2017 (5) TMI 1305 - AT - Income Tax

Determining the ALP of AMP expenses - Held that - We set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judicial position, after allowing a reasonable opportunity of being heard to the assessee. A bare perusal of the mandate of Rule 10B(1)(c) postulates under sub-clause (ii) that the amount of a normal gross profit mark-up to such costs, in a comparable uncontrolled transaction is determined. Such gross profit mark-up of comparable uncontrolled transactions is adjusted under sub-clause (iii) to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions. Thus, it is vivid that it is the adjusted gross profit mark up of the comparables which is applied to the direct and indirect cost incurred by the assessee in respect of international transaction, for determining the ALP under Cost Plus Method and there is no mandate for considering the assessee s own gross profit rate for this purpose. We, therefore, do not countenance the working done by the TPO in this regard. To sum up, the impugned order on this score is set aside and the matter is sent back to the TPO/AO for a fresh determination of the ALP of AMP expenses. - Decided in favour of assessee for statistical purposes. Denial of deduction u/s 80IC - quantification of income for the purpose of granting deduction u/s 80-IC - Held that - The issue of quantification of deduction u/s 80IC has not attained finality in at least the immediately preceding three assessment years. In the absence of any decision on such issue for the earlier years, it is not possible to independently evaluate and examine the issue in the instant appeal. Under these circumstances, we set aside the impugned order on this score and remit the matter to the file of the Assessing Officer for a de novo determination of the amount eligible for deduction u/s 80IC of the Act. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.- Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Addition on account of transfer pricing adjustment related to advertising, marketing, and promotion (AMP) expenses.
2. Denial of deduction under section 80IC of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for AMP Expenses:
The primary issue in this appeal is the addition of ?308.19 crore by the Assessing Officer (AO) on account of transfer pricing adjustment related to AMP expenses. The assessee, a subsidiary engaged in manufacturing confectionary products, reported international transactions, including AMP expenses and royalty payments to its associated enterprises (AE). The Transfer Pricing Officer (TPO) determined that the AMP expenses constituted an international transaction and proposed adjustments using the bright line test and Cost plus method.

The Dispute Resolution Panel (DRP) upheld the TPO’s adjustments but suggested AMP intensity adjustment if higher judicial forums did not approve the TP adjustment. The AO, in the final order, made an addition of ?308.19 crore based on the TPO’s substantive adjustment.

The assessee contended that AMP expenses are not an international transaction, citing judgments from the Delhi High Court in Maruti Suzuki India Ltd. and Whirlpool of India Ltd. Conversely, the Department relied on the Delhi High Court’s judgment in Sony Ericson Mobile Communications (India) Pvt. Ltd., which held AMP expenses as an international transaction.

The Tribunal noted that several judgments on the issue had emerged since the TPO’s order. The Tribunal directed a fresh determination of the ALP of AMP expenses by the TPO/AO, considering the entirety of the judicial position. The Tribunal also highlighted that similar issues were restored to the TPO/AO for fresh consideration in the assessee’s own case for preceding assessment years.

The Tribunal clarified that if AMP expenses are determined to be an international transaction, the ALP should not be computed using the bright line test. If the Cost plus method is applied, selling expenses should be excluded from AMP expenses, and the normal gross profit mark-up of comparable uncontrolled transactions should be used instead of the assessee’s own gross profit rate.

2. Denial of Deduction under Section 80IC:
The second issue involves the denial of deduction under section 80IC, amounting to ?132.95 crore. The AO observed discrepancies in the assessee’s profit declarations from eligible and non-eligible units and opined that profits were shifted to the eligible unit. Consequently, the AO refused the deduction and apportioned the income based on turnover ratios.

The Tribunal noted that the eligibility condition for deduction under section 80IC was not disputed. The Tribunal also observed that the issue of quantification of deduction under section 80IC had not attained finality in the preceding assessment years due to ongoing appeals and revisions.

Given the lack of a final decision on the quantification issue in earlier years, the Tribunal set aside the impugned order and remitted the matter to the AO for a de novo determination of the eligible deduction amount under section 80IC, ensuring a reasonable opportunity of hearing for the assessee.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing fresh determinations on both the transfer pricing adjustment for AMP expenses and the quantification of deduction under section 80IC. The order was pronounced in the open court on 24.05.2017.

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