2021 (11) TMI 647 - AT - Income Tax

Adjustment on account of AMP expenses - whether there existed an international transaction within the meaning of Section 92B? - HELD THAT - Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, and then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected. On the facts of the present case, it cannot be held that there was any kind of understanding or arrangement with the AE which can be lead to inference that AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure. If we go by the alternative arguments placed by the ld. Counsel, Mr. Deepak Chopra that if intensity approach is to be applied to determine the assessee s profitability, then assessee has earned a profit margin 15.70% as against PLI of the comparable determination by the TPO 4.36% and therefore, at the entity level profitability assessee s margin was far excess of the comparables and accordingly no adjustment on such transaction can be made. As regards the substantive AMP adjustment of applying residual profits split methods, it is incumbent upon the TPO firstly to combine profit from the so called international transaction of incurring of AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. The manner in which RSPM has been applied by the TPO cannot be held as same is consistent with Rule 10B of the Income Tax Rules. Accordingly, this ground raised by the assessee is allowed. Deduction claimed u/s 80- IC - Whether given the actual allocation of expenses done by the assessee could be disturbed by the AO so as to attribute such expenses on the basis of the sales turnovers of the eligible and non-eligible units? - HELD THAT - From a perusal of Chart A it was shown by the assessee that it has incurred total advertising expenses of ₹ 115,55,70,416/-. Out of these expenses, the expenses of ₹ 4,99,08,629/- were specifically allocable to the eligible unit which left the balance expenses of ₹ 110,56,61,787/-. These balance expenses have been allocated in Chart B on a brand wise basis. What is noteworthy that while allocating these expenses brand wise between the eligible and noneligible units based on the actual manufacture in these units, the advertising expenses have been allocated by the assessee. This methodology was brought to the attention of AO by way of its letter dated 28.11.2019 which is annexed at pages 511 to 520 of the paper book. This has not been disputed by the AO. We find that after these actual allocations only an amount of ₹ 52,55,64,865/- are left to be allocated between the eligible and non-eligible units, which brings us to the second issue. We find no justification in the reduction of the turnover of the ineligible units by the excise duty which has disturbed the overall allocable percentages. We find force in the contention of the assessee that even for the purposes of section 145A of the Act which deals with the method of accounting for income tax purposes specifically provides that the sale of goods should be inclusive of the amount of tax, duty, cess or fees actually paid or incurred by the assessee. The Ld. Counsel also placed reliance on the definition of the term turnover under the Central Sales Tax Act and the Companies Act. We do not find any basis for the change of allocation from the turnover basis to the production basis since the production basis does not reflect all the costs relating to the manufacturing. In our view, the basis of allocation done by the assessee by taking the actual turnover of the eligible and noneligible units was a reasonable basis since the non-eligible units were subjected to excise duty and there was no reason to reduce the element of excise duty while taking the turnover of the noneligible units for allocation of common expenses. Having allocated the common expenses if there resulted in any consequential allocation of expenses to the eligible unit then the reduction of the 80IC claim would be limited to 30% of such expenses - We find force in this contention of the assessee given that this was the ninth year of such claim by the assessee in respect of such unit. As per the applicable provision of Section 80IC the deduction is 100% of the eligible profits for the first five years and 30% of the eligible profits for the balance five years. Thus if at all any reduction of the claim had to be made by the AO it has to be limited to 30% of such allocable expenses and no more. Seeking allowability of the education cess paid - HELD THAT - Ergo, if cess is considered as part of surcharge, i.e., the additional surcharge on tax, then if income tax payable under the Act is not reckoned as allowable expenditure u/s.37. Ostensibly by this logic, the cess also cannot be held to be allowable business expenditure, because the cess is always calculated and paid on percentage of income tax payable and not actually incurred for the business or profession of assessee. In the context of 115JB Hon ble Calcutta High Court in the case of Srei Infrastructure Finance Ltd. 2016 (8) TMI 967 - CALCUTTA HIGH COURT held that both surcharge and education cess are part of the income tax, though payable in addition to the income tax. The Hon ble Court after quoting provision of the Finance Act observed that income tax being increased by the amount of surcharge and cess. Accordingly, it was held that surcharge and education cess is nothing other than income tax. The above CBDT Circular of 1967 has been referred and relied upon by the Hon ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. . 2018 (10) TMI 589 - RAJASTHAN HIGH COURT and held that in view of the said CBDT circular, the cess is not disallowable u/s. 40(a)(ii) and hence the assessee s claim that education cess is an allowable expenditure was upheld - Decided in favour of assessee.

Summary

Issues Involved:

1. Transfer Pricing Adjustment - AMP Expenses
2. Disallowance of Deduction under Section 80-IC
3. Disallowance of Loss Due to Floods
4. Applicability of Interest under Sections 234B/234C and Initiation of Penalty Proceedings under Section 271(1)(c)
5. Allowability of Education Cess

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment - AMP Expenses:

The primary issue was whether the AMP expenses incurred by the assessee constituted an international transaction under Section 92B of the Income-tax Act, 1961. The assessee, a subsidiary of a foreign AE, argued that AMP expenses were incurred solely for local market needs without any arrangement with the AE. The TPO had applied the Bright Line Test (BLT) and a version of the Profit Split Method (PSM) to determine excessive AMP expenses, leading to a substantive adjustment of ?135.52 crores. The Tribunal noted that the BLT was rejected by higher courts and emphasized that AMP expenses must be proven as an international transaction. The Tribunal found no arrangement or understanding obligating the assessee to incur AMP expenses for the AE's benefit. Consequently, the Tribunal ruled that AMP expenses did not constitute an international transaction and deleted the transfer pricing adjustment.

2. Disallowance of Deduction under Section 80-IC:

The issue involved the allocation of common expenses between eligible and non-eligible units for deduction under Section 80-IC. The assessee had allocated expenses based on turnover ratios, including excise duty. The AO, following an earlier CIT(A) order, excluded excise duty from the turnover of non-eligible units, leading to a disallowance of ?17.96 crores. The Tribunal held that the AO's exclusion of excise duty was unjustified, as excise duty is part of the turnover. The Tribunal supported the assessee's allocation method and ruled that any disallowance should be limited to 30% of the expenses, as the assessee was in the ninth year of claiming the deduction. Thus, the Tribunal allowed the assessee's claim.

3. Disallowance of Loss Due to Floods:

The Tribunal did not provide a detailed analysis of this issue in the summarized judgment. However, it is implied that the Tribunal addressed the disallowance of the loss claimed by the assessee due to floods, as part of the overall appeal.

4. Applicability of Interest under Sections 234B/234C and Initiation of Penalty Proceedings under Section 271(1)(c):

These issues were deemed consequential and premature by the Tribunal. The Tribunal dismissed these grounds as they were dependent on the final outcome of the substantive issues addressed in the appeal.

5. Allowability of Education Cess:

The assessee raised an additional ground for the allowability of education cess as a business expenditure. The Tribunal admitted this ground and referred to the CBDT Circular and judicial precedents, including the Bombay High Court's decision in Sesa Goa Ltd., which held that education cess is not disallowable under Section 40(a)(ii). The Tribunal concluded that education cess is an allowable expenditure and allowed the assessee's claim.

Conclusion:

The Tribunal ruled in favor of the assessee on the key issues of transfer pricing adjustment for AMP expenses and the disallowance of deduction under Section 80-IC. The Tribunal also allowed the additional ground regarding the allowability of education cess. The issues of interest applicability and penalty proceedings were dismissed as premature. The overall appeal of the assessee was allowed.