2023 (1) TMI 1110 - AT - Income Tax

TP adjustment - Advertisement, Marketing and Sales Promotion Expenses AMP incurred by the assessee - DR concluded by saying that since the Tribunal in the preceding years has upheld the bench marking of AMP expenses by applying TNMM, the same may be applied in the year under consideration also but after making comparability adjustment on account of AMP expenses - HELD THAT - We have to state that this Tribunal in for Assessment Year 2008-09 2019 (1) TMI 1567 - ITAT DELHI and in Assessment Year 2009-10 2019 (2) TMI 2062 - ITAT DELHI had the occasion to consider an identical quarrel and had the benefit of the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd 2015 (3) TMI 580 - DELHI HIGH COURT as held that the assessee being a full-fledged manufacturer, entire AMP expenditure is incurred at its own discretion and for its own benefit for sale of LG products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark LG manufactured by the assessee and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE - Thus we direct the Assessing Officer /TPO to delete the impugned adjustment. Excessive AMP expenses have been incurred by the assessee so as to benefit AE - HELD THAT - Nothing has been brought on record by the Revenue to demonstrate that there is a direction from LG Korea to incur certain minimum level expenditure on AMP. Therefore, we are of the considered view that the said Article in TLA does not provide for or result in rendering of any service in relation to AMP expenses incurred by the assessee as an independent full risk-bearing manufacturer/ distributor of the products manufactured/distributed in the Indian market. Reimbursement of certain advertisement expenses by LG Korea - HELD THAT - As mentioned elsewhere, in terms of Article 20, LG Korea did not have any obligation whatsoever to indicate or reimburse advertisement expenditure in relation to sale of products by the assessee in India. It appears that the said reimbursement of AMP expenses have been made by LG Korea voluntarily and without any legal binding and by way of support the assessee. We find that similar reimbursement has been received by the assessee in earlier years and as mentioned elsewhere, this quarrel has been decided by this Tribunal in earlier Assessment Years in favour of the assessee and against the Revenue. Bench marking of AMP expense on aggregation basis applying TNMM - HELD THAT - It would be pertinent to mention here that the TPO did not dispute the combined benchmarking analysis undertaken by the assessee in its Transfer Pricing study in respect of all international transactions and, in fact, accepted the same to be at arm s length. The TPO has proceeded on the premise that an international transaction in respect of AMP expenses is to be bench marked separately applying BLT. The contention of the ld. DR that profit margin of assembly segment of the assessee is 3.70% whereas the same for comparable companies is at 4.70% cannot be accepted since the said margin is within arm s length range of /- 5% as per proviso to section 92C of the Act. Considering the factual matrix from all angles, TP adjustment made by treating AMP expenses as an international transaction deserves to be deleted in line with the decision of this Tribunal in assessee s own case for Assessment Years 2008-09 and 2009-10. Accordingly, Ground No.4 is allowed. TP adjustment in respect of royalty - HELD THAT - We find that this Tribunal 2019 (2) TMI 2062 - ITAT DELHI in Assessment Year 2009-10 has followed its own decision given 2019 (1) TMI 1567 - ITAT DELHI in Assessment Year 2008-09 as we direct the TPO to determine the Arm s Length royalty @ 4.05%. TP adjustment in respect of Asian Regional Overheads expense - HELD THAT - In our considered opinion, the assessee is free to conduct business in the manner that the assessee deems fit and the commercial or business expediency of incurring any expenditure has to be from the assessee s point of view, which means that the Assessing Officer cannot step into the shoes of a business man. In our considered view, an item of expenditure has to be incurred wholly and exclusively for the purpose of business of the assessee and whether the assessee has derived any benefit from incurring such expenditure is, according to us, irrelevant consideration for the purpose of determination of ALP. There is no dispute that the brand LG is owned by LG Korea but such expenses are incurred for undertaking marketing or promoting sale of the group companies which includes the assessee. Therefore, it can be safely concluded that the same has been incurred for the purpose of the business of the assessee in ordinary course of its business. As already decided the quarrel relating to the aggregate bench marking while deciding Ground No. 4 relating to AMP expenses and the same reasoning would fully apply here also. Allocation of expenses in proportion to sale - HELD THAT - We find that the same is supported by the decision of the Hon'ble Madras High Court in the case of Manjushree Plantations Ltd 1979 (2) TMI 11 - MADRAS