2017 (2) TMI 691 - AT - Income Tax

Tribunal rulings on transfer pricing and non-transfer pricing additions with detailed observations and legal precedents.

Swarovski India Private Limited Versus ACIT, Circle-7 (1), New Delhi and DCIT, Circle-7 (1), New Delhi Versus Swarovski India Private Limited

Swarovski India Private Limited Versus ACIT, Circle-7 (1), New Delhi and DCIT, Circle-7 (1), New Delhi Versus Swarovski India Private Limited - TMI Issues Involved:1. Transfer Pricing Additions (Import of Crystal and Crystal Components, AMP Expenses)2. Non-Transfer Pricing Additions (Provision for Doubtful Debts and Advances, Mediclaim Insurance Policy, Depreciation on Foreign Exchange Loss, Advertisement and Publicity Expenses)Detailed Analysis:I. TRANSFER PRICING ADDITIONSA. TP Addition on Import of Crystal and Crystal Components1. CUP Method Appropriateness:The assessee applied the Comparable Uncontrolled Price (CUP) method to demonstrate that the international transaction was at arm's length price (ALP). The Transfer Pricing Officer (TPO) rejected the CUP method, stating that the items imported by the assessee were not imported by third parties, thus making the comparables chosen by the assessee unreliable. The TPO adopted the Transactional Net Margin Method (TNMM) instead, resulting in a proposed transfer pricing adjustment of Rs. 4.72 crore. The CIT(A) upheld the use of TNMM but directed that only the current year’s data should be used. The tribunal agreed with the TPO in rejecting the CUP method due to lack of reliable comparables.2. TNMM vs. RPM:The TPO used TNMM, considering data from associated enterprises in South Korea and Singapore, and 20 independent foreign companies. The tribunal found inconsistencies in the TPO's calculations and noted that the TPO's approach of averaging gross and net margins was not in line with the rules. The tribunal also highlighted that transactions involving associated enterprises are controlled transactions and cannot be used as comparables under TNMM. The tribunal directed the AO/TPO to first apply the Resale Price Method (RPM) as the most appropriate method, given that the goods were resold without any value addition. If RPM could not be applied, the TNMM should be used correctly as per the rules.B. TP Addition of AMP ExpensesThe CIT(A) made an addition of Rs. 1,91,94,998/- for AMP expenses. The tribunal noted that the CIT(A) did not have the benefit of recent judicial precedents and restored the matter to the TPO/AO for fresh determination of whether AMP expenses constitute an international transaction. If found to be an international transaction, the TPO should determine the ALP in light of relevant judgments.II. NON-TRANSFER PRICING ADDITIONS1. Provision for Doubtful Debts and Advances:The AO disallowed Rs. 22,52,032/- for provisions for doubtful debts and advances. The tribunal upheld the disallowance, noting that the provision for doubtful debts is not deductible under section 36(1)(vii) unless actually written off. The tribunal directed the AO to verify the actual write-off amount and allow deduction accordingly. The tribunal also upheld the disallowance of provision for doubtful advances, stating that amounts due from government departments cannot be considered irrecoverable.2. Mediclaim Insurance Policy:The AO disallowed Rs. 47,47,698/- for Mediclaim insurance policy premiums, treating it as a personal expense. The tribunal disagreed, stating that the insurance policy was for the benefit of employees and should be allowed as a deduction.3. Depreciation on Foreign Exchange Loss:The AO disallowed depreciation on Rs. 8,50,330/- capitalized in the block of buildings due to foreign exchange loss. The tribunal upheld the disallowance, stating that forex loss on assets acquired in India cannot be added to the block of assets for depreciation purposes, as per section 43A and relevant judicial precedents.4. Advertisement and Publicity Expenses:The AO amortized advertisement and publicity expenses over three years, disallowing 2/3rd of the amount. The CIT(A) deleted the disallowance. The tribunal upheld the deletion, referencing the jurisdictional High Court's judgment that such expenses are fully allowable in the year incurred.Conclusion:The tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, directing fresh determinations and adjustments as per the detailed observations and legal precedents.