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TMI Blog2022 (12) TMI 1542X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. [ 2021 (3) TMI 1379 - ITAT BANGALORE ] had categorically held that deduction to the extent of leave encashment has actually been 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 [ 2023 (3) TMI 656 - ITAT BANGALORE ] has also taken a similar view. Thus we restore the issue raised in ground 14 to the files of the A.O. with the direction to allow deduction u/s 43B(f) of the I.T.Act with regard to leave encashment on actual payment basis. Not allowed appropriate credit for TDS as claimed - The issue raised is restored to the files of the A.O. to examine the matter and grant TDS credit in accordance with law. - Shri George George K, JM And Shri Laxmi Prasad Sahu, AM For the Appellant : Sri. Ajay Vohra, Advocate. For the Respondent : Sri. Arun Kumar, CIT(TP)-2-DR. ORDER PER GEORGE GEORGE K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 28.02.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T. Act. The relevant assessment year is 2017-2018. 2. The assessee has raised 13 grounds in its memorandum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been allowed by the learned AO under section 37 of the Act. Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Assessee does not constitute an international transaction under Chapter X of the Act, the Assessee craves to raise following grounds on merits: Ground No. 7: Selling expenses in the nature of sales promotions costs cannot be considered as part of the brand promotion / AMP expense 7.1 The learned DRP / AO / TPO has erred' in law and on facts in considering expenses in the nature of sales promotion as expenses leading to brand promotion as a part of the alleged AMP /brand promotion expenses without due consideration to the Assessee's submissions. 7.2 The learned DRP / AO / TPO has erred in law and on facts in not considering the several judicial precedents, stating that selling expenses are not in the nature of AMP. Ground No. 8 : Alleged DEMPE functions undertaken by the Assessee: 8.1 The learned DRP / AO/ TPO have erred in law and on facts in concluding that the Assessee contributes to the development, enhancement, maintenance, protection and exploitation ( DEMPE ) of the alleged marketing intangible generated by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of its Own Motion v. CIT (2012) 21 taxmann.com 372 (Delhi). 3. The assessee has also raised an additional ground, namely, ground 14 vide its application dated 14.07.2022. The additional ground raised reads as follows:- Ground No. 14: 14.1 The learned DRP/AO have erred in not granting the leave encashment payments of INR 14,650,125 made during the year under section 43B of the Act. We shall adjudicate the above grounds and the additional ground as under: Grounds 6 to 9 (TP Adjustment of AMP Expenses) 4. 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 29.01.2022). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fourth step would be to compare the price of the transaction that is shown to exist with the ALP and make the transfer pricing adjustment by substituting 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 deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and IC Issacs Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign AE is able to be located in some agreement, written (for e.g., the sample agreements produced 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 transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 3.82% and that at the entity level is 7.29%. The margin earned by the taxpayer 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 interlin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with law. It is ordered accordingly. 11. In the result, ground 11 is allowed for statistical purposes. Additional ground 14 (Corporate Tax Issue) 12. The brief facts in relation to the above ground are as follows: In the assessment year 2012-2013, the assessee had claimed deduction towards provision for leave encashment on accrual basis for an amount of Rs. 10,68,47,430 by relying on the judgment of the Hon ble Calcutta High Court in the case of Exide Industries Ltd. v. UOI reported in 292 ITR 470 (Cal). This claim made by the assessee during the assessment proceedings for A.Y. 2012-2013 was disallowed vide order passed u/s 143(3) of the I.T. Act dated 03.01.2017. The assessee preferred an appeal and the same was adjudicated by the Co-ordinate Bench of the Tribunal in assessee s own case for assessment year 2012-2013 (supra). It is claimed that owing to the decision of the Hon ble High Court as it was existing at the relevant assessment proceedings, the assessee did not claim any consequential relief for the claim on payment basis. It is submitted that the issue is now settled against the assessee in view of the judgment of the Hon ble Apex Court in the case of UOI v. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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