2017 (8) TMI 944 - AT - Income Tax

Tribunal directs fresh comparables & expenses review for AY 2003-06, upholds Resale Price Method

The Tribunal partly allowed the appeals for AY 2003-04 and 2005-06, directing the TPO to select fresh comparables and reconsider certain expenses. For AY ... Transfer pricing addition - international transaction of ‘Purchase of finished goods’- Whether RPM is the most appropriate method? - Held that:- It is apparent from the nomenclature of the method, that is, ‘Resale price method’ and the modus operandi given in Rule 10B(1)(b) that where the goods purchased by an enterprise are resold as such, without making any value addition, the RPM is the most appropriate method as it specifically deals with the situations of resale of the goods purchased by an enterprise from its AE. In contrast to that, the TNMM is a method of last resort. When none of the specified methods out of the given methods in section 92C(1) can be applied, then, the TNMM is applied for determining the ALP of an international transaction. As the assessee in the instant case is directly engaged in reselling the goods, in our considered opinion, the RPM is the most appropriate method in the given circumstances. The same is directed to be applied for benchmarking the international transaction of ‘Purchase of finished goods’. Comparability - Held that:- As reminded of the prescription of section 92(1) of the Act, which provides that any income arising from an international transaction shall be computed having regard to the ALP. When this position was confronted, it was fairly admitted by both the sides that in the given circumstances, it would be appropriate if the question of finding suitable comparables is restored to the file of the TPO. We agree with the same and order accordingly. The impugned order to this extent is set aside and the matter is restored to the file of Assessing Officer/TPO for selecting a fresh set of comparables after due opportunity to the assessee and then determining the ALP of the international transaction of purchase of goods. Addition on account of business promotion expenses - Held that:- It is visible from the details of business promotion expenses that some of the expenses do not have any relation with enhancing the value of brand owned by the foreign AE. Such expenses cannot be considered as leading to the brand promotion. Further, some of the expenses like training customers and entertainment, etc., have no relation whatsoever with the brand promotion. In our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is also set aside and the matter is restored to the file of Assessing Officer. We order accordingly and direct him to examine details of the items extracted above. The expenses which are not in the nature of advertising, marketing and promotion, not leading to the enhancement in value of the brand owned by the AE, should be excluded. The remaining amount should be considered for seeing firstly, if there is an international transaction and if yes, then, to compute the ALP of such international transaction Depreciation on computers, UPS and printers, etc., @ 60% allowed. See CIT vs. BSES Yamuna Powers Ltd [2010 (8) TMI 58 - DELHI HIGH COURT] Addition being the amount of testing material purchased - revenue or capital expenditure - Held that:- We find that this expenditure includes cost of empty tins, test cards, colour panels for checking the colour shades and developing variant colour formulae. This expenditure has been incurred to check the quality, coverage and shade of colours dealt with by the assessee in its business. After use, the testing material becomes waste product having no value. This shows that the expenditure on such testing material is in the nature of revenue field and, hence, cannot be disallowed as a capital expenditure. It has been brought to our notice that the Assessing Officer has consistently allowed deduction of such expenses in earlier years. We, therefore, countenance the view taken by the ld. CIT(A) on this issue Working capital adjustment in the computation of ALP of the ‘Contract R&D’ segment - Held that:- CIT(A) agreed with the assessee for grant of working capital adjustment in ‘Contract R&D’ segment. In our considered opinion, this issue is no more res integra in view of several orders passed by the Tribunal permitting the grant of working capital adjustment in case of comparables finally shortlisted. We, therefore, uphold the action of the ld. CIT(A) in principle that the working capital adjustment should be considered. However, it would have to be decided afresh only after the fresh comparables are chosen by the TPO which are really similar. Issues Involved:1. Deletion of transfer pricing addition for 'Purchase of