2018 (12) TMI 277 - AT - Income Tax

TPA on AMP computed by the TPO using BLT - whether at all by incurring of higher AMP expenses, a conclusion can be reached that it is an international transaction which warrants determination of Arm s Length Price? - Held that - The onus is on the Revenue to show that the twin requirement of Section 92B exists, that is, firstly, the transaction involved was between the AE, one of which is resident and other a non-resident was involved; and secondly, the transaction of AMP expenses has taken place between the two AEs Here in this case this is not in dispute that no transfer of any unique intangibles has been made accept for license to use trademark which too was royalty free. According to the Rule, under the PSM, combined net profit of the AEs arising from the international transaction has to be determined and thereafter, if incurrence of AMP expenses is to be considered from the value of such international transaction then the combined profit has to be determined from the value of such international transaction. No FAR analysis of AE has been carried out or even demonstrated that any kind of profit has been derived by the AE from the AMP expenses incurred in India. Otherwise also, the profit earned on account of AMP expenses incurred by the assessee by way of economic exploitation of the trademark/brand in India already stands captured in the profit and loss account for the assessee company and the same has duly offered to tax and hence there was no logic to compute or make any Transfer Pricing Adjustment on this score. TPO has followed the same reasoning in the Assessment Year 2013-14 also, but the DRP did not find any substance in the TPO s approach and directed the application of Other Method as prescribed under Rules as against the application of PSM. By applying Other Method , adjustment had been made by comparing the AMP/sales ratio of the US parent AE with that of the assessee company and thereafter the DRP has considered the excessive AMP spent by the assessee company as a Transfer Pricing Adjustment. The only difference between the earlier approach of the TPO and the approach adopted by the DRP is that, earlier TPO compared the AMP/sales of the party, i.e., the assessee with that of the third party and now the DRP compares the AMP/sales of the assessee company with that of the parent AE. In our opinion, even the Other Method has been incorrectly implied for the sake of ready reference Rule 10AB which provides that that Other Method shall be any method which takes into account the price which had been charged or paid for the same or similar uncontrolled transaction with or between non-associated enterprises under similar circumstances. Comparison of the AMP over sales ratio of the assessee with the AMP ratio of Pepsi Co Group on a worldwide basis was nothing but a distorted version of the BLT. We hold that in none of the years impugned before us, the AMP adjustment made by the TPO/Assessing Officer can be sustained and accordingly, same is directed to be deleted. Transfer Pricing Adjustment pertaining to the IT support services segment - AO/TPO have made a Transfer Pricing Adjustment in the IT Support Services Segment by recharacterizing the assessee, who is back-end service provider, as a software developer - Held that - In view of the above, grounds pertaining to incorrect characterization of the functional profile of the assessee, do not require adjudication at this stage, hence same is dismissed. Transfer Pricing Adjustment on account of receivables - Held that - Once, no interest has been charged on receivables from unrelated parties, then to allege that assessee is conforming any benefit to its AE by not charging the interest on its outstanding receivable would not be correct under the Arm s Length scenario, because here in this case in a comparability analysis of both control and uncontrol transaction, no benefit has arisen from delay in trade receivables from the AE. Now it is quite well settled proposition in the wake of various judicial pronouncements as has been relied upon by the learned counsel that, when there is a complete uniformity in the act of the assessee in not charging interest from both AEs and non AEs debtors for delay in realization of export proceeds then Assessing Officer/TPO cannot make addition on account of notional interest on delay receivables, because similar credit period of given to both related and unrelated parties. Hence, no adjustment should be called for. Accordingly, we hold that no adjustment