2022 (12) TMI 492 - AT - Income Tax

Appellate Tribunal rules in favor of limited risk distributor, overturns adjustment, emphasizes arm's length principle

The Appellate Tribunal overturned the CIT(A)'s decision to uphold the arm's length price adjustment of Rs. 17,63,878. The Tribunal ruled in favor of the ... TP Adjustment - ALP determination - as per TPO assessee has incurred expenses for sale promotion under instructions and was reimbursed the same without any mark up by the said AE thus by incurring these expenses, the assessee was providing marketing support services to the AE - TPO recommended an ALP adjustment of 6.86% on the amount spent on behalf of the AE, and this figure of 6.86% was arithmetic mean of seven comparables that the TPO picked up for market support services margin - HELD THAT:- As assessee is a limited risk distributor and this sale promotion expenses was incurred, under the terms of the agreement and under the instructions of the principal, as a part of this composite activity, and that the sale promotion activity, on behalf of the overseas AE, is not a standalone activity. It is also important to bear in mind that the margins of the assessee have been accepted to be at an arm’s length, on the basis of the arithmetic mean of the margins of the selected comparables with admittedly similar activity, and, therefore, whether the additional profits on account of the mark-up are taken into account or not, the profits of the assessee cannot be subjected to the arm’s length price adjustment. We, therefore, deem it fit and proper to delete the impugned ALP adjustment - The assessee gets the relief accordingly. Issues:1. Arm's length price adjustment upheld by CIT(A)Analysis:Issue 1: Arm's length price adjustment upheld by CIT(A)The appellant, engaged in the distribution of synthetic stones and related products, challenged the arm's length price adjustment of Rs. 17,63,878 made by the CIT(A) in the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2016-17. The adjustment was recommended by the Transfer Pricing Officer (TPO) based on the expenses incurred by the appellant for sale promotion under instructions from its associated enterprise (AE) abroad. The TPO viewed these expenses as providing marketing support services to the AE, necessitating compensation. The CIT(A) upheld the adjustment, emphasizing that the expenses were reimbursed by the AE, indicating they were incurred under specific instructions. The CIT(A) agreed with the TPO that the appellant should have charged a mark-up on these expenses. The appellant contended that the TPO's selection of comparables for the adjustment was erroneous, but failed to provide specific details to support this claim. The CIT(A) rejected the appellant's contentions and confirmed the TPO's findings.In the appeal before the Appellate Tribunal, it was argued that the appellant, as a limited risk distributor, incurred the sale promotion expenses as part of a composite activity under the agreement and AE's instructions, and not as a standalone activity. The Tribunal noted that the appellant's margins were already at arm's length based on comparables with similar activities. Therefore, regardless of additional profits from mark-up, the appellant's profits should not be subject to further arm's length price adjustment. Consequently, the Tribunal decided to delete the ALP adjustment of Rs. 17,63,878, providing relief to the appellant.In conclusion, the Appellate Tribunal allowed the appeal, overturning the CIT(A)'s decision to uphold the arm's length price adjustment. The Tribunal's ruling was based on the understanding that the appellant's profits were already at arm's length, considering the margins of selected comparables. The Tribunal's decision highlights the importance of considering the specific circumstances of a case and ensuring that adjustments are made in accordance with the arm's length principle.