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2019 (12) TMI 1615 - AT - Income TaxTP adjustment - AMP expenses - International transaction - HELD THAT - We find that all the decisions which have been claimed by the learned counsel of the assessee to be in his favour are based on the premise that there was no agreement between the parties to incur the AMP expense. It was also found that there was no arrangement or obligation between the parties to incur those expenditure. However in the present case we find that this plank miserably fails. Even the decision of ITAT in assessee s own case for earlier year doesn t help the assessee as subsequently there was an amendment in the agreement between the parties. These amendment have already been mentioned in the above said submissions. In the present case there is a mutual agreement in existence between the assessee and its AE to incur AMP expenses and further that agreement is also existing to allocate or apportion or to contribute the AMP cost or expense. The agreement also clarifies that the level of AMP expense allocation or apportionment contribution is based on the benefit received. Thus when there is an agreement that the overseas associated enterprise will share the AMP expense of the assessee when benefitted, undoubtedly the AMP expense becomes an international transaction and the TPO cannot be debarred from examining the said international transaction with respect to the arms length price. This becomes amply clear from the fact that the overseas associated enterprise has also contributed a sum towards its contribution to the AMP expense incurred by the assessee. The contention of the learned counsel of the assessee that the sum has been paid not by way of any expense having been incurred by the assessee towards AMP expense of the overseas associated enterprise but to enable the assessee to meet certain rate of return of income. The submission is not at all acceptable. Firstly this is not emanating out of the agreement. It is only an explanation carved out by the assessee. The claim of the learned counsel of the assessee that the contribution is meant to ensure that the assessee has a margin of 5% income in the manufacturing segment and 3% margin in the distribution segment is at best a self-serving statement. As pointed out by the learned department representative this claim itself shows that assessee is having scant regard to the Transfer Pricing mechanism. It shows that assessee has a predetermined margin and thereafter went around finding comparables to justify the same. This is totally in constraint of the Transfer Pricing laws and jurisprudence. On this plank itself this explanation fails. Further it defies logic that overseas AE will pay gratuitous sum to the assessee, without any benefit to itself. As relying on case of BMW Ltd. 2017 (11) TMI 715 - ITAT DELHI we remit the issue to file of the assessing officer to follow the direction of the ITAT as above and determine the arm length price in this regard. As regards to the other adjustment in this regard being claimed by the assessee, the same are consequential. The AO shall consider the same afresh and decide as per law. The ld. Counsel of the assessee claimed that the TPO should not be given second innings. We find the same is not tenable in light of facts and case laws referred hereinabove. Disallowance of royalty - We find that it is the claim of the assessee that payment of royalty is an international transaction and assessee has submitted the benchmarking report and the Transfer Pricing Officer has not made any adjustment. In this view of the matter, the Transfer Pricing officer has not made any adjustment. Hence, it was not open to the AO to apply the benefit test and make the disallowance u/s.37(1) of the Act, without proper examination of all aspects of the claim. We find that assessee s submission in this regard have not been properly appreciated by the Assessing Officer, hence, in our considered opinion, the aforesaid issue deserves to be remitted to the AO for fresh consideration. We direct accordingly. Royalty payment claimed on payment basis u/s.40(a)(ia) - Claim which is now being claimed to be allowable on payment basis u/s.40(a)(ia) of the Act, we find that the same was disallowed in the earlier year by applying the Section 37(1) of the Act holding the same that it is not for the purpose of the business. Once it was held that the said payment was not allowable for A.Y.2009-10, the same cannot be claimed to be allowable in A.Y.2010-11 on payment basis u/s.40(a)(ia). Hence, this claim of the assessee is not sustainable, hence, we uphold the orders of the authorities below, disallowing the royalty payment paid to Diageo North America pertaining to A.Y.2009-10 which has been claimed on payment basis u/s.40(a)(ia) in the present assessment year. Disallowance of expenses incurred for liason office at Sri Lanka - AO disallowed the same on the ground that assessee had not carried out any business activity in Sri lanka Or received any income from Sri Lanka - HELD THAT - We find that assessee was incurring expenses in respect of liason office expenses at Sri lanka. It is undisputed that during the current year as well as previous year no income was received on account of activities of the liason office. No detail for the activities conducted by the liason office is also on record. In the earlier year also this claim was rejected. Accordingly, we do not find any infirmity in the order of the assessing officer in this regard.
Issues Involved:
1. Set-off of reimbursement of AMP expenditure. 2. Rejection of comparables used by the TPO for determining the Bright Line test. 3. Transfer pricing adjustment on advertisement and sales promotion expenses. 4. Disallowance of royalty. 5. Disallowance of expenses incurred for liaison office in Sri Lanka. Detailed Analysis: 1. Set-off of Reimbursement of AMP Expenditure: The Revenue challenged the DRP's decision to allow the set-off of AMP expenditure reimbursed by the AE to the assessee, despite finding that the compensation lacked a sound and scientific basis. The Tribunal noted that the DRP accepted the assessee's contention and directed the TPO to reduce the brand contribution received from AMP expenses while computing the AMP adjustment for the distribution segment. 2. Rejection of Comparables Used by the TPO for Determining the Bright Line Test: The Revenue argued that the DRP erred in rejecting the comparables used by the TPO for the Bright Line test without merit consideration. The Tribunal observed that the TPO had rejected segmental data due to the lack of supporting documents and vouchers, and the DRP upheld this rejection. The Tribunal directed the TPO to verify the actual working provided by the assessee and delete any double disallowance. 3. Transfer Pricing Adjustment on Advertisement and Sales Promotion Expenses: The assessee contested the TPO's adjustment of Rs. 14.42 crores on account of excessive AMP expenses. The TPO had applied the Bright Line test, which the Tribunal noted was negated by the Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. The Tribunal remitted the issue back to the AO to follow the principles laid down by the Delhi High Court and determine the arm's length price accordingly. The Tribunal emphasized that the AMP expenses incurred on brands owned by the assessee should be excluded from the total AMP expenditure and that sales-related expenses should also be excluded. 4. Disallowance of Royalty: The AO disallowed the royalty payment of Rs. 6.28 crores to Diageo North America, questioning its necessity for business purposes. The Tribunal found that the TPO had not made any adjustment to the benchmarking of the royalty transaction. Hence, it was not open to the AO to disallow the expense under Section 37(1) without proper examination. The Tribunal remitted the issue back to the AO for fresh consideration. However, the Tribunal upheld the disallowance of Rs. 5.01 crores pertaining to AY 2009-10, which was claimed on a payment basis under Section 40(a)(ia) in the current year, as it was already disallowed in the previous year. 5. Disallowance of Expenses Incurred for Liaison Office in Sri Lanka: The AO disallowed the expenses of Rs. 6.69 lakhs incurred for the liaison office in Sri Lanka, as the assessee did not receive any income from Sri Lanka during the relevant year. The DRP upheld this disallowance. The Tribunal agreed with the AO and DRP, noting that no income was earned through the liaison office in the current or previous year, and no details of activities conducted by the liaison office were provided. Therefore, the disallowance was upheld. Conclusion: The Tribunal partly allowed the appeals, remitting the issues related to AMP expenditure and royalty back to the AO for fresh consideration, while upholding the disallowance of expenses for the liaison office in Sri Lanka. The Tribunal emphasized the need for proper verification and adherence to legal principles in determining the arm's length price and allowable expenses.
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