2019 (1) TMI 1838 - AT - Income Tax

TP Adjustment - upward adjustment on account of reimbursement of marketing, advertisement and brand promotion - HELD THAT - We find identical issue had come up before the Tribunal in assessee s own case in the immediately preceding assessment year, after considering the rival arguments made by both the sides had restored the issue to the file of the AO/TPO for fresh determination of the issue as held TPO did not have the benefit of the Special Bench order in the case of LG Electronics 2013 (6) TMI 217 - ITAT DELHI 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. In such circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of the AO/TPO for a fresh determination of disallowance, if any, on account of Transfer pricing adjustment for AMP expenses. Addition of the Provision of support services in area countries - Comparable election - submission of the assessee that certain companies which were included by the assessee should not have been rejected by the TPO/DRP since the Tribunal in assessee s own case in the preceding years has accepted those companies as comparables - HELD THAT - We find the order of the DRP is not a speaking order especially when in assessee s own case, certain comparables were held to be accepted as comparables. Although the decision of the Tribunal was available for the assessment year 2006-07 and 2009-10 when the order of the DRP was passed, however, it appears that no cognizance has been taken by the DRP of the order of the Tribunal. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the ld. DRP to pass a speaking order relating to the various comparables which the assessee is challenging in its application under Rule 27 of the ITAT Rules and which have been reproduced in the preceding paragraphs. DRP should also pass a speaking order on the issue relating to foreign exchange fluctuation/loss to be considered as operating item while computing the ALP of the international transaction. The ground raised by the Revenue is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Advertising, Marketing, and Sales Promotion (AMP) Expenses.
2. Provision of Support Services in Area Countries.
3. Service Income Characterization.
4. Disallowance of Royalty Expenditure.
5. Disallowance of Administrative Expenses.
6. Disallowance of Depreciation.
7. Disallowance of Research and Development Expenses.

Detailed Analysis:

1. Transfer Pricing Adjustment for AMP Expenses:
The core issue was whether AMP expenses incurred by the assessee for brand promotion, legally owned by the foreign AE, constituted an international transaction under Section 92B of the Act. The Tribunal referenced a prior decision in the assessee's case, which had restored the issue to the AO/TPO for fresh determination in light of the Special Bench decision in LG Electronics India Pvt. Ltd. The Tribunal directed the AO/TPO to reassess the AMP expenses following the parameters established by the Special Bench, ensuring a proper examination of relevant factors before concluding on the TP adjustment.

2. Provision of Support Services in Area Countries:
The Revenue challenged the deletion of an addition of ?1,83,76,224/- related to support services. The TPO had initially made an upward adjustment based on a set of comparables. The DRP had directed the AO/TPO to recompute margins after rectifying computational errors and allowing working capital adjustments. The Tribunal found the DRP's order lacking a detailed rationale, especially concerning comparables accepted in prior years. Hence, the Tribunal restored the issue to the DRP for a detailed and speaking order, considering the assessee's arguments and judicial precedents.

3. Service Income Characterization:
The DRP had characterized the service income earned by the assessee as "income from other sources" instead of "business income." The Tribunal noted that this issue had become infructuous since the grounds of appeal were allowed by the DRP. Therefore, the Tribunal dismissed the grounds related to the corporate tax matter as infructuous.

4. Disallowance of Royalty Expenditure:
The DRP upheld the AO's disallowance of royalty expenditure paid by the assessee. However, since the grounds related to corporate tax matters were allowed by the DRP, the Tribunal dismissed these grounds as infructuous.

5. Disallowance of Administrative Expenses:
The AO had disallowed administrative expenses, attributing them to the assessee's subsidiary. The DRP upheld this disallowance. The Tribunal dismissed the grounds related to this issue as infructuous, given the DRP's favorable decision on corporate tax matters.

6. Disallowance of Depreciation:
The AO disallowed a part of the depreciation claim. The DRP upheld this disallowance. The Tribunal dismissed the grounds related to this issue as infructuous, as the DRP allowed the grounds of appeal.

7. Disallowance of Research and Development Expenses:
The AO disallowed research and development expenses, treating them as capital in nature. The DRP upheld this disallowance. The Tribunal dismissed the grounds related to this issue as infructuous, given the DRP's favorable decision on corporate tax matters.

Conclusion:
The Tribunal restored the AMP issue to the AO/TPO for fresh adjudication, following the Special Bench's guidelines. The issue of provision of support services was also restored to the DRP for a detailed order. The grounds related to corporate tax matters were dismissed as infructuous since they were allowed by the DRP. The appeals filed by both the assessee and the Revenue were allowed for statistical purposes.