2016 (6) TMI 493 - AT - Income Tax

Tribunal decisions on cost base, expenses, and income treatment upheld with directions for AO

The Tribunal upheld the CIT(A)'s decisions on various issues, including the inclusion of reimbursed expenses in the cost base for calculating the NCP ... Transfer pricing adjustment - determination of cost incurred by assessee towards marketing support service - whether the cost reimbursed to assessee by its AEs is to be included in the cost base for determining the NCP of assessee or not? - Held that:- in order to bring the tested party and comparables at level playing field, it is necessary that reimbursed cost should be considered in the cost base as well as part of income so as to neutralize any variation in the cost incurred by assessee towards carrying out marketing support services. Admittedly, at first place assessee has incurred all these expenses and then got reimbursed by its AEs. All risks incidental to these expenses were at assessee’s account and not AE. Ld. CIT(A) has very rightly excluded any allocation towards finance charges because assessee had received advance from its AEs. The statement given by Mr. Surjit Verma, referred to earlier, in the observation of ld. TPO, clearly showed that both employees coordinated with various agencies which were to conduct or organize these events. He has observed that research was also conducted on behalf of Seagram Martell, findings for which were communicated by Mr. Aditya Gooptu to Seagram Martell. In order to avoid repetition, we are not referring to the detailed activities performed by assessee noticed by ld. TPO, which we have reproduced earlier, while considering the TPO’s findings. It would suffice to observe that assessee played a vital role in all the activities done to promote sales of Seagram Martell Duty Free Ltd. in India and the meager amount of US$ 2500 p.m. was not at all justified considering the services rendered by assessee. We could appreciate assessee’s contention of not including the reimbursement of expenses as part of the cost base if income of Marketing Support Services did not include these reimbursements but that is not so. Ld. TPO has included the same Unascertained liability - provision appearing in the accounts of the assessee company on account of transit shortages - Held that:- Respectfully following the decision of Hon’ble Delhi High Court in assessee’s own case, we restore the matter to the file of AO to pass the order in terms of the observations made by Hon’ble Delhi High Court noted that the AO shall allow the actual transit breakages for A Y 2001-02 as revenue expenditure consistent with the settled legal position. The Assessees would also be permitted to get the benefit of the reversal of the provision for transit breakages made in the AYs in question accordance with law. Income returned by assessee under the head ‘business income' as 'income from other source' - Held that:- The issue was considered for AY 1998-99 and not 1999-2000 as submitted by assessee. Further, the interest income earned only on loans given to employees were considered. Therefore, we direct the assessee to furnish the details of interest earned on loans given to employees before AO and the AO will treat the said interest under the head “business income” and the balance interest is to be confirmed as income from other sources, as assessee has not furnished any details. In terms of aforementioned observations this ground is partly allowed for statistical purposes. Allocation of expenses to Marketing support Service segment and also for including the reimbursement of expenses as cost base and also for the income of this segment for computing the NCP of this segment confirmed Loss on account of foreign exchange rate fluctuation - Held that:- Respectfully following the decision of Hon’ble Jurisdictional High Court in the case of Woodward Governor India Pvt. Ltd. (2009 (4) TMI 4 - SUPREME COURT ), dismiss this ground of appeal, holding that the loss incurred by the assessee was a fate accomplice and not a notional one. Allowance of sales and marketing expenses - Held that:- Respectfully following the order of the ITAT in the case of M/s Seagram Distilleries Pvt. Ltd. (2015 (7) TMI 560 - ITAT DELHI), holding that the brand expenses were in revenue field and contributed towards profit earning process of the assessee, dismiss both these grounds raised by revenue Issues Involved:1. Determination of Arm’s Length Price (ALP) for international transactions.2. Inclusion of reimbursed expenses in the cost base for calculating Net Cost Plus (NCP) margin.3. Disallowance of provision for transit breakages.4. Treatment of interest income as business income or income from other