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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ NEW DLEHI
Before: SHRI K. NARASIMHA CHARY
PER K. NARASIMHA CHARY, J.M. Aggrieved by the order dated 31.10.2017 passed by the Commissioner of Income Tax (Appeals)-38, New Delhi ("Ld. CIT(A)") for the assessment year 2004-05, Timex Group India Ltd.(“the assessee”), both the assessee and the Revenue preferred these cross appeals.
Brief facts of the case are that the assessee is a company engaged in the business of manufacture, trading, sale and servicing of quartz, analogue and digital watches and watch components; manufacture and sale of plastic components, tools and moulds; and rendering information technology and financial support services to its overseas group companies. For the assessment year 2008-09 they have filed a return of income on 29.09.2008 declaring nil income after setting of loss of Rs.7,22,02,563/-. Recording that the assessee has international transaction with the Associated Enterprises (“AEs”), learned Assessing Officer referred the determination of the Arms Length Price (“ALP”) to the Ld. Transfer Pricing Officer (Ld. TPO). Ld. TPO suggested an adjustment of Rs.19,82,44,016/-. By incorporating the transfer pricing adjustment, learned Assessing Officer also made certain additions on account of, inter alia, advances written off, fine and penalty, provision for stamp duty, disallowance of professional fee on account of short deduction of TDS etc.
Aggrieved by such an action of the learned Assessing Officer, assessee preferred appeal before the Ld. CIT(A). Insofar as the AMP expenditure is concerned, Ld. CIT(A) directed the Ld. TPO to bring the adjustment in tune with the BEPS example without using the concept of bright line observing that this approach would take care of the mark-up in a reasonable manner in line with the BEPS proposals, as the assessee was unable to provide a viable and irrational alternative course to test the AMP function to ascertain compliance to the provisions of chapter X.
In respect of the disallowance of professional fees on account of short deduction of TDS, Ld. CIT(A) upheld the disallowance by holding that the assessee admitted that it is an assessee in default under section 201 of the Act. Ld. CIT(A), however, deleted the additions made by the learned Assessing Officer on account of advances written off and provision for stamp duty. Aggrieved by these findings both the assessee and the Revenue are in appeal.
Insofar as the AMP issue is concerned, submissions of the Ld. AR are that use of bright line method has been disregarded by the Hon’ble jurisdictional High Court in the case of Sony Ericsson, 374 ITR 18, which was followed by the Tribunal in the case of the assessee for the assessment year 2011-12 in and was upheld by the Hon’ble Delhi High Court in ITA No. 795 of 2019. He further submits that in ITA 795 of 2019 the Hon’ble High Court upheld the deletion of the AMP adjustment. He further submitted that AMP adjustment cannot be upheld since the substantive adjustment computed as well by the Ld. TPO while giving effect to the orders of the Hon’ble High Court and the Tribunal in the case of assessee for the assessment year 2011-12, is nil.
Per contra, it is submitted on behalf of the Revenue that the Ld. CIT(A) is incorrect in coming to the conclusion that under certain methods there would be no justification for making any transfer pricing adjustments if the overall profits at the entry level are higher, disregarding that the newly enacted provisions of section 92 as contradistinguished from the pre-amended provision, make a departure from profit determination to price determination; that the law has directed in India mandates determination of price of an international transaction; that as per the Indian transfer pricing law, compensation for functions performed, being AMP services rendered to AE needs to be benchmarked separately; and that international commentaries and practice largely disapprove of comparison of overall profits at entry-level. Revenue also questions the findings of the Ld. CIT(A) in respect of AMP adjustment holding that set off of a higher price in one transaction with lower price in another is permissible when the Indian TP law does not provide for such set off in cases where, there is no material on record to suggest that any such set off was contemplated by the transacting parties, disregarding that wherever such set off is intended at any other place, the Act has provided explicit stipulation for the same. According to the Revenue different transactions cannot be bundled up and the Arms Length Price (“ALP”) to be determined as of packaged transaction particularly when the assessee failed to lead the primary information in this regard as provided under rule 10 D of the Income Tax Rules, 1962 (“the Rules”) to substantiate that such transactions are closely linked as mandated in rule 10A (d) of the Rules. It is further argued that the Bright Line Test (BLT) is mandated in law and hence permissible and the fact that the BLT was not used as a method to determine the price but only as an economic tool to arrive at the cost of services rendered to the foreign enterprise by the Indian entity has to be considered and the Ld. TPO has the mandate to determine such cost as primary step in ALP determination as provided under the rules. Further according to the Revenue the Ld. CIT(A) was incorrect in giving a finding that the economic ownership of an intangible can be accepted, if pleaded, disregarding the fact that Indian tax laws have not so far recognised economic ownership as forming the basis of taxation. Ld. DR submits that the Ld. CIT(A) should have appreciated the distinction made by the Revenue between normal expenses incurred for selling a product and the expenses incurred for penetration of the market, brand promotion, creation and development of marketing intangibles, which remains the function of the foreign supplier/legal owner of the brand and not of the Indian entity. Lastly he submits that the trade discounts are not in the nature of selling expenses and hence are within the purview of AMP expenses inasmuch as trade discounts emanated from the overall strategy of the AE to penetrate the market or to promote its brand.