HIGH COURT which has been approved by the Hon'ble Apex Court in the case of Consolidated Coffee 2000 (11) TMI 136 - SUPREME COURT and also supported by the Hon'ble Delhi High Court in the case of EHPT India Pvt Ltd 2011 (12) TMI 49 - DELHI HIGH COURT Thus we do not find any merit in the transfer pricing adjustment in respect of allocation of Asian Regional Headquarter expenses and direct the Assessing Officer/TPO to delete the same. TP adjustment in respect of international transaction of payment of export commission - HELD THAT - A perusal of the additional evidence shows that the same indicates brand promotion expenses incurred by LG Korea for promoting its brand name and overseas marketing and network. The assessee has been providing access to the overseas marketing/network which is continuously developed and maintained by the AE, because of which the assessee is able to export its product in these markets. It is not in dispute that the assessee has no office set up or infrastructure outside India to undertake exports and it is also not disputed by the Revenue that the assessee is able to secure orders for exports in the overseas market through the network and basis the established brand name of LG Korea. In our considered view, the Assessing Officer shall examine the additional evidence and decide the issue afresh. Adjustment to the service warranty charges received by the assessee by apportioning a margin of 32.95% on such cost of reimbursement - HELD THAT - It is an undisputed fact that the products are imported from the AE, which is the manufacturer and, therefore, the ultimate warranty liability/cost is to be borne by manufacturing entity i.e. the AE. In such a scenario, the assessee is only acting as a pass through. The entire cost incurred in providing warranty services is reimbursed by the AE and now, such reimbursement, in our considered view, there is no basis for charging of mark-up by the assessee. We find that the facts are identical to the facts considered by this Tribunal in 2019 (2) TMI 2062 - ITAT DELHI for Assessment Year 2009-10. Therefore, considering the facts in totality, in light of the decision already taken on this issue by this Tribunal, we direct the Assessing Officer/TPO to delete the impugned adjustment. Ground No. is 8 allowed. TP adjustment in respect of international transaction of payment of design and development charges - HELD THAT - Rule 10A(d) of the Rules provides that closely linked transactions can be considered together. In light of the above discussion, we are of the considered view that it is possible to conduct combined evaluation of interlinked transactions and it is equally possible for the AE involved in the controlled transaction to undertake/provide benefit in one controlled transaction to compensate for the benefit received in the other controlled transaction. Accordingly, benefit received should be set off against the benefit provided. Clubbing of closely linked transactions has also been upheld in the case of Sony Ericsson Mobile Communications 2015 (3) TMI 580 - DELHI HIGH COURT wherein the Hon'ble Jurisdictional High Court held that clubbing of closely linked, including continuous transactions, is permissible in appropriate cases. In the same breath, the Hon'ble High Court held that once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to treat a particular expenditure as a separate international transaction. We do not find any merit in the TP adjustment in respect of international transaction of payment of design and development charges. We, accordingly, direct the Assessing Officer/TPO to delete the same. TP adjustments in respect of amount outstanding in the account of AE written off during the year under consideration - HELD THAT - Dehors whether the impugned transaction can be termed as an international transaction, the write off has to be allowed as a trading loss and also as a bad debt, as the same was given in the ordinary course of the business for purchase of monitors. We, therefore, do not find any reason in denying the write off. Further, bankruptcy certificate which is placed at pages 3414 to 3422 of the paper book Volume IX clearly shows the fact that the liabilities in the books of AE were far more than the book value of assets and the AE was not even able to pay the debt due to third-party creditors. Even assuming that the impugned transaction falls within the ambit of international transaction between two AEs, then also, the TPO is obliged under the law to determine ALP by following any one of the prescribed methods of determining the ALP as detailed in section 92C(1) of the Act. This has also been clarified by the Central Board of Direct Taxes in Instruction No. 3 of 2003 dated 20.05.2003. Facts on record show that the TPO has not applied any one of the prescribed methods in Section 92C(1) of the Act to determine ALP before disallowing the write off. In view of the above, we direct the AO/TPO to delete the impugned disallowance. Ground is, accordingly, allowed. Disallowance of salary paid to expatriates u/s 37(1) - expatriate employees work under