2019 (6) TMI 601 - AT - Income Tax

Tribunal confirms Resale Price Method for international transaction and supports revenue treatment over capital.

The Tribunal allowed the assessee's appeal, confirming Resale Price Method (RPM) as the suitable benchmark for the international transaction. The ... TP adjustment - applying TNMM after rejecting assessee’s bench marking under Resale Price Method (RPM) - whether the international transaction relating to purchase of reagents, spares, consumables from the AE is a simple trading activity, hence, can be benchmarked under RPM ? - HELD THAT:- It is revealed that the assessee has selected RPM as the most appropriate method and has also explained why TNMM is not applicable to the subject transaction. RPM is the most appropriate method to benchmark the subject international taxation relating to purchase of reagents analyzers, etc. Since, neither the Transfer Pricing Officer nor learned DRP has pointed out any other defect in the transfer pricing analysis of the assessee except that the assessee is involved in manufacturing activity, we are of the view that the benchmarking done by the assessee under RPM has to be accepted. More so, when the Transfer Pricing Officer has accepted the comparables selected by the assessee. That being the case, only thing which requires verification is the gross margin of the assessee with that of the comparables. We direct AO/TPO to examine this aspect and decide the issue accordingly after due opportunity of being heard to the assessee. With the aforesaid observations, grounds are allowed. Disallowance of expenditure by treating them as capital in nature - HELD THAT:- From the nature of expenditure incurred by the assessee, it is very much clear that they are for day–to–day running of the business and have not brought into existence any asset of enduring benefit to the assessee. Merely because the assessee has capitalized the expenditure in its accounts it will not change the nature and character of the expenditure. It is well settled principle of law that accounting entries are not conclusive and one has to look to the actual nature of expenditure. In this context, we rely upon the decision of Kedarnath Jute Mfg. Co. Ltd. [1971 (8) TMI 10 - SUPREME COURT] . Moreover, the AO himself has allowed 25% of the expenditure as revenue in nature. In view of the aforesaid, we uphold the decision of learned DRP on the issue. However, it is made clear, depreciation, if any, has been allowed to the assessee on the aforesaid expenditure has to be withdrawn. Grounds are dismissed. Issues Involved:1. Transfer Pricing Adjustment by Applying Transactional Net Margin Method (TNMM) vs. Resale Price Method (RPM).2. Disallowance of Expenditure Treated as Capital in Nature.Detailed Analysis:1. Transfer Pricing Adjustment by Applying TNMM vs. RPM:The core issue was whether the international transaction relating to the purchase of reagents, spares, and analyzers could be benchmarked under RPM rather than TNMM. The assessee, a wholly-owned Indian subsidiary of a UK-based company, imported reagents and diagnostic equipment from its parent company and sold them to third parties in India. The assessee benchmarked this transaction using RPM, showing a gross profit margin of 47.09%, much higher than the comparables' arithmetic mean of 13.61%.The Transfer Pricing Officer (TPO) rejected RPM, arguing that the assessee was involved in manufacturing activities, thus making TNMM more appropriate. However, the assessee contended that it was merely a reseller without any value addition, and analyzers were provided to customers under specific agreements for use in clinical analysis.Upon review, it was found that the assessee was not engaged in manufacturing during the relevant year as the manufacturing unit was still being set up. The analyzers were not sold but provided for testing and research, and the assessee's transactions were purely trading activities. The Tribunal held that RPM was the most appropriate method for benchmarking the arm's length price of the transaction, as the goods were resold without any value addition. The Tribunal directed the Assessing Officer/TPO to verify the gross margin of the assessee with that of the comparables and decide the issue accordingly, allowing the assessee's appeal.2. Disallowance of Expenditure Treated as Capital in Nature:The Revenue's appeal concerned the deletion of disallowance of Rs. 44,69,880, treated as capital expenditure by the Assessing Officer. The Assessing Officer had allowed only 25% of the product development cost as revenue expenditure, disallowing the balance. The DRP, however, observed that the expenditure was for running the existing business and not for bringing any asset of enduring nature into existence, thus directing the deletion of disallowance.The Tribunal upheld the DRP's decision, noting that the nature of the expenditure indicated it was for day-to-day business operations. The Tribunal emphasized that accounting entries are not conclusive, and the actual nature of the expenditure must be considered. The Tribunal relied on the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v/s CIT, which established that the nature of expenditure determines its treatment, not how it is recorded in the books. The Tribunal dismissed the Revenue's appeal but clarified that any depreciation allowed on the said expenditure should be withdrawn.Conclusion:The assessee's appeal was allowed, affirming RPM as the appropriate method for benchmarking the arm's length price of the international transaction. The Revenue's appeal was dismissed, upholding the DRP's decision to treat the expenditure as revenue in nature.