×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
These are the latest case laws decided by various Income Tax Appellate Tribunals (ITAT) of India on Income Tax which have been published recently. The case laws are open for discussion and we invite expert comments from our members on its applicability and effect on relevant issues.
07-01-2020, Samsung India Electronics, Section 92C, 144C(10), Tribunal Delhi
The present appeal has been filed by the assessee against the order dated 23.10.2017 passed by the AO u/s 144C r.w.s . 143(3) o f the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
“1 That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant for the relevant AY at Rs.1 ,23,84 ,592,620/- as against the returned income of Rs. 8 ,93,81,81 ,030/- .
2. That on the facts and circumstances of the case and in law, the Hon’ble Dispute Resolution Panel (“DRP”) / AO / Learned Transfer Pricing Of ficer (“TPO”) erred in making a transfer pricing ad justment of Rs. 3 ,42,58 ,84,850 on account of (i) advertising, marketing and promotion (“AMP”) expenses incurred by the Appellant and (ii) interest accrued on outstanding receivables due to the Appellant from its Associated Enterprises (“AE”) alleging the same to be not at arm’s length in terms of the provisions o f section 92C of the Act read with Rule 10D of the Income-tax Rules, 1962 (“the Rules”). Further, the AO disallowed depreciation amounting to Rs . 2 ,05,26 ,740 as a result of reduction in the ALP of the transaction of purchase of fixed assets.
GROUNDS AGAINST ADJUSTMENT MADE IN RELATION TO AMP EXPENSES
3. That on the facts and in circumstances of the case and in law, the DRP/AO/TPO have erred in holding that the AMP expenditure incurred by the Appellant in India is an ‘international transaction’ as per the provisions of the Act.
4. That on the facts and in circumstances of the case and in law, the DRP/AO/TPO, while making ad justments of Rs. 3 ,42 ,07,18 ,758 on account of AMP expenditure, erred in:
a. not demonstrating the existence of an 'understanding' or an 'arrangement' or 'action in concert' between the Appellant and its AEs as regards sales promotion spend; and
b. not app eciating that the sales promotion expenses incurred by the Appellant are wholly and exclusively focused on generating domestic sales for its own business operations and the benefit arising from the incurrence of sales promotion expenses by the Appellant has been received by the Appellant with the benefit, if any , resulting to its AEs is merely incidental.
5. That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in holding that the AMP expenses incurred by Appellant has led to the creation o f marketing intangibles and resulted in promotion of “Samsung Brand” for which the Appellant should be compensated by the legal owner of the brand.
6. That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in not appreciating that the Appellant had used Transactional Net Margin Method (“TNMM”) to benchmark its international transactions for the trading business (including alleged AMP activity, if any) and manufacturing business (including alleged AMP activity, i f any), which was otherwise duly accepted by the DRP/AO/TPO and thus, no separate arm’s length analysis was required in respect o f the individual elements of cost as it is inconsistent with the tenets of application o f TNMM as per Rule I0B(l)(e) o f the Rules.
7. That on the facts and circumstance of the case and in law, the DRP/AO/TPO have erred in using product-wise pro fitability of the Appellant between Information Technology (“IT”) and Non-IT products ignoring the functional classification between manufacturing and trading business segments and compared the same with that o f comparables which is in gross contravention of Rule 10B(2) of the Rules. In doing so, the DRP/AO/TPO erred in:
a. Modi fying the comparables’ set by including / selecting comparables that are no t comparable to the Appellant in terms of functions performed assets employed and risks assumed and also re jecting comparables that are functionally comparable to the Appellant;
b. Wrongly computing the margin o f the Appellant and the comparables, including determination of AMP expenditure of both the Appellant and comparables .
8. That on the facts and circumstances of the case and in law, the AO/TPO, in contravention to the direction of the DRP and in violation o f provisions of the section 144C(10) of the Act, erred in including direct sale expenses viz . selling and distribution and sales promotion as a part o f AMP expenditure while computing the ad justment.
9. That on the facts and circumstances of the case and in law, the TPO in contravention to the direction of the DRP and in violation o f provi sions o f the section 144C(10) of the Act, erred in suo moto using indirect expenses to sales ratio while computing the AMP ad justment in the order giving ef fect to the DRP directions whereas the TPO himself had taken AMP / sales ratio at the time o f passing the Transfer Pricing order.
10. That on the facts and circumstances o f the case and in law, the AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing marke t support functions in order to determine the mark-up to be imputed on AMP ad justment.
11. That on the facts and circumstances o f the case and in law, the DRP /AO / TPO have erred in making a protective ad justment of Rs.27 ,81,57 ,54,132 for the AMP transaction, which is impermissible under law.
12. That on the facts and circumstances o f the case and in law, the DRP/AO/TPO have erred in applying the ‘bright line’ test as a tool to benchmark the alleged AMP transaction which has no statutory mandate under the Act as laid down by the Hon’ble Delhi HC in the case o f Sony Ericson Mobile Communications India Pvt. Ltd  374 ITR 118 (Delhi).
13. That on the facts and circumstances o f the case and in law, the Id . DRP/AO/TPO have erred in levying a further mark-up on the alleged AMP expenses incurred over and above the so-called ‘bright-line’ limit, stating that it tantamount to services being provided by Appellant to its AEs.
GROUND AGAINST ADJUSTMENT MADE IN RELATION TO INTER COMPANY RECEIVABLES