finished goods' for AY 2003-04.2. Deletion of addition on account of business promotion expenses.3. Deletion of addition on account of depreciation on computers, UPS, and printers.4. Deletion of addition on account of testing material purchased.5. Confirmation of addition on account of transfer pricing adjustment for 'Purchase of traded goods' for AY 2004-05.6. Rejection of TNMM and upholding RPM for determining ALP for 'Purchase of goods' for AY 2005-06.7. Selection of comparables for 'Contract Research & Development' segment.8. Grant of working capital adjustment in the computation of ALP for 'Contract R&D' segment.Issue-wise Detailed Analysis:1. Deletion of Transfer Pricing Addition for 'Purchase of Finished Goods' for AY 2003-04:The Revenue challenged the deletion of transfer pricing addition amounting to Rs. 3,21,70,540/- made by the Assessing Officer (AO) from the international transaction of 'Purchase of finished goods'. The assessee, a 100% subsidiary of Akzo Noble Coatings International, B.V., used the Resale Price Method (RPM) with a Profit Level Indicator (PLI) of Gross profit/Sales to demonstrate that its international transaction was at arm's length price. The Transfer Pricing Officer (TPO) rejected RPM and applied the Transactional Net Margin Method (TNMM), selecting five additional comparables, resulting in an average OP/Sales of 3.71%. The CIT(A) approved the RPM and the comparables chosen by the assessee, leading to the deletion of the addition. The Tribunal upheld the RPM as the most appropriate method due to the nature of the transaction (resale of goods without value addition) and remitted the matter to the TPO for selecting fresh comparables.2. Deletion of Addition on Account of Business Promotion Expenses:The AO disallowed 50% of the business promotion expenses amounting to Rs. 33,25,517/-, attributing them to brand enhancement for the parent company. The CIT(A) deleted the addition. The Tribunal restored the matter to the AO to examine the nature of the expenses and exclude those not related to brand promotion, directing the AO to determine the ALP of any international transaction involved.3. Deletion of Addition on Account of Depreciation on Computers, UPS, and Printers:The AO restricted depreciation on computers, UPS, and printers to 25%, leading to an addition of Rs. 3,63,461/-. The CIT(A) deleted the addition. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's ruling in CIT vs. BSES Yamuna Powers Ltd. and the Special Bench decision in DCIT vs. Data Craft India Ltd., which allowed higher depreciation for computer peripherals working in tandem with computers.4. Deletion of Addition on Account of Testing Material Purchased:The AO treated the expenditure of Rs. 60,17,801/- on testing material as capital expenditure. The CIT(A) overturned this decision. The Tribunal agreed with the CIT(A), noting that the expenditure was for quality checking and had no residual value, thus qualifying as revenue expenditure.5. Confirmation of Addition on Account of Transfer Pricing Adjustment for 'Purchase of Traded Goods' for AY 2004-05:The assessee used RPM for showing the purchase of finished goods at ALP, while the TPO applied TNMM. The CIT(A) upheld the TPO's method. The Tribunal, noting the similarity in transactions to the previous year, directed the use of RPM and remitted the matter to the TPO for fresh comparables.6. Rejection of TNMM and Upholding RPM for Determining ALP for 'Purchase of Goods' for AY 2005-06:The CIT(A) upheld RPM as the most appropriate method, contrary to the TPO's application of TNMM. The Tribunal approved RPM, consistent with the previous years, and remitted the matter to the TPO for fresh comparables.7. Selection of Comparables for 'Contract Research & Development' Segment:The TPO selected comparables leading to a transfer pricing adjustment of Rs. 1,06,16,921/-. The CIT(A) restored the assessee's comparables. The Tribunal, agreeing with both parties that the chosen comparables were not suitable, remitted the matter to the TPO for fresh selection.8. Grant of Working Capital Adjustment in the Computation of ALP for 'Contract R&D' Segment:The CIT(A) allowed the working capital adjustment. The Tribunal upheld this in principle but directed that it be reconsidered after selecting fresh comparables.Conclusion:The appeals for AY 2003-04 and 2005-06 were partly allowed for statistical purposes, with directions to the TPO for fresh comparables and reconsideration of certain expenses. The appeal for AY 2004-05 was allowed for statistical purposes, with similar directions for fresh comparables. The Tribunal emphasized the importance of selecting functionally similar comparables and upheld the RPM as the most appropriate method for resale transactions.