2023 (4) TMI 617 - AT - Income Tax

TP Adjustment - Adjustment on AMP expenses - HELD THAT - When the TPO has not rejected the gross margin and the net margin of the assessee in the trading segment separate TP adjustment on AMP expenses is not called for. Therefore we delete the TP adjustment proposed by the TPO under the AMP segment. TP adjustment on BSS Segment - Comparable selection - Majestic Research Services Solutions Limited Company is functionally not compatible with that of the Assessee as the company is engaged in the business of providing marketing research services and offers wide range of qualitative and quantitative research services. Scarecrow Communications Limited - Since the Tribunal has excluded this company as comparable for assessment year 2016-2017 and the profile is same for the relevant assessment year namely A.Y. 2017-2018 which has been even accepted by the TPO the above company needs to be excluded from the comparable list. Pressman Advertising Limited - We find that the assessee s main stream of revenue is for providing services pertaining to advertisement on radio television and public relation. The same prima facie cannot be compared with the profile of the assessee s business support services. Since the matter needs fresh examination we restore the issue to the AO / TPO to consider whether Pressman Advertising Limited s profile is the same as that of the assessee.

Summary

Issues Involved:
1. Validity of the reference to the Transfer Pricing Officer (TPO) and the motive of tax evasion.
2. Transfer Pricing (TP) adjustment related to Advertisement, Marketing, and Promotion (AMP) expenses.
3. TP adjustment related to Business Support Services (BSS) segment.
4. Levy of interest under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Validity of Reference to TPO and Motive of Tax Evasion:
The assessee argued that the reference to the TPO for determining the Arm's Length Price (ALP) of international transactions was made without demonstrating the necessity and expediency, and without proving any motive for tax evasion. The Tribunal did not specifically adjudicate this issue as it was not pressed by the assessee during the hearing.

2. TP Adjustment on AMP Segment:
The primary contention was regarding the TP adjustment of Rs. 27,32,19,909 towards AMP expenses. The assessee argued that AMP expenses were incurred with third parties and not with the Associated Enterprise (AE), and thus, should not be considered an international transaction. It was also argued that inappropriate comparables were selected and that the premium profits in the distribution segment compensated for any excess AMP expenses.

The Tribunal noted that the issue was identical to the assessee's own case for the assessment years 2015-2016 and 2016-2017, where it was held that when the net profit margin is tested under the Transactional Net Margin Method (TNMM), it presupposes that various components of income and expenditure are at arm's length. The Tribunal relied on the Delhi High Court's decision in Sony Ericsson Mobile Communication India Private Limited, which stated that once TNMM is adopted, AMP expenses should not be treated as a separate international transaction. Consequently, the Tribunal deleted the TP adjustment proposed by the TPO under the AMP segment.

3. TP Adjustment on BSS Segment:
The assessee contested the inclusion of certain comparables, namely Majestic Research Services & Solutions Limited, Scarecrow Communications Limited, and Pressman Advertising Limited, for computing ALP in the BSS segment.

- Majestic Research Services & Solutions Limited: The Tribunal found that this company was functionally incompatible with the assessee as it was engaged in market research services. This company was excluded from the comparable list based on the Tribunal's decision in the assessee's own case for the assessment year 2016-2017.

- Scarecrow Communications Limited: The Tribunal noted that this company provided advertisement services on radio, television, and public relations, which were different from the business support services rendered by the assessee. This company was also excluded based on the Tribunal's earlier decision in the assessee's own case for the assessment year 2016-2017.

- Pressman Advertising Limited: The Tribunal observed that this company was engaged in providing advertisement services on radio, television, and public relations, which were prima facie different from the assessee's business support services. The matter was remanded to the AO/TPO for fresh examination to determine whether the profile of Pressman Advertising Limited was comparable to that of the assessee.

4. Levy of Interest under Sections 234B and 234C:
The assessee contended that the interest levied under sections 234B and 234C amounting to Rs. 6,73,97,432 and Rs. 27,26,185, respectively, was not leviable as it was consequential in nature. The Tribunal did not specifically address this issue in the detailed analysis.

Conclusion:
The appeal was partly allowed. The Tribunal deleted the TP adjustment under the AMP segment and directed the exclusion of Majestic Research Services & Solutions Limited and Scarecrow Communications Limited from the comparables list for the BSS segment. The issue regarding Pressman Advertising Limited was remanded for fresh examination.