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2023 (3) TMI 1433 - AT - Income TaxTP adjustment - Advertisement, Marketing and Promotion (AMP) expenses, alleged to have been incurred on behalf of the Associated Enterprises (AEs) - international transaction or not? - HELD THAT - As we find, the TPO has made the adjustment to AMP expenses by treating it as international transaction coming within the definition of section 92B of the Act and has computed the adjustment applying Bright Line Test (BLT) method. It is observed, while deciding identical issue in assessee s own case for assessment year 2008-09, the Tribunal in order 2022 (1) TMI 1082 - ITAT DELHI has held that the transaction relating to AMP expenses will not fall in the category of international transaction. Thus we restore the issue to the Assessing Officer with similar direction. Adjustment made to ALP of Information Technology (IT) support services provided by the assessee to its AEs - assessee is a resident corporate entity engaged in the business of manufacturing, marketing and selling of wrist watches and after selling services - HELD THAT - Assessee provided services in ITES segment. In fact, in the order passed under section 92CA(3) of the Act, the TPO himself has stated that the assessee provides limited IT help desk and support services to the AEs. In spite of such factual position established on record, the TPO has gone forward to re-characterize the assessee as a software development service provider and selected fresh comparables in the software development segment. Unfortunately, Commissioner (Appeals) has also completely misconceived the facts by approving the re-characterization of the assessee. As observed, similar erroneous approach was adopted by the TPO while proposing adjustment to similar transaction with the AEs in assessment year 2011-12. While deciding assessee s objections on the issue, learned DRP accepted assessee s business profile as an IT service provider and directed the AO/TPO to select comparables in ITES segment. However, the TPO again selected comparables providing Knowledge Process Outsourcing (KPO) services. While deciding the issue in appeal, the Tribunal in 2018 (12) TMI 1852 - ITAT DELHI rejected the comparables selected by the TPO. It is relevant to observe, while dismissing Revenue s appeal against the decision of the Tribunal in assessment year 2011-12, the Hon ble Jurisdictional High Court upheld the decision of the Tribunal holding the assessee as an ITES segment company. Addition on account of advance written off - assessee has debited certain amounts on account of advances written off - as deduction claimed by the assessee does not satisfy the condition of section 36(2) of the Act, the Assessing Officer disallowed the deduction - HELD THAT - As could be seen from the facts on record, certain trade advances in relation to the business operations could not be recovered even after long lapse of time. Therefore, the assessee has written them off in its books of account. In our view, the Assessing Officer made a fundamental error by holding that the deduction claimed comes under section 36(2) of the Act. Undisputedly, the trade advances were in course of business. Therefore, if the assessee was unable to recover such advances, it can be treated as business loss, hence, allowable. Accordingly, we uphold the decision of Commissioner (Appeals) on the issue. Spreading over of expenditure - Payment for stamp duty and brokerage for office lease - as per AO since, the period of lease is for five years, the brokerage expenditure has to be spread over the period of lease - HELD THAT - It is a fact on record that the assessee has incurred the brokerage expenditure in the year under consideration. Therefore, the expenditure has to be allowed in the year under consideration. Merely because the lease of office premises is for particular period, the expenditure actually incurred on brokerage cannot be spread over the period of lease . Accordingly, we uphold the decision of learned Commissioner (Appeals) on the issue.
Issues Involved:
1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses. 2. Adjustment to the Arm's Length Price (ALP) of Information Technology (IT) support services. 3. Deletion of addition made on account of advance written off. 4. Deduction for payment of stamp duty and brokerage for office lease. Summary: 1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses: The first common issue in the appeals pertains to the adjustment made for AMP expenses, alleged to have been incurred on behalf of the Associated Enterprises (AEs). The Tribunal noted that the Transfer Pricing Officer (TPO) made adjustments by treating AMP expenses as an international transaction under section 92B of the Act, using the Bright Line Test (BLT) method. However, referencing the Tribunal's decision in the assessee's case for the assessment year 2008-09, it was held that AMP expenses do not fall under international transactions. The Tribunal restored the issue to the Assessing Officer to decide afresh, in line with the pending decision of the Hon'ble Supreme Court on similar matters. The Tribunal reiterated that the alleged excessive AMP expenditure does not qualify as an international transaction, thus the adjustment made by the Revenue is unsustainable. The matter was restored to the Assessing Officer to act in accordance with the Supreme Court's findings. 2. Adjustment to the Arm's Length Price (ALP) of Information Technology (IT) support services: The second common issue relates to the adjustment made to the ALP of IT support services provided by the assessee to its AEs. The assessee benchmarked the transaction using the Transactional Net Margin Method (TNMM), which the TPO rejected, re-characterizing the assessee as a software development service provider and selecting new comparables from the software development services segment. The Tribunal found the TPO's re-characterization erroneous, noting that the assessee provides ITES and not software development services. The Tribunal referenced its decision in the assessee's case for the assessment year 2011-12, upheld by the Hon'ble Jurisdictional High Court, which confirmed the assessee as an ITES segment company. Consequently, the Tribunal directed the Assessing Officer to delete the additions. 3. Deletion of addition made on account of advance written off: The first common issue in the Revenue's appeal concerns the deletion of addition made on account of advances written off. The Assessing Officer disallowed the deduction, believing it did not satisfy the conditions of section 36(2) of the Act. However, the learned Commissioner (Appeals) deleted the disallowance, relying on the Tribunal's decision in the assessee's case for assessment years 2004-05 and 2005-06. The Tribunal upheld the decision, noting that the trade advances were related to business operations and their non-recovery constituted a business loss, thus allowable. 4. Deduction for payment of stamp duty and brokerage for office lease: The next issue involves the deduction for payment of stamp duty and brokerage for office lease. The Assessing Officer spread the brokerage expenditure over the lease period, allowing only a part. The learned Commissioner (Appeals) deleted the disallowance, considering the expenditure incurred in the year under consideration. The Tribunal found no infirmity in this decision, stating that the expenditure should be allowed in the year it was incurred, irrespective of the lease period. Conclusion: In conclusion, the Tribunal partly allowed the assessee's appeals and dismissed the Revenue's appeals. The Tribunal restored the AMP expenses issue to the Assessing Officer with specific directions and directed the deletion of additions related to IT support services, advances written off, and brokerage expenditure. The order was pronounced on 27th March 2023.
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