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2021 (8) TMI 1423 - AT - Income TaxAddition on account of difference in ALP of international transactions of payment of trademark fee entered into by the assessee with its Associated Enterprise ( AE ) in USA - HELD THAT - There is no change into the facts and circumstances of the case in the present year. Therefore, taking a consistent view, we hereby direct the Assessing Officer to delete the addition in the light of decisions of the Tribunal pertaining to Assessment Years 2007-08 to 2009-10 2016 (7) TMI 21 - ITAT DELHI 2011-12 to 2012-13 2018 (1) TMI 1716 - ITAT DELHI and 2014-15 2019 (2) TMI 2111 - ITAT DELHI in assessee s own case wherein concluded that there exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities. The Hon'ble Delhi High Court in CIT v. Cushman Wakefield (India) (P.) Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. Accordingly,nwe are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm s length applying TNMM as the most appropriate method. Thus, direct the assessing officer to delete the adjustment on this account. Adhoc disallowance being 30% of the total expenditure incurred by the assessee on advertisement and publicity - assessee was show-caused as to why the expenditure incurred on advertisement should not be disallowed being in nature of brand building activity - HELD THAT - We find that the similar issues arose in earlier years as well and the Tribunal was pleased to decide the issue in favour of the assessee 2019 (2) TMI 2111 - ITAT DELHI held that the advertisement expenditure incurred by the assessee is incurred wholly for the purpose of its business and profession and ought to be allowed deduction in entirety. AO has clearly made an ad-hoc disallowance of advertisement expenditure incurred by the assessee, which is not permissible under the law. We are of the considered view that AO was not justified in making such ad-hoc disallowances and therefore, direct the assessing officer to delete the adjustment on this account - Decided in favour of assessee.
Issues Involved:
1. Legality of the assessment order under Section 143(3) read with Section 144C of the Income Tax Act, 1961. 2. Addition of Rs. 10,07,80,000 on account of difference in Arm's Length Price (ALP) of international transactions for payment of trademark fee. 3. Adhoc disallowance of Rs. 3,52,33,953 being 30% of the total expenditure on advertisement and publicity. 4. Levying of interest under Section 234B of the Income Tax Act. Issue-wise Detailed Analysis: 1. Legality of the Assessment Order: The assessee contended that the assessment order framed by the Assessing Officer (AO) under Section 143(3) read with Section 144C of the Income Tax Act, 1961, was bad in law and unsustainable. However, the Tribunal noted that Ground Nos. 1 & 1.1 were general in nature and did not require adjudication. 2. Addition of Rs. 10,07,80,000 on Account of Difference in Arm's Length Price (ALP): The assessee challenged the addition of Rs. 10,07,80,000 made on account of the difference in ALP of international transactions for payment of trademark fee to its Associated Enterprise (AE), the Goodyear Tire & Rubber Company, USA. The Transfer Pricing Officer (TPO) had determined the ALP of the trademark fee as NIL, which was upheld by the Dispute Resolution Panel (DRP). The Tribunal observed that the issue was covered in favour of the assessee in the earlier years. The Tribunal referred to its previous decisions in ITA Nos. 5650/Del/2011, 6240/Del/2012, and 916/Del/2014, where it was held that the royalty payments were closely linked to the manufacturing segment and were essential for the appellant's business operations. The Tribunal emphasized that the royalty payments could not be evaluated separately and that the entire business model was based on the licenses granted by the AE. The Tribunal also noted that the TPO's contention that the Goodyear brand was weak and did not require payment of royalty was not supported by evidence. The Tribunal concluded that the payment of royalty had a direct nexus with the revenue earned by the assessee and could not be analyzed in isolation. Accordingly, the Tribunal directed the AO to delete the addition of Rs. 10,07,80,000. 3. Adhoc Disallowance of Rs. 3,52,33,953 on Advertisement and Publicity Expenditure: The assessee challenged the adhoc disallowance of Rs. 3,52,33,953, being 30% of the total expenditure on advertisement and publicity. The AO had disallowed this expenditure, claiming it was in the nature of brand building activity for the AE. The Tribunal noted that the issue was covered in favour of the assessee in the earlier years. The Tribunal referred to its previous decisions in ITA Nos. 1516/Del/2015, 1004/Del/2016, and 1706/Del/2017, where it was held that the advertisement expenditure was incurred wholly for the purpose of the assessee's business and should be allowed in entirety. The Tribunal emphasized that the AO had made an adhoc disallowance without any specific reason, which was not permissible under law. The Tribunal concluded that the expenditure on advertisement and publicity was incurred for the benefit of the assessee and not its AE. Therefore, the Tribunal directed the AO to delete the adhoc disallowance of Rs. 3,52,33,953. 4. Levying of Interest under Section 234B: The assessee challenged the levy of interest under Section 234B of the Income Tax Act. The Tribunal noted that this issue was consequential in nature and held accordingly. Conclusion: The Tribunal allowed the appeal of the assessee, directing the AO to delete the addition of Rs. 10,07,80,000 on account of the difference in ALP and the adhoc disallowance of Rs. 3,52,33,953 on advertisement and publicity expenditure. The Tribunal also held that the issue of levying interest under Section 234B was consequential. The decision was pronounced on 11th August 2021.
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