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2019 (1) TMI 1567 - AT - Income TaxTP adjustment - advertisement marketing and sales promotion expenses AMP expenses - existence of an international transaction - HELD THAT - As held by the Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communications 2015 (3) TMI 580 - DELHI HIGH COURT if the Indian entity is the economic owner of the brand and is incurring AMP expenses for the purpose of promotion of such brand benefit is only received by the Indian entity. It was submitted that the economic ownership of the brand rests with the assessee and accordingly the assessee cannot be expected to seek compensation for the expenditure incurred on the asset economically owned by it. No Transfer Pricing adjustment on account of AMP expenses would be warranted. The aforesaid test is fully satisfied in the case of the assessee and the Transfer Pricing adjustment on account of AMP expenses made by the TPO is liable to be deleted. In the case in hand the operating profit margin of the assessee is at 5.01% in the manufacturing segment and 4.52% in the distribution segment and the same is higher than that of the comparable companies at 4.04% in the manufacturing segment and 4.46% in the distribution segment. TNMM has undisputedly been satisfied. Since the operating margins of the assessee are in excess of the selected comparable companies no adjustment on account of AMP expenses is warranted - decided in favour of assessee. TP adjustment - payment of royalty - selection of comparable - HELD THAT - As decided in assessee s own case 2013 (6) TMI 217 - ITAT DELHI we direct the TPO to determine the Arm s Length royalty @ 4.05%. Transfer Pricing adjustment on account of Allocation of Asian Region Office Expenses - determination of ALP of intra group services - Revenue contends that the assessee has not adduced evidence sufficient to justify the need benefit and arm s length nature of intra group service charges paid to its AE - HELD THAT - As in the light of the decision of CIT vs Lumax Industries Limited 2015 (10) TMI 2509 - DELHI HIGH COURT we are of the opinion that once the assessee has satisfied the TNMM method i.e. the operating margins of the assessee are higher than those of the comparable companies as mentioned elsewhere no separate adjustment is warranted. The adjustment computed by the TPO/DRP on account of allocation of RHQ expenses is uncalled for and deserves to be deleted TP adjustment - payment of overseas marketing related services - TPO disallowed part of market survey expenses on account of non-furnishing of evidences - AR pointed out that the results of the survey undertaken by the AE were provided to the assessee in the form of a report and the report was submitted before the DRP who dismissed the same stating that it did not pertain to the current year only incidental benefit has been derived by the appellant and the services were in the nature of shareholder activities - HELD THAT - We find that the facts have not been properly appreciated by the lower authorities. It appears that the evidences furnished by the assessee have been considered in the light of allocation of expenses by RHQ. In the interest of justice and fair play we restore this issue to the file of the TPO. The assessee is directed to furnish evidences specifically mentioning the issues under consideration and the TPO is directed to verify the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Addition on account of Sales-tax subsidy - nature of receipt - revenue or capital receipt - HELD THAT - As decided in assessee s own case 2010 (2) TMI 916 - ITAT DELHI it is a undisputed fact that none of the clause of the Notification issued under section 4-A of Trade Tax Act 1948 had authorised the assessee to collect sales tax/trade tax - Nowhere in the Notification has it been stated that exemption from sales tax/trade tax was provided for the setting up of the eligible unit - Since the assessee has collected the sales tax as part of dealer s price the sales tax element will be trading receipt in the hands of the assessee Provision for service warranty disallowance - HELD THAT - We do not find any force in the findings of the DRP. When in A.Ys 2002-03 2003-04 2004-05 and 2007-08 this issue has been settled in favour of the assessee and against the Revenue we do not find any reason why the same should not be followed for the year also. Respectfully following the findings of the coordinate benches we direct the Assessing Officer to delete the addition Disallowance of deduction u/s 80JJAA - deduction in respect of additional wages paid in financial years 2005-06 2006-07 and 2007-08 - employment equal to or more than 300 days in the subsequent year - AO has allowed the deduction in A.Y 2005-06 but disallowedin A.Y 2006-07 and 2007-08 - Scope of amendment - HELD THAT - There is no dispute that he assessee satisfies all the conditions for claiming deduction u/s 80JJAA. The claim of the assessee is that the workmen who joined in the preceding year in which such workmen worked for less than 300 days should be considered provided that the period of employment of such workmen is equal to or more than 300 days in the relevant previous year. What the assessee contends is that new workmen who did not fall in the category of regular workmen on account of employment being for less than 300 days in the year of appointment should be considered as regular workmen in the subsequent year provided such workmen continue to be employed with the company and the total period of their employment is equal to or more than 300 days in the subsequent year. Thought this contention of the assessee has been take care of by the second proviso but the same has been given effect from 1.4.2019. If the effect of the second proviso is given retrospectively then the assessee s claim of deduction is allowable. Memorandum explaining provisions of Finance Bill 2018 states that the amendment is intended to rationalize the deduction of 30% of additional wages by allowing the benefit for a new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in subsequent year. This amendment i.e. second proviso is clarifactory in nature and is intended to remove the anomaly so as to advance legislative intention of providing incentive to new worker for more than 300 days and must be given retrospective effect CIT Vs. Alom Extrusions Ltd 2009 (11) TMI 27 - SUPREME COURT wherein held that where a proviso in section is inserted to remedy unintended consequences to make section workable the proviso which supplies obvious omission therein in required to be read retrospectively in operation particularly to give effect to section as a whole. Thus we direct the AO to allow claim of deduction u/s 80JJAA as claimed by the assessee. Levying of interest u/s 234B and 234C is mandatory though consequential to our decision. The Assessing Officer is directed to levy interest as per provisions of the law. Interest u/s 234C to be charged on the returned income.
