2019 (11) TMI 333 - AT - Income Tax

TP Adjustment - Advertising, Marketing and Promotional ( AMP ) Expenses addition - AMP expenditure as international transactions - HELD THAT - The assessee who is in the business of distribution of goods manufactured by its foreign controlling parent and did not own any trademark or brand, had performed significant functions like brand development, market development, marketing customer support, technical and administrative support on behalf of its AEs in India bearing cost, investing huge sum and using its skilled manpower and time. These facts clearly prove that the assessee had developed marketing intangible for brand owned and goods manufactured by its foreign AEs by bearing significant cost and risk. Accordingly, the assessee was entitled to get reimbursement of the cost incurred by it and was entitled to retain intangible income in India. All these contentions of both the Ld. AR and Ld. DR has not been taken into account by the TPO/AO which needs to be verified by the Revenue. Therefore, it will be appropriate to remand back this entire issue to the file of the TPO/AO for adjudication on merit as well as in light of the decisions of the Hon ble High Court and the Special Bench in case of L G Electronics 2013 (6) TMI 217 - ITAT DELHI Addition in respect of Software Development Services segment (SDS) - comparable selection - Application of various filters - HELD THAT - The assessee did not dispute the profit margin in case of on-site work which is normally low as compared to offshore work. In the present year also the TPO demonstrated with facts and figures that there is considerable difference between the average rate per hour in the case of offshore projects vis- -vis on site projects. The TPO was right in applying the on-site revenue s filter considering the companies generating more than 75% of their export revenue s from onsite operation. Therefore, this filter was rightly applied. As regards to filter relating to employee cost more than 25% of sales and companies falling less than this threshold have been excluded, the said issue is held in favour of the assessee in assessee s own case for A.Y. 2007-08 wherein it has been held that the employee cost/sales of the assessee is 65% and hence a range of 50% to 80% should be applied instead of the threshold limit of 25% as applied by the TPO - this filter is wrongly applied by the Revenue. Hence we direct the TPO/AO to apply a range of 30% to 60% as it will be most appropriate ratio for the SDS segment. The companies having diminishing revenue or consistent losses are definitely cannot be compared with the assessee company. Thus, this filter was rightly rejected. Related party transactions (both income and expenditure) being more than 25% of sales - We direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables. Filter relating to Research and Development Sales which is less than/equivalent to 3% ( 3%) were accepted by the assessee Advertisement, marketing and distribution cost less than/equivalent to ( ) 3% were accepted the Tribunal partly held in favour of the assessee in assessee s own case for A.Y. 2007-08 and held that application of this filter will have to be seen on a case by case basis. Denial of economic adjustment for difference in working capital - HELD THAT - It is pertinent to note that the TPO has given the benefit of working capital adjustment in the previous year and there is no change in the factual aspect in the present assessment year as well. Inappropriate comparable companies selected by the TPO/AO in respect of Software Development Services Segment - Companies functionality dissimilar with that of assessee's Software Development Services Segment need to be deselected from final list. Error in margin computation - TPO while computing the adjustment amount in SDS segment has incorrectly taken margin of Assessee as 5 10% instead of 8.22% - HELD THAT - From the perusal of the records it can be seen that there is error in the margin computation which needs to be verified. Therefore, we remand back this issue to the file of the AO/TPO for verifying the said computation and quantifying the same correctly. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Adjustment made in respect of provision of Administrative support services and market support services segment (MSS) - HELD THAT - We direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables. Marketing Support Services Segment - Companies functionally dissimilar with that of assessee need to be deselected from final list. Denial of economic adjustment for difference in Risk profile - HELD THAT - Computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion Addition on account of corporate recharges and reimbursements paid in the nature of Intra Group services - HELD THAT - From the perusal of the records it can be seen that the additional evidences filed before us and before the DRP has a relevance in deciding this issue. The TPO did not have these documentary evidences at the time of deciding, therefore, it will be appropriate to remand back this issue to the file of the TPO/AO for verifying these evidences and taking cognizance in respect of the claim made by the assessee on merit. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice Disallowance of provision of liquidated damages - HELD THAT - Clause on liquidated damages clearly fixes amount of liquidated damages in delay and therefore liability of the Assessee to pay accrues immediately upon delay and such liability is fully ascertainable. Thus, provisions made in that respect is allowable Disallowance of capitalization of software purchases - Nature of expenses - HELD THAT - DRP has not given any finding on this issue. It is the Assessee s case that these software expenses do not have a benefit of permanent or enduring nature and, therefore, are not a capital asset. These are only for updating and maintaining the existing software. It is pertinent to note that issue is identical. Therefore it will be appropriate to remand back this issue to the file of the TPO/AO Disallowance of deduction under section 10A/10B - Assessing Officer rejected this claim on the basis that revised CA certificate was not issued - HELD THAT - AR submitted before us that in the return of income, the Assessee had also made suo-moto adjustment of ₹ 18.81 Crores on account of ALP for the software segment being lower than TP margin required as per law. Out of the said adjustment of ₹ 18.81 Crores, ₹ 10.16 Crores pertain to the 10A/10B units allocate in proportion to the turnover which is now reflected in the revised CA certificate. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for verifying whether the claim of the assessee is proper or not and adjudicate the same on merit after considering the revised CA certificate. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice

Summary

Issues Involved:

1. Validity of the assessment order.
2. Determination of the arm's length price (ALP) for international transactions.
3. Jurisdictional error in reference to Transfer Pricing Officer (TPO).
4. Addition on account of Advertisement, Marketing, and Promotion (AMP) expenses.
5. Adjustment related to Software Development Services (SDS) segment.
6. Adjustment related to Administrative and Marketing Support Services (MSS) segment.
7. Determination of ALP for payment towards services availed fees/reimbursements.
8. Denial of the benefit of the +/- 5 percent range in computing ALP.
9. Disregard of judicial pronouncements in computing ALP.
10. Disallowance of provision for liquidated damages.
11. Disallowance of Computer Software expenses as capital in nature.
12. Disallowance of claims under sections 10A and 10B.
13. Initiation of penalty proceedings under section 271(l)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The assessment order was challenged as being bad in law. However, the Tribunal dismissed these grounds as they were not pressed by the appellant.

2. Determination of the ALP for International Transactions:
The TPO's approach to re-determining the ALP for the appellant's international transactions was contested, particularly concerning AMP expenses and adjustments in the SDS and MSS segments. The Tribunal remanded these issues back to the TPO/AO for fresh consideration, emphasizing the need to follow judicial precedents and proper benchmarking methodologies.

3. Jurisdictional Error in Reference to TPO:
The appellant argued that the AO did not record reasons for referring the matter to the TPO, as required under section 92CA(1) of the Income Tax Act. This ground was not specifically addressed in the Tribunal's final order.

4. Addition on Account of AMP Expenses:
The Tribunal noted extensive litigation surrounding the "Bright line test" used by the TPO to determine excessive AMP expenses. The Tribunal remanded the issue back to the TPO/AO, directing them to consider the impact of non-payment of royalty and to verify the appellant's claim of cost credits from its AEs. The Tribunal emphasized the need to follow the principles laid down by the Delhi High Court in cases like Sony Ericsson, Maruti Suzuki, and Whirlpool.

5. Adjustment Related to SDS Segment:
The Tribunal addressed various filters applied by the TPO, such as onsite revenue, employee cost, and diminishing revenue. It directed the TPO to apply appropriate filters and exclude certain comparables that were functionally different or had other discrepancies. The Tribunal also directed the TPO to consider working capital adjustments and risk adjustments as per the CAPM model.

6. Adjustment Related to MSS Segment:
Similar to the SDS segment, the Tribunal directed the TPO to apply appropriate filters and exclude functionally different comparables. The Tribunal also emphasized the need for working capital and risk adjustments.

7. Determination of ALP for Payment Towards Services Availed Fees/Reimbursements:
The Tribunal noted that the TPO had not provided comparable data for arriving at the ALP of NIL and had not considered additional evidence submitted by the appellant. The issue was remanded back to the TPO/AO for fresh consideration, with a direction to verify the additional evidence and adjudicate the matter on merit.

8. Denial of the Benefit of the +/- 5 Percent Range in Computing ALP:
This issue was not specifically addressed in the Tribunal's final order.

9. Disregard of Judicial Pronouncements in Computing ALP:
The Tribunal emphasized the need to follow judicial precedents in determining the ALP for various segments and transactions.

10. Disallowance of Provision for Liquidated Damages:
The Tribunal allowed the appellant's claim for the provision of liquidated damages, following its own decision in the appellant's case for AY 2007-08. The Tribunal held that the liability for liquidated damages accrues upon delay in execution of contracts and is fully ascertainable.

11. Disallowance of Computer Software Expenses as Capital in Nature:
The Tribunal remanded the issue back to the AO to decide it in light of the guidelines laid down by the Special Bench of the Delhi Tribunal in the case of Amway India Enterprises.

12. Disallowance of Claims Under Sections 10A and 10B:
The Tribunal remanded the issue back to the AO for verifying the appellant's claim for deduction under sections 10A and 10B, considering the revised CA certificate submitted by the appellant.

13. Initiation of Penalty Proceedings Under Section 271(l)(c):
The Tribunal did not specifically address the initiation of penalty proceedings in its final order.

Conclusion:
The Tribunal's order primarily involved remanding several issues back to the TPO/AO for fresh consideration, with specific directions to follow judicial precedents and verify additional evidence submitted by the appellant. The Tribunal allowed the appellant's claims regarding the provision for liquidated damages and directed the AO to reconsider the disallowance of computer software expenses and claims under sections 10A and 10B.