2019 (3) TMI 1696 - AT - Income Tax

Tribunal remands TP adjustments decision, directs fresh examination on technical fees & import issue

The Tribunal set aside the AO's decision on both Transfer Pricing (TP) adjustments. For the reimbursement of technical fees, the Tribunal remanded the ... TP Adjustment - Arm’s Length Price (ALP) of the reimbursement of technical fee - HELD THAT:- The purpose of determining ALP of a transaction is to find out as to whether similar kind of payments would have been made to an unrelated party for similar kind of services rendered. Hence the details relating to nature of services that were received by the assessee are, in our view, crucial for determining ALP. Hence we are of the view that the TPO has not questioned the genuineness of transactions. We also agree with the contentions of the Ld. DR that the copies of invoices received by the assessee from its AE would not demonstrate the details of services received by the assessee. From the order of TPO, we noticed that the assessee has given examples of services received by it from its AE Though the assessee has claimed to have received the above said services, yet it has not furnished any material to demonstrate that the above said services were actually received. Hence, in the absence of any material to prove the details of services actually rendered by the AE, it would be difficult for the tax authorities as well as for the Tribunal to appreciate the contentions of assessee. Before us, the Ld. AR submitted that the assessee has prepared a detailed note explaining the details of services received by it. In the interest of natural justice, we are of the view that the assessee may be provided with one more opportunity in this matter. Accordingly we admit the additional evidences furnished by the assessee explaining the details of received services provided by its AE. In view of the above, this issue requires fresh examination at the end of AO/TPO. TP adjustment made in respect of import of men’s wear from its AE - Selection of MAM - RPM or TNMM - AR submitted that the assessee imports men’s wear from its AE and distributes the same as it is without making any value addition - HELD THAT:- The assessee is the distributor of men’s wear imported from its AE. It does not carry out any value addition. Though the assessee is alleged to have incurred huge expenses on advertisement and market promotion, the same would not increase the inherent value of the products. In the case of simple distribution of products, it has been consistently held in the above said case laws that the “Resale Price method” (RPM) is the most appropriate method. Under the RPM, the profits are compared at Gross Margin level, in which case, the expenses incurred on Advertisement and Marketing should not be deducted while arriving at the Gross profit margin. Hence the TNMM method adopted by the assessee as well as the TPO is not appropriate method. Since the T.P study requires to be carried out afresh by adopting “RPM”, we set aside the order passed by the AO on this issue and restore the same to his file for examining this issue afresh. Appeal of the assessee is treated as allowed for statistical purposes Issues Involved:1. Transfer Pricing (TP) adjustment for reimbursement of technical fees.2. TP adjustment for import of men’s wear from Associated Enterprise (AE).Detailed Analysis:1. TP Adjustment for Reimbursement of Technical Fees:The assessee is aggrieved by the TP adjustment of Rs. 3,47,91,041/- made by the AO. The Transfer Pricing Officer (TPO) noticed that the assessee failed to furnish justification and evidence for services received from its AE. The TPO determined the Arm’s Length Price (ALP) of the reimbursement of technical fees as NIL because the services rendered were of routine nature and the assessee could not provide substantial evidence of the services received. The assessee had paid a technical fee of Rs. 104.27 Lakhs, which the TPO held had an ALP of NIL.Before the Dispute Resolution Panel (DRP), the assessee argued that the TPO is not entitled to examine the genuineness of the expenses. However, the DRP upheld the TPO’s decision, noting the lack of evidence provided by the assessee. The assessee then prepared a detailed note on the nature of services rendered by its AE and requested it be admitted as additional evidence. The Tribunal agreed to admit the additional evidence and remanded the matter back to the AO/TPO for fresh examination. The Tribunal emphasized that the nature, quality, and quantity of services are crucial for determining the ALP and that the TPO had not questioned the genuineness of the transactions but rather the lack of evidence.Decision: The Tribunal set aside the order passed by the AO on this issue and restored it to the file of AO/TPO for fresh examination, considering the additional evidence and TP study of the assessee.2. TP Adjustment for Import of Men’s Wear from AE:The assessee, a distributor of Celio Brand men’s wear, benchmarked the transaction under the Transactional Net Margin Method (TNMM), initially adopting 'cost + mark up' as the Profit Level Indicator (PLI) based on single-year data. The TPO noticed that the assessee incurred a loss during the year, with a net margin of (-) 8.21%, while the comparables had a net profit margin of 1.12%. The TPO proposed a TP adjustment of Rs. 320.52 Lakhs.Before the DRP, the assessee argued that the 'Re-sale Price Method' (RPM) is the most appropriate method for distribution transactions. However, the DRP noted heavy expenses towards branding and upheld the use of TNMM. The Tribunal, after reviewing several case laws, agreed that RPM is the most appropriate method for benchmarking international transactions involving the purchase of finished goods for resale without value addition. The Tribunal cited multiple cases where RPM was deemed suitable for similar transactions, emphasizing that advertisement and sales promotion expenses do not increase the inherent value of the products and should not affect the gross profit margin under RPM.Decision: The Tribunal set aside the order passed by the AO on this issue and restored it to the file of AO for fresh examination using RPM as the most appropriate method for benchmarking the international transaction.Conclusion:In summary, the appeal of the assessee is treated as allowed for statistical purposes, with both issues remanded back to the AO/TPO for fresh examination in accordance with the Tribunal's directions.Order pronounced in the open court on 15th day of March, 2019.