on account of notional interest is warranted. Disallowance of Price Support given to Bottlers - Held that - Assessing Officer concededly adopted the same characteristic to all parties related and unrelated as to the prevailing and local market conditions. There may be several reasons why an Assessee or a commercial venture might be compelled to provide discounts/price support etc. for ensuring the marketability of its product at the price that they proposes. Having regard to these, the method of averaging, to say the least, is illegal Respectfully following the binding precedence on the same issue rendered in the earlier years in assessee s own case which has been upheld by the Hon ble Delhi High Court also as incorporated above, we decide this issue in favour of the assessee. Disallowance of sponsorship fees paid by the assessee to ICC - whether the decision taken by the assessee for paying sponsorship fees was for the purpose of business or not? - Held that - Here in this case, the commercial expediency has not been doubted but rather it has been held by the AO that in all the years transfer pricing adjustments has been made on this score and benefit is arising to the other AEs also. What is relevant for an expense to be allowable as revenue expense is that, whether it has been incurred during the course of business and is for the purpose of business. Benefit factor to other related parties is relevant under transfer pricing provision and not while allowability of business expense u/s 37(1). It is well known fact that companies use sports event as a platform to advertise their range of products as it has a very high viewership. Any such incurring of expenditure is ostensibly for promotion of business only and hence, no disallowance is called for. Disallowance under section 14A - Held that - It is only when the assessee is able to substantiate its claim from the nature of exempt income from the investments made and having regard to accounts maintained and the nature of expenditure debited that nothing is attributable for the earning of exempt income, the onus stands discharged. If assessee is able to demonstrate its claim, then onus shifts upon the Assessing Officer, who has to then examine the nature of accounts and having regard to such accounts maintained, he has to record his satisfaction that assessee s claim is not correct before proceeding to make the disallowance u/s.14A. Thus, contention of the learned counsel cannot be accepted under the facts and circumstances of the case. Accordingly, Assessing Officer is directed to compute the disallowance in view of the aforesaid direction. Subsidy received by the assessee from the subsidy received under the West Bengal Incentive Scheme of 2004 - capital or revenue receipt - Held that - Merely because here in this case the quantification of subsidy was based on reimbursement of sales tax, it does not meant that it is a revenue receipt. This view now is well supported by the various decisions as noted above that character of subsidy in the hands of the assessee is the determinative factor having regard to the purpose for which subsidy was given. Accordingly, we hold that the subsidy received by the assessee from the subsidy received under the West Bengal Incentive Scheme of 2004 is capital in nature and cannot be taxed as revenue receipts. Thus, this issue is decided in favour of the assessee. Levy of interest under section 234A and 234B - Held that - In the instant case, the assessee had deposited advance tax amounting to ₹ 64,20,00,000/-. The assessee had filed an application before the AO for rectification of mistakes apparent from his order and pursuant to his order on such, the amount of assessed tax stood at INR 70,97,80,046. Since, the amount of advance tax deposited was greater than 90% of the assessed tax, no interest under Section 234B of the Act could have been levied. In view of the aforesaid facts submitted by the assessee, we direct the AO to verify the claim of the assessee and re-compute the interest leviable under section 234A/ 234B of the Act in as per law. Credit of tax deduction at source (TDS), advance tax and self-assessment tax not given - Now as a result of the amalgamation order by the Hon ble High Court, the group companies ceased to exist from 01.04.2010 onwards and could not be regarded as a legal entity for F.Y. 2010-11 and onwards - Held that - We direct the AO to verify the claim of the assessee and allow the credit of taxes in accordance with the directions contained herein and as per law.