direct control of LG Korea - HELD THAT - The only logical conclusion that can be drawn is that, such expatriates were employees of the assessee during the year under consideration and worked under the direct control and supervision of the assessee for the purpose of business of the assessee, and for such services they were paid remuneration directly by the assessee, on which tax was deducted at source as per the relevant provisions of the Act, which part has not been disputed by the revenue. The decision of the Hon'ble Supreme Court in the case of Carborandum 1977 (4) TMI 2 - SUPREME COURT squarely apply on the facts of the case, in as much, as the assessee company had taken such expatriates on its payroll on the basis of various agreements of employment, and such expatriate employees worked under the direct control of the assessee company for day to day working. The expatriates were wholly and exclusively working for the business interest of the assessee and payment of salary to such expatriates is allowable u/s 37 of the Act. We, accordingly, direct the Assessing Officer to delete the impugned addition. Ground is allowed. Treatment of sales tax subsidy as taxable revenue receipt - HELD THAT - The findings given by this Tribunal in Assessment Year 2009-10 2019 (2) TMI 2062 - ITAT DELHI as held neither the certificates issued by Greater Noida Industrial Development Authority nor the Notification issued by the State Govt. authorises the assessee to collect sales tax from its customers. The assessee has been exempted from collecting the sales tax from customers on the sales made with effect from 27th March, 1998 The assessee had included the element of sales tax in the dealers' price as a sale price of the product. In the States other than Uttar Pradesh, the sales tax so collected as a part of dealers' price has been paid to respective State Governments, whereas in the case of the assessee, since the assessee was not liable to pay sales tax, as exemption has been provided to the extent of 200 per cent of fixed capital investment, the sales tax element which is embedded in the sale price have been retained by the assessee as excess sales consideration. At the year end the assessee has allocated the sales tax element from dealer s price and has claimed the same as capital subsidy. Therefore, the collection of dealers' price has been made in the ordinary course of trading activities. When the assessee is not permitted to collect the sales tax under the notification issued by the State Govt. the collection of sales tax as a part of dealers' price is nothing but constitutes a trading receipt - Respectfully following the decision of the co-ordinate bench, Ground is dismissed. Nature of expenditure - Disallowance paid to LK Electronics Inc. Korea holding the same to be in the nature of capital expenditure - HELD THAT - This Tribunal in assessee s own case in Assessment Year 2008-09 2019 (1) TMI 1567 - ITAT DELHI AND Assessment Year 2009-10 2019 (2) TMI 2062 - ITAT DELHI direct the Assessing Officer to treat royalty payment as revenue expenditure. Disallowance of export commission paid to LG Electronics Inc. Korea holding the same to be diversion of income - HELD THAT - Respectfully following the findings of the co-ordinate bench 2019 (2) TMI 2062 - ITAT DELHI we restore this matter to the file of the Assessing Officer. The Assessing Officer is directed to consider the additional evidences and decide the same afresh after giving reasonable opportunity of being heard to the assessee. Restriction of the deduction claimed u/s 80JJAA - HELD THAT - This Tribunal in 2019 (1) TMI 1567 - ITAT DELHI and in Assessment Year 20009-10 followed in 2019 (2) TMI 2062 - ITAT DELHI has decided this issue as relying on Alom Extrusions Ltd 2009 (11) TMI 27 - SUPREME COURT held where a proviso in section is inserted to remedy unintended consequences to make section workable the proviso which supplies obvious omission therein in required to be read retrospectively in operation particularly to give effect to section as a whole. Same view was followed by the Hon'ble Supreme Court in the case of CIT Vs. Kolkata Export Company 2018 (5) TMI 356 - SUPREME COURT - we direct the Assessing Officer to allow claim of deduction u/s 80JJAA of the Act as claimed by the assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment related to Advertisement, Marketing, and Sales Promotion (AMP) Expenses.
2. Transfer Pricing Adjustment in respect of Royalty.
3. Transfer Pricing Adjustment in respect of Asian Regional Overheads Expense.
4. Transfer Pricing Adjustment of Export Commission.
5. Adjustment to Service Warranty Charges.
6. Transfer Pricing Adjustment of Payment of Design and Development Charges.
7. Transfer Pricing Adjustments for Amount Outstanding in AE Account Written Off.
8. Disallowance of Salary Paid to Expatriates.
9. Treatment of Sales Tax Subsidy.
10. Disallowance of Royalty Payment as Capital Expenditure.
11. Disallowance of Export Commission as Diversion of Income.
12. Restriction of Deduction Claimed u/s 80JJAA.
13. Levy of Interest u/s 234B, C, and D.

