Income Tax Appellate Tribunal - Delhi
Motorola Solutions India Pvt. Ltd.,, ... vs Dcit, Gurgaon on 7 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: I: NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No. 1933/Del/2017
Assessment Year: 2007-08
Motorola Solutions Vs. DCIT,
(India) Pvt. Ltd., Circle-II,
415/2, Mehrauli Gurgaon Road, Gurgaon
Gurgaon.
PAN: AAACM9343D
(Appellant) (Respondent)
Assessee By : Shri Himanshu Sinha, Advocate
Shri Manoneet Dalal, Advocate
Department By : Shri Sanjay J. Basra, CIT, DR
Date of Hearing : 06.02.2018
Date of Pronouncement : 07.02.2018
ORDER
PER R.S. SYAL, VP:
This appeal by the assessee is directed against the final assessment order dated 31.01.2017 passed by the Assessing Officer (AO) u/s. 143(3) r/w 144 C (13) of the Income tax Act, 1961 (hereinafter also called `the Act') in relation to the A.Y. 2007-08.ITA No.1933/Del/2017
2. It is a second round of proceedings. The assessee preferred appeal against the original final assessment order, which was disposed off by the Tribunal on 14.01.2014 in ITA No. 5637/D/2011. The Tribunal, inter alia, restored certain issues of transfer pricing adjustment on account of Advertisement, marketing and promotion (AMP) expenses to the TPO/AO for fresh determination, which we will advert to hereinafter and also expenses on Software.
3. Firstly, we are espousing transfer pricing addition on account of AMP expenses. Pursuant to the aforesaid Tribunal order, the TPO proposed transfer pricing adjustment of Rs. 81,85,60,715/- vide his order dated 21.01.2016. The assessee carried the matter before the Dispute Resolution Panel (DRP), which gave certain directions. The TPO gave effect to such directions and vide his order dated 1.12.2016 computed the amount of transfer pricing adjustment at Rs. 10.56 crore. The AO made such an addition on account of AMP expenses in the impugned order. Thereafter, an order u/s. 154 of the Act was passed by the TPO/AO, again increasing the addition on account of transfer pricing adjustment of AMP expenses to Rs. 81.85 crore and odd. That is how, the assessee is aggrieved before the Tribunal.
4. We have heard both the sides and pursued the relevant material on record. In the ultimate analysis, the Tribunal sent the matter back to the file of the AO/TPO for determining the transfer pricing adjustment by applying the decision of the 2 ITA No.1933/Del/2017 Special Bench of the Tribunal in the case of L.G. Electronics India (P) Ltd. VS. ACIT (2013) 152 TTJ 273 (Del) (SB) and also giving certain specific directions for such computation.
5. The first such direction is contained in para No. 18.4 of the order, vide which the TPO was directed to consider the credit notes, the global transfer pricing policy and other documents to be produced by assessee for substantiating that the credit notes were issued by the foreign AE towards compensation for promotion of brands. The TPO in the fresh round of proceedings examined this aspect and noted that the credit notes provided by the AE were only in respect of "sales price of product" to the assessee and not to compensate it for "other expenses".
6. The Ld. AR contended that the policy of the group was to compensate the assessee by way of credit notes towards all expenses. It was, therefore, submitted that the credit notes should have been treated as reimbursement of AMP expenses incurred by the assessee in the peculiar facts of the case. We have gone through copies of the credit notes, which have been placed on record. The first one is at page No. 362 of the paper book. This credit note refers to dates 12.04.2006, 23.11.2006, 29.12.2006, 06.12.2006, 01.01.2007 at the top right side. On a specific query, it was submitted that the dates referred on the credit note are the `purchase transactions' of the assessee. Narration given in the credit note is ;
"Credit note against transfer price charged for the period 01.04.2006 to 3 ITA No.1933/Del/2017 31.03.2007". On going the credit note as a whole, it becomes clear that the assessee's foreign AE sold goods to the assessee and then issued credit notes in respect of such sales. These credit notes have no relation whatsoever with the expenses incurred by the assessee, including AMP expenses. All other credit notes are on the same pattern which demonstrates that these were issued to the assessee for compensation against the price charged for products sold. The alleged Global policy also does not say as has been urged by the assessee. In view of these facts, we are unable to see as to how such credit notes can be considered as reimbursement of AMP expenses, when they are specifically towards the goods sold. We, therefore, countenance the view of the authorities below on this issue that the credit notes were issued towards discount on the sale price and are in no way a compensation for incurring AMP expenses.
