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2021 (11) TMI 1124 - AT - Income TaxTP Adjustment - upward adjustment in respect of advertisement and marketing ('A M') expenses - existence of international transactions - TPO as well as the Hon ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A M expenses incurred by the AE - HELD THAT - main contention advanced by the appellant is that the existence of international transaction cannot be inferred by the TPO in the absence of any actual transactions and the presumption by the lower authorities that the benefit had enured to its foreign AE is merely based on the conjectures. In the absence of any agreement between the assessee and its foreign AE to incur any A M expenses to the benefit of its foreign AE, the presumption of existence of international transaction is incorrect. An identical issue was considered by the Co-ordinate Bench of Tribunal in assessee s own case for immediately preceding A.Y. 2009-10 wherein the Co-ordinate Bench of the Tribunal after making reference to the decision of Sony Ericsson India Pvt. Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT and in the case of Maruti Suzuki India Ltd. 2015 (12) TMI 634 - DELHI HIGH COURT and placing reliance on Essilor India Pvt. Ltd. 2016 (3) TMI 959 - ITAT BANGALORE held that in the absence of agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to the existence of international transaction on mere incurring excess expenses on the marketing and advertisement as compared to the expenditure incurred by the comparables. It was further held that in the absence of any machinery provisions to compute arm's length price provision, the provisions of Chapter X cannot be invoked and bright line test cannot be used either to determine the existing international transaction or its arm's length price -ground of appeal No.1 filed by the Revenue is devoid of merit and stands dismissed. Determination of arm's length price with regard to the transaction of import of raw materials - HELD THAT - It is settled position of law that comparison should be between the tested party and the controlled transaction. A controlled transaction has been defined to mean that a transaction entered into between two associated enterprises and therefore, we are of the considered opinion that the lower authorities were justified in not giving any credence to the certificates issued by deemed AEs. However, in the light of additional evidence filed before us in the form of price list obtained from the third parties, we remit the matter back to the file of AO / TPO with a direction to undertake the exercise of benchmarking the transaction of import of raw material taking cognizance of price list furnished by the assessee from the third party vendors and to restrict any TP adjustment only in respect of AE transactions as following case of (i) CIT vs. Hindustan Unilever Ltd. 2016 (7) TMI 1245 - BOMBAY HIGH COURT and (ii) CIT vs. Ratilal Becharlal Sons 2015 (11) TMI 1524 - BOMBAY HIGH COURT - Thus, this ground of appeal stands partly allowed. TDS u/s 194J - Addition on account of management cost - AO disallowed the expenditure for non-deduction of tax at source treating the same as expenditure under the provision of managerial services - HELD THAT - There is no material on record to show that the HUL had provided any services like technical or managerial in nature to the appellant company. Mere reimbursement of salary of employees does not constitute provision of managerial services. When the expenditure is a mere reimbursement of salary of employees deputed, the question of deduction of tax at source does not arise in the light of the decisions of Siemens Aktiongesellschaft, 2008 (11) TMI 74 - BOMBAY HIGH COURT (ii) CIT vs. Industrial Engineering Projects (P.) Ltd. 1992 (7) TMI 38 - DELHI HIGH COURT ; and, (iii) CIT vs. Dunlop Rubber Co. Ltd., 1982 (2) TMI 24 - CALCUTTA HIGH COURT . Therefore, we are of the considered opinion that the provisions of section 194J of the Act have no application to the subject payment. Accordingly, the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) - Decided in favour of assessee. TDS u/s 194H - Disallowance on account of selling discount given to HUL - As submitted that the HUL is the distributor of products of the appellant company and selling discount was given to the HUL towards the sale cost - HELD THAT - The expenditure in question was incurred towards the selling discount given to the distributor stockists. The relationship between the appellant and the distributor was that of the principal to principal. No services were rendered by the distributor to the appellant company and what was offered to the distributor was discount under the sales promotion schemes and, therefore, it cannot be said that the discount is in the nature of commission within the meaning of Explanation 1 to section 194H of the Act as held in the case of Intervet India Pvt. Ltd. 2014 (4) TMI 353 - BOMBAY HIGH COURT and CIT vs. Piramal Healthcare, 2015 (1) TMI 873 - BOMBAY HIGH COURT - we are of the considered opinion that the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the selling discount. Disallowance u/s 40(a)(ia) being the payment made to Star India Pvt. Ltd. towards advertisement charges - AO disallowed the expenditure on the ground that no TDS was made on said payment - HELD THAT - We find force in the alternative submission made on behalf of the appellant that the benefit of second proviso to section 40(a)(ia) of the Act be examined by the Assessing Officer after due verification of the evidence in support of the same. In the circumstances, we remit this ground of appeal back to the file of the Assessing Officer for limited purpose of examining the applicability of second proviso to section 40(a)(ia) of the Act. Thus, the ground of appeal no.10 stands partly allowed for statistical purposes. Denial of credit for dividend distribution taxes paid by the appellant - HELD THAT - On perusal of the assessment order, we find that the Assessing Officer had not granted credit for dividend distribution taxes paid by the appellant without assigning any reason. In these circumstances, this ground of appeal is also remitted back to the file of the Assessing Officer with a direction to grant a credit for dividend distribution taxes paid by the appellant after due verification.
