2023 (2) TMI 1326 - AT - Income Tax

Nature of expenditure - royalty expenditure - Capital or revenue expenditure - HELD THAT - DR could not place on record any order favouring revenue on this issue and conceded that it has been consistently held that royalty expenditure is revenue in nature, in favour of the assessee and against the department. DR also could not point out any contrary facts and circumstances as compared to what is already placed on record before us. Considering the fact that this issue has been consistently held in favour of the assessee on same parity of reasoning in the same set of facts and circumstances, respectfully following our order in Assessee s case ground is allowed. TP addition pertaining to development, enhancement, maintenance, protection, exploitation ( DEMPE‟) related functions - whether the assessee has performed DEMPE functions or not has to be examined and verified in detail keeping in mind the relevant clauses of the agreement entered into by the assessee? - assessee has contended T.P.O has not used any of the prescribed method to make TP adjustment. It has been further alleged that the ld. T.P.O/D.R.P has not brought anything on record to compare the alleged international transactions with comparable uncontrolled transactions to test the ALP of such transactions - HELD THAT - We in the interest of justice, the issue should be remanded back to the file of the A.O/T.P.O for re-adjudication as per law while complying with the principles of natural justice. We order accordingly. Grounds No. 1 to 8 of the appeal are allowed for statistical purposes.

Issues Involved:

1. Transfer pricing adjustment.
2. Disallowance of royalty expenditure.
3. Validity of the final assessment order.
4. Limitation of the final assessment order.
5. Levy of interest under section 234D.
6. Non-consideration of TDS credit.
7. Initiation of penalty proceedings under section 270A.

Detailed Analysis:

I. Transfer Pricing Adjustment:

1. Reference to TPO Without Proper Application of Mind:
The appellant argued that the reference to the TPO was made without proper application of mind, without recording reasons, and without valid approval, thus not in accordance with sections 92C(3)/92CA(1). The Tribunal remanded the issue back to the AO/TPO for re-adjudication as per law, emphasizing the need to comply with the principles of natural justice.

2. Upward Adjustment of INR 5,63,47,440:
The TPO made an upward adjustment based on DEMPE activities. The Tribunal noted that the TPO failed to use any prescribed method for determining the ALP and did not bring any comparable uncontrolled transactions for benchmarking. The issue was remanded back for re-examination.

3. Allegation of Performing DEMPE Functions:
The appellant contested the conclusion that it was performing DEMPE activities related to the brand. The Tribunal found that the TPO and DRP did not establish the existence of an international transaction for DEMPE functions and remanded the issue for re-adjudication.

4. Treatment of Advertisement and Marketing Expenditure as International Transaction:
The Tribunal noted that the TPO failed to demonstrate the existence of an international transaction between the appellant and its AE for DEMPE activities through advertisement and marketing expenses. The issue was remanded back for re-examination.

5. Non-Application of Prescribed Methods for DEMPE Activities:
The TPO did not apply any of the six methods prescribed under section 92C for determining the ALP for DEMPE activities. The Tribunal remanded the issue for re-adjudication using appropriate methods.

6. Application of "Other Method" for ALP Determination:
The TPO considered the "Other Method" without using any comparable uncontrolled data. The Tribunal remanded the issue for re-examination with proper application of methods and comparable data.

7. Methodology for Computing Adjustment Without Identifying Comparable Transactions:
The Tribunal found that the TPO applied a methodology without identifying comparable uncontrolled transactions and remanded the issue for re-adjudication.

8. Rejection of Combined Transaction Approach:
The TPO rejected the combined transaction approach adopted by the appellant. The Tribunal remanded the issue for re-examination.

II. Disallowance of Royalty Expenditure:

9. Royalty Expenditure Considered as Capital Expenditure:
The DRP disallowed royalty expenditure of INR 64,31,80,188, considering it as capital expenditure. The Tribunal noted that this issue had been consistently adjudicated in favor of the appellant in previous years, treating the royalty expenditure as revenue in nature. The Tribunal allowed the ground, holding that the royalty expenditure should be treated as revenue expenditure.

III. Other Grounds of Appeal:

10. Validity of Final Assessment Order:
The appellant did not press this ground during the hearing. The Tribunal dismissed it as not pressed.

11. Limitation of Final Assessment Order:
The appellant did not press this ground during the hearing. The Tribunal dismissed it as not pressed.

12. Levy of Interest Under Section 234D:
This ground was noted as consequential by the Tribunal.

13. Non-Consideration of TDS Credit:
The Tribunal remanded this ground back to the AO/TPO for verification.

14. Initiation of Penalty Proceedings Under Section 270A:
The Tribunal noted this ground as premature.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remanded back for re-adjudication and verification. The Tribunal emphasized the need for proper application of methods and compliance with natural justice principles.

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