7. The next direction is contained in para No. 26.1 of the Tribunal order. Through this para and the immediately preceding paras, the assessee's contention for removal of selling expenses from the ambit of AMP expenses was remitted for a fresh examination at the TPO's end. In such fresh proceedings, the TPO noticed that the assessee spent Rs.62.98 crore towards AMP expenses, comprising of Demo and Dummy Phones of Rs. 1,03,59,593/-; Prize, Awards, Gifts and Photoshoot of Rs. 9,66,91,327; Product Marketing Research of Rs. 49,16,823/-; Salesman Training expenses of Rs. 14,81,01,235/-; Business Meeting & 4 ITA No.1933/Del/2017 Conference expenses of Rs. 28,27,04,656/-; and Dealer Commission of Rs. 8,71,07,635/-. He treated Salesmen Training Expenses of Rs.14,81,01,235/- and Dealer Commission of Rs. 8,71,07,635/- as Selling expenses and rest of the amount as AMP expenses. The assessee contended before the DRP that the TPO did not properly examine the nature of expenses. The DRP directed the TPO to re- examine the nature of such expenses and exclude Selling expenses, if any, and take the rest as expenses towards brand building. Giving effect to the DRP direction, the TPO vide order dated 27.01.2017 considered total of Rs. 62.49 crore as selling expenses and recomputed the amount of transfer pricing adjustment at Rs. 10.56 crore. A rectification order was passed thereafter in which the amount of Selling expenses again got restricted to Salesmen Training expenses and Dealer commission and rest of the expenses as AMP. This led to the transfer pricing adjustment on account of AMP expenses at Rs. 81.85 crore. The ld. AR contended that the nature of expenses was not properly considered.
8. In this regard, we find that the Special Bench of the Tribunal in LG Electronics (supra) has held that that the expenses for the promotion of the sales are different from the expenses in connection with sales. While expenses for the promotion of the sales directly lead to brand building, the expenses directly in connection with sales are only sales specific and hence cannot be brought within ambit of AMP expenses. It is observed that the TPO has not properly examined 5 ITA No.1933/Del/2017 the nature of expenses before placing them under the category of `AMP expenses'. Each and every item of expenditure needs to be properly examined for ascertaining if it is for promotion of sales or in connection with the sales. In the absence of minute details of such expenses filed by the assessee, we are unable to characterise such expenses as Selling expenses or AMP expenses. Under these circumstances, we set aside the impugned order on this score and remit the matter to the AO/ TPO for deciding the same afresh and then exclude `Selling expenses' from the base amount of AMP expenses.
9. The Ld. AR contended that the TPO in the fresh round was not supposed to follow decision of the Special Bench in the case of LG Electronics (supra) as ordained by the Tribunal. Relying on certain decisions rendered by the Hon'ble Delhi High Court, he contended that the AMP expenses have been held to be not an international transaction. Countering this argument, the ld. DR also relied on a series on decisions in which the Hon'ble Delhi High Court has held AMP expenses to be an international transaction. On a specific query, it was admitted by the ld. AR that the Hon'ble Punjab & Haryana High Court is the jurisdictional High Court and so far no decision has been rendered by it on the issue. The ld. AR further stated that the assessee has preferred an appeal against the original tribunal order before the Hon'ble High Court on the issues concerning the transfer pricing adjustment towards AMP expenses, which is still pending.
