2019 (4) TMI 1868 - AT - Income Tax

Tribunal decision: Resale Price Method for ALP recalculated, expenses excluded. CIT(A) decisions upheld.

Michelin India Tyre Pvt. Ltd. Versus DCIT, Circle 6 (1) New Delhi And Vice-Versa.

The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal. It directed the AO/TPO to recompute the arm's length price (ALP) ... TP Adjustment - rejecting TNMM as most appropriate method for determining arm’s length price of international transaction being import of furnished goods for resale in India - whether, RPM or TNMM is the most appropriate method - assessee has applied resale price method on purchase of goods, enterprise purchases a property or services from associated enterprise and then resells property or services to an unrelated enterprises - HELD THAT:- A close scrutiny of above Clauses of rule 10B(1)(b) makes it clear that RPM is best suited for determining ALP of an international transaction in nature of purchase of goods from AE, which is resold. Ordinarily, this method pre-supposes, no or insignificant value addition to goods purchased from foreign AE. In case goods so purchased are used either as raw material for manufacturing finished products, or are further subjected to processing before resale, then RPM cannot be characterized as proper method for benchmarking international transaction of purchase of goods by assessee from its AE. Further on facts of present case it is observed that assessee has used 6 comparables and the PLI chosen was gross profit margin being GP/sales. CIT(A) upon verification of accounts of comparables approved comparables being Falcon Tyres Ltd, Monotona Tyres Ltd and TVS Srichakra Ltd. Ld.CIT (A) compared accounts of comparables. He rejected Kesoram Industries Ltd. and India Tyres and Rubber Company Ltd., as quantitative details of sales were not available. From the order of Ld.TPO, it is observed that Ld.TPO has considered India Tyre and Rubber company, to be best comparable. Under such circumstances it is desirable to set aside this issue to Ld.AO/TPO, with a direction to determine ALP of subject transaction with RPM as most appropriate method. Assessee is directed to provide gross profit of comparables Kesoram Industries Ltd and India Tyres and Rubber Company Ltd. and then ALP should be determined by considering GP/sales of comparable companies as discussed above. - Decided against revenue. Disallowance of advertising and publicity expenses stating that these expenses are revenue in nature - HELD THAT:- AO disallowed 50% of expenditure incurred for advertising and publicity expenses without any basis. There is nothing brought on record by Ld.AO or Ld.Sr.D.R. to show that the expenditure incurred are bogus. Further the disallowance has been made by Ld.AO for two reasons: (i) that these expenditure incurred by assessee is towards establishment and Promotion of the ‘International Brand’ which is not the property of assessee and (ii) that it has not been incurred wholly and exclusively for assessee’s business. In our considered opinion, the reason given by ld.AO for making disallowance has already been considered by Ld.TPO while proposing djustment under the head ‘AMP expenditure’. Further such addition cannot be based on presumptions. We are therefore in conformity with the view taken by Ld. CIT (A). Provision for impairment of stock - CIT-A deleted the addition - HELD THAT:- Assessee has valued at inventory based on accounting standard 2 after reducing recorded value of closing stock. The net value of closing stock was then taken to the balance sheet. In our considered opinion this is a recognised method of valuation prescribed under the Companies Act and also recognised under section 145 of the Income Tax Act. Excess claim of depreciation on printer and UPS at 60% of computer peripheral - HELD THAT:- the issue now stands squarely covered by the decision of Hon’ble Delhi High Court in case of CIT vs BSESE Yamuna Power Ltd [2010 (8) TMI 58 - DELHI HIGH COURT]. Disallowance of management fee - HELD THAT:- From order passed by Ld.CIT(A) it is noticed that assessee placed before authorities below, e-mail, or online access to workshop/conference, records etc. which do not have any evidentiary value. In our considered opinion for considering expenses to be revenue in nature, one has to produce evidence to support and substantiate receipt of such services like copies of argument, bills, vouchers etc. for the payments made, kinds of managerial services received by assessee. In the present facts of case assessee has neither produced any such evidences before authorities below, nor before us to substantiate its claim. We therefore do not find any infirmity in view taken by Ld.CIT(A). TDS u/s 195 - training expenses on account of non-deduction of TDS - HELD THAT:- It is observed that amount payable as on 19/09/2006 as per Invoice dated 20.06.2005 was ₹ 4,806,214/-. But assessee deposited ₹ 5,43,533.98 on 19/09/2006. It is also observed that assessee deducted 15% TDS on ₹ 56,54,369.07 which Ld.TPO accepted and did not deduct TDS on ₹ 5,43,533.98. There is nothing on record produced by assessee prove that ₹ 5,43,533.98 represent the foreign exchange loss, neither before authorities below nor before us. We therefore do not find any infirmity in the view taken by ld.CIT(A) and the same is upheld. - Decided against assessee. AMP expenditure not being an international transaction - HELD THAT:- No merit in the argument advanced by Ld.Counsel regarding AMP spent not being an international transaction. However we do not agree with application of BCT by Ld.TPO for computing the ALP. Alternate plea regarding the AMP reimbursement received during F.Y. 2010-11 being subjected to Tax and accordingly filed rectification application u/s 154 - HELD THAT:- n our considered opinion offering of reimbursement received during F.Y. 2010-11 cannot be a reason not to determine the ALP of the international transaction. In present facts conduct of assessee