HP India Sales Private Limited Vs JCIT (ITAT Bangalore)
Held that TP adjustment, relating to Advertisement, Marketing and Promotion expenditure incurred by the assessee, merely on the basis of presumption that expenses are incurred at the instance or on behalf of the AE is unsustainable
Facts-
During the course of assessment proceedings, it was noticed that international transaction with the AEs exceeded the prescribed limit, therefore, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the said transactions.
The TPO u/s 92CA vide order dated 28.01.2016 proposed TP adjustment of Rs.29,03,35,855. Pursuant to the TPO’s order, draft assessment order was passed on 28.03.2016 u/s 143(3) r.w.s. 144C(1) of the I.T.Act incorporating the above said TP adjustment proposed by the TPO. AO also made certain additions / disallowances on the corporate tax front.
Aggrieved by the draft assessment order, the assessee preferred objections before the Dispute Resolution Penal (DRP). The DRP vide its directions dated 26.12.2016 rejected the objections of the assessee and confirmed the TP adjustment proposed by the TPO. In corporate tax front, partial relief was given to the assessee by deleting the disallowance of excess depreciation on motor vehicles. Pursuant to the directions of the DRP, the impugned final assessment order was passed. Aggrieved by the final assessment order dated 03.01.2017, the assessee has filed the present appeal
Conclusion-
Held that in the present case also, no material is brought on record by the TPO to establish the existence of an arrangement, understanding or action in concert with the AE for incurring the Advertisement, Marketing and Promotion (AMP) expenses for the benefit of the AE. Merely because the AE has a financial interest, it cannot be presumed that AMP expenses incurred by the assessee are at the instance or on behalf of the associated enterprise. In the absence of any international transaction relating to AMP expenses, the impugned TP adjustment cannot be sustained.
Held that the applicability of section 43B in respect of interest on customs duty depends on whether interest on customs duty is levied for keeping the imported goods in the customs warehouse beyond the statutory period or for non-payment of customs duty. If the interest on customs duty is payable for keeping the imported goods in the customs warehouse beyond the statutory period the said interest would not be covered by section 43B and would be allowable as deduction even if it is not paid. However, if the interest on customs duty is payable for the arrears of customs duty or delayed payment of customs duty then the said interest would be regarded as part and parcel of the customs duty. In such circumstances, the assessee cannot get deduction for interest payable as such interest is directly linked to non-payment or late payment of customs duty. As customs duty is allowable only on payment basis u/s. 43B, interest levied on arrears or late payment of customs duty is also allowable on actual payment basis u/s. 43B.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against final assessment order dated 03.01.2017 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2012-2013.
2. The brief facts of the case are as follows:
The assessee is a company engaged in import of computer peripherals from its Associated Enterprises (AEs) for sale in India and also rendered certain support services. The return of income for assessment year 2012-2013 was filed on 29.02.2012, admitting total income of Rs.544,61,99,276. The return was revised on 25.03.2014 admitting total income of Rs.519,65,70,114. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act dated 12.08.2013 was issued and served on the assessee. During the course of assessment proceedings, it was noticed that international transaction with the AEs exceeded the prescribed limit, therefore, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the said transactions. The TPO u/s 92CA of the I.T.Act vide order dated 28.01.2016 proposed TP adjustment of Rs.29,03,35,855. Pursuant to the TPO’s order, draft assessment order was passed on 28.03.2016 u/s 143(3) r.w.s. 144C(1) of the I.T.Act incorporating the above said TP adjustment proposed by the TPO. The Assessing Officer also made certain additions / disallowances on the corporate tax front. Aggrieved by the draft assessment order, the assessee preferred objections before the Dispute Resolution Penal (DRP). The DRP vide its directions dated 26.12.2016 rejected the objections of the assessee and confirmed the TP adjustment proposed by the TPO. In corporate tax front, partial relief was given to the assessee by deleting the disallowance of excess depreciation on motor vehicles. Pursuant to the directions of the DRP, the impugned final assessment order was passed. Aggrieved by the final assessment order dated 03.01.2017, the assessee has filed the present appeal raising the following grounds:-
“General Ground
The assessment order dated January 03,2017, passed by the learned Assessing Officer (“learned AO”) under section 143(3) read with section 144C (13) of the Income Tax Act, 1961 (“the Act”) in the case of HP India Sales Private Limited (formerly known as Hewlett-Packard India Sales Private Limited) (“HPISPL” or lithe Appellant”) is not in accordance with law and is contrary to the facts and circumstances of the case.
