2014 (12) TMI 600 - AT - Income Tax

Transfer pricing adjustment - Disallowance of excessive AMP expenses - Advertisement Marketing and Sales Promotion - assessee has a license arrangement with YRAPL for operation of various KFC and PH outlets in India Held that - In LG. Electronics India P. Ltd. Versus Assistant Commissioner of Income-tax 2013 (6) TMI 217 - ITAT DELHI it has been held that incurring of AMP expenses towards promotion of brand, legally owned by the foreign AE, constitutes a transaction - the TPO did not have the benefit of the Special Bench order in the case of LG Electronics and the DRP failed to apply it correctly to the facts of the case, by making sweeping observations generally without considering the effect of relevant factors laid down by the special bench thus, the matter is to be remitted back to the AO/TPO for a fresh determination of disallowance, if any, on account of Transfer pricing adjustment for AMP the issue related to the disallowance u/s 40A(2) of the Act shall be decided by the AO after having found out the amount of TP adjustment on account of AMP expenses Decided in favour of assessee. Selection of comparbles - Exclusion of Ma Foi Management Consultant Ltd. Different nature of services - Held that The Company is a HR Services Company - as against this, the assessee under this segment is engaged in providing Liaison services, Market development and Ongoing support to the licensees outside India - the nature of services provided by the assessee to its AEs is no match with those provided by Ma Foi Management Consultant Ltd. - unless a company passes the test of functional comparability in the first instance, it cannot be taken up for further comparison - the authorities below were justified in not including this company in the list of comparables, though on a different reason. Saket Projects Ltd. (Segment) Held that - The assessee treated Saket Project Ltd.(Seg.) as comparable in its TP study, as was also done for the preceding year - assessee assailed before the Tribunal, the non-exclusion of this company by the authorities below for the preceding year - in assessee s own case for the preceding year it has been held that Saket Projects Ltd is not functionally comparable as it was engaged in the business of organizing events and was also earning revenue in this division from selling of events by offering space for rent, which had no comparison with the assessee s nature of business under this international transaction thus, the order is set aside and the matter is remitted back to the TPO/AO for fresh determination of ALP Decided partly in favour of assessee. Allowability of carry forward and set off of brought forward losses of past years against the income for the current year u/s 79 - Change in the shareholding of the assessee-company - Held that - 100% shareholding of the assessee company underwent a change, by which another company came to hold 100% shares of the assessee company - the first condition for magnetizing section 79 is satisfied - there is no change of the beneficial ownership of shares because both the predecessor and successor companies are subsidiaries of the same holding company and in that sense of the matter, the beneficial interest remains the same, that is, of the ultimate holding company - the Revenue has made out a case that there is a change of the beneficial ownership of shares because the predecessor and successor companies are distinct from each other, and the factum of they being subsidiaries of the ultimate holding company, does not mean that there is no change in the beneficial interest - the provisions of section 79 are attracted Decided partly in favor revenue and partly in favor of assessee.

Issues Involved:

1. Transfer Pricing Adjustment in AMP Expenses
2. Transfer Pricing Adjustment in Support Services Segment
3. Double Disallowance/Taxation of Certain Expenses
4. Working Capital Adjustment
5. Use of Single Year Data vs. Multiple Year Data
6. Application of Proviso to Section 92C
7. Classification of Service Income
8. Disallowance of Royalty Expenditure
9. Hypothetical Disallowance of Administrative Expenses
10. Disallowance of Tax Depreciation
11. Carry Forward and Set Off of Brought Forward Losses
12. Addition on Account of R&D Expenses

Detailed Analysis:

1. Transfer Pricing Adjustment in AMP Expenses:

The assessee challenged the addition of Rs. 5,27,33,344/- for Transfer Pricing adjustment in AMP expenses. The TPO observed that the assessee made a 5% sales contribution to YRMPL for AMP activities, which was considered a brand-building exercise for the AE's benefit. The AO made an additional disallowance under section 40A(2)(b) of Rs. 6,05,01,229/-. The DRP upheld the TP adjustment but acknowledged the double addition issue. The Tribunal referred to the Special Bench decision in LG Electronics, which held that AMP expenses for promoting a brand owned by a foreign AE constitute a transaction. The Tribunal remitted the matter to the AO/TPO for fresh determination of the disallowance considering the Special Bench's parameters.

2. Transfer Pricing Adjustment in Support Services Segment:

The assessee contested the TP adjustment of Rs. 1,22,80,220/- in the 'Support Services' segment, arguing improper short-listing of comparables. The TPO excluded Ma Foi Management Consultant Ltd. and included Saket Projects Ltd. (Segment). The Tribunal found Ma Foi Management Consultant Ltd. functionally dissimilar and upheld its exclusion. However, it directed the exclusion of Saket Projects Ltd. (Segment) based on a precedent from the previous year, where the Tribunal found it functionally incomparable. The matter was remitted to the TPO/AO for fresh determination of the ALP.

3. Double Disallowance/Taxation of Certain Expenses:

The assessee did not press this ground, and it was dismissed.

4. Working Capital Adjustment:

The assessee did not press this ground, and it was dismissed.

5. Use of Single Year Data vs. Multiple Year Data:

The assessee used multiple-year data for benchmarking, which the TPO rejected, preferring single-year data. The Tribunal upheld the authorities' decision, citing precedents favoring single-year data.

6. Application of Proviso to Section 92C:

The Tribunal directed the AO/TPO to consider the application of the proviso to section 92C as per law following the determination of the ALP of the international transactions.

7. Classification of Service Income:

The Tribunal ruled in favor of the assessee, classifying the service income as 'Business income' instead of 'Income from other sources,' following the precedent from the previous year.

8. Disallowance of Royalty Expenditure:

The Tribunal allowed the assessee's appeal, following the precedent from the previous year, where the royalty expenditure was deemed allowable.

9. Hypothetical Disallowance of Administrative Expenses:

The Tribunal allowed the assessee's appeal, following the precedent from the previous year, where the hypothetical disallowance of administrative expenses was deemed unjustified.

10. Disallowance of Tax Depreciation:

The Tribunal remitted the matter to the AO for fresh verification of the factual position regarding the sale of individual assets forming part of the block of assets, following the precedent from previous years.

11. Carry Forward and Set Off of Brought Forward Losses:

The Tribunal held that section 79 was attracted due to a 100% change in the assessee's shareholding, rejecting the assessee's contention that the beneficial ownership remained unchanged because both predecessor and successor companies were subsidiaries of the same holding company.

12. Addition on Account of R&D Expenses:

The Tribunal deleted the addition of Rs. 6,56,133/- on account of R&D expenses, following the precedent from the previous year, where the assessee's view was upheld.

Conclusion:

The assessee's appeal was partly allowed, and the Revenue's appeal was partly allowed for statistical purposes. The Tribunal remitted several issues for fresh determination by the AO/TPO, adhering to precedents and ensuring a thorough examination of the facts and applicable law.

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