2020 (10) TMI 1049 - AT - Income Tax

Validity of reopening of assessment - Notice after expiry of 4 years from the end of the assessment year - assessee requested the A.O. to treat the return originally filed u/s 139 of the Act on 31.10.2007 as the return filed in response to the notice issued u/s 148 - HELD THAT - It is imperative on the part of the A.O. to show that there was failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment. Admittedly, no such allegation has been made by the A.O. in the reasons for reopening. As held in the case of Shri Shakti Textiles Ltd. 2010 (8) TMI 449 - MADRAS HIGH COURT that the A.O. should have recorded in the reasons for reopening that there was failure on the part of the assessee to make true and full disclosure. The A.O. has not recorded that there was failure on the part of the assessee in the reasons for reopening. When there is no failure on the part of the assessee, the reopening after expiry of four years is bad in law as held by Hon ble jurisdictional Karnataka High Court in the case of Karnataka Bank 2015 (7) TMI 535 - KARNATAKA HIGH COURT . We notice that the TPO/AO has taken a conscious decision on this issue on the basis of explanations furnished by the assessee. Having taken a conscious decision, it is not permissible for the AO to take a different view on the basis of subsequent decision of the Tribunal, after expiry of four years from the end of the relevant assessment year. The decision rendered in the case of Sesa Goa Ltd 2004 (5) TMI 54 - BOMBAY HIGH COURT supports the case of the assessee. We find merit in the contentions of the assessee that the reopening is bad in law for more than one reason and hence the assessment order is liable to be quashed. Accordingly, we allow the legal ground urged by the assessee and accordingly the impugned assessment order is liable to be quashed TP adjustment made in respect of Advertisement and Market Promotion (AMP) expenses other than that paid to BCCI for advertisement - HELD THAT - As decided in own case AY 2009-10 as per the definition of the international transactions as contemplated under Section 92B r.w.s. 92F(v) it does not necessarily require transfer or assigning of property or creating any right or interest in the property but even an arrangement, understanding or an action in concert having a bearing on the profit, income, losses or assets of the enterprises would fall in the term of international transaction. Since the TPO has considered the entire expenditure as international transactions which we have reversed to the extent of the expenditure incurred in normal course without any agreement, understanding or action in concert therefore, the determination of ALP of the international transactions to the extent of the sharing of cost between the assessee and AE paid to the BCCI is required to be reconsidered and readjudicated. Accordingly, we set aside this issue to the record of the TPO.A.O for determination of ALP afresh. The other AMP expenses should be considered as part of the operating cost. T.P adjustment in respect of reimbursement of expenses - HELD THAT - TPO has been right in holding that the nature of these expenses are such that they cannot be attributed to have been solely and exclusively for the distribution business of the assessee; Claim of the assessee that it had derived tangible benefit from the expenditure has not been substantiated with evidence AND there is no evidence or likelihood of any independent entity dealing in similar circumstances bearing such expenditure. We, therefore, uphold the finding in the orders of the authorities below in making the T.P. adjustment on reimbursement of expenses. T.P adjustment made in respect of third party royalty - HELD THAT - As observed by the co-ordinate bench in the case of the assessee in AY 2005-06, the onus to prove that the expenses incurred by the AE was towards sale of products and not for purpose of creating brand awareness lies upon the assessee. We notice that this onus has not been discharged by the assessee. The basic details like the agreement if any for reimbursing this expenses, RBI approval, business necessity/expediency in making the payment, the basis of calculation etc., have not been furnished. Hence, the TPO has taken the view that this expenditure is not related to the business of the assessee and accordingly he has determined the ALP at NIL. Before us also, no further details were furnished. In view of the above, we are of the view that there is no infirmity in the order so passed by the TPO/AO. TP adjustment made in respect of payment of trade mark Royalty - HELD THAT - Having regard to the fact that the TPO has accepted service tax component as assessee s expenditure in assessment year 2012-13 and consequently did not make any Transfer pricing adjustment, we are of the view that this issue may be restored to the file of TPO for examining it afresh. Accordingly, we set aside the order passed by A.O. on this issue and restore the same to the file of AO/TPO. TP adjustment made in respect of interest paid on Compulsorily Convertible Debentures (CCD) - HELD THAT - TPO has been taking different stand in different years. While he accepted the CCD as debentures in AY 2012-13 and reduced the rate of interest only, the TPO treated CCD as equity in AY 2014-15. However, in AY 2015-16, the TPO has accepted the rate of interest of 12% to be at arms length. We notice that the TPO has made certain enquiries in AY 2015-16 and accordingly came to the conclusion that the interest payment is at arms length. The benefit of those enquiries was not available with the TPO in the two years under consideration. Since the issue is the same in all the years and further, in view of the conflicting stands taken by TPO, we are of the view that this issue requires fresh examination at the end of TPO. Accordingly, we restore this issue in both the years under consideration to the file of AO/TPO for examining it afresh. TP Adjustment made in respect of Sourcing Commission payment - A.R submitted that the assessee has furnished various evidences to prove that the sourcing agent has provided services to the assessee. He submitted that the assessee has utilized services of one USA entity and one Singapore entity. However, the assessee has paid commission only to the Singapore entity - HELD THAT - We are of the view that this issue requires fresh examination at the end of TPO. Accordingly we restore this issue to the file of AO/TPO for examining it afresh by duly considering the various evidences furnished by the assessee. After affording adequate opportunity of being heard, the AO/TPO may take appropriate decision in accordance with law. Disallowance of purchase of samples and incidental expenses - HELD THAT - When the transaction is between related parties, the Act places more burden on the shoulders of the assessee to prove that the expenditure is related to the business of the assessee. Further, in trade circles also, it is known fact that the expenditure on samples are borne by the manufacturers only. Hence this claim of expenditure is against the trade practice and the assessee appears to have borne the expenses only on the reasoning that the same was charged upon it by its parent company - AO was justified in holding that the burden to incur this expenditure is that of parent company and is not related to the business activities of the assessee. Accordingly, we confirm the disallowance made by the AO. Disallowance of Provision for Sales return - assessee submitted that it creates a provision for anticipated sales returns based on a percentage of the sales made each month - HELD THAT - In the instant case is Sales and not Sales return . When there is no past event, the question of present obligation out of such past event does not arise - provision for sales return does not represent present obligation arising as a result of past event. Rather, it is an expected obligation that may arise as a result of a future event. Accordingly, we are of the view that the Provision for Sales return would not fall under the category of Present obligation as a result of past events . Hence various case laws relied upon by the assessee and the Accounting Standard 29 would not support the case of the assessee - AO justified in holding the Provision for sales return as contingent liability. Accordingly we confirm the disallowance made by the assessing officer on this issue in both the years referred above. Disallowance made u/s 40(a) - Provision for expenses made by it in the earlier was disallowed in earlier years for non-deduction of tax at source - HELD THAT - Having regard to the submissions made by Ld A.R and also the observations made by the AO in the assessment order, we are of the view that this issue requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by the AO on this issue and restore the same to his file for examining it afresh in accordance with law.

