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TMI Blog2024 (2) TMI 1484X X X X Extracts X X X X X X X X Extracts X X X X ..... and statutory notices were served on the assessee. The assessee had international transactions with its AE and the case was referred to the TPO after approval from the competent authority. The TPO passed order on 28.01.2021 and accordingly the AO passed the final assessment order on 24.05.2021. 3. The ld. CIT(TP) on examination of records noted that the assessee has recognized the expense on account of share based compensation transactions and the TPO allowed exclusion of share based compensation(SBC) in the form of ESOP cost from the operating cost and also excluded depreciation and amortization from the operating cost without due inquiry/verification. It was noted that while delivery charges and related warranty charges are to be considered in AMP expenses, the TPO has excluded delivery charges and warranty charges from the AMP expenses without due inquiry/verification while determining the AMP adjustment. Therefore, the ld. CIT(TP) considered the TPO's order dated 28.01.2021 as erroneous and prejudicial to the interests of revenue and issued show cause notice for revision of the order u/s. 263 of the Act. After considering the submissions of the assessee, the ld. CIT(TP) held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egment); and (b) excluding delivery charges and warranty expenses from AMP Expenses, without making necessary/proper enquiries and verification. 12. It is submitted that in the transfer pricing report for the relevant assessment year 2017-18, the segmental operating margin of the appellant for MSS Segment was determined at 14.86% by considering total operating cost at Rs. 7,103.14 million, after inter-alia excluding SBC cost of Rs. 27 million. Refer page 262 of the paperbook. 13. In the present case, CIT(TP) has sought to invoke revisionary jurisdiction qua MSS Segment and inter-alia contended that SBC in the form of ESOP was erroneously considered as non-operating expense by the TPO. 14. It is at the outset submitted that SBC / ESOP attributable to MSS Segment amounted to INR 27 million only as against INR 1,760 million erroneously considered by the CIT(TP). Furter, the CIT(TP) has failed to appreciate that since the aforesaid expense was notional and non-operating in nature, the same was excluded from operating cost for the purpose of computation of segmental operating profit/margin for the relevant year. 15. Further, the CIT(TP) failed to appreciate that the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier years involving adjudication of transfer pricing issues. d. Copies of relevant agreements in respect of international transactions. e. Copy of Form No.3CEB. f. Copy of TPO's order for the last assessment year .................................. k. Details of all international transactions along with segment- wise break- up of such transactions. ................................. p. Fact sheet showing business description, total turnover, Gross Operating Net profit, Method applied, value of International Transaction, PLI etc. of three year including the relevant year" Reply dated 17.01.2020 In response to notice dated 06.01.2020, the appellant vide reply dated 17.01.2020, submitted all the requested information/ documents, inter alia, enclosing: - Audited Financial accounts and auditors report (@ Pg. 35 - 85 of the PB. SBC @ pg. 63,67 of the PB) [Copy enclosed at pages 31 to 222 of paperbook] -Transfer Pricing Study (@ Pg. 86 - 166 of the PB) -Inter-company agreements, as amended, on sample basis, providing for specific exclusion of 'cost of equity compensation' for computation of service fee and foreign exchange expense entered into by the appellant with: (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arranty expense should not be included as part of AMP Expense. However, on considering the detailed response dated 11.01.2021 filed by the appellant, the same was not considered relevant for inclusion in the AMP Expense by the TPO and adjustment was made only qua advertisement and promotion expenses in the TP order dated 28.01.2021 (Refer page 50 of TP order). 22. In the impugned revisionary order, the CIT(TP) though categorically accepted the fact that specific query was raised by the TPO qua delivery and warranty expense, but has referred to para 13 of the TPO order dated 28.1.2021 to contend, merely on the basis of presumption, that the entire submission dated 11.01.2021 filed by the appellant was rejected by the TPO, which included the issue of delivery and warranty expense as well. However, the CIT(TP) failed to appreciate that the submissions, to the extent not accepted/rejected by the TPO was specifically dealt with in the TP Order by providing specific reasons for the rejection and nowhere in the order has the TPO stated that the entire submission of the appellant stands rejected. The same is also evident from the TP order, wherein the TPO has observed as under: "The su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Amazon Development Centre (India) Pvt Ltd in IT(TP)A No. 417/Bang/ 2023, order dated 