9911796707
TMI Blog2022 (12) TMI 1543X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as follows:- "TP adjustment on account of Advertisement, Marketing and promotion ("AMP") expense Ground no. 2: TP adjustment of INR 1,25,18,85,488 on account of alleged excess AMP expenditure pertaining to trading segment AMP expenditure not an international transaction: 2.1 The learned DRP / AO/ TPO has erred in law and on facts by alleging that the unilateral AMP expenditure, being payments made to third parties, is an "international transaction" as per the provisions of Section 92B of the Act. 2.2 The learned DRP / AO/ TPO has erred in law and on facts in not appreciating that there was no agreement, understanding or arrangement between the Appellant and the AE with respect to the alleged AMP expenditure. 2.3 The learned DRP / AO/ TPO has erred in law and on facts by not appreciating that no transfer pricing adjustment can be made in respect of AMP expenses, where the expenses are legitimate, bonafide and deductible business expenditure. 2.4 The learned DRP / AO/ TPO has erred in law and on facts by disregarding various judicial an specific jurisdictional pronouncements in making a TP adjustment for AMP for the Appellant who is engaged in distribution. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g cost base of the distribution segment, the adjusted net margin earned from the trading activity by the Appellant is still at arm's length. 4.4 The learned DRP / AO/ TPO have erred in applying the Bright Line Test as a methodology to quantify the AMP service alleged to have been rendered by the Appellant to its AE despite the fact that BLT is not legally recognized under various legal jurisprudence. Ground No. 5: Benchmarking the alleged international transaction of brand promotion service by Appellant to its AE 5.1 The learned AO / TPO has erred in laws and facts by not appreciating that no separate TP adjustment for alleged AMP expenses is warranted as the net operating profit margin earned by the Assessee with respect to trading segment is within the arm's length range of net operating profit margin earned by comparable companies as affirmed by the Ld. TPO in the TP order. 5.2 The learned AO / TPO has erred in law in not considering the detailed submissions of the Assessee that even after performing an AMP expense intensity adjustment to the comparable companies, the adjusted net margin earned from the trading activity by the Assessee is at arm's le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INR 23,39,15,241 in page 59 of the final assessment order, has erred in not grating the TDS credit on account of technical issues in the ITBA system, while passing the final assessment order, along with computation enclosed to the same." We shall adjudicate the above grounds as under: Grounds 2 to 8 (TP Adjustment of AMP expenses) 3. The assessee is a company engaged in import of computer peripherals from its Associate Enterprises (AEs) for the sale in India. The assessee also renders certain support services to its AE's. During the relevant previous year, the assessee had entered into various international transactions with its AEs, which are listed at page 5 of the Transfer Pricing Officer's (TPO) order passed u/s 92CA(3) of the I.T.Act (order dated 30.07.2022). Since the operating margin of the assessee and the margin of the comparable was within arm's length, the international transaction of import of resale of computer and peripherals was considered to be at arm's length. During the course of transfer pricing proceedings, the TPO did not dispute the bench mark analysis of international transaction undertaken by the assessee and accepted the same to be at arm's length. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituting the ALP for the contract price. 63. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 64. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC is engaged in AMP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. Absence of a machinery provision 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wildgoose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r at the entity level as calculated by the TPO is 2.50%. Hence, no adverse inference drawn by the TPO in respect of the distribution segment results. Thus, the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on AMP expenses. The Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Relevant observations from the above decision in this context are as under:- "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above. lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(J)(e), whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound, the assessee submits that a sum of Rs. 1,55,96,001 is to be allowed as deduction on payment basis u/s 43B(f) of the I.T.Act. In this context, the learned AR relied on the order of the Bangalore Bench of the Tribunal in the case of M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. v. ACIT in IT(TP)A No. 2866/Bang/2017 (order dated 10.03.2021). The learned DR was duly heard. 11. We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. v. ACIT (supra) had categorically held that deduction to the extent of leave encashment, which has been actually paid should be allowed as deduction u/s 43B of the I.T.Act. The Tribunal in assessee's own case for assessment year 2012-2013 (supra) has also taken a similar view. The relevant finding of the Tribunal in assessee's own case, in this regard, reads as follows:- "13. We have heard rival submissions and perused the material on record. The Calcutta High Court in Exide Industries Ltd v UOI 292 ITR 470 struck down the provisions of section 43B(f). However, the Supreme Court in UOI v Exide Industries Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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