Detailed Analysis:
1. Transfer Pricing Adjustment related to AMP Expenses:
The Tribunal considered the AMP expenses incurred by the assessee and the TPO's application of the Bright Line Test (BLT) for benchmarking. The TPO believed that the assessee incurred AMP expenses to promote the brand of its foreign AE, leading to an adjustment of Rs. 10,44,88,67,112/-. The Tribunal, referencing previous decisions in the assessee's case and the Delhi High Court's rulings, held that AMP expenses incurred by the assessee were for its own business and not for the AE's brand promotion. The Tribunal directed the deletion of the adjustment, emphasizing that the TPO cannot benchmark AMP expenses separately when TNMM is applied on an aggregate basis.

2. Transfer Pricing Adjustment in respect of Royalty:
The Tribunal addressed the TPO's adjustment of royalty payments, which were increased from 1% to 5%. The TPO had benchmarked this using the CUP method and selected comparables, resulting in an adjustment. The Tribunal, following its earlier decisions, directed the TPO to determine the arm's length royalty rate at 4.05%, considering the comparables and the perpetual nature of the license agreement.

3. Transfer Pricing Adjustment in respect of Asian Regional Overheads Expense:
The Tribunal considered the TPO's determination of the ALP of services received from LG Electronics Singapore at NIL, questioning the benefit derived by the assessee. The Tribunal, referencing earlier decisions, held that the commercial expediency of incurring such expenses is from the assessee's perspective. The Tribunal found the allocation of expenses in proportion to sales to be justified and directed the deletion of the adjustment.

4. Transfer Pricing Adjustment of Export Commission:
The Tribunal noted that the TPO had adjusted the export commission paid by the assessee, benchmarking it against the AMP/sales ratio. The Tribunal, referencing its previous decision, remanded the issue back to the Assessing Officer for fresh adjudication after considering additional evidence provided by the assessee.

5. Adjustment to Service Warranty Charges:
The TPO had made an adjustment for reimbursement of warranty service charges, asserting that the assessee should have charged a mark-up. The Tribunal held that the assessee acted as a pass-through for warranty costs, which were reimbursed by the AE. The Tribunal directed the deletion of the adjustment, consistent with its earlier decision.

6. Transfer Pricing Adjustment of Payment of Design and Development Charges:
The TPO had determined the ALP of design and development charges at NIL, considering them covered under the royalty agreement. The Tribunal, referencing the license agreement and earlier decisions, held that the payment for design and development services was justified and directed the deletion of the adjustment.

7. Transfer Pricing Adjustments for Amount Outstanding in AE Account Written Off:
The TPO disallowed the write-off of advances paid to an AE, which went bankrupt. The Tribunal held that the write-off was a trading loss and allowable as a bad debt. The Tribunal directed the deletion of the disallowance, noting that the TPO did not apply any prescribed method to determine the ALP.

8. Disallowance of Salary Paid to Expatriates:
The AO disallowed salaries paid to expatriates, asserting they worked under LG Korea's control. The Tribunal found that the expatriates were employed by the assessee, working under its control, and the salaries were paid by the assessee. The Tribunal directed the deletion of the disallowance, referencing the Supreme Court decision in Carborandum.

9. Treatment of Sales Tax Subsidy:
The AO treated sales tax subsidies received from Maharashtra and Uttar Pradesh governments as taxable revenue receipts. The Tribunal, following its earlier decisions, upheld the AO's treatment, referencing the Tribunal's decision in the assessee's own case for previous years.

10. Disallowance of Royalty Payment as Capital Expenditure:
The AO disallowed a portion of royalty payments, treating them as capital expenditure. The Tribunal, following its earlier decisions, directed the AO to treat the royalty payments as revenue expenditure and delete the disallowance.

11. Disallowance of Export Commission as Diversion of Income:
The AO disallowed export commission paid to LG Korea, treating it as diversion of income. The Tribunal, referencing its earlier decisions, remanded the issue back to the AO for fresh adjudication after considering additional evidence provided by the assessee.

12. Restriction of Deduction Claimed u/s 80JJAA:
The AO restricted the deduction claimed u/s 80JJAA, disallowing a portion of it. The Tribunal, following its earlier decisions, directed the AO to allow the deduction as claimed by the assessee, considering the amendment to section 80JJAA as clarificatory and retrospective.

13. Levy of Interest u/s 234B, C, and D:
The Tribunal noted that the levy of interest under these sections is consequential and directed the AO to charge interest as per the provisions of law.

Conclusion:
The Tribunal's judgment extensively referenced previous decisions and judicial precedents, emphasizing consistency and adherence to established legal principles. The Tribunal directed the deletion of several transfer pricing adjustments and disallowances, remanded certain issues for fresh adjudication, and upheld the AO's treatment of sales tax subsidies. The judgment underscores the importance of consistency in judicial decisions and the application of legal principles in transfer pricing and tax assessments.