2014 (12) TMI 560 - AT - Income Tax

Transfer pricing adjustment AMP expenses disallowed Commission on sales, sales discount and sales promotion expenses need to be excluded from the AMP expenses or not Held that - The assessee incurred an expenditure of ₹ 12,39,19,327 - As per the assessee s claim it was 4.46% of the sales - the TPO considering the 6 companies was of the view that the expenditure was in excess of the bright line by 1.87% which was considered to be for promotion of brand/trade name which was owned by the AE for which suitable the assessee was required to be compensated by the AE, accordingly a markup of 15% was applied - This resulted in an adjustment of ₹ 8,27,61,669/-. The action was upheld by the DRP as decided in LG Electronics India Pvt. Ltd., Versus ACIT, Circle-3, Noida 2014 (12) TMI 437 - ITAT DELHI the matter is to be remitted back to the TPO to pass a speaking order in accordance with law taking into consideration the principles laid down by the Special Bench in L.G. Electronics case Decided in favour of assessee. Determination of ALP International transaction of payment of Royalty on exports made to AE Held that - As decided in M/s Hero MotoCorp Limited Versus Additional Commissioner of Income tax 2013 (9) TMI 796 - ITAT DELHI - the payment of royalty and the export commission are for two different purposes - the motorcycles which were exported by the assessee, were manufactured by using the technical know-how provided by HMCL under the technical know-how agreement - Therefore, royalty is payable on such manufacturing of goods - the export sale value was more than the domestic sale rate and the assessee has given a detailed working, which is enclosed with this order in the form of Annexure-I - the assessee has reduced the export commission - by export to the AE of Honda Japan, the assessee has been benefited and was not at a loss - The further finding of the TPO that the position of the assessee company with regard to export was that of a contract manufacturer is without any basis and in fact contrary to the facts on record - thus, there is no justification for disallowance of the royalty on the export thus, the order of the TPO is directed to consider the claim of the assessee that the Agreement entered into by the assessee with the AE is similar to the Agreement entered into by the sister concern with the AE in as much as the terms and conditions impacting the issue are materially similar Decided in favour of assessee. Corporate Tax matters Royalty amount and technical assistance fee disallowed Held that - as decided in assessee s own case for the earlier assessment year, it has been held that the DRP refused to interfere on the reasoning that the issue was still alive as a result thereof the relief granted in appeal in 2007-08 assessment year by the First Appellate Authority was not followed in assessee s own case it has been held that the comparative clauses based on the agreement in the case of the assessee and its sister concern were pari materia and consequently the payments were revenue in nature Decided in favour of assessee. Export commission paid to M/s Honda Motor Co. Ltd. of Japan disallowed u/s 40(a)(i) TDS to be deducted on royalty/fee for technical service u/s 195 or not Held that - as decided in assessee s own case for the earlier assessment year, it has been held that the technical collaboration agreement are pari materia in the case of the assessee, the export commission was neither royalty nor fees for technical services and as such the assessee was not required to deduct tax at source payment of export fee and thus once the assessee was not required to deduct the tax at source the occasion to consider failure to deduct the same does not arise - the export commission has been paid for the business purposes of the assessee the additions made u/s 40(a)(i) is set aside Decided in favour of assessee.

Issues Involved:
1. Validity of the assessment order under Sections 143(3) and 144C.
2. Transfer Pricing adjustments related to Arm's Length Price (ALP) of international transactions.
3. Transfer Pricing adjustments related to Advertisement, Marketing, and Sales Promotion (AMP) expenses.
4. Arm's Length Price of royalty payments for exports to associated enterprises.
5. Classification of royalty and technical guidance fee as capital or revenue expenditure.
6. Disallowance of export commission under Section 40(a)(i) due to non-deduction of tax at source.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order framed by the Assessing Officer (AO) under Section 143(3) read with Section 144C, claiming it was "bad in law, violative of principles of natural justice and void ab-initio." The AO computed the income of the appellant at Rs. 55,57,99,420 against the returned total income of Rs. 37,15,72,026.

2. Transfer Pricing Adjustments - ALP of International Transactions:
The AO made an addition of Rs. 9,81,11,429 due to alleged differences in the arm's length price of international transactions. The assessee contended that the adjustments were not justified and requested the matter be restored to the Transfer Pricing Officer (TPO) for reconsideration in light of judicial precedents, including the Special Bench decision in the case of L.G. Electronics.

3. Transfer Pricing Adjustments - AMP Expenses:
The AO made a transfer pricing adjustment of Rs. 8,27,61,669 related to AMP expenses. The assessee argued that these expenses were not international transactions under Section 92B and should not be subject to transfer pricing adjustments. The AO used the Bright Line Test (BLT) to deem an international transaction, which the assessee contended was not a prescribed method under Section 92C. The Tribunal restored the issue to the TPO to apply principles laid down by the Special Bench in the L.G. Electronics case and consider any modifications by the Jurisdictional High Court in the Canon India Pvt. Ltd. case.

4. Arm's Length Price of Royalty Payments:
The AO held that the arm's length price of international transactions of royalty payments on exports to associated enterprises was nil, treating the assessee as a contract manufacturer. The assessee argued that it acted on a principal-to-principal basis and that the royalty payments were justified. The Tribunal directed the TPO to reconsider the issue, taking into account the terms of the agreement and the decision in the case of the sister concern, Hero Motorcorp Ltd. vs. ACIT.

5. Classification of Royalty and Technical Guidance Fee:
The AO disallowed royalty and technical guidance fee payments, treating them as capital expenditure. The assessee argued that these payments were revenue in nature, citing a similar case with its sister concern, Hero Honda Motors Ltd. The Tribunal, following its earlier decision in the assessee's own case for the 2007-08 assessment year, held that the payments were revenue in nature and allowed the ground.

6. Disallowance of Export Commission:
The AO disallowed export commission paid to Honda Motor Co. Ltd., Japan, under Section 40(a)(i), treating it as royalty/fee for technical services on which tax was not deducted at source. The assessee contended that the payment was not royalty or fee for technical services and did not accrue income in India. The Tribunal, following its earlier decision in the assessee's own case, held that the export commission was neither royalty nor fee for technical services and directed the deletion of the addition.

Conclusion:
The Tribunal partly allowed the appeal, restoring specific issues to the TPO for reconsideration and following its earlier decisions in the assessee's own case and similar cases involving its sister concern. The order emphasized the need for a detailed examination of agreements and judicial precedents to ensure a fair and lawful assessment.

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