Transfer Pricing adjustment under section 92CA of the Act
1.1. The Honorable Dispute Resolution Panel (“DRP”), learned AO and Transfer Pricing Officer (“TPO”) grossly erred in law and on facts of the case in determining the transfer pricing adjustment of Rs 290,335,855 in respect of alleged international transaction pertaining to excess Advertising, Marketing and Promotion (“AMP”) expenditure, alleging the same to be not at arm’s length in terms of the provisions of sections 92C (1) and 92C (2) of the Act read with Rule 10D of the Income-tax Rules, 1962 (lithe Rules”).
1.2. The Honorable DRP have erred in upholding the approach followed by learned TPO in suo-moto benchmarking the alleged international transaction relating to AMP expenses without there being any reference from the AO in relation thereto, in addition to its power and jurisdiction to computing Arm’s Length Price (“ALP”) of the international transaction actually undertaken by the Appellant and referred by the learned AO to determine arm’s length nature of such international transaction(s).
1.3. The learned AO and TPO 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, without appreciating that HPISPL had not incurred any expenditure on the directions of the Associated Enterprises (“AEs”) and without having regard to the rulings in the case of Maruti Suzuki India limited vs Commissioner of Income-tax – ITA 110/2014 & 710/2015 – Honorable Delhi High Court, Bausch & Lomb Eyecare (India) Private limited vs ACIT – Honorable Delhi High Court ITA Nos. 643, 675-77/2014 and 165, 166/2015 Honda Siel Power Products Limited – Honorable Delhi High Court ITA 346/2015 and other judicial precedents that the Appellant relied upon. Furthermore, the learned TPO has erred in applying bright line method which is not one of the prescribed methods under section 92C of the Act, in determining the existence of an international transaction.
1.4. The learned AO, TPO and Honourable DRP erred in law and in fact by exceeding their jurisdictions by determining the ALP of a transaction with third parties that is not an international transaction as def0ined in Section 92B and with flagrant disregard to the rulings of Maruti Suzuki India Limited vs Commissioner of Income-tax ITA 110/2014 & 710/2015 Honorable Delhi High Court, and the jurisdictional tribunal ruling in the case of Essilor India Private Limited vs Dcrr. IT(TP} A No.29/Bang/2014 and IT (TP}A. No. 227/Bang/2015.
1.5. The Honorable DRP, learned AO and TPO have erred in law and on facts in holding that the appellant promoted the brand of the AE merely on the ground that the AMP expenses incurred by the Appellant are more than the AMP expenses incurred by the comparable entities. Thereby, the Honorable DRP, learned TPO and AO have alleged that the Appellant has put in its efforts / finances for the promotion of brand name of the Associated Enterprises and thereby building marketing intangibles for its AEs without giving cognizance to the commercial expediency of the Appellant.
1.6. The Honorable DRP, learned TPO and AO have erred in law and on facts in presuming that the transaction of brand promotion has taken place without bringing on record any tangible and reliable evidences and such a finding of the Honorable DRP, learned AO and TPO is perverse as being not supported by any materials on record.
1.7. The Honorable DRP, learned AO and TPO have erred on facts and in law in ignoring the facts that the AMP expenses incurred by the Appellant were in respect of its own business requirements / considerations / purposes and that all and any benefit resulting from such expenditure are to its own account (in the form of increased sales and market share) and benefits, if any, fetched on this account by the AEs, were purely incidental.