and AE has already established that AMP is an International Transaction. Once a transaction has been held to be an international transaction, ALP needs to be determined. Whether comparables selected by TPO to arrive at a mark-up of 13.04% is inappropriate? - HELD THAT;- computation of ALP needs to be revisited by Ld.TPO. Ld.TPO is directed to compute ALP by not applying Bright Line Test. Further it is also directed that trade/sales discount given to sub distributors/retailers may be excluded as these cannot be linked to brand building of AE. Ld.TPO is also directed to exclude freight expenses on import of goods. Issues Involved:1. Deletion of TP adjustments by rejecting the TPO's approach.2. Rejection of TNMM by the TPO and acceptance of the assessee's transfer pricing approach.3. Deletion of disallowance of advertising and publicity expenses.4. Deletion of disallowance on account of impairment of stock.5. Deletion of disallowance on account of excess claim of depreciation on printer and UPS.6. Disallowance of management fee.7. Disallowance related to training expenses on account of non-deduction of TDS.8. AMP expenses as an international transaction and computation of ALP.Detailed Analysis:1. Deletion of TP Adjustments by Rejecting the TPO's Approach:The Tribunal upheld the CIT(A)'s decision to use the Resale Price Method (RPM) instead of the Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP) of imported finished goods for resale in India. The Tribunal noted that RPM is more appropriate for transactions involving resale of goods without significant value addition. The CIT(A) had verified the comparables and found no infirmity in the application of gross profit margin using RPM. The Tribunal directed the AO/TPO to determine the ALP using RPM and to consider the gross profit of comparables Kesoram Industries Ltd. and India Tyres and Rubber Company Ltd.2. Rejection of TNMM by the TPO and Acceptance of the Assessee's Transfer Pricing Approach:The Tribunal agreed with the CIT(A) that RPM is the most appropriate method for determining the ALP for the resale of imported goods, as there was no significant value addition by the assessee. The Tribunal noted that the TPO had accepted RPM in previous and subsequent assessment years, reinforcing its appropriateness for the current year. The Tribunal dismissed the revenue's ground on this issue.3. Deletion of Disallowance of Advertising and Publicity Expenses:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 2,22,39,759/- on account of advertising and publicity expenses. The Tribunal noted that the AO had disallowed 50% of the expenses on an ad hoc basis without any basis or evidence to show that the expenses were not incurred wholly and exclusively for the assessee's business. The Tribunal found that the disallowance was based on presumptions and upheld the CIT(A)'s view that the expenses were revenue in nature.4. Deletion of Disallowance on Account of Impairment of Stock:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 1,38,26,742/- on account of impairment of stock. The Tribunal noted that the assessee had valued the inventory based on Accounting Standard 2, which is a recognized method of valuation under the Companies Act and section 145 of the Income Tax Act. The Tribunal found no infirmity in the CIT(A)'s view that the provision for impairment of stock was not an unascertained liability.5. Deletion of Disallowance on Account of Excess Claim of Depreciation on Printer and UPS:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 20,277/- made on account of excess claim of depreciation on printer and UPS at 60% as computer peripherals. Both sides admitted that the issue was covered by the decision of the Hon'ble Delhi High Court in the case of CIT vs BSES Yamuna Power Ltd.6. Disallowance of Management Fee:The Tribunal upheld the CIT(A)'s decision to disallow the management fee of Rs. 1,38,60,565/-. The Tribunal noted that the assessee had provided inadequate proof/evidence for availing services from its associated enterprise. The CIT(A) observed that the evidence provided by the assessee, such as emails and online access to workshops/conferences, did not sufficiently show that the expenses were incurred for the purposes of business. The Tribunal found no infirmity in the CIT(A)'s view that the onus of proof was not discharged by the assessee.7. Disallowance Related to Training Expenses on Account of Non-Deduction of TDS:The Tribunal upheld the CIT(A)'s decision to disallow the training expenses of Rs. 5,43,533/- on account of non-deduction of TDS. The Tribunal noted that the assessee had not provided any evidence to prove that the amount represented foreign exchange loss. The Tribunal found no infirmity in the CIT(A)'s view that the assessee had failed to deduct TDS on the amount as required under Rule 26, read with Section 195 of the Act.8. AMP Expenses as an International Transaction and Computation of ALP:The Tribunal upheld the CIT(A)'s decision that AMP expenses constituted an international transaction. The Tribunal noted that the assessee had received reimbursement for AMP expenses from its associated enterprise during FY 2010-11, establishing it as an international transaction. However, the Tribunal disagreed with the application of the Bright Line Test (BLT) for computing the ALP and directed the TPO to compute the ALP without applying BLT. The Tribunal also directed the TPO to exclude trade/sales discounts given to sub-distributors/retailers and freight expenses on import of goods from the computation of AMP expenses.Conclusion:The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, directing the AO/TPO to recompute the ALP using RPM for the resale of imported goods and to exclude certain expenses from the computation of AMP expenses. The Tribunal upheld the CIT(A)'s decisions on the disallowance of advertising and publicity expenses, impairment of stock, excess claim of depreciation, management fee, and training expenses.