Issues Involved:
1. Transfer Pricing adjustment on account of advertisement, marketing, and sales promotion expenses (AMP). 2. Transfer Pricing adjustment on account of payment of royalty. 3. Transfer Pricing adjustment on account of allocation of Asian Region Office expenses. 4. Transfer Pricing adjustment on account of payment of overseas marketing-related services. 5. Segregation of closely linked transactions. 6. Addition on account of Sales-tax subsidy. 7. Disallowance of provision for service warranty. 8. Disallowance of payment of royalty as capital expenditure. 9. Disallowance of payment of export commission. 10. Disallowance of deduction under section 80JJAA. 11. Levying of interest under sections 234B and 234C. Detailed Analysis: 1. Transfer Pricing Adjustment on AMP Expenses: The Transfer Pricing Officer (TPO) proposed an adjustment of Rs. 2,64,96,14,750/- based on the Bright Line Test (BLT), which was subsequently reduced by the Dispute Resolution Panel (DRP) to Rs. 2,64,96,17,750/-. The Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT discarded the BLT, stating that it has no mandate under the Act and cannot be used to ascertain if there exists an international transaction of brand promotion services. The court emphasized that the existence of an international transaction must be established based on tangible evidence and cannot be inferred merely on the basis of BLT. The Revenue's failure to demonstrate the existence of an international transaction led to the conclusion that no adjustment on account of AMP expenses was warranted. 2. Transfer Pricing Adjustment on Payment of Royalty: The TPO noted that the rate of royalty payment had increased from 1% to 5% within a span of three years without commensurate enhancement in the right and benefit of the assessee company. The DRP/TPO considered only three comparables engaged in the manufacture of color television and arrived at an average royalty rate of 4.50%. After making an ad hoc adjustment of 1%, the arm's length royalty was determined at 3.50%, resulting in an adjustment of Rs. 34,30,08,092/-. The Tribunal directed the TPO to determine the Arm's Length royalty at 4.05%, following the findings of a coordinate bench in the assessee's own case for A.Y 2007-08. 3. Transfer Pricing Adjustment on Allocation of Asian Region Office Expenses: The assessee paid a sum of Rs. 4,59,20,550/- to LG Electronics Singapore Limited for various services. The Revenue contended that the assessee could not justify the need, benefit, and arm's length nature of the intra-group service charges. The Tribunal held that the services were indeed rendered, benefitted the assessee, and were not duplicative or shareholder services. The Tribunal directed the deletion of the adjustment, emphasizing that the commercial or business expediency of incurring any expenditure must be seen from the assessee's point of view. 4. Transfer Pricing Adjustment on Payment of Overseas Marketing-Related Services: The assessee reimbursed its associated enterprises for market survey and sales promotion expenses. The TPO disallowed part of the market survey expenses amounting to Rs. 1,30,08,500/- due to non-furnishing of evidence. The Tribunal restored the issue to the file of the TPO for verification of the evidence and directed the TPO to decide the issue afresh. 5. Segregation of Closely Linked Transactions: This issue was covered by the findings given in Ground Nos. 3 to 6 and thus went in favor of the assessee. 6. Addition on Account of Sales-Tax Subsidy: The assessee received a subsidy in the form of sales tax exemption amounting to Rs. 46,29,42,435/-, which was treated as a capital receipt. The Assessing Officer treated it as a revenue receipt liable to tax, following the Tribunal's decision in the assessee's own case for earlier years. The Tribunal adhered to the precedent and upheld the addition. 7. Disallowance of Provision for Service Warranty: The Assessing Officer disallowed Rs. 38,02,141/- claimed as a provision for service warranty, considering it a contingent liability. The Tribunal directed the deletion of the addition, following the coordinate bench's findings in the assessee's own case for earlier years. 8. Disallowance of Payment of Royalty as Capital Expenditure: The AO disallowed Rs. 85,75,19,908/- paid as royalty, treating it as capital expenditure. The Tribunal directed the AO to treat the royalty payment as revenue expenditure, following the findings in the assessee's own case for A.Y. 2007-08. 9. Disallowance of Payment of Export Commission: The Tribunal restored the issue to the file of the Assessing Officer for fresh adjudication after verifying additional evidence furnished by the assessee. 10. Disallowance of Deduction under Section 80JJAA: The AO disallowed the deduction claimed under section 80JJAA amounting to Rs. 29,06,091/-. The Tribunal directed the AO to allow the deduction, considering the amendment to section 80JJAA as clarificatory and retrospective in nature. 11. Levying of Interest under Sections 234B and 234C: The Tribunal directed the AO to levy interest as per the provisions of the law, stating that the levy of penalty is mandatory though consequential to the decision. Conclusion: The appeal of the assessee was partly allowed, with several adjustments and disallowances being deleted or restored for fresh adjudication, while some were upheld following precedents. The Tribunal emphasized the need for tangible evidence to establish international transactions and the proper application of the arm's length principle.
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