Issues Involved:
1. Transfer Pricing Adjustment on Advertisement and Marketing (A&M) Expenses 2. Transfer Pricing Adjustment on Import of Raw Material 3. Disallowance under Section 40(a)(ia) for Reimbursement of Additional Discount 4. Disallowance under Section 40(a)(ia) for Reimbursement of Salary Cost 5. Disallowance under Section 40(a)(ia) for Selling Discounts 6. Non-Consideration of Chartered Accountant’s Certificate in Form 26A 7. Non-Consideration of Directions for Provision of Expenses 8. Disallowance for Payment to Star India Private Limited 9. Non-Grant of Credit for Dividend Distribution Tax 10. Levy of Interest under Section 234B and 234C 11. Initiation of Penalty Proceedings under Section 271(1)(c) Detailed Analysis: 1. Transfer Pricing Adjustment on Advertisement and Marketing (A&M) Expenses: The appellant challenged the addition of Rs. 21,17,81,020 on account of Transfer Pricing adjustment for A&M expenses. The TPO inferred the existence of international transactions by comparing the appellant’s A&M expenses with those of comparables, assuming the benefit extended to its foreign AE. The appellant argued that the TPO/DRP recharacterized the A&M expenses as international transactions without any explicit arrangement or agreement. The Tribunal referred to the decision in Maruti Suzuki India Ltd. vs. CIT, emphasizing that in the absence of any machinery provision to compute the ALP of such transactions, the provisions of Chapter X cannot be invoked. The Tribunal dismissed this ground, applying the decision from the preceding year. 2. Transfer Pricing Adjustment on Import of Raw Material: The appellant contested the adjustment of Rs. 15,42,54,297 for the import of raw materials. The TPO used TNMM to benchmark the transaction, rejecting the appellant’s CUP method and certificates from third-party vendors. The Tribunal noted that comparison should be between the tested party and the controlled transaction. The Tribunal remitted the matter back to the AO/TPO to benchmark the transaction using the price list from third-party vendors and restrict any TP adjustment only to AE transactions. 3. Disallowance under Section 40(a)(ia) for Reimbursement of Additional Discount: The appellant argued that the reimbursement of additional trade discount extended to HUL was not managerial service and should not warrant disallowance under Section 40(a)(ia) for non-withholding of tax under Section 194J. The Tribunal agreed, noting no services were rendered by HUL, thus, the provisions of Section 194H did not apply. This ground was allowed in favor of the appellant. 4. Disallowance under Section 40(a)(ia) for Reimbursement of Salary Cost: The appellant contended that the reimbursement of salary cost for employees deputed by HUL was not managerial service. The Tribunal found no material evidence showing HUL provided managerial services and ruled that mere reimbursement of salary does not constitute managerial services, thus, the provisions of Section 194J did not apply. This ground was allowed in favor of the appellant. 5. Disallowance under Section 40(a)(ia) for Selling Discounts: The appellant argued that selling discounts extended to HUL were not commission payments. The Tribunal agreed, noting the relationship was principal to principal, and no services were rendered by HUL. Thus, the provisions of Section 194H did not apply. This ground was allowed in favor of the appellant. 6. Non-Consideration of Chartered Accountant’s Certificate in Form 26A: The appellant submitted that the payments made to HUL were included in HUL’s total income, thus the addition under Section 40(a)(ia) was not warranted. The Tribunal did not provide a specific ruling on this issue but implied consideration in the context of other related grounds. 7. Non-Consideration of Directions for Provision of Expenses: The appellant argued that the AO did not verify whether the provision for expenses was made on a scientific basis. The Tribunal did not provide a specific ruling on this issue but remitted related grounds for further verification. 8. Disallowance for Payment to Star India Private Limited: The appellant claimed it was under a bona fide belief that no TDS was required on payments to Star India Pvt. Ltd. The Tribunal ruled that the benefit of the second proviso to Section 40(a)(ia) should be examined by the AO after verification. This ground was partly allowed for statistical purposes. 9. Non-Grant of Credit for Dividend Distribution Tax: The appellant argued that the AO did not grant credit for dividend distribution taxes paid. The Tribunal remitted the issue back to the AO for verification and granting of credit. This ground was remitted for further verification. 10. Levy of Interest under Section 234B and 234C: The Tribunal did not provide a specific ruling on this issue, implying it was consequential to other findings. 11. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal did not provide a specific ruling on this issue, implying it was consequential to other findings. Conclusion: The appeal was partly allowed for statistical purposes, with specific grounds remitted back to the AO/TPO for further verification and consideration. The Tribunal upheld the appellant’s contentions on various disallowances and transfer pricing adjustments, emphasizing the need for explicit agreements and proper benchmarking methods.
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