Summary

Issues Involved:
1. Validity of reopening of assessment for AY 2007-08.
2. Transfer Pricing (T.P) adjustments related to Advertisement and Market Promotion (AMP) expenses.
3. T.P adjustments concerning reimbursement of expenses.
4. T.P adjustments regarding third-party royalty payments.
5. T.P adjustments on payment of trademark royalty.
6. T.P adjustments on interest paid on Compulsorily Convertible Debentures (CCD).
7. T.P adjustments on sourcing commission payments.
8. Disallowance of purchase of samples and incidental expenses.
9. Disallowance of provision for sales return.
10. Disallowance under Section 40(a) of the Income Tax Act.

Detailed Analysis:

1. Validity of Reopening of Assessment for AY 2007-08:
The assessee challenged the reopening of the assessment, arguing that it was done after four years without any failure on their part to disclose material facts. The Tribunal observed that the reopening was based on a subsequent Tribunal decision for earlier years and not due to any failure by the assessee to disclose facts. The Tribunal held that reopening after four years requires a clear mention of the assessee's failure to disclose material facts, which was absent in this case. Thus, the reopening was deemed invalid, and the assessment order was quashed.

2. T.P Adjustments Related to AMP Expenses:
The TPO made adjustments for AMP expenses, treating excess expenditure over industry average as "non-routine" and attributing it to brand promotion for the AE. The Tribunal referred to its earlier decision for AY 2009-10, where it was held that AMP expenses (excluding those paid to BCCI) are not separate international transactions but part of other transactions. For BCCI-related AMP expenses, the matter was remanded for further examination. Consequently, the Tribunal followed the same approach for the relevant assessment years, allowing the appeals for non-BCCI AMP expenses and remanding the BCCI-related expenses for further examination.

3. T.P Adjustments Concerning Reimbursement of Expenses:
The TPO had determined the ALP of various reimbursements (purchase of trade samples, salary to expatriates, expenses on sporting events, and freight and insurance) as NIL, arguing that these were not related to the assessee's business. The Tribunal, relying on its earlier decision for AY 2005-06 and 2006-07, upheld the TPO's adjustments, stating that the assessee failed to prove these expenses were solely for its business and not for the AE's benefit.

4. T.P Adjustments Regarding Third-Party Royalty Payments:
The TPO determined the ALP of third-party royalty payments as NIL, considering it a duplication of the royalty paid to the AE and lacking RBI approval. The Tribunal upheld this adjustment, noting the assessee's failure to provide necessary agreements, RBI approval, or justification for the payment.

5. T.P Adjustments on Payment of Trademark Royalty:
The TPO made adjustments for service tax paid on royalty, treating it as the AE's liability. The Tribunal noted that the TPO accepted this expense in AY 2012-13 and remanded the issue for fresh examination.

6. T.P Adjustments on Interest Paid on CCD:
The TPO took different stands in different years regarding the nature of CCD (as debt or equity) and the applicable interest rate. The Tribunal, noting the conflicting stands, remanded the issue for fresh examination in light of the TPO's findings in AY 2015-16, where the interest rate was accepted as arm's length.

7. T.P Adjustments on Sourcing Commission Payments:
The TPO determined the ALP of sourcing commission as NIL, doubting the genuineness of services provided by the AE. The Tribunal, acknowledging the assessee's submission of various evidences, remanded the issue for fresh examination.

8. Disallowance of Purchase of Samples and Incidental Expenses:
The AO disallowed these expenses, considering them the manufacturer's responsibility. The Tribunal, following its earlier decision, upheld the disallowance, stating that the expenses were for brand promotion, not solely for the assessee's business.

9. Disallowance of Provision for Sales Return:
The AO disallowed the provision for sales return, treating it as contingent liability. The Tribunal upheld the disallowance, concluding that the provision did not represent a present obligation from a past event but an expected future obligation.

10. Disallowance Under Section 40(a):
The assessee claimed deduction for expenses disallowed in earlier years due to non-deduction of TDS, arguing that TDS was now paid. The Tribunal remanded the issue for verification, as the AO found the claim unverifiable.

Conclusion:
The appeal for AY 2007-08 was allowed, and other appeals were partly allowed, with several issues remanded for fresh examination. The Tribunal emphasized the need for detailed scrutiny and proper documentation to support the assessee's claims.