2024 (2) TMI 1484 - AT - Income Tax

Revision u/s 263 - excluding the SBC as non-operating cost while calculating the OP/OC - HELD THAT - This issue is covered in favour of the assessee in its group company as relied by assessee noted supra in the case of Amazon Development Centre (India) Pvt. Ltd. 2023 (11) TMI 30 - ITAT BANGALORE and the other case law relied by the ld. AR of the assessee supports the case of the assessee. In the case cited above the similar issue has been decided by the co-ordinate bench in the proceeding initiated by the ld. CIT u/s 263 in favour of the assessee. In view of this respectfully following the above judgment we hold that this issue is in favour of the assessee. While calculating OP/OC by the TPO the depreciation and amortization expenses of Rs. 3 million have been excluded by the TPO from the operating cost - There is difference between revenue from operations and operating cost reported by the assessee and calculated by the TPO and no reconciliation is produced for the difference is produced before us. Therefore we hold that the ld. CIT(TP) has rightly exercised his jurisdiction on this issue. We further observe from the submissions made by the ld. AR of the assessee even if ld. CIT(TP) has rightly exercised his jurisdiction on this issue there will be futile exercise because the operating margin of the assessee will be within the /-3% range as prescribed in the provisions. We find substance in the submission of the ld. AR of the assessee After including the depreciation and amortization expenses as operating cost the margin of the assessee still will remain the range of /- 3% and no addition is called for. Therefore there is no erroneous and prejudicial order passed by the TPO on this issue. Accordingly the assessee succeeds on this issue. Delivery and warranty expenses not part of AMP expenses - After going through the detailed submissions and case law relied by the ld. AR of the assessee these expenditure cannot be regarded as having been incurred for the purpose of development of brand since these are post sales activities and part of sales expenditure. It is also not a case of lack of enquiry. We hold the delivery cost and warranty expenses are not part of AMP expenditure. Therefore the ld. CIT(TP) is not justified for revising the order on this issue u/s. 263 of the Act. The assessee succeeds on this issue.

Summary

Issues Involved:

1. Exclusion of Share-Based Compensation (SBC) and Depreciation and Amortization from Operating Costs.
2. Inclusion of Delivery and Warranty Expenses in Advertising, Marketing, and Promotion (AMP) Expenses.
3. Jurisdiction of the Commissioner of Income-tax (CIT) under Section 263 of the Income Tax Act.

Detailed Analysis:

1. Exclusion of Share-Based Compensation (SBC) and Depreciation and Amortization from Operating Costs:

The primary issue revolves around whether Share-Based Compensation (SBC) in the form of Employee Stock Option Plans (ESOP) and depreciation and amortization expenses should be considered as operating expenses. The CIT(TP) argued that these should be included in the operating cost, whereas the Transfer Pricing Officer (TPO) had excluded them, which was challenged as erroneous. The Tribunal noted that the exclusion of SBC as non-operating cost is supported by precedent, specifically referencing the case of Amazon Development Centre (India) Pvt. Ltd., where it was held that ESOP expenses are non-operating expenditures. The Tribunal upheld this view, stating that SBC costs are notional and should not be part of the operating expenses for computing operating margins. Regarding depreciation and amortization, the Tribunal observed that these were already included in the operating cost base by the TPO, and even if they were not, the appellant's margin would still fall within the permissible range, thus not prejudicing the revenue.

2. Inclusion of Delivery and Warranty Expenses in AMP Expenses:

The CIT(TP) contended that delivery and warranty expenses should be included in AMP expenses, which the TPO had excluded. The Tribunal found that these expenses are incurred post-sale and are not related to brand promotion, aligning with the appellant's argument. The Tribunal referenced legal precedents, including the Delhi High Court's ruling in Sony Ericson Mobile Communication India Pvt. Ltd., which clarified that selling expenses are not synonymous with brand promotion. The Tribunal concluded that the TPO had conducted sufficient inquiries and correctly excluded these expenses from AMP, thus the CIT(TP) was not justified in revising the order on this issue.

3. Jurisdiction of the Commissioner of Income-tax (CIT) under Section 263:

The Tribunal examined whether the CIT(TP) had the jurisdiction to revise the TPO's order under Section 263. It was argued that the CIT(TP) could not exercise revisionary jurisdiction merely due to a difference in opinion on the inquiries conducted by the TPO. The Tribunal emphasized that the TPO had made detailed inquiries, and the CIT(TP) did not demonstrate a lack of inquiry or verification that would justify revision. Furthermore, the Tribunal noted that the amendment to Section 263, which included orders passed by the TPO under its ambit, was effective only from 01.04.2022, and thus not applicable retrospectively to the order in question. Consequently, the Tribunal held that the CIT(TP) lacked jurisdiction to revise the TPO's order under Section 263 for the assessment year 2017-18.

Conclusion:

The Tribunal concluded that the CIT(TP)'s invocation of Section 263 was not justified on the grounds of SBC and depreciation/amortization expenses, as well as delivery and warranty expenses. The Tribunal allowed the appeal in favor of the assessee on these issues, while leaving other legal issues open. The decision underscores the necessity for the CIT(TP) to demonstrate clear errors and prejudice to revenue before exercising revisionary powers, especially when detailed inquiries have been conducted by the TPO.