2023 (1) TMI 315 - AT - Income Tax

Tribunal directs re-examination of benchmarking analysis for import of raw materials

Kimberly Clark Lever Pvt. Ltd. Versus DCIT, Circle-14, Pune.

Kimberly Clark Lever Pvt. Ltd. Versus DCIT, Circle-14, Pune. - TMI Issues Involved:1. Transfer Pricing Adjustment on Import of Raw Materials2. Transfer Pricing Adjustment on Advertising and Marketing (A&M) Expenses3. Application of Section 37(1) of the Income Tax ActDetailed Analysis:1. Transfer Pricing Adjustment on Import of Raw Materials:The appellant, a joint venture company, engaged in the manufacturing of Infant Care and Feminine Hygiene Care Products, reported various international transactions, including the import of raw materials. The Transfer Pricing Officer (TPO) suggested adjustments based on the Transactional Net Margin Method (TNMM), which was contested by the appellant who preferred the Comparable Uncontrolled Price (CUP) method. The appellant provided certificates from third-party vendors and internal benchmarking analysis to justify the arm's length price. The TPO rejected these, considering the certificates as self-certified and the third-party vendors as deemed associated enterprises (AEs). The Dispute Resolution Panel (DRP) upheld the TPO's adjustments, leading to a significant addition in the final assessment order.Upon appeal, it was argued that the third-party vendors were not AEs and that the certificates confirming lower prices under a global sourcing arrangement should be considered. The Tribunal found merit in the appellant's arguments, noting that the lower authorities did not adequately address the appellant's submissions. The Tribunal remanded the matter back to the AO/TPO to re-examine the benchmarking analysis and consider the appellant's evidence. Additionally, the Tribunal allowed the appellant's alternative claim to benchmark the transaction at the gross profit level if the initial analysis was not accepted.2. Transfer Pricing Adjustment on Advertising and Marketing (A&M) Expenses:The TPO and DRP inferred an international transaction from the appellant's higher A&M expenditure compared to comparables, suggesting that the benefit of this expenditure accrued to the foreign AE. The appellant argued that there was no explicit arrangement or agreement with the AE to incur such expenses and that the inference of an international transaction was based on conjecture. The Tribunal referred to previous decisions, including the Delhi High Court's ruling in Maruti Suzuki India Ltd. vs. CIT, which stated that the existence of an international transaction cannot be presumed without explicit evidence. The Tribunal concluded that the Revenue failed to prove the existence of such a transaction and that the A&M expenses should be treated as part of the aggregate transactions for TNMM application.3. Application of Section 37(1) of the Income Tax Act:The DRP directed the AO to disallow the A&M expenses under Section 37(1), holding that they were not incurred wholly and exclusively for business purposes. The appellant contended that even if a third party benefits from the expenditure, it should still be allowable if incurred for the appellant's business. The Tribunal agreed, citing precedents that support the allowance of such expenses. Consequently, the Tribunal vacated the DRP's direction to disallow the A&M expenses under Section 37(1).Conclusion:The Tribunal allowed the appellant's appeal, directing the AO/TPO to re-examine the benchmarking analysis for the import of raw materials and to consider the A&M expenses as part of the aggregate transactions for TNMM application. The Tribunal also vacated the DRP's direction to disallow the A&M expenses under Section 37(1), thereby providing relief to the appellant.