25.10.2023, group concern of the appellant, wherein revisionary jurisdiction invoked under section 263 of the Act by the CIT(TP) (same incumbent as in the case of the appellant) on almost similar facts, was quashed by the Tribunal by observing as under: "8. After considering the rival submissions, we note that the ld. CIT has exercised is power as per section 263 and observed that the TPO has wrongly calculated the total operating expenses ignoring the ESOP expenses issued by the parent company to the employees of the subsidiary company and debited expenses to the P&L account of Rs. 4,054 million. He further noted that the foreign exchange fluctuation loss of Rs. 110 million and loss on investment in subsidiaries of Rs. 118 million was to be treated as operating expenses. However, the TPO has not treated these as operating expenditure and accepted the TP study of the assessee. We note that the TPO has issued show cause notice to the assessee and the assessee has duly replied. Copy of notices and reply are placed in the PB which were referred to by the ld. AR during the course of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Co. Ltd: 243 ITR 83 (SC) -CIT vs. Max India Limited: 268 ITR 128 (P&H) [affirmed by SC in 295 ITR 282 (SC)] -CIT V. Gabriel India Limited: 203 ITR 108 (Bom) -CIT V. Ganpat Ram Bishnoi: 198 CTR 546/ 152 Taxman 242 (Raj.) -Paul Mathew & Sons v. CIT: 263 ITR 101 (Ker.) -Vimgi Investment (P) Limited: 290 ITR 505 (Del.) -CIT V. Mepco Industries Limited: 294 ITR 121 (Mad.) 32. In the present case, it is submitted that: (i) SBC cost, being notional in nature was rightly treated as non-operating expenses; (ii) Depreciation and amortisation cost was already included as part of operating cost base; and (iii) Delivery and Warranty expenses, being post sales expense, did not warrant inclusion in AMP expenditure. 33. Each of the aforesaid is explained hereunder: Re: (i)SBC / ESOP cost to be excluded from operating expenses 34. It is at the outset submitted that treatment of SBC/ESOP cost as non- operating expense for the purpose of computation of operating margin has recently been upheld by the Bangalore Tribunal in the case of Amazon Development Centre (India) Pvt Ltd in IT(TP)A No. 417/Bang/ 2023, order dated 25.10.2023, a group concern of the appellant, wherein simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has considered the expenditure on account of depreciation/ amortization as operating expenditure and the same has been included in the operating cost base for the purpose of computing the operating margins [Refer page 262 of PB and pages 5 to 7 of the TP Order]. 39. It may also be pertinent to note that the operating margin of the appellant in respect of MSS segment has been determined at 14.86% (Refer TP study @ page 165 of PB) after including depreciation and amortization as part of the cost base, which has been accepted to be at arms' length by the TPO, being within +/- 3% of the average PLI of the comparable considered (see page 28 of the TP order - pg 55 of appeal set). Thus, even if for the sake of argument, though which is not the case as explained above, depreciation and amortization expense (aggregating to Rs. 3 million) is not considered as part of cost base, as aforementioned, it would still fall within the permissible range of +/-3. Given the above, the order of the TPO is not erroneous much less prejudicial to the interest of the Revenue. 40. That apart, it is also critical to note that the aforesaid fact was also disclosed to the TPO vide response dated 11.01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Pvt. Ltd. v. CIT: 374 ITR 118 (Del.), wherein the Hon'ble Delhi High Court held that selling expenses are not in the nature and character of 'brand promotion' and thus cannot be construed as part of AMP expense. Relevant observation of the Court is extracted as under: "176. The aforesaid argument, when AMP expenses are segregated from the composite transaction including distribution and marketing function, is flawed and has to be rejected. The respondent-appellants engaged in distribution and marketing of consumer goods. Distribution and marketing exercise in case of tangibles requires transfer/sale of goods to third parties, be it sub-distributors or retailers. The said transaction is in the nature of sale of goods for consideration. The marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub- distributors or retailers are not in the nature and character of 'brand promotion' They are not directly or immediately related to 'brand building' exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (TS-122-ITAT-2014(DEL)-TP) -Perfetti Van Melle India Pvt. Ltd. (TS-119-ITAT-2014(DEL)-TP) -LG Electronics India Pvt. Ltd. Vs. ACIT (TS-11-ITAT-2013(DEL)-TP) 51. In the case of the appellant, it is respectfully submitted that the TPO accepted the claims of the appellant only after examining the issue thoroughly and considering the legal position as submitted by the appellant vide reply dated 11.01.2021, filed during the course of assessment. Re: Lack of enquiry vs. Inadequate Enquiry 52. It is well settled law that if the concerned officer (in this case TPO), acting in accordance with law makes an assessment, the same could not be regarded as erroneous, simply because according to CIT more enquiries should have been conducted by such officer or the order should have been written more elaborately. In other words, jurisdiction under section 263 of the Act cannot be invoked for making further enquiries or to go into the process of assessment again and again, merely on the basis that more enquiries ought to have been conducted to find something. 