2014 (10) TMI 355 - AT - Income Tax

Transfer pricing adjustment Advertising, Marketing and Promotion expenses - Held that - The authorities have not conclusively held that the assessee could not enter into such a transaction nor had they disallowed the same by holding that such expenditure is not assessee's business expenditure - the payments are reimbursement in respect of Ms. Rita Ricken and other personnel's case to serve the interest of shareholders - By saying so they have only described the circumstance under which the international transaction has been entered by the appellant, so as to test the benefit that can be said to have reached the assessee It cannot be said to have questioned the commercial expediency of transactions entered by the appellant - The I.T. rules contain exhaustive detail regarding nature of information and documents which are required to be maintained by the assessee. Rule 10D(1) of the I.T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analysing the comparability of the international functions entered into by the assessee - It is obligatory on part of the assessee to maintain record and produce the same before the TPO to show that it has benchmarked the international transaction at ALP - This obligation has not been discharged by the assessee. Assessee is also not shown to be willing to pay any amount for such services, if it were, so provided by an independent enterprise or if the same would have been performed in house - The DRP is found to have considered these services as non-beneficial for the recipient and did not take it as chargeable services - The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided by the associate enterprise - there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE - The TPO has rightly adopted Nil value for benchmarking the arm's length price in respect of both these services. Treatment of outstanding receivables Held that - There is merit in the argument of revenue, the nature and heading of expenses as made by the assessee needs to be verified - Since the approach earlier adopted by the lower authorities did not require verification of expenses and categorization of heads, in the changed scenario it will be desirable that relevant expenses are verified by the AO thus, the matter is to be remitted back to the TPO for fresh adjudication. Disallowance of Intra Group Support Services Held that - Revenue has claimed that inordinate delay in receiving the outstanding amounts to passing a benefit to AE and it constitutes real income - assessee has been able to demonstrate that assessee as a policy does not charge any interest on any delayed payment irrespective of the party being AE or non AE, as it was a consistent business policy - no interest could be charged on delayed payment on commercial consideration for ensuring a long and healthy relationship as persuasive value - there was uniformity in assessee s act in not charging interest both from AE and non AE and delay in realization in both the cases - notional interest cannot be considered with ALP on delayed realization - the adjustment in relation to notional interest on outstanding receivables cannot be made in the case of the assessee Decided in favour of assessee. Advances written off u/s 36(2) r.w section 36(1)(vii) Held that - The nature of expenditure is demonstrated by the assessee in terms - besides, the explanation has not been controverted either by the TPO or DRP in objective terms there was no cogency or justification in the reasons applied by DRP to sustain the disallowance - the expenditure incurred was wholly and exclusively for the business purpose on revenue account - The advances have a proximate and direct nexus with assessee s regular business operations which is explicit from the nature of expenditure remanded by the AO himself - Advances having become irrecoverable and actually written off are allowable as bad debt written off, as well as business loss/ expenditure u/s 37(1) relying upon Badridas Daga Versus Commissioner Of Income-Tax 1958 (4) TMI 2 - SUPREME Court the addition is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing - Adjustment on account of AMP expenditure.
2. Transfer Pricing - Disallowance on account of intra-group support services.
3. Transfer Pricing - Adjustment in relation to notional interest on outstanding receivables.
4. Corporate Tax Issues - Disallowance of advances written off.

Detailed Analysis:

1. Transfer Pricing - Adjustment on account of AMP expenditure:
- Common Issue: The common issue across all the assessment years (2006-07 to 2009-10) pertains to the adjustment on account of Advertising, Marketing, and Promotion (AMP) expenditure.
- Appellant's Argument: The appellant, a wholly-owned subsidiary, argued that its AMP expenditure was focused on expanding and maintaining sales in India and was predominantly selling in nature rather than related to advertisement. The expenses were claimed as routine revenue expenditure.
- TPO's Approach: The Transfer Pricing Officer (TPO) considered the AMP expenditure excessive and benchmarked it against chosen comparables, leading to a transfer pricing adjustment. The TPO added a mark-up on the alleged brand promotion services.
- Special Bench in LG Electronics Case: The Special Bench in LG Electronics India Ltd vs. ACIT case laid down parameters for TP adjustment on AMP, distinguishing selling expenses from AMP expenses. The Special Bench ruled that selling expenses such as trade discounts and commission should not be part of AMP.
- Tribunal's Decision: The Tribunal found merit in the appellant's argument that the AMP expenses, including trade discounts, commission, and other selling expenses, should be excluded from AMP. The Tribunal directed the TPO to verify the expenses and categorize them as per the Special Bench's directions in LG Electronics.

2. Transfer Pricing - Disallowance on account of intra-group support services:
- Assessment Years: This issue pertains to AY 2007-08 and 2008-09.
- Appellant's Argument: The appellant entered into agreements for support services with its associated enterprises (AEs) and paid a cost plus 5% for these services. The services were claimed to be essential for the appellant's operations.
- TPO's Approach: The TPO rejected the appellant's benchmarking methodology and determined the ALP as Nil, alleging that no services were actually received and no independent party would pay for such services.
- Tribunal's Decision: The Tribunal found that the appellant had provided some evidence of services received, which was not considered by the lower authorities. The Tribunal set aside the issue back to the TPO for a de novo decision, allowing the appellant to produce contemporaneous evidence.

3. Transfer Pricing - Adjustment in relation to notional interest on outstanding receivables:
- Assessment Years: This issue pertains to AY 2009-10.
- Appellant's Argument: The appellant contended that it did not charge interest on delayed payments from both AE and non-AE customers, consistent with its business policy. The appellant relied on judicial precedents and OECD guidelines, arguing that notional interest on receivables should not be considered.
- TPO's Approach: The TPO treated the receivables as unsecured loans to AEs and imputed a notional interest rate of 15.77%.
- Tribunal's Decision: The Tribunal, following judicial precedents, held that the adjustment for notional interest on outstanding receivables could not be made as the appellant had a consistent policy of not charging interest on delayed payments. The Tribunal allowed the appellant's ground on this issue.

4. Corporate Tax Issues - Disallowance of advances written off:
- Assessment Year: This issue pertains to AY 2007-08.
- Appellant's Argument: The appellant argued that the advances written off were in the nature of expenses incurred towards marketing and sales promotion activities, sponsorship of events, etc., and were incurred in the ordinary course of business.
- AO's and DRP's Approach: The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) disallowed the claim, stating that the appellant failed to prove the advances were given in the ordinary course of business and were revenue in nature.
- Tribunal's Decision: The Tribunal found that the appellant had provided evidence of the nature of the expenses and that they were incurred in the ordinary course of business. The Tribunal allowed the deduction for advances written off as business loss under section 37(1) of the Act, citing judicial precedents.

Conclusion:
The Tribunal allowed the appeals for AY 2006-07 and 2008-09 for statistical purposes and partly allowed the appeals for AY 2007-08 and 2009-10 for statistical purposes. The Tribunal directed the TPO to re-examine the AMP expenditure and intra-group support services issues de novo, while allowing the appellant's claims on notional interest on receivables and advances written off.