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2023 (1) TMI 12 - AT - Income TaxTP Adjustment - AMP expenditure incurred by the assessee - TPO proposed an adjustment by application of BLT - TPO concluded that the AMP expenses of the assessee are higher than that of comparable companies and applied BLT by charging a mark up of 15.43% for alleged brand building services provided to AE - HELD THAT - TPO has only undertaken an adjustment by application of BLT. There is no agreement, understanding or arrangement between the assessee and its AE for the expenditure to be incurred on AMP which has been brought on record by the Revenue and hence it cannot be presumed that an international transaction exists. The application of BLT for the purpose of undertaking an adjustment under transfer pricing provisions is not permissible under chapter X of the Act. The Hon ble Delhi High Court has struck down the application of BLT for making adjustment on account of AMP expenses as an international transaction in Maruti Suzuki India Ltd. s case 2015 (12) TMI 634 - DELHI HIGH COURT BLT as an approach is not permissible for undertaking any addition on account of AMP expenses incurred by the assessee. We, therefore, set aside this issue to the file of the Ld. AO/ TPO to decide it afresh in light of the decisions of Maruti Suzuki India Ltd. 2015 (12) TMI 634 - DELHI HIGH COURT and Sony Ericsson Mobile Communications India Pvt. Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT after giving reasonable opportunity of hearing to the assessee. Before us, the assessee has prayed that if the AMP adjustment is determined at Rs. NIL by application of jurisdictional High Court decisions (supra) the issue whether this is an international transaction would become academic and thus the assessee will not press this ground. However, leave may be granted to the assessee to argue this issue in the subsequent assessment years if so required. We have no objection and allow the assessee to argue on this issue in future. Disallowance on account of payment of royalty - Assessee in its transfer pricing study adopted CUP as the most appropriate method for the purpose of benchmarking the transaction - assessee had submitted a fresh corroborative analysis using Profit Split Method ( PSM ) before the Hon ble DRP - HELD THAT - We find force in the contention of the assessee that royalty agreements operating in different geographical regions can be applied as a filter as the Ld. TPO himself has accepted royalty agreements operating in foreign jurisdictions. While the primary objection of the Hon ble DRP in respect of comparability analysis is that the comparable selected by the assessee are from a different geographical region (i.e. USA), we observe that the three comparables considered by the Ld. TPO in the remand report are from the same geographical location (i.e. USA) and hence in our view the objection relating to difference in geographical region does not hold good. Whether set of comparables selected by the assessee are appropriate for benchmarking the payment of royalty or not? - Five comparables selected by the assessee are from same geography i.e. USA and the same industry i.e. Kitchenware and home furnishing items as the comparables considered by the Ld. TPO. The Ld. TPO rejected two of his own comparables i.e. Mikasa Inc. and Oneida Ltd. by holding that these two comparables are providing know-how whereas the assessee is not obtaining know-how which in our considered view is incorrect as evident from the license agreement as well as other documentary evidence submitted by the assessee. The assessee has paid royalty for use of trademark and marketing information /marketing know-how. All the eight comparables listed in the chart are from the same geography and same industry and hence are valid comparables to that of the assessee. Accordingly, the Ld. AO/TPO is directed to include the aforesaid eight comparables in the final set of comparable agreements for the purpose of benchmarking the payment of royalty by the assessee. Ground No. 6 and 9 are thus allowed. Payment of management services fee - TPO held that the assessee could not submit any evidence that management support services had actually been received and also failed to demonstrate the need for such services - ALP was determined at NIL by using CUP and an adjustment - HELD THAT - Respectfully following the decision of the coordinate bench in assessee s own case for AY 2012-13 2021 (11) TMI 1122 - ITAT DELHI we set aside this issue to the file of the Ld. AO with a direction to the assessee to furnish the required information / document / details of payment etc. in support of its claim that services were actually rendered and benefit was derived by the assessee and the Ld. TPO is directed to verify the same and decide the ALP afresh after giving reasonable opportunity to the assessee. Accordingly, ground Nos. 10, 11 and 12 are allowed subject to the above directions. TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee paid software charges and intranet and other IT cost - reimbursement of expenses made by the assessee to Dart Industries Inc., USA ( Dart ) - TPO in its order has not drawn any adverse inference in relation to ALP of such reimbursement - HELD THAT - The issue whether the amounts paid by resident Indian end users / distributors to non-resident computer software