2019 (2) TMI 795 - AT - Income Tax

Determination of ALP of AMP expenses - Held that - TPO for determining ALP of AMP expenses. AO/TPO shall call for all agreements entered into by assessee with its AE for purchase and resale of Cannon products in India. Needless to say that assessee will be allowed reasonable opportunity of hearing during proceedings and Ld.AO/TPO shall call for all necessary evidences/documents which shall be produced by assessee to substantiate its claim. Ld.AO/TPO shall determine the issue by applying law in force. Benchmarking alleged international transaction of AMP expenses by using PSM as most appropriate method - Held that - As we have already set aside issue relating to nature of AMP expenditure to Ld.AO/TPO, applicability of most appropriate method relating to same head of transaction also deserves to be set-aside. It is also observed that, this is the consistent view taken by this Tribunal in case of assessee for preceding Assessment Years, copies of orders are placed before us. Inclusion of selling/business promotion expenses in scope of AMP expenditure when DRP for Assessment Year 2011-12 excluded similar expenses - Held that - Admittedly this Tribunal in orders for preceding Assessment Years directed Ld.TPO to exclude sales related expenditure/subsidies received by assessee. Insofar as business promotion expenses are concerned, Ld.TPO shall consider the same after perusal of relevant agreements entered into by assessee with its AE and to decide this issue as per law. TDS u/s 195 - payments in respect of reimbursement of salaries of seconded employees without deducting TDS - Held that - In our considered opinion, inference that could be drawn from documents filed by assessee does not distinguish present case from Centrica offshore India (P.) Ltd. case (2014 (5) TMI 154 - DELHI HIGH COURT) and documents produced by assessee are no substitute for Secondment Agreement and fails assessee in discharge of its burden of proof. It would be relevant to go through secondment agreement before coming to a conclusion. Neither before DRP nor before us assessee filed Secondment Agreement. Assessee is therefore directed to file Secondment Agreement before Ld.AO and Ld.AO is then directed to verify the same. In the event assessee is not able to demonstrate through the Secondment Agreement that the payment made to A.E. is in nature of reimbursement of salary paid by A.E. to seconded employees in India, Ld.AO shall consider the issue as per law. We are therefore remitting the issue back to file of ld.AO to verify nature of reimbursement as per law.

Summary

Issues Involved:
1. Transfer Pricing Issues
2. Corporate Tax Issues

Detailed Analysis:

Transfer Pricing Issues:

1. Adjustment of AMP Expenditure:
- The AO assessed the total income of the appellant at INR 146,04,58,050 against a returned loss of INR 33,76,80,930, making an adjustment of INR 175,91,11,274 to the arm’s length price (ALP) of AMP expenditure.
- The appellant argued that there was no agreement or arrangement between itself and the AE for incurrence of such expenditure, thus challenging the categorization of AMP expenditure as an international transaction.
- The Tribunal referred to its earlier orders for preceding assessment years and directed the AO/TPO to verify the existence of an international transaction by examining the agreements between the appellant and its AE.

2. Recharacterization of AMP Expenditure:
- The appellant contested the recharacterization of AMP expenditure as an international transaction and the use of the Profit Split Method (PSM) for benchmarking.
- The Tribunal set aside the issue to the AO/TPO for reconsideration, following its consistent approach in earlier years.

3. Inclusion of Selling/Business Promotion Expenses:
- The appellant argued against the inclusion of selling/business promotion expenses in the scope of AMP expenditure.
- The Tribunal directed the AO/TPO to exclude such expenses and subsidies from the AMP expenditure, as per the precedent in the appellant’s own case for earlier years.

4. 5% Range Benefit:
- The appellant claimed the benefit of the 5% range as per section 92C(2) of the Act.
- The Tribunal noted this as consequential and did not require adjudication.

Corporate Tax Issues:

1. Reimbursement of Salaries of Seconded Employees:
- The DRP directed the AO to enhance the income by disallowing INR 3,90,27,709/- being the reimbursement to Canon Inc., Japan of salaries of seconded employees under section 40(a)(i) for non-deduction of tax at source under section 195.
- The appellant argued that the reimbursement was not in the nature of fees for technical services (FTS) and should not be subject to TDS under section 195, as the seconded employees worked exclusively for the appellant.
- The Tribunal observed that the secondment agreements were not provided, making it difficult to determine the nature of services. The Tribunal remitted the issue back to the AO to verify the secondment agreements and determine the nature of the reimbursement.

2. Credit of TDS:
- The appellant claimed that the AO did not allow the credit of TDS amounting to INR 5,36,848/-.
- The Tribunal directed the AO to verify and allow the TDS credit as per law.

3. Interest under Sections 234A and 234B:
- The appellant contested the charging of interest under sections 234A and 234B.
- The Tribunal noted this as consequential and did not require adjudication.

4. Initiation of Penalty Proceedings:
- The appellant contested the initiation of penalty proceedings under section 271(1)(c).
- The Tribunal noted this as premature and did not require adjudication.

Outcome:
- The appeals for both assessment years 2012-13 and 2013-14 were allowed for statistical purposes, with several issues being remitted back to the AO/TPO for reconsideration and verification in light of the Tribunal’s observations and directions.