2018 (9) TMI 140 - AT - Income Tax

TPA - jurisdiction of the TPO to determine ALP of an international transaction and not to re-characterize transaction as an international transaction - Held that - Any transfer pricing issue can be taken up by the TPO as the same is referred to the TPO by the Assessing Officer as per sub-section 1 of Section 92CA of the Act. In fact, sub-section 2 of Section 92CA itself is clear in that respect that where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm s length price in relation to the international transaction or specified domestic transaction referred to in sub-section (1) of the Act. Thus, Ground No. 3 is dismissed. Non-existence of international transaction - no creation of marketing intangible in favour of AE - non rendition of any brand building services. - AR submitted that existence of an international transaction is sine qua non to invoke the provisions of transfer pricing - Held that - This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee Ita with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural justice. Ground No. 4, 5 and 6 of the assessee s appeal are partly allowed for statistical purpose. AMP expenditure not amenable to Chapter X - selection of MAM - wrong application of Bright Line Test by the AO/DRP/TPO - Held that - since the main issue of AMP is remanded back to the file of the TPO/AO it will be appropriate to send this issue to the file of TPO/AO as well Exclusion of direct selling and distribution expenses along with subsidy from ambit of AMP expenditure - Held that - As read with the subsequent directions of the Hon ble Delhi High Court in Assessee s own case i.e. judgment in batch of cases of Sony Ericsson 2016 (1) TMI 1234 - DELHI HIGH COURT case, the TPO should be directed to exclude Trade discount, commission and special purpose subsidy from the ambit of the AMP expenditure. Thus, following the order of the Tribunal for A.Y. 2006- 07 to 2008-09 read with the subsequent directions of the Hon ble Delhi High Court in Assessee s own case, it will be appropriate to direct the TPO to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the AMP expenditure, as given in the tabulated form hereinabove after verifying the same in accordance with the records available with the TPO/AO. Unutilized subsidy required to be recognized as income of the Assessee in the year of its receipt - Held that - As decided in assessee s own case 2013 (7) TMI 380 - ITAT DELHI we are unable to accept the Revenue s contention that the unutilized subsidy is required to be recognized as income of the Assessee in the year of its receipt. This would be contrary to the matching concept, which is the substratal principle for computing income during a relevant period - where an Assessee follows the Accrual/Mercantile system of Accounting - as in this case - income can be recognized only when the matching expenditure is also accounted for irrespective of the cash outflows/inflows during the year. It would thus, not be correct to recognize the subsidies received for incurring specific expenditure as income without accounting for the corresponding expenditure. Claim of prepaid taxes and foreign tax credit claimed - Held that - From the records it can been seen that the Assessing Officer has not allowed credit of pre-paid taxes to the assessee which should have been taken into consideration. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer. Thus, this issue is remanded back to the file of the Assessing Officer.

Issues Involved:
1. Transfer Pricing Grounds
2. Corporate Tax Grounds
3. Jurisdiction of the TPO
4. Non-existence of International Transaction
5. Application of Bright Line Test (BLT)
6. Exclusion of Selling and Distribution Expenses
7. Profit Split Method (PSM) for Benchmarking
8. Aggregated Approach for Benchmarking
9. Quantitative Adjustments
10. Credit of Prepaid Taxes and Foreign Tax Credit
11. Set-off of Brought Forward Losses
12. Deduction under Chapter VI-A
13. Charging of Interest under Sections 234B and 234D
14. Computational Errors
15. Initiation of Penalty Proceedings

Detailed Analysis:

1. Transfer Pricing Grounds:
The Assessee challenged the adjustments made by the AO/DRP/TPO regarding the alleged international transaction of excess AMP expenditure, arguing that it was not at arm's length. The AO used the Bright Line Test, which is not a prescribed method under Indian TP regulations. The Tribunal remanded the issue back to the TPO/AO for verification in light of agreements signed by the Assessee with its AEs.

2. Corporate Tax Grounds:
The Assessee contested the addition of unutilized subsidy received from Canon Singapore Pte. Ltd., arguing it should not be treated as revenue receipt. The Tribunal, referencing earlier decisions, ruled in favor of the Assessee, stating the unutilized subsidy is a current liability and not income.

3. Jurisdiction of the TPO:
The Assessee argued that the TPO does not have the jurisdiction to determine the character of a transaction as an international transaction. The Tribunal dismissed this ground, stating that the TPO can take up any transfer pricing issue referred by the AO as per Section 92CA of the Act.

4. Non-existence of International Transaction:
The Assessee contended that the AMP expenditure does not qualify as an international transaction. The Tribunal remanded the issue back to the TPO/AO for verification, directing them to examine the agreements signed by the Assessee with its AEs.

5. Application of Bright Line Test (BLT):
The Assessee argued against the use of BLT for benchmarking AMP expenditure, citing several judicial pronouncements that have held BLT to be ultra-vires the provisions of the Act. The Tribunal remanded this issue back to the TPO/AO for reconsideration.

6. Exclusion of Selling and Distribution Expenses:
The Assessee argued that trade discounts, commission, and other sales-related expenses should be excluded from AMP expenditure. The Tribunal directed the TPO/AO to exclude these expenses from the ambit of AMP expenditure, following earlier Tribunal and High Court decisions.

7. Profit Split Method (PSM) for Benchmarking:
The Assessee contended that the TPO incorrectly applied PSM for benchmarking the alleged international transaction of brand building services. The Tribunal remanded this issue back to the TPO/AO for reconsideration, stating that the main issue of AMP is also remanded back.

8. Aggregated Approach for Benchmarking:
The Assessee argued for an aggregated approach for benchmarking distribution and marketing functions. The Tribunal dismissed this ground, stating it becomes infructuous as the main issue of AMP is remanded back.

9. Quantitative Adjustments:
The Assessee's ground regarding quantitative adjustments was dismissed as academic, given the remand of the main AMP issue.

10. Credit of Prepaid Taxes and Foreign Tax Credit:
The Assessee argued that the AO did not allow the entire credit of prepaid taxes and foreign tax credit. The Tribunal remanded this issue back to the AO for verification and proper consideration.

11. Set-off of Brought Forward Losses:
The Assessee contended that the AO did not allow the set-off of brought forward losses. The Tribunal remanded this issue back to the AO for verification and reconsideration.

12. Deduction under Chapter VI-A:
The Assessee argued that the AO did not allow the deduction under Chapter VI-A. The Tribunal remanded this issue back to the AO for verification and reconsideration.

13. Charging of Interest under Sections 234B and 234D:
The Tribunal dismissed the grounds related to the charging of interest under Sections 234B and 234D as consequential.

14. Computational Errors:
The Tribunal dismissed the ground related to computational errors as consequential.

15. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(C) as consequential.

Separate Judgments:
The Tribunal delivered a comprehensive judgment covering multiple appeals and issues, remanding several matters back to the TPO/AO for verification and reconsideration, while dismissing others as academic or consequential.

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