2018 (4) TMI 31 - AT - Income Tax

Transfer pricing addition on account of AMP expenses - Held that - It is observed that albeit a specific direction was given by the Tribunal for considering the impact of non-payment of royalty on the question of determining the transfer pricing adjustment of AMP expenses, the TPO did not examine such issue. Under these circumstances, we are left with no option but to send matter back to the AO/TPO for considering the effect of non-payment of royalty on the transfer pricing adjustment in the light of the decision rendered by the Special Bench in the case of LG Electronics (2013 (6) TMI 217 - ITAT DELHI). To sum up, we set aside the impugned order on the transfer pricing addition on account of AMP expenses and send the matter back to the TPO/AO for determining its ALP afresh Allowability of software expenses - revenue or capital expenditure - Held that - Assessee did not furnish complete details of software expenses. We fail to appreciate as to how the AO could have determined the nature of software expenses, being capital or revenue, without going through the relevant bills. In the given situation, we are of the considered view that it would be in the fitness of things if the impugned order is set aside and the matter is remitted to the AO for examining this issue afresh. It is made clear that the assessee will be duty bound to submit any detail as called for by the AO in this regard. If the assessee again fails to produce such bills/details, the AO will be entitled to draw adverse inference against the assessee.

Summary

Issues:
1. Transfer pricing adjustment on account of AMP expenses.
2. Determination of software expenses as capital or revenue.

Transfer Pricing Adjustment on Account of AMP Expenses:
The appeal pertains to a final assessment order passed by the Assessing Officer under the Income Tax Act, 1961. The Tribunal had previously restored certain issues of transfer pricing adjustment on AMP expenses for fresh determination. The TPO proposed an adjustment of ?81.85 crore, which was later revised to ?10.56 crore. The Tribunal directed the TPO to consider credit notes, global transfer pricing policy, and other documents to substantiate the compensation for brand promotion. However, it was found that the credit notes were related to product sales and not AMP expenses. The Tribunal also examined the nature of expenses, distinguishing between expenses for sales promotion and sales-related expenses. The Tribunal set aside the order and remitted the matter for fresh examination by the TPO to properly categorize expenses as selling or AMP expenses. The Tribunal held that excessive AMP spend is an international transaction, rejecting the argument that AMP expenses are not an international transaction. The impact of non-payment of royalty on the transfer pricing adjustment was also directed to be considered.

Determination of Software Expenses:
Regarding software expenses, the AO treated them as capital in nature, and the Tribunal remitted the matter for further examination. The AO required the assessee to produce bills to substantiate the revenue nature of expenses. As the bills were not furnished, the expenses were treated as capital, and depreciation was allowed accordingly. The Tribunal found that only 60% of the bills were submitted, indicating incomplete details provided by the assessee. The Tribunal set aside the order and remitted the matter to the AO for a fresh examination, emphasizing that the assessee must submit all required details. Failure to do so may lead to adverse inferences being drawn against the assessee.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, sending both the issues back to the respective authorities for fresh determination. The assessee will be given an opportunity of hearing in the fresh proceedings, and it is emphasized that complete details must be provided to substantiate the nature of expenses in both cases.