions. The breakdown includes:
- Advertisement, marketing, and sales promotion expenses (AMP expenses): Rs. 49,72,06,126/-
- Royalty expenses: Rs. 15,28,77,527/-

AMP Expenses:
The Transfer Pricing Officer (TPO) benchmarked the AMP expenses using the bright line test, comparing the assessee's AMP expenditure of 12.33% of total turnover against an average of 2.51% from comparable companies. The TPO concluded that the excess expenditure was for promoting the brand owned by the Associated Enterprises (AE) and recommended an adjustment with a 15% markup, later reduced to 12.5% by the Dispute Resolution Panel (DRP), resulting in an adjustment of Rs. 49,72,06,126/-.

The Tribunal referenced the Special Bench decision in the LG Electronics India Pvt. Ltd. case, which allowed benchmarking of AMP expenses under Transfer Pricing regulations. The Tribunal directed the TPO to exclude selling expenses that do not lead to brand promotion and to re-evaluate the AMP expenses using proper comparables.

Royalty Expenses:
The TPO contested the royalty payment of Rs. 15,28,77,527/- to the AE, arguing that the approval from the Ministry of Commerce did not validate the arm's length nature of the transaction. The TPO concluded that the payment did not bring any commensurate benefit to the assessee, as evidenced by a decline in the net profit to sales ratio. The TPO determined the arm's length price of the royalty at Rs. NIL.

The Tribunal, however, found that the assessee's entire business depended on the technology provided by the AE and that the royalty payment was justified. The Tribunal noted that the assessee had demonstrated significant benefits from the technology, and the payment was necessary for the business. The Tribunal rejected the TPO's conclusion and upheld the royalty payment as justified.

2. Corporate Tax Issue:
The issue pertains to the disallowance of Rs. 36,69,882/- under Section 40(a)(ia) due to non-deduction of TDS. The assessee argued that the payment was made to ICC, and tax was deducted and paid to the Government, but not reflected in the TDS return due to a dispute with ICC.

The DRP directed the Assessing Officer to verify the assessee's claim. The Assessing Officer, however, did not find evidence of the TDS payment in the TDS return. The Tribunal remitted the issue back to the Assessing Officer to verify if the tax was deducted and paid to the Government. If verified, the disallowance would not be sustained.

3. Levying Interest under Sections 234B and 234C:
The issue of levying interest under Sections 234B and 234C is consequential and depends on the outcome of the other issues.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the TPO to re-evaluate the AMP expenses and the Assessing Officer to verify the TDS payment for the corporate tax issue. The Tribunal upheld the royalty payment as justified and necessary for the business.

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