2014 (3) TMI 810 - HC - Income Tax

Grant of stay on recovery - Legitimacy of demand Held that - The Special Bench found that the assessee in that case had incurred extremely high AMP expenses for promotion and development of the L.G. brand in India. The decision turned to a large extent on the facts of the case. Further the Special Bench observed in paragraph 9.7 that the first question which falls for consideration in such cases is whether there is any transaction between the assessee and the foreign AE building, in India, a brand the legal ownership of which vests in the foreign AE. The Special Bench in paragraph 9.09 also held that there can be no presumption about two parties acting in concert. It was necessary for the authorities to indicate some reasons at least before rejecting the application on the basis of the order of the Special Bench. The AO however, did not do so. None of the factors indicated in the order of the Special Bench have been adverted to. The ITAT also in its impugned order dated 20.01.2014 did not address itself to the relevant facts and issues. It merely rejected the application on the ground that the petitioner had not made out a case of irreparable loss which cannot be compensated in terms of money in the case stay is not granted. This Court in the case of KEC International Limited vs. B.R. Balakrishnan 2001 (3) TMI 32 - BOMBAY High Court set out the parameters for considering applications for stay. These observations have been repeatedly referred to in subsequent judgments of this Court. In the case before us the petitioner has serious issues to urge, some of which have so far not been dealt with either in the assessment order or in the orders on the stay application. We would ourselves have considered the application for stay but we refrain from doing so for two reasons. Firstly, the entire material is not on record. The respondents may well rely upon further material in support of their case, especially in view of the order in L.G. Electronics. Secondly, the Tribunal has expedited the hearing. Decided in favour of Assessee.

Summary

Issues Involved:
1. Legitimacy of the AMP expenditure disallowance.
2. Application of the Special Bench decision in L.G. Electronics case.
3. Consideration of stay application and irreparable loss.
4. Adjustment of refund against demand.

Issue-wise Detailed Analysis:

1. Legitimacy of the AMP Expenditure Disallowance:
The petitioner, engaged in the manufacture and sale of alcoholic beverage bases, claimed significant deductions towards Advertising Marketing Promotion (AMP) expenses and service charges. The Transfer Pricing Officer (TPO) determined that these expenses were incurred for the benefit of the petitioner's Associated Enterprise (AE) and should be compensated at the arm's length price (ALP). The TPO refused to accept the petitioner's method of computing AMP/sales ratio and determined the non-routine AMP expenses to be added to the petitioner's income. The Dispute Resolution Panel (DRP) upheld the TPO's findings, leading to the assessment order disallowing the AMP expenses under Section 37(1) and assessing the petitioner's total income significantly higher than reported.

2. Application of the Special Bench Decision in L.G. Electronics Case:
The petitioner argued that the issues raised in their case were similar to those addressed in the Special Bench decision in the L.G. Electronics case, which dealt with transfer pricing adjustments related to AMP expenses. The Special Bench had held that merely incurring higher AMP expenses compared to similarly placed entities does not automatically imply brand promotion for the foreign AE without evidence of a formal or informal agreement. The authorities, however, did not adequately consider the applicability of this decision to the petitioner's case. The judgment emphasized that the authorities must at least briefly address the relevance of such precedents when deciding on stay applications.

3. Consideration of Stay Application and Irreparable Loss:
The petitioner's application for a stay against the recovery of the disputed demand was denied by the Assessing Officer (AO) and later by the Income Tax Appellate Tribunal (ITAT). The AO's order did not analyze the petitioner's detailed submissions regarding the L.G. Electronics case and other relevant aspects. The ITAT rejected the stay application on the sole ground that the petitioner had not demonstrated irreparable loss, which the court found insufficient. The court highlighted that irreparable loss is not the only consideration for granting a stay; the merits of the case and judicial consideration of the issues involved are equally important.

4. Adjustment of Refund Against Demand:
The petitioner contended that a refund of Rs.43.08 crores from previous assessment years was wrongly adjusted against the demand for the years in question. The AO did not consider this issue in the orders rejecting the stay application and the miscellaneous application for rectification. The court noted that while this issue alone might not warrant granting the relief sought, it should have been considered by the AO.

Conclusion:
The court found that the authorities failed to adequately consider the applicability of the L.G. Electronics case and other relevant issues raised by the petitioner. The AO's and ITAT's orders lacked sufficient reasoning and judicial consideration. The court reiterated the principles laid down in previous judgments, emphasizing the need for a judicial approach in handling stay applications and the importance of addressing the merits of the case. Consequently, the court made the rule absolute in terms of the petitioner's prayers and directed that the petitioner shall not seek adjournment of the hearing before the Tribunal.