AMAZON DEVELOPMENT CENTRE (INDIA) PRIVATE LIMITED,BENGALURU vs. COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BANGALORE

ITTPA 417/BANG/2023Status: DisposedITAT Bangalore25 October 2023AY 2017-1822 pages
AI SummaryPartly Allowed

What were the facts?

The assessee, Amazon Development Centre (India) Private Ltd., filed its return of income for Assessment Year 2017-18 declaring a total income of Rs. 667.27 crores. The case was selected for scrutiny, and due to international transactions with an Associated Enterprise (AE), it was referred to the Transfer Pricing Officer (TPO). The TPO passed an order on January 24, 2021, and the Assessing Officer (AO) passed the final assessment order on April 23, 2021. The Commissioner of Income-tax (TP) [CIT(TP)] examined the records and noted that the TPO, while calculating the Profit Level Indicator (PLI) based on operating expenses (OP/OC), had excluded three items: Share-based compensation (Rs. 4,054 million), Foreign exchange fluctuation loss (Rs. 110 million), and Impairment of investments in subsidiaries (Rs. 118 million). These expenses were debited to the assessee's Profit & Loss account. The CIT(TP) issued a show cause notice for revision under Section 263 of the Income-tax Act, 1961, alleging the TPO's order was erroneous and prejudicial to the revenue's interest. The CIT(TP) passed an order on March 29, 2023, setting aside the TPO's order on these issues and directing fresh inquiries.

What did the Tribunal hold?

The Tribunal held that the order passed by the TPO was not erroneous and prejudicial to the interests of the revenue, and consequently, the impugned order of the CIT(TP) was quashed. Regarding Share-based compensation (ESOP expenses), the Tribunal, respectfully following the judgments relied upon by the assessee's AR, held that ESOP expenses are non-operating in nature for the purpose of computing operating margin. Therefore, the CIT(TP) was not justified in treating them as operating expenses. Concerning foreign exchange fluctuation loss and loss on investments in subsidiaries (aggregating to Rs. 228 million), the Tribunal noted that the CIT(TP) himself observed in paragraph 26 of his order that these items do not prima facie constitute operating expenses. However, in paragraph 27, the CIT(TP) directed the AO for fresh consideration of these issues. The Tribunal found this contradictory, stating that when the CIT(TP) himself observed they were not operating expenses, he could not direct a fresh examination. The Tribunal also noted that the TPO had issued a show cause notice and the assessee had replied, and the TPO had accepted the assessee's TP study. The legal issue raised by the assessee regarding the CIT's power under Section 263 before the amendment by the Finance Act, 2022, was not adjudicated as the appeal was decided on merits. The appeal was partly allowed.

What were the issues?

1. Whether the order passed by the TPO under Section 92CA(3) of the Income-tax Act, 1961, dated January 24, 2021, is erroneous and prejudicial to the interests of the revenue, thereby justifying revision under Section 263 of the Act, specifically concerning the exclusion of Share-based compensation (ESOP cost), Foreign exchange fluctuation loss, and Impairment of investments in subsidiaries from operating expenses? Assessee's contentions: - The revisionary jurisdiction under Section 263 requires twin conditions: the assessment order must be erroneous and prejudicial to the revenue. Reliance was placed on various Supreme Court and High Court decisions, including Malabar Industrial Co. Ltd. v. CIT and CIT vs. Max India Limited. - The TPO's order was not erroneous as it was passed after due application of mind. The excluded items were either notional (Share-based compensation) or non-operating in nature (exchange differences and impairment of investment). - The CIT(TP) himself admitted in his order that foreign exchange loss and impairment of investment are not operating expenses, yet directed fresh examination. - The TPO's order was passed with the approval of the Principal Commissioner of Income Tax (PCIT), making it not amenable to revision by a co-ordinate or lower-ranking Commissioner. Revenue's contentions: - The learned DR relied on the order of the learned CIT(TP).

Which sections of the Income-tax Act were involved?

Section 263,Section 92CA(3),Section 92CA(2)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B” BENCH : BANGALORE

Before: SHRI GEORGE GEORGE K. & SHRI LAXMI PRASAD SAHU

For Appellant: Shri Ajay Singh Vohra, Sr. Advocate, Smt. Deepashree Rao, CA &, Shri Hardeep Singh Chawla
For Respondent: Dr. G. Manoj Kumar, CIT(DR)(ITAT)
Hearing: 26.09.2023Pronounced: 25.10.2023

Per Laxmi Prasad Sahu, Accountant Member This appeal is against the DIN & Order No.ITBA/COM/F/17/2022-23/1051586507(1) dated 29.03.2023 of the Commissioner of Income-tax(TP) [CIT] passed u/s. 263 of the Income-

IT(TP)A No.417/Bang/2023 tax Act, 1961 [the Act] dated 29.03.2023 for the assessment year 2017-18. 2. The brief facts of the case are that the assessee filed e-return of income declaring total income of Rs.667.27 crores on 30.11.2017. The case was selected for complete scru

The order continues below.

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