Motorola Solutions India Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 1933/DEL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3755 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2007-2008
• Appeal Filed On: 30-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY J BASRA
• Keywords: Gift; Transfer pricing; Rectification of order; International transaction
• Section: 143(3); 154; 2

Judgement Text

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 (INDIA) PVT. LTD., 415/2, MEHRAULI GURGAON ROAD, GURGAON. PAN: AAACM9343D VS. DCIT, CIRCLE-II, GURGAON (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 (A O) U/S. 143(3) R/W 144 C (13) OF THE INCOME TAX ACT, 1961 (HEREINAFTER ALSO CALLE D `THE ACT) IN RELATION TO THE A.Y. 2007-08. ITA NO.1933/DEL/2017 2 2. IT IS A SECOND ROUND OF PROCEEDINGS. THE AS SESSEE 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 DE TERMINATION, WHICH WE WILL ADVERT TO HEREINAFTER AND ALSO EXPENSES ON SOFTWARE . 3. FIRSTLY, WE ARE ESPOUSING TRANSFER PRICING A DDITION 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 O RDER DATED 21.01.2016. THE ASSESSEE CARRIED THE MATTER BEFORE THE DISPUTE RESO LUTION PANEL (DRP), WHICH GAVE CERTAIN DIRECTIONS. THE TPO GAVE EFFECT TO SUCH DIR ECTIONS AND VIDE HIS ORDER DATED 1.12.2016 COMPUTED THE AMOUNT OF TRANSFER PRICING A DJUSTMENT AT RS. 10.56 CRORE. THE AO MADE SUCH AN ADDITION ON ACCOUNT OF AMP EXPE NSES IN THE IMPUGNED ORDER. THEREAFTER, AN ORDER U/S. 154 OF THE ACT WA S PASSED BY THE TPO/AO, AGAIN INCREASING THE ADDITION ON ACCOUNT OF TRANSFER PRIC ING ADJUSTMENT OF AMP EXPENSES TO RS. 81.85 CRORE AND ODD. THAT IS HOW, THE ASSES SEE IS AGGRIEVED BEFORE THE TRIBUNAL. 4. WE HAVE HEARD BOTH THE SIDES AND PURSUED T HE 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 ITA NO.1933/DEL/2017 3 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 P ARA 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 COMPENS ATION 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 F OR OTHER EXPENSES. 6. THE LD. AR CONTENDED THAT THE POLICY OF THE GROU P WAS TO COMPENSATE THE ASSESSEE BY WAY OF CREDIT NOTES TOWARDS ALL EXPENSE S. 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 T HE 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 R EFERS TO DATES 12.04.2006, 23.11.2006, 29.12.2006, 06.12.2006, 01.01.2007 AT T HE TOP RIGHT SIDE. ON A SPECIFIC QUERY, IT WAS SUBMITTED THAT THE DATES REF ERRED 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 ITA NO.1933/DEL/2017 4 31.03.2007. ON GOING THE CREDIT NOTE AS A WHOLE, IT BECOMES CLEAR THAT THE ASSESSEES FOREIGN AE SOLD GOODS TO THE ASSESSEE AN D THEN ISSUED CREDIT NOTES IN RESPECT OF SUCH SALES. THESE CREDIT NOTES HAVE NO R ELATION WHATSOEVER WITH THE EXPENSES INCURRED BY THE ASSESSEE, INCLUDING AMP E XPENSES. ALL OTHER CREDIT NOTES ARE ON THE SAME PATTERN WHICH DEMONSTRATES T HAT 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 B Y THE ASSESSEE. IN VIEW OF THESE FACTS, WE ARE UNABLE TO SEE AS TO HOW SUCH CREDIT N OTES CAN BE CONSIDERED AS REIMBURSEMENT OF AMP EXPENSES, WHEN THEY ARE SPECIF ICALLY TOWARDS THE GOODS SOLD. WE, THEREFORE, COUNTENANCE THE VIEW OF THE A UTHORITIES 