1.8. The Honorable DRP, learned AO and TPO have failed to consider that the alleged AMP expenses were incurred exclusively in relation to the Appellant’s business, which is also evident from the fact that the expenditure have been accepted by the AO under section 37 of the Act.
1.9. The Honorable DRP, learned AO and TPO have erred in law and on facts by disregarding judicial pronouncements in undertaking transfer pricing adjustments.
1.10. The Honorable DRP, learned AO and TPO have not placed correct reliance on Organization for Economic Cooperation and Development (“OECD”) TP Guidelines for Multinationals Enterprises and Tax Administrators, July 2010 and other international commentaries and jurisprudence, as updated by revised guidance under Action 10 on the Base Erosion and Profit Shifting project.
1.11. The Honorable DRP, learned AO and TPO have not placed correct reliance on the India Chapter of the United Nations Transfer Pricing Manual (“UN Manual”) wherein it is clarified that compensation for AMP function need not be separate if the same is performed with the intention to exploit the results in the form of sales and profitability for the Indian entity.
Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds of appeal on merits.
1.12. The Honorable DRP, learned AO and TPO have erred in law and on facts in concluding that the distribution and AMP are two distinctive functions and requires to be remunerated separately.
1.13. The Honorable DRP have erred in upholding the approach of the learned AO and TPO of carrying out separate benchmarking analysis for AMP and making an adjustment without considering and appreciating the fact that aggregation approach followed by the Appellant using Transactional Net Margin Method (“TNMM”) would have already factored in all operating expenses (which includes the AMP expenditure) and proving it at arm’s length to the satisfaction of the Honorable DRP, learned AO and TPO.
1.14. The Honorable DRP, learned AO and TPO have erred in law and on facts in not appreciating that the Appellant has not provided any value added / brand building services to its AE by incurring AMP expenses, and therefore, no mark-up could have been charged / levied on such expenses, even if the same was to be characterized as an ‘international transaction’.
1.15. Notwithstanding the fact that the Appellant did not add any value to its AE by way of incurring the AMP expenses, the learned AO and Honorable DRP erred in recognizing that even if the mark-up is to be applied, the same could have been charged only on the value added expenses incurred by the Appellant for such alleged brand promotion service and not on the entire amount incurred / paid to third party vendors.
1.16. The Honorable DRP, learned AO and TPO have erred in not appreciating that in view of the Appellant being contractually assured of a margin after cost recovery, the entire AMP expenditure has in fact been recovered from the AE and hence adjustment should only be restricted to markup element, that too if the international transaction relating to distribution was not at ALP.
1.17. IheHonorable DRP, learned AO and TPO have erred in law and on facts in choosing comparable companies without sharing the search strategy, for benchmarking the alleged transaction of rendering AMP services.
1.18. The Honorable DRP, learned AO and TPO have erred in law and on facts in considering certain expenses which are inextricably linked to sales promotion and do not lead to brand promotion (such as sales commission, trade discounts, sales schemes etc.), as a part of the alleged AMP brand promotion expenses while benchmarking the alleged brand promotion service, thereby resulting in the unjustified demand.
1.19. The Honorable DRP, learned AO and TPO have erred in law and on facts in not considering the several judicial precedents, including the decision by the Special Bench of Income Tax Appellant Tribunal (“ITAT”) in the case of LG Electronics India (P.) Ltd (ITA No. 5140/DeI/2011) wherein it was held that selling expenses cannot constitute part of AMP expenses. The said aspect has been upheld by the Honorable High Court of Delhi including in the case of Maruti Suzuki India Ltd vs CIT (ITA 110/2014 & ITA 710/2015).