53. There is, it is respectfully submitted, distinction between "lack of enquiry" and "inadequate enquiry". While in the former ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 263 of the Act to hold that non- conduct of proper enquiry by the TPO renders the order erroneous and prejudicial to the interest of the Revenue. 59. In this regard, it is submitted that the aforesaid Explanation cannot, in our respectful submission, be read to provide unfettered powers to the CIT to set aside an assessment order, on a paltry ground of insufficient enquiry being conducted by the TPO, at his whims and fancies. 60. Even after insertion of the aforesaid Explanation, the CIT, would, in our respectful submission, need to point out failure on the part of the TPO in not conducting relevant enquiries which were critical for decision on an issue, before branding the assessment order to be erroneous and prejudicial to the interest of the Revenue. Any failure on the part of the TPO in conducting an enquiry would not, in our respectful submission, validate assumption of jurisdiction by the CIT under section 263 of the Act, in accordance with the consistent view of the Courts referred supra, unless the CIT can demonstrate that the enquiries or verification conducted by the TPO was not in accordance with the enquiries or verification that would have been carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g necessary enquiry(ies) and is not empowered to blanketly set aside the assessment order on the ground that sufficient enquiries were not conducted by the assessing officer: -ITO v. DG Housing Projects Ltd.:343 ITR 329 (Del.) -DIT v. Jyoti Foundation: 357 ITR 388 (Del.) -CIT v. Delhi Airport Metro Express (P) Ltd.: ITA No. 705/2017 (dated 5.9.2017); -CIT v. Modicare Ltd.: 759/2016 (dated 20.9.2017) -CIT v. Prithvi Raj And Co.: 199 ITR 424 (Del) -CIT v. O. P. Seth: 201 ITR 635 (Del) -CIT, Mysore v. T. Narayana Pai: 98 ITR 422 (Kar) -J.P.Srivastava And Sons (Kanpur) Ltd. v. CIT, UP: 111 ITR 326 (All) -S.B.Sankar v. State of Kerala and Another: 171 ITR 689 (All) -CIT v. Kanda Rice Mills: 178 ITR 446 (P&H) -CIT, Patiala v. Chawla Trunk House: 139 ITR 182 (P&H) 65. In the facts of the present case, the CIT(TP) has merely set aside the transfer pricing order passed by the TPO. The CIT(TP) has not even carried out minimal enquiries to allege that claim of appellant is not acceptable. That apart, it is not even suggested/ explained by the CIT(TP) as to what more enquiries was the TPO is required to make prior to accepting the claim of the appellant. Order under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew section 59 was held infructuous. 7. We hold that section 59 is not retrospective in operation and that the reopening of the assessment under section 59 is bad in law." (emphasis supplied) 70. Therefore, it is submitted that on this ground too, the impugned order needs to be quashed as void ab initio, passed wholly without jurisdiction. Re: Assessment order passed under supervision of Pr.CIT 71. It is submitted that where the TP Order is passed under the supervision and with the approval of the Pr.CIT, it is not open to the CIT(TP) to revise such an order in terms of section 263 of the Act. In other words, a Commissioner of co-ordinate/ lower rank, cannot sit in judgment to determine whether the order passed by the assessing officer/TPO after incorporating directions of the Pr.CIT, is erroneous and prejudicial to the interest of the Revenue. 72. Support in this regard is drawn from the following decisions wherein it has been held that where the assessment order was passed with the approval of CIT such an order was not amendable to revisionary jurisdiction under section 263 of the Act: -Hari Iron Trading Co. vs. CIT: 263 ITR 437 (P&H) -CIT v. Hastings Properties: 253 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the TPO at 14.43% and comparable mean margin adopted by the TPO is 15.88%. Accordingly the TPO noted that the taxpayer's margin is within the range of +/- 3% and no adjustment was suggested in the market support service segment. However, the ld. CIT(TP) noted that depreciation and amortization expenses of Rs. 3 million should be part of the operating cost. We further note from the PB filed at page no.165 the assessee has shown revenue from operations of Rs. 8053 million and total operating cost has been considered at Rs. 7011 million resultantly there is operating profit of 1042 million. According the margin (OP/TC) has been calculated at 14.86%. Accordingly, we note that 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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