Summary

Issues Involved:

1. AMP adjustment using BLT.
2. Addition on account of Price Support given to Bottlers.
3. Addition on account of un-utilized MODVAT credit.
4. Initiation of penalty proceedings under section 271(1)(c).
5. Addition on account of un-utilized CENVAT credit.
6. Adjustment to book profit under section 115JB.
7. Transfer Pricing adjustment of AMP expenses.
8. Disallowance of sponsorship fees paid to ICC.
9. Wrongful levy of interest under section 234A, 234B, and 234D.
10. Disallowance under section 14A.
11. Addition on account of IPA Subsidy.
12. Adjustment on account of receivables.
13. Credit of tax deduction at source (TDS), advance tax, and self-assessment tax.

Detailed Analysis:

1. AMP Adjustment Using BLT:
The assessee challenged the AMP adjustment computed by the TPO using the Bright Line Test (BLT). The Tribunal found that the TPO's application of BLT was incorrect and not in accordance with the settled legal position. The Tribunal held that the AMP expenditure incurred by the assessee did not fall within the ambit of "international transaction" under Section 92B. The Tribunal emphasized that the onus was on the Revenue to demonstrate the existence of an arrangement between the assessee and its AE for incurring AMP expenses, which the Revenue failed to do. Consequently, the AMP adjustments made by the TPO were deleted.

2. Addition on Account of Price Support Given to Bottlers:
The assessee challenged the addition made by the AO on account of Price Support given to Bottlers. The Tribunal noted that the issue was already decided in favor of the assessee in earlier years, which was affirmed by the Hon'ble High Court. The Tribunal reiterated that the AO's method of averaging the percentage of price support was unfounded and not legally sustainable. Therefore, the additions on account of Price Support were deleted.

3. Addition on Account of Un-utilized MODVAT Credit:
The assessee did not press this ground, and hence, the Tribunal did not adjudicate on this issue.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The grounds pertaining to the initiation of penalty proceedings under section 271(1)(c) were deemed consequential in nature and were not adjudicated at this stage.

5. Addition on Account of Un-utilized CENVAT Credit:
The assessee did not press this ground, and hence, the Tribunal did not adjudicate on this issue.

6. Adjustment to Book Profit under Section 115JB:
The assessee did not press this ground, and hence, the Tribunal did not adjudicate on this issue.

7. Transfer Pricing Adjustment of AMP Expenses:
The Tribunal held that the AMP expenses incurred by the assessee did not constitute an international transaction requiring separate benchmarking. The Tribunal emphasized that the Revenue failed to prove any arrangement or understanding between the assessee and its AE regarding AMP expenses. Consequently, the AMP adjustments made by the TPO were deleted.

8. Disallowance of Sponsorship Fees Paid to ICC:
The assessee challenged the disallowance of sponsorship fees paid to ICC. The Tribunal held that the expenditure was incurred wholly and exclusively for the purpose of the assessee's business and any incidental benefit to other entities could not bar the allowance of the expenditure under section 37. Therefore, the disallowance was deleted.

9. Wrongful Levy of Interest under Section 234A, 234B, and 234D:
The Tribunal directed the AO to verify the assessee's claim regarding the filing of the return within the due date and the payment of advance tax exceeding 90% of the assessed tax. The AO was instructed to recompute the interest under sections 234A and 234B as per law.

10. Disallowance under Section 14A:
The Tribunal directed the AO to compute the disallowance under section 14A by considering only those investments that yielded exempt income during the year, following the judicial precedent set by the Hon'ble Delhi High Court and the Special Bench of the Tribunal.

11. Addition on Account of IPA Subsidy:
The Tribunal held that the subsidy received by the assessee under the West Bengal Incentive Scheme, 2004, was capital in nature and could not be taxed as revenue receipts. The Tribunal emphasized that the purpose of the subsidy was to promote industrialization and not to support the business operations of the assessee.

12. Adjustment on Account of Receivables:
The Tribunal held that since the assessee did not charge interest on receivables from both AEs and non-AEs, no adjustment on account of notional interest was warranted. The Tribunal emphasized that the assessee's uniform policy of not charging interest indicated that no benefit was conferred to the AEs.

13. Credit of Tax Deduction at Source (TDS), Advance Tax, and Self-assessment Tax:
The Tribunal directed the AO to verify the assessee's claim regarding the credit of taxes paid by the amalgamated entities and to allow the credit in accordance with the law.

Conclusion:
The Tribunal allowed the appeals of the assessee on various grounds, including the deletion of AMP adjustments, disallowance of price support, disallowance of sponsorship fees, and addition on account of IPA subsidy. The Tribunal also directed the AO to verify and recompute the interest under sections 234A and 234B and to allow the credit of taxes paid by the amalgamated entities. The grounds pertaining to the initiation of penalty proceedings and other general grounds were dismissed as being consequential or not pressed.