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 PAR AS, THE ASSESSEES CONTENTION FOR REMOVAL OF SELLING EXPENSES FROM THE AMBIT OF A MP EXPENSES WAS REMITTED FOR A FRESH EXAMINATION AT THE TPOS END. IN SUCH FRES H 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 RE SEARCH OF RS. 49,16,823/-; SALESMAN TRAINING EXPENSES OF RS. 14,81,01,235/-; B USINESS MEETING & ITA NO.1933/DEL/2017 5 CONFERENCE EXPENSES OF RS. 28,27,04,656/-; AND DEA LER COMMISSION OF RS. 8,71,07,635/-. HE TREATED SALESMEN TRAINING EXPENS ES OF RS.14,81,01,235/- AND DEALER COMMISSION OF RS. 8,71,07,635/- AS SELLING E XPENSES AND REST OF THE AMOUNT AS AMP EXPENSES. THE ASSESSEE CONTENDED BEF ORE THE DRP THAT THE TPO DID NOT PROPERLY EXAMINE THE NATURE OF EXPENSES. T HE DRP DIRECTED THE TPO TO RE- EXAMINE THE NATURE OF SUCH EXPENSES AND EXCLUDE SE LLING EXPENSES, IF ANY, AND TAKE THE REST AS EXPENSES TOWARDS BRAND BUILDING. G IVING EFFECT TO THE DRP DIRECTION, THE TPO VIDE ORDER DATED 27.01.2017 CONS IDERED TOTAL OF RS. 62.49 CRORE AS SELLING EXPENSES AND RECOMPUTED THE AMOUNT OF TR ANSFER 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 T RAINING EXPENSES AND DEALER COMMISSION AND REST OF THE EXPENSES AS AMP. THIS LE D 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 CONSID ERED. 8. IN THIS REGARD, WE FIND THAT THE SPECIAL B ENCH OF THE TRIBUNAL IN LG ELECTRONICS (SUPRA) HAS HELD THAT THAT THE EXPENSES FOR THE PROMOTION O F THE SALES ARE DIFFERENT FROM THE EXPENSES IN CONNECTION WITH SALES. WHILE EXPENSES FOR THE PROMOTION OF THE SALES DIRECTLY LEAD TO BRAND BUILD ING, THE EXPENSES DIRECTLY IN CONNECTION WITH SALES ARE ONLY SALES SPECIFIC AND H ENCE CANNOT BE BROUGHT WITHIN AMBIT OF AMP EXPENSES. IT IS OBSERVED THAT THE TPO HAS NOT PROPERLY EXAMINED ITA NO.1933/DEL/2017 6 THE NATURE OF EXPENSES BEFORE PLACING THEM UNDER TH E CATEGORY OF `AMP EXPENSES. EACH AND EVERY ITEM OF EXPENDITURE NEEDS TO BE PROP ERLY EXAMINED FOR ASCERTAINING IF IT IS FOR PROMOTION OF SALES OR IN CONNECTION W ITH THE SALES. IN THE ABSENCE OF MINUTE DETAILS OF SUCH EXPENSES FILED BY THE ASSESS EE, 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 R EMIT THE MATTER TO THE AO/ TPO FOR DECIDING THE SAME AFRESH AND THEN EXCLUDE `SELL ING EXPENSES FROM THE BASE AMOUNT OF AMP EXPENSES. 9. THE LD. AR CONTENDED THAT THE TPO IN THE FRESH R OUND 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 DECIS IONS RENDERED BY THE HONBLE DELHI HIGH COURT, HE CONTENDED THAT THE AMP EXPENSE S HAVE BEEN HELD TO BE NOT AN INTERNATIONAL TRANSACTION. COUNTERING THIS ARGUM ENT, THE LD. DR ALSO RELIED ON A SERIES ON DECISIONS IN WHICH THE HONBLE DELHI HIGH COURT HAS HELD AMP EXPENSES TO BE AN INTERNATIONAL TRANSACTION. ON A SPECIFIC Q UERY, IT WAS ADMITTED BY THE LD. AR THAT THE HONBLE PUNJAB & HARYANA HIGH COURT IS THE JURISDICTIONAL HIGH COURT AND SO FAR NO DECISION HAS BEEN RENDERED BY IT ON T HE ISSUE. THE LD. AR FURTHER STATED THAT THE ASSESSEE HAS PREFERRED AN APPEAL AG AINST THE ORIGINAL TRIBUNAL ORDER BEFORE THE HONBLE HIGH COURT ON THE ISSUES CONCERN ING THE TRANSFER PRICING ADJUSTMENT TOWARDS AMP EXPENSES, WHICH IS STILL PEN DING. ITA NO.1933/DEL/2017 7 10. IT IS NOTICED THAT THE TRIBUNAL, AT THE TIM E 