sources.5. Disallowance of brand promotion expenses as capital expenditure.6. Foreign exchange fluctuation loss.7. Disallowance of commission paid to M/s Sunrise Bottlers Pvt. Ltd.8. Levy of interest under sections 234B and 234D.Issue-wise Detailed Analysis:1. Determination of Arm’s Length Price (ALP) for International Transactions:The Transfer Pricing Officer (TPO) accepted the ALP determined by the assessee for the purchase of raw materials, interest-free loans, and the sale of cotton flannel. However, the TPO did not accept the ALP for marketing support services provided to Seagram Martell Duty Free Ltd. The TPO observed that the assessee did not have the authority to conclude contracts on behalf of Seagram Martell and was reimbursed for actual marketing costs plus a fixed commission. The TPO found defects in the economic analysis, stating that the expenditure for marketing support services was not properly allocated and reimbursed expenses were excluded from the cost base. The TPO included these expenses in the cost base, resulting in a negative NCP ratio for the assessee.2. Inclusion of Reimbursed Expenses in the Cost Base for Calculating NCP Margin:The TPO included reimbursed expenses in the cost base for calculating the NCP margin, arguing that the efforts made by the assessee required a markup on the cost. The CIT(A) upheld the TPO's decision, stating that the resources of the entire enterprise were used for discharging comprehensive functions, and the reimbursed expenses should be part of the cost base. The Tribunal agreed, noting that the comparables selected by the assessee did not have similar reimbursement arrangements, and including reimbursed expenses in the cost base was necessary to bring the tested party and comparables to a level playing field.3. Disallowance of Provision for Transit Breakages:The AO disallowed the provision for transit breakages, considering it an unascertained liability. The CIT(A) partly allowed the assessee’s appeal, but the Tribunal, following the Delhi High Court's decision in the assessee's own case, restored the matter to the AO to allow actual transit breakages as revenue expenditure and permit the benefit of the reversal of the provision in accordance with law.4. Treatment of Interest Income as Business Income or Income from Other Sources:The AO treated the interest income as income from other sources, while the assessee claimed it as business income. The CIT(A) upheld the AO's decision due to the lack of evidence from the assessee. The Tribunal directed the assessee to furnish details of interest earned on loans given to employees, and the AO was instructed to treat such interest as business income and the balance as income from other sources.5. Disallowance of Brand Promotion Expenses as Capital Expenditure:The AO disallowed 10% of the brand expenses, treating them as capital expenditure. The CIT(A) allowed the expenses as revenue expenditure, citing the Supreme Court's decision in Empire Jute Company and the Calcutta High Court's decision in Berger Paints. The Tribunal, following its decision in the case of the assessee's sister concern, upheld the CIT(A)'s decision, stating that the expenses were in the revenue field and contributed to the profit-earning process.6. Foreign Exchange Fluctuation Loss:The AO disallowed the foreign exchange fluctuation loss, considering it a notional loss. The CIT(A) allowed the claim, following the Delhi High Court's decision in Woodward Governor India Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the Supreme Court had affirmed the Delhi High Court's decision.7. Disallowance of Commission Paid to M/s Sunrise Bottlers Pvt. Ltd.:The AO disallowed the commission paid to M/s Sunrise Bottlers Pvt. Ltd. due to the absence of a confirmation letter. The CIT(A) allowed the claim based on evidence of payments made by account payee cheques, TDS deductions, and reconciliation sheets. The Tribunal upheld the CIT(A)'s decision, finding no evidence to contradict the findings.8. Levy of Interest under Sections 234B and 234D:The AO was instructed to recalculate the interest under sections 234B and 234D while giving effect to the appellate orders.Conclusion:The Tribunal upheld the CIT(A)'s decisions on most issues, including the inclusion of reimbursed expenses in the cost base for calculating the NCP margin, the treatment of brand promotion expenses as revenue expenditure, and the allowance of foreign exchange fluctuation loss. The Tribunal restored the matter of provision for transit breakages to the AO and directed the AO to treat interest on loans to employees as business income. The Tribunal dismissed the department's appeals and partly allowed the assessee's appeals for statistical purposes.