2020 (2) TMI 248 - AT - Income Tax

Appeal allowed on transfer pricing & AMP expenses, remand for ad expenses. Revenue's appeal dismissed.

ACIT-15 (1) (2), Mumbai Versus M/s Brother International (India) Pvt. Ltd. And (Vice-Versa)

ACIT-15 (1) (2), Mumbai Versus M/s Brother International (India) Pvt. Ltd. And (Vice-Versa) - TMI Issues Involved:1. Transfer pricing adjustment of Rs. 11,917,839 related to international transactions.2. Adjustment of Rs. 42,70,636 as compensation for Advertisement Marketing and Promotion (AMP) services.3. Disallowance of advertisement and sales promotion expenses of Rs. 2,84,514.4. Disallowance of provision of warranty of Rs. 11,61,620.5. Procedural error in directing the TPO to make inquiries and collect documents about comparables.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment of Rs. 11,917,839:The assessee, a wholly owned subsidiary of Brother Japan, engaged in the distribution of information and communication equipment, selected the Resale Price Method (RPM) to benchmark its trading transactions. The Transfer Pricing Officer (TPO) rejected RPM and adopted the Transaction Net Margin Method (TNMM), resulting in an adjustment of Rs. 11,917,839. The Commissioner of Income Tax (Appeals) [CIT(A)] restored the matter to the TPO for further inquiries. However, the Tribunal found that RPM is appropriate for transactions involving resale without significant value addition, as supported by several judicial precedents (e.g., CIT v. L’Oreal India (P.) Ltd., Nokia India (P.) Ltd. v. DCIT). Consequently, the Tribunal deleted the adjustment of Rs. 11,917,839, allowing the assessee's appeal on this ground.2. Adjustment of Rs. 42,70,636 as Compensation for AMP Services:The TPO proposed an adjustment of Rs. 42,70,636 for AMP expenses, arguing that the assessee incurred excessive AMP expenses qualifying as services to its Associated Enterprises (AEs). The CIT(A) directed the TPO to re-examine the AMP expenses. The Tribunal noted that the assessee’s AMP expenses, after excluding selling expenses, were just 0.91% of sales, nearly equivalent to the comparables' 0.9%. Citing judicial precedents (e.g., Maruti Suzuki India Limited v. CIT, Bausch & Lomb Eyecare (India) Pvt. Ltd. v. Additional Commissioner of Income Tax), the Tribunal held that no adjustment was warranted as the AMP expenses met the arm's length standard under the Act. Thus, the adjustment of Rs. 42,70,636 was deleted.3. Disallowance of Advertisement and Sales Promotion Expenses of Rs. 2,84,514:The CIT(A) confirmed the disallowance based on the observation that the expenses were debited thrice. The Tribunal found that the disallowance needed re-verification and restored the matter to the Assessing Officer (AO) for proper verification, directing the assessee to provide relevant documents. Thus, this ground of appeal was allowed for statistical purposes.4. Disallowance of Provision of Warranty of Rs. 11,61,620:The CIT(A) confirmed the disallowance, observing that the actual warranty expense had been debited to the profit & loss account, leading to a double claim. The Tribunal directed re-verification by the AO, allowing the assessee to submit relevant evidence. This ground of appeal was also allowed for statistical purposes.5. Procedural Error in Directing the TPO to Make Inquiries:The Revenue argued that the CIT(A) erred in directing the TPO to make inquiries and collect documents about comparables instead of calling for a remand report or analyzing the comparables himself. Since the Tribunal deleted the adjustments of Rs. 11,917,839 and Rs. 42,70,636, the Revenue's appeal did not survive and was dismissed.Conclusion:The Tribunal partly allowed the assessee's appeal, deleting the adjustments related to transfer pricing and AMP expenses, and remanded the disallowances of advertisement and sales promotion expenses, and provision of warranty for re-verification. The Revenue's appeal was dismissed.