A perusal of the order of the Hon’ble jurisdictional High Court in the case of assessee for the assessment year 2011-12 in of 2019 makes it clear that the issue is no longer res Integra. For the sake of completeness we deem it just and necessary to extract the relevant observations of the Hon’ble High Court, while referring to the observations of the Tribunal in ITA No. 845/del/2016, hereunder,-
“16. The issue relating to adjustment of AMP is covered by the decision of the Court inSony Ericsson Indio Pvt. Ltd. v. LIT (2015) 374 ITR liS (Del.) and Maruti Suzuki India Ltd. v. CIT (2016) 381 ITR 117. 17. The Tribunal while dealing with said issue held as under:-
“20. Bare perusal of the order under challenge passed by the ld. TPO particularly at pages 67, 73 and 75 goes to prove that the entire adjustment qua AMP expenses has been made by the TPO on the basis of bright line method and no material whatsoever has been brought on record to show that if the taxpayer and AE have acted in concert and that they have entered into any agreement to enter into international transactions qua AMP expenses.
Hon ’ble Delhi High Court in Sony Ericsson Indio Pvt. Ltd. v. LIT (2015) 374 ITR IIS (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 32S ITR 210 (Del.) has categorically held that BET is not a valid basis for determining the existence of international transaction or for that matter for computing the AI.P of such international transaction involving AMP expenses. So. In these circumstances, the order of TPO passed by making BIT as basis of the ALP adjustment is not sustainable in the eyes of law.
Furthermore, Hon ’ble Delhi High Court in subsequent decisions viz. Bausch & Lomb Eye Care (India) Pvt. Ltd. viz Additional CIT (2016) 3S11TR 227 (Del.) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 held that it is for the Revenue to firstly discharge the onus to prove the existence of an international transaction between the taxpayer and its AE and only thereafter ALP of international transactions involving AMP can he computed.
It is further contended by the ld. AR for the taxpayer that quantitative adjustment made by the TPO on account of AMP expenses is not permissible within the framework of Chapter-X as has been held by the Hon ’ble Delhi High Court in Maruti Suzuki India Ltd. v. CIT –ITA No.110/2014 & 710/2015). Hon ’ble High Court has categorically held that none of the substantive or procedural provisions of Chapter-X permits adjustment on account of AMP expenses.
The taxpayer has contested before ld. DRP that incurring of AMP expenses are not international transactions and BET method has no statutory basis to infer the existence of international transactions qua AMP expenses, however, the ld. DRP has proceeded to hold inter alia that incurring of AMP expenses is an international transaction and directed to exclude the routine selling and distribution expenses and directed the TPO to use the cost plus method and further directed to apply the markup on excess AMP expenses as per sub-clause (ii) of Rule 108(I)(c).
However, we are of the considered view that following the decision rendered by Hon ’ble Delhi High
Court in Maruti Suzuki India l.td. v. C1T (supra), the first step for the Revenue to benchmark the AMP expenses is to establish the existence of international transaction; if it is proved, then to proceed for benchmarking the transactions qua AMP expenses. Now, it is the settled principle of law that existence of international transaction qua AMP expenses requires to be established de hors the "bright line test”, particularly when the taxpayer has categorically denied the existence of international transaction and 81% of its turnover is from the sale of its manufacturing in India. Moreover, without prejudice, it is the case of the taxpayer that despite the directions issued by the ld. DRP, the TPO has wrongfully proceeded to consider selling and distribution expenses as part of the AMP expenses for the purposes of applying the bright line test.
In view of what has been discussed above, we are of the considered view that since the taxpayer is a full- fledged manufacturer as 81% of its turnover is from the sale of its manufactured goods in India and the entire AMP expenses have been incurred by it to enhance its sale in India and not for promoting the brand of its AH and for creating intangibles for its AH, the alleged excess AMP expenditure does not fall in the category of international transactions. Moreover, the Revenue has not brought on record any cogent evidence to prove these facts. So, following the law laid down by the Hon ’ble Delhi High Court in case cited as (supra), we arc of the considered view that adjustment made by the Revenue on account of incurrence of AMP expenses are not sustainable in the eyes of law.
Learned DR for the Revenue, although admitted the legal position enunciated in the preceding paragraphs, but he contended that since all the aforesaid decisions are lying challenged before the Hon ’ble Apex Court, the matter may be kept pending till the decision by Hon ’ble Apex Court. However, we are of the considered view that since it is a stay granted matter and the proceedings before the second
appellate authority have not been stayed by any higher forum, the same cannot be kept pending.