1.20. The Honorable DRP, learned AO and TPO have erred in applying the Bright Line Test (“BLT”) as methodology to quantify the AMP service alleged to have been rendered by the Appellant to its AE and not placed reliance on Delhi High Court ruling of Sony Ericsson Mobile Communication India Private Limited (ITA Nos. 638/2015 & 648/2015).
1.21. The Honorable DRP, learned AO and TPO have erred in law and on facts in rejecting the Appellant’s contention against the companies chosen as comparable by the learned TPO as listed below, in relation to determining the mark-up on excess AMP expenditure without giving concrete reasons:
a)Asian Business Exhibition & Conference Limited;
b)I C C International Agencies Limited;
c)Cyber Media (India) Limited;
d)Killick Agencies & Marketing Limited; and
e)Marketing Consultants & Agencies Limited
1.22. The Honorable DRP, learned AO and TPO have erred in law and on facts by not granting the benefit of quantitative adjustments (such as non-payment of royalty, etc.) while computing the transfer pricing adjustment for the alleged excessive AMP expenditure incurred by the Appellant.
1.23. The Honorable DRP, learned AO and TPO have erred in not granting appropriate favourable economic adjustments (including the working capital adjustment) when assessing the arm’s length nature of alleged international transaction of provision of AMP services.
1.24. The Honorable DRP have erred in law and on facts in not giving specific direction for the following grounds of objection raised before the Honorable DRP. In this regard the Appellant relies on the Honorable Delhi High Court in Vodafone Essar Limited vs Dispute Resolution Pane – II in writ petition (civil) No. 7028/2010 and M/s Itron Metering Solutions India Pvt Ltd vs DCIT Circle-Bt l), New Delhi which states that speaking order has to be passed by the Honorable DRP
2.3. The learned TPO have erred in stating that the Assessee has used Resale Price Method (“RMP”) to benchmark its international transactions. Based on this, the learned TPO has stated that gross margins do not reflect the expenditure relating to the additional function carried out by the Assessee in the form of AMP function. In doing so, the learned TPO has erroneously disregarded the fact that the Assessee has used Transactional Net Margin Method (“TNMM”) to benchmark its transactions which factors in the benchmarking of the AMP expenses. Further the Honorable DRP has upheld the learned TPO’s erroneous remarks stating that the ground is academic in nature and does not require specific directions.
2.4. Without prejudice to the fact that the Assessee is not in agreement with the learned TPO’s / Honorable DRP contention that AMP expenses should be benchmarked separately, the revised Net profit Margin (“NPM”) of the Assessee, after adding an alleged mark up of 15.69 percent to the allegedly excessive AMP expenses, as proposed by the learned TPO is 7.25 percent which is still higher than the ALP determined thereby establishing the alleged transaction of AMP expenses to be at arm’s length.
No specific findings by the Honorable DRP on certain grounds of objections filed before the Honorable DRP at the time of DRP proceedings
1.25. The Honorable DRP have erred in law and on facts by not providing its own findings for certain grounds of objection on AMP raised by the Appellant at the time of DRP proceedings by merely stating that the Honorable DRP places reliance on High Court ruling of Sony Ericsson Mobile Communication India Private Limited (ITA Nos. 638/2015 & 648/2015) which is pending adjudication before the Supreme Court.
2. Disallowance of provision for leave encashment – Rs. 106,847,430
2.1 The Honourable DRP and the learned AO have erred, in law and on facts, in disallowing an amount of Rs. 106,847,430 on account of leave encashment provision created by HPISPL for the subject AY;
2.2 The Honorable DRP and the learned AO have erred, in law and on facts, in disregarding the decision of the Honorable Calcutta High court in case of Exide Industries Limited and Anr vs UOI and Ors (292 ITR 470), wherein it was held that even a provision made for leave encashment is a liability and the same must be allowed as a deduction in computing the taxable income since the same is not in the nature of a contingent liability;
2.3 The Honorable DRP and the learned AO have erred in law and on facts, in making the subject disallowance after having noted that the Honorable Supreme Court (SLP Civil Appeal – 12060/2008) had allowed for claim of deduction towards provision for leave encashment in the return of income, after discharging applicable taxes.
