ITAT affirms CIT(A)'s deletion of ALP adjustment, emphasizes comparability. Revenue's appeal dismissed.

The ITAT upheld the CIT(A)'s decision to delete the adjustment on account of the difference in Arm's Length Price (ALP) due to customs duty variations, emphasizing the need for adjustments to ensure comparability. The ITAT affirmed the deletion of the adjustment for advertisement and business promotion expenses, following precedents establishing such expenses as revenue in nature. The Revenue's appeal was dismissed, and the judgment was pronounced on 30.01.2020.

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Issues Involved:
1. Deletion of addition on account of difference in Arm’s Length Price (ALP) for international transactions.
2. Deletion of addition on account of advertisement and business promotion expenses.

Detailed Analysis:

1. Deletion of Addition on Account of Difference in Arm’s Length Price (ALP):

Facts and Background:
The assessee-company, a wholly-owned subsidiary of the Swatch Group Limited, Switzerland, operates as a distributor of Swatch Group brands in India. The company undertook several international transactions, including the import of watches and spares, pricing support/subsidy, and other reimbursements. The Transfer Pricing Officer (TPO) analyzed these transactions using the Resale Price Method (RPM) and made adjustments based on the comparables selected.

TPO’s Observations and Adjustments:
The TPO observed that the marketing subsidy received by the assessee should not be aggregated with the cost of imports. The TPO excluded the subsidy amount from the international transactions and selected new comparables, primarily Italian companies, for benchmarking. The TPO determined an adjustment of Rs. 4,01,47,762 based on the gross profit margins of these comparables.

CIT(A)’s Findings:
The CIT(A) agreed with the use of foreign comparables but emphasized the need for adjustments due to differences in customs duty rates between India and Italy. The CIT(A) noted that high customs duty rates in India significantly impact the gross margins of the assessee. The CIT(A) computed the gross margin after normalizing the customs duty and found it to be 61.10%, higher than the comparables, leading to the deletion of the adjustment.

ITAT’s Analysis and Conclusion:
The ITAT upheld the CIT(A)’s decision, stating that adjustments for differences in customs duty are necessary to ensure comparability. The ITAT noted that the regulations do not restrict adjustments to the tested party’s results and highlighted the significant impact of customs duty on the assessee’s margins. The ITAT dismissed the Revenue’s ground, affirming the CIT(A)’s deletion of the adjustment.

2. Deletion of Addition on Account of Advertisement and Business Promotion Expenses:

Facts and Background:
The assessee claimed an expenditure of Rs. 2,80,22,958 on advertisement and business promotion, which the Assessing Officer (AO) treated as capital expenditure, amortizing it over three years. The AO allowed only 1/3rd of the expenditure for the current assessment year and added back the balance.

CIT(A)’s Findings:
The CIT(A) observed that advertisement expenditure is allowable under Section 37 of the Income Tax Act as it is wholly and exclusively for business purposes and not capital in nature. The CIT(A) directed the deletion of the addition made by the AO.

ITAT’s Analysis and Conclusion:
The ITAT referred to a similar issue in the assessee’s case for the A.Y. 2005-06, where the Delhi High Court held that advertisement expenditure is revenue in nature and fully allowable. The ITAT noted that the Supreme Court dismissed the Revenue’s SLP against the High Court’s decision. Considering these precedents, the ITAT upheld the CIT(A)’s deletion of the addition related to advertisement expenses.

Final Judgment:
The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 30.01.2020.

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