After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the AI.P of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission made by the learned DR that the matter is pending before Hon ’ble Apex Court and the decision of Hon ’ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon ’ble Jurisdictional High Court which is under consideration before the Hon ’ble Apex Court is modified or reversed by the Hon ’ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of Hon ’ble Apex Court. In those circumstances, he will also allow opportunity of being heard to the assessee. ”
Since the aforesaid issues stand covered by the earlier decisions of this Court, no question of law arises for our consideration.”
It is not in dispute that the case of the assessee has been that the primary engagement of the assessee is in manufacturing operations and the AMP expenditure incurred by it is to the benefit of its operations in India. In the case of the assessee, Tribunal took into consideration the submissions made by the Ld. DR that the matter relating to the international transaction involving AMP expenses is pending before the Hon’ble Apex Court and addition of the Hon’ble Apex Court would be binding upon all the authorities and therefore, while returning a finding that the assessee is a full-fledged manufacturer and the entire AMP expenses were incurred by it to enhance its sale in India and not for promoting the brand of its AE and for creating intangibles for its AE, the alleged excessive AMP expenditure does not fall in the category of international transaction and therefore the adjustment made by the Revenue on account of incurrence of AMP expenses is not sustainable in law, set aside the orders of the authorities below and restored the matter to the file of the learned Assessing Officer to act in accordance with the findings of the Hon’ble Apex Court to be given in the pending matters.
In view of the view taken by the Hon’ble High Court, and while respectfully following the same, we hold that the alleged excessive AMP expenditure does not fall in the category of international transaction and therefore the adjustment made by the Revenue on account of incurrence of AMP expenses is not sustainable in law, and set aside the orders of the authorities below. We, however, in consonance with the view taken by the Tribunal in assessee’s own case for the assessment year 2011-12, as in the Hon’ble jurisdictional High Court, restore the matter to the file of the learned Assessing Officer to act in accordance with the findings of the Hon’ble Apex Court to be given in the pending matters. We accordingly, allow ground No. 2 of assessee’s appeal and grounds No. 3 to 12 of Revenue’s appeal, for statistical purpose.
Ground No. 3 of assessee’s appeal related to the disallowance of professional fees on account of short deduction of TDS. According to the learned Assessing Officer since the TDS was not deducted, the expense has to be disallowed; whereas according to the Ld. CIT(A) since the assessee admitted to be an assessee in default under section 201 of the Act, such disallowance has to be upheld. When we go through the impugned order, it makes the things clear that the assessee pleaded before the Ld. CIT(A) that although the TDS was deducted, there was a short deduction of TDS by Rs. 464/-and the disallowance under section 40(a)(ia) of the Act deals only with the non-deduction of TDS altogether but not short deduction. Assessee also placed reliance on the decision of the Kolkata Tribunal in the case of CIT vs. SK Tekriwal (2011) 15 taxman.com 289 (Kolkata-Trib) and also CIT vs. Chandabhoy and Jassobhoy (2012) 49 SOT 448.
This issue is no longer res Integra and squarely covered by the decision of the Hon’ble Calcutta High Court in of 2012 in the case of CIT vs. M/s SK Tekriwal and also the decision of the Hon’ble Andhra Pradesh High Court in the case of PV Rajagopal vs. UOI (1998) 99 taxman 475 wherein the Hon’ble High Court held that section 201 has 2 limbs – one is that where the employer does not deduct the tax and the 2nd is where after deducting the tax fails to remit it to the government and there cannot be assumption that if there is any shortfall due to any difference of opinion as to the taxability of any item the employer can be declared to be an assessee in default. In view of this settled position of law we allow the ground of appeal.
11. Now coming to the appeal of the Revenue, ground No. 1 relates to the disallowance of advances written off and the Ld. CIT(A) decided the issue in favour of the assessee while following the binding precedents of the Tribunal in assessee’s own case for the assessment years 2004-05 and 2005-06 in /Del/ 2012 and ITA No. 258 /Del/ 2013 respectively. Since the Ld. CIT(A) followed the binding precedents, and in the absence of any contrary decision by any higher forum, it cannot be said that the Ld. CIT(A) committed anything wrong. We therefore dismiss ground No. 1 of Revenue’s appeal.
Ground No. 2 of Revenue’s appeal related to the disallowance of provision of stamp duty. Inasmuch as the assessee incurred the stamp duty expenditure in respect of the instrument for 3 years, learned Assessing Officer was of the opinion that for each year of the 3 years, assessee is entitled only for 1/3rd of such an expense and on that premise, disallowed 2/3rd of the stamp duty. Ld. CIT(A) recorded a finding that in order to secure expenditure to be deferred Revenue expenditure, such an expense must result in a benefit in Revenue field and inasmuch as by incurring the stamp duty, the assessee does not get any enduring benefit of creation of a capital asset so as to have any enhanced income. We agree with this finding of the Ld. CIT(A) and dismiss this ground of appeal.
In the result, appeal of the assessee and the Revenue are allowed in part and for statistical purpose.