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2020 (1) TMI 404 - AT - Income TaxTP Adjustment - adjustment on account of AMP expenses - existence of international transaction of AMP-expenses - HELD THAT - Scope and value of the International Transaction cannot be expanded beyond the reimbursement received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year. Regarding the applicability of the Bright Line Text (BLT) to determine the adjustment in the AMP expenditure has been rejected by the Hon ble Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT . In view of the judgment of the Hon ble High Court, we hereby hold that no International Transaction can be presumed to be in existence and hence no addition is called for. Inter company receivables - In this case, admittedly, the taxpayer has provided benefit to its AE by way of advancement of interest free loan in the garb of delay receipt of receivables - DRP held that the TPO charged interest on receivables beyond 30 days and directed to re-compute the interest on receivables beyond the period mentioned in the respective invoices - HELD THAT - Having gone through entire factum of the issues, we find that the approach of the DRP is not based on sound legal principles. The interest cannot be recomputed treating the transaction as international transaction in case of sale purchases (receivables and payables) based on each invoice. The test to be applied is whether the compensation paid for the products and services is at arm s length, but at the same time it cannot be ignored that the two entities have a business and a commercial relationship. The transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm s length price. The purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. An entity which permits a longer credit period of realizing its sale proceeds would want to receive compensatory interest which is often inbuilt in the price of goods/services sold. Similarly, a customer who is paying the full price upfront would want a discount to account for the prompt payment that is made. The necessity and desirability of an adjustment for the same is advocated by the OECD and the UN guidelines on Transfer Pricing as well. What is required to be done is to examine, by going through entire transaction between the AE and the non AE parties regarding the payment pattern and to arrive at a decision as to whether there is any overt or covert scheme to transfer the profits by the way of delaying the payments to the assessee by the AE and thus getting benefited. This pattern unless established by the revenue, no adjustment on outstanding receivables can be made. Hence, the decision of the TPO of determining the 30 days as the credit period for computing interest on outstanding receivables, without appreciating the actual credit terms offered to the AEs cannot be accepted. Once, the pattern has been established the issue of the netting of outstanding receivables and payables arises. Since, no such pattern is established by the revenue, we hereby direct that the addition made be deleted. Adjustment on account of disallowance of mark-up charged by the AE on the sale of fixed assets - TPO made an adjustment to the international transaction of purchase of fixed assets and made an adjustment to the depreciation claimed on these assets on account of disallowance of the mark-up charged by the AE on sale price of fixed assets - HELD THAT - Regarding the mark-up, the IPC division charged not more than 1% on the procurement cost of fixed asset by the IPC division from the third party and iMarket Korea Inc. charged a mark-up of 5% of un procurement cost of the fixed assets. The said transactions were benchmark by the assessee using TNMM through a combined transaction approach under the manufacturing segment in TP documentation. The TPO made adjustment to the ALP of the complete import transaction amounts from SEC Korea ignoring the fact that the imports by the assessee were from 4 divisions of SEC Korea, wherein, only IPC division had charged a mark-up of 1% and the imports from other 3 divisions of SEC Korea were made at cost. TPO reduced the ALP of the transaction of purchase of fixed assets by the assessee from its AEs from ₹ 2,149,246,567/- to ₹ 2,085,191,606/- (reduced by ₹ 64,054,961/-) and thereafter, the AO disallowed depreciation of ₹ 20,526,740/-. The argument that segregation of this transaction from other transaction while retaining TNMM for other transactions as a whole cannot be accepted as in determination of ALP this transaction can be tested separately. The ld. AR s submissions about the applicability of case of Magneti Marelli Powertrain India Pvt. Ltd. Vs CIT 2016 (11) TMI 123 - DELHI HIGH COURT has been considered. The mark-up of 1% to 5% has to be allowed as it cannot be said that the AE would be in a position to extend services to the assessee at free of cost. The observation that only one division of AE charging mark-up while others do not charge cannot be a reason to make any adjustments in the mark-up and consequently to the depreciation. Hence, the ground of appeal of the assessee on this issue is allowed. The deduction of the ALP of the transaction on purchase of fixed assets by the assessee is directed to be deleted. Appeal of the assessee is allowed.
Issues Involved:
1. Total income assessment. 2. Transfer pricing adjustment on AMP expenses. 3. Classification of AMP expenditure as an international transaction. 4. Use of the Bright Line Test for AMP adjustments. 5. Adjustment on inter-company receivables. 6. Disallowance of depreciation on fixed assets. 7. Charging of interest under Section 234C. 8. Initiation of penalty proceedings under Section 271(1)(c) and Section 271AA. Detailed Analysis: 1. Total Income Assessment: The Assessee contested the AO's assessment of total income at ?1,23,84,592,620/- against the returned income of ?8,93,81,81,030/-. 2. Transfer Pricing Adjustment on AMP Expenses: The Assessee challenged the transfer pricing adjustment of ?3,42,58,84,850 on AMP expenses and interest on outstanding receivables. The AO disallowed depreciation of ?2,05,26,740 due to the reduction in ALP of the transaction of purchase of fixed assets. 3. Classification of AMP Expenditure as an International Transaction: The DRP/AO/TPO erred in holding AMP expenditure incurred by the Assessee in India as an 'international transaction'. The ITAT referred to previous judgments, including the case of BMW India Pvt. Ltd., where the existence of an international transaction of AMP expenses was upheld. However, the ITAT noted that the scope and value of the international transaction cannot be expanded beyond the reimbursement received under the MDF agreement. 4. Use of the Bright Line Test for AMP Adjustments: The ITAT observed that the Bright Line Test (BLT) for determining AMP adjustments was rejected by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. Consequently, no international transaction can be presumed to exist, and no addition is warranted. 5. Adjustment on Inter-Company Receivables: The Assessee argued that no interest adjustment on receivables is warranted when working capital adjustment is assumed in TNMM. The ITAT found that the TPO's approach of determining a 30-day credit period for computing interest on outstanding receivables was not based on sound legal principles. The ITAT directed that the addition made be deleted, emphasizing the need to examine the entire transaction pattern to ascertain any scheme to transfer profits. 6. Disallowance of Depreciation on Fixed Assets: The TPO made an adjustment to the international transaction of purchase of fixed assets, reducing the ALP and disallowing depreciation. The ITAT held that the mark-up of 1% to 5% on the procurement cost of fixed assets should be allowed, as the AE would not extend services at no cost. The ITAT directed the deletion of the deduction of the ALP of the transaction on the purchase of fixed assets. 7. Charging of Interest under Section 234C: The Assessee contested the charging of interest under Section 234C of the Act. 8. Initiation of Penalty Proceedings under Section 271(1)(c) and Section 271AA: The Assessee also contested the initiation of penalty proceedings for furnishing inaccurate particulars and concealment of income. Conclusion: The ITAT allowed the appeal of the Assessee, directing the deletion of adjustments made by the AO/TPO/DRP on various grounds, including AMP expenses, inter-company receivables, and depreciation on fixed assets. The ITAT emphasized the need for tangible evidence to demonstrate the existence of an international transaction and rejected the use of the Bright Line Test for AMP adjustments.
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