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 A MP 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 T O 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 PARTICU LAR 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 WE RE RIGHTLY NOT COMPETENT TO DO. IN OUR CONSIDERED OPINION THE DRP HAS RIGHTLY FOLLO WED THE TRIBUNAL ORDER IN THE ASSESSEES OWN CASE HOLDING THAT EXCESSIVE AMP SPEN D IS AN INTERNATIONAL TRANSACTION. IN SUCH CIRCUMSTANCES, THE ARGUMENT OF THE ASSESSEE AGAIN BEFORE US THAT AMP EXPENSES IS NOT AN INTERNATIONAL TRANSACTI ON, DOES NOT REQUIRE CONSIDERATION AS THE SAME DOES NOT ARISE FROM THE O RDER PASSED BY THE TRIBUNAL PURSUANT TO WHICH THESE PROCEEDINGS HAVE ARISEN. SU CH ISSUES HAVE BEEN CHALLENGED BY THE ASSESSEE BEFORE THE HONBLE HIGH COURT, WHIC H IS THE RIGHT FORUM TO DEAL ITA NO.1933/DEL/2017 8 WITH THE SAME. WE THEREFORE, APPROVE THE VIEW OF TH E 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 ROUN D NOTED THIS FACT IN PARAS 18.3 AND 18.4 OF ITS ORDER AND THEREAFTER DIRECTED THE TPO T O CONSIDER THE IMPACT OF THIS FACTOR ON THE DETERMINATION OF TRANSFER PRICING ADJ USTMENT TOWARDS AMP EXPENSES IN THE LIGHT OF DECISION OF THE SPECIAL BENCH IN TH E 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, TH E 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 NO N-PAYMENT OF ROYALTY ON THE TRANSFER PRICING ADJUSTMENT IN THE LIGHT OF THE DEC ISION 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 ABO VE DISCUSSION. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED AN OPPORTUNITY OF HEAR ING IN SUCH FRESH PROCEEDINGS. ITA NO.1933/DEL/2017 9 13. THE ONLY OTHER ISSUE WHICH SURVIVES IN THIS APP EAL 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 I N PARAS 177 AND 178 OF ITS ORDER AND REMITTED THE MATTER TO THE AO FOR DECIDING IT I N 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 SUBSTANTI ATE ITS CLAIM THAT THE EXPENSES WERE REVENUE IN NATURE. THE ASSESSEE DID NOT FURNIS H SUCH BILLS. CONSEQUENTLY, THE AMOUNT WAS TREATED AS CAPITAL IN NATURE AND DEPRECI ATION 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 ASS ESSEE IS AGAIN AGGRIEVED BEFORE THE TRIBUNAL. 14. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THERE IS A SPECIFIC DIRECTI ON 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 EXAMIN ING 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 W ERE 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 ITA NO.1933/DEL/2017 10 COMPLETE DETAILS OF SOFTWARE EXPENSES. WE FAIL TO APPRECIATE AS TO HOW THE AO COULD HAVE DETERMINED THE NATURE OF SOFTWARE EXPENS ES, BEING CAPITAL OR REVENUE, WITHOUT GOING THROUGH THE RELEVANT BILLS. IN THE G IVEN 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 EXAM INING 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 FA ILS TO PRODUCE SUCH BILLS/DETAILS, THE AO WILL BE ENTITLED TO DRAW ADVERSE INFERENCE A GAINST THE ASSESSEE. 15. IN THE RESULT, THE APPEAL IS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 07.02.20 18. SD/- SD/- [KULDIP SINGH] [R. S. SYAL] JUDICIAL MEMBER VICE PRESIDE NT DATED, 07 TH FEBRUARY, 2018. NEHA ITA NO.1933/DEL/2017 11 COPY FORWARDED TO: APPELLANT RESPONDENT CIT CIT (A) DR, ITAT AR, ITAT, NEW DELHI.