6 ITA No.1933/Del/2017
10. It is noticed that the Tribunal, at the time of passing the order, had the benefit of Special Bench decision in the case of LG Electronics (supra). Following such decision, the Tribunal restored the issue of AMP expenses to the TPO/AO to be decided afresh in the light of the ratio laid down by the Special bench decision and also giving certain specific directions. Thus, it is vivid that the entire AMP issue was not thrown open at large before the TPO to be decided de novo. But there was a specific direction to deal with the issue in a particular manner. It is but natural that when the Tribunal restored the matter to the TPO/AO for deciding certain issues concerning AMP expenses in a particular way, while holding it to be an international transaction, the authorities could not have entertained the argument of the assessee that the AMP expenses be treated as not an international transaction. Such a contention, if accepted, would have made the order of the Tribunal unworkable, which the lower authorities were rightly not competent to do. In our considered opinion the DRP has rightly followed the Tribunal order in the assessee's own case holding that excessive AMP spend is an international transaction. In such circumstances, the argument of the assessee again before us that AMP expenses is not an international transaction, does not require consideration as the same does not arise from the order passed by the Tribunal pursuant to which these proceedings have arisen. Such issues have been challenged by the assessee before the Hon'ble High Court, which is the right forum to deal 7 ITA No.1933/Del/2017 with the same. We therefore, approve the view of the AO in not examining any fresh contentions de hors the remit order by the Tribunal.
11. The Ld. AR submitted that the assessee did not pay any royalty to its AE. It was pointed out that the Tribunal in the first round noted this fact in paras 18.3 and 18.4 of its order and thereafter directed the TPO to consider the impact of this factor on the determination of transfer pricing adjustment towards AMP expenses in the light of decision of the Special Bench in the case of LG Electronics (supra). It is observed that albeit a specific direction was given by the Tribunal for considering the impact of non-payment of royalty on the question of determining the transfer pricing adjustment of AMP expenses, the TPO did not examine such issue. Under these circumstances, we are left with no option but to send matter back to the AO/TPO for considering the effect of non-payment of royalty on the transfer pricing adjustment in the light of the decision rendered by the Special Bench in the case of LG Electronics (supra).
12. To sum up, we set aside the impugned order on the transfer pricing addition on account of AMP expenses and send the matter back to the TPO/AO for determining its ALP afresh in the light of our above discussion. Needless to say, the assessee will be allowed an opportunity of hearing in such fresh proceedings. 8 ITA No.1933/Del/2017
13. The only other issue which survives in this appeal is against software expenses. The Tribunal dealt with computer software expenses aggregating of Rs. 1.10 crore treated by the AO as capital in nature in paras 177 and 178 of its order and remitted the matter to the AO for deciding it in the light of Special Bench verdict in Amway India Enterprises vs. DCIT. Pursuant to such direction, the AO required the assessee to produce bills to substantiate its claim that the expenses were revenue in nature. The assessee did not furnish such bills. Consequently, the amount was treated as capital in nature and depreciation allowed accordingly. The DRP also recorded that the assessee did not furnish any fresh details before the AO and hence no larger relief could be given. The assessee is again aggrieved before the Tribunal.
14. After considering the rival submissions and perusing the relevant material on record, we find that there is a specific direction given by the Tribunal for considering the nature of software expenses of Rs. 1.10 crore as capital or revenue in the light of Special Bench decision in Amway India (supra). This exercise entails going through all the bills and then examining the period during which their benefit would run. This could have been done by the AO only after going through the bills depicting the nature of expenses, which were not filed by the assessee. The ld. AR contended that roughly 60% of the bills were furnished to the AO in the original proceedings. This clearly proves that the assessee did not furnish 9 ITA No.1933/Del/2017 complete details of software expenses. We fail to appreciate as to how the AO could have determined the nature of software expenses, being capital or revenue, without going through the relevant bills. In the given situation, we are of the considered view that it would be in the fitness of things if the impugned order is set aside and the matter is remitted to the AO for examining this issue afresh. It is made clear that the assessee will be duty bound to submit any detail as called for by the AO in this regard. If the assessee again fails to produce such bills/details, the AO will be entitled to draw adverse inference against the assessee.
15. In the result, the appeal is partly allowed for statistical purposes.
The order pronounced in the open court on 07.02.2018.
Sd/- Sd/-
[KULDIP SINGH] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 07th February, 2018.
Neha
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ITA No.1933/Del/2017
Copy forwarded to:
Appellant
Respondent
CIT
CIT (A)
DR, ITAT
AR, ITAT, NEW DELHI.
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