manufacturer / supplier as consideration for the resale/use of the computer software through end users license agreements (EULAs) /distribution agreements is the payment of royalty for the use of copyright in the computer software now stands settled by the decision of Engineering Analysis Centre of Excellence P. Ltd. 2021 (3) TMI 138 - SUPREME COURT wherein the Hon ble Supreme Court has held that such payments are not royalty payment and the same does not give rise to any income taxable in India, as a result of which such payments are not liable to tax deduction at source under the provisions of section 195 of the Act. The decision (supra) of the Hon ble Supreme Court will apply to the case of the assessee provided the consideration paid by the assessee is towards purchase of standard/off-the-shelf software from Dart. The issue whether the software supplied by Dart to the assessee is standard/off-the-shelf software or customized software needs verification in the light of observations made by the Hon ble DRP. We, therefore, deem it fit to restore this issue to the file of the Ld. AO for verification. Needless to say, the assessee will be given adequate opportunity of hearing before the Ld. AO. If, on verification it is found that the software supplied by Dart is standard software without any customization being done by Dart, the Ld. AO shall reconsider this issue in light of the decision of the Hon ble Supreme Court in Engineering Analysis Centre of Excellence P. Ltd. (supra) and modify the assessment accordingly. As an alternate argument the assessee has also contended that being pure reimbursement in nature and no element of income embedded, the payment made by the assessee to Dart is not liable to tax in India. Since both the Ld. AO / Hon ble DRP have decided this issue against the assessee holding such payment in the nature of royalty which is yet to be determined based on the directions above, we refrain from adjudicating upon the alternate plea taken by the assessee.
Issues Involved:
1. Transfer Pricing Adjustments: AMP Expenditure, Management Service Fee, Royalty. 2. Corporate Tax Issues: Disallowance under section 40(a)(i) for reimbursement of expenses. Detailed Analysis: 1. Transfer Pricing Adjustments: AMP Expenditure: - The TPO proposed an adjustment of Rs. 39,33,04,674/- on account of AMP function, arguing that AMP expenses incurred by the assessee are significantly high, leading to the creation of marketing intangibles in India. The TPO applied the Bright Line Test (BLT) and charged a mark-up of 15.43%. - The DRP upheld the TPO's view of characterizing AMP expenses as an international transaction but directed the TPO to exclude selling expenses from AMP expenses and to compare the intensity of AMP spending to determine ALP, leading to a revised adjustment of Rs. 14,70,72,217/-. - The Tribunal found that the application of BLT is not permissible under Chapter X of the Act, citing the Delhi High Court's decisions in Maruti Suzuki India Ltd. and Sony Ericsson Mobile Communications India Pvt. Ltd. The Tribunal set aside the issue to the AO/TPO to decide afresh in light of these decisions. Management Service Fee: - The TPO determined the ALP of the management service fee at 'NIL' using the CUP method, leading to an adjustment of Rs. 1,90,95,017/-. The DRP confirmed this addition. - The Tribunal, following its decision in the assessee's own case for AY 2012-13, remanded the matter back to the TPO to verify the actual receipt of services, the need for such services, and the benefit derived by the assessee. Royalty: - The TPO selected CUP as the most appropriate method for benchmarking the royalty transaction and determined an arm's length royalty rate of 2% of sales, leading to an adjustment of Rs. 15,65,90,752/-. - The DRP upheld the TPO's benchmarking, rejecting the comparables selected by the assessee due to geographical and product dissimilarity. - The Tribunal found that the comparables selected by the TPO and the assessee belong to the same industry and geography. The Tribunal directed the AO/TPO to include eight valid comparables in the final set for benchmarking the royalty payment. 2. Corporate Tax Issues: Disallowance under section 40(a)(i): - The AO disallowed Rs. 46,29,269/- under section 40(a)(i) for non-deduction of tax on payments made to Dart Industries Inc., USA, classifying the reimbursements as royalty. - The DRP confirmed the AO's classification, stating that the payments for software and IT infrastructure are covered under Article 12 and Explanation 2 of section 9(i)(vi) of the Act. - The Tribunal noted that the issue whether the software supplied by Dart is standard or customized needs verification. The Tribunal restored the issue to the AO for verification, directing the AO to reconsider the issue in light of the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd. if the software is found to be standard. Conclusion: The Tribunal provided partial relief to the assessee by setting aside the AMP expenditure issue for fresh consideration, remanding the management service fee issue for verification, and directing the inclusion of valid comparables for royalty benchmarking. The disallowance under section 40(a)(i) was remanded for verification of the nature of the software supplied. The appeal was allowed for statistical purposes.
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