3. Disallowance of depreciation on intangibles – Rs.2,873,837
3.1 The Honorable DRP and the learned AO have erred in law and on facts in disallowing the depreciation claim of Rs.2,873,837 on intangible assets claimed by the Appellant.
3.2 The Honorable DRP and the learned AO have further, erred in law and on facts in not following the jurisdictional Bangalore Tribunal and the Commissioner of Income-tax (Appeals) [“CIT(A)”] decision in Appellant’s own case for AY 2000-01, AY 2004-05, AY 2005-06, AY 2006-07, AY 200708 and AY 2008-09, on identical issues, which has been held in favor of the Appellant.
3.3 Without prejudice to the above, the Honorable DRP and the learned AO have erred in law and on facts in not allowing the said expenditure as a deduction under section 37 of the Act.
4. Disallowance of interest on Customs duty – Rs.346,884,164
4.1 The Honorable DRP and the learned AO have erred in law and on facts, in disallowing an amount of Rs.346,884,164, which represents interest on custom duty, stating that the same is covered within the provisions of section 43B of the Act;
4.2 The Honorable DRP and the learned AO have erred in disregarding the detailed submission made by Appellant, wherein it was stated that the interest on custom duty is not covered with the scope of the provisions of section 43B of the Act and reliance placed on the decision of Honorable Calcutta High Court in the case of Hindustan Motors Limited Vs CIT (218 ITR 450) and other decisions relied on by the Appellant;
4.3 The Honorable DRP and the learned AO has further erred in law and on facts, in stating that decisions of the Courts are conflicting on the subject issue, without appreciating that the decision of the Calcutta High Court (supra) was on interest on custom duty.
4.4 Without prejudice to the above, the Honorable DRP and the learned AO, have erred in law in not directing / providing relief in respect of the aforementioned disallowance in AY 2013-14, having noted that the same has been remitted during previous year 2012-13.
5. Consequential relief – Deferred revenue
5.1 Without prejudice and notwithstanding the Appellant’s grounds on taxability of Deferred Revenue raised for earlier AYs, the Honorable DRP and the learned AO have erred in law and on facts, in not granting any relief to the Appellant with respect to the negative movement of Deferred Revenue account representing the income recognized during the year, which has been bought to tax by the AO in the earlier years (ie in AY 2008-09, AY 2009-10).
5.2 The Honorable DRP and the learned AO have erred in law and on facts in upholding the principles of taxation of amount of deferred revenue pronounced by the erstwhile AO in the assessment order of earlier AYs.
5.3 The Honorable DRP and Learned AO have erred in law and on facts on one hand upholding the principles of taxation of amount of deferred revenue pronounced by the erstwhile AO in the assessment order of earlier AY’s and on the other hand not granting the credit in respect of income recognized by the Appellant in AY 2012-13
5.4 The learned AO and the Honorable DRP has erred in law and facts in not appreciating the fact that non-grant of relief in respect of negative movement of Deferred Revenue results in double taxation of same income in different years which is not permissible under the taxation laws.
6. Other grounds
6.1 The Honorable DRP and the learned AO have erred in law and on facts in making adjustments of Rs. 746,941,286 to the returned income of the Appellant.
6.2 The learned AO has erred in law and on facts in proposing to initiate penalty proceedings under section 271(1) (c) of the Act.
Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant.
The Appellant craves leave to add, alter, vary omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the learned members of the Honorable Tribunal to issue orders.”
Ground A is a general ground and no specific adjudication is called for, hence, we dismiss the said ground. The other grounds, we shall adjudicate as under:-
Transfer Pricing Adjustment of Rs.29,03,35,855 on account of AMP Expenses (Ground 1 and sub grounds)
3. During the relevant previous year, the assessee had entered into following international transactions with its AEs:-
