Trademark fee TP adjustment deleted as operating margin exceeded comparables, other transfer pricing issues remanded for fresh examination

ITAT DELHI allowed assessee's appeal partly. TP adjustment for trademark fee payment deleted as assessee's operating margin (6.96%) exceeded comparables (2.77%), establishing arm's length pricing under TNMM. Addition for outstanding receivables deleted since payables to AEs were higher and no interest charged by AEs. Purchase/sale of finished goods remanded to TPO for fresh examination. Regional service charges and accounting support services remanded with directions to demonstrate actual expenses and mark-up. Advertisement expenditure disallowance deleted following previous favorable decisions. ESI contribution disallowance upheld following SC precedent in Checkmate Services requiring timely deposit.

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Issues Involved:

1. Validity of assessment order under Section 143(3) read with Section 144C of the Income-tax Act, 1961.
2. Transfer pricing adjustments on account of trademark fees.
3. Transfer pricing adjustments on account of delay in receipt of receivables.
4. Transfer pricing adjustments on account of purchase and sale of finished goods.
5. Transfer pricing adjustments on account of Regional Service Charges and Accounting Support Services fees.
6. Disallowance of advertisement and publicity expenses.
7. Disallowance related to late deposit of employee contributions to Employee State Insurance.
8. Incorrect determination of Dividend Distribution Tax (DDT).
9. Incorrect charging of interest under Section 234C of the Act.
10. Charging of interest under Section 234B of the Act.
11. Initiation of penalty proceedings under Section 270A of the Act.

Issue-wise Detailed Analysis:

1. Validity of Assessment Order:
The assessment orders for AY 2017-18 and AY 2018-19 were challenged on the grounds that they were bad in law and unsustainable. The Tribunal did not find any specific adjudication required for this ground, thus it was dismissed as general in nature.

2. Transfer Pricing Adjustments on Account of Trademark Fees:
The assessee argued that the payment of trademark fees to Goodyear USA was at arm's length since it was based on a comparable uncontrolled price (CUP) method. The Tribunal referred to its own decisions from previous years (AY 2007-08 to 2014-15) where similar adjustments were deleted. It was held that the payment of trademark fees was justified and the addition of Rs. 10,38,00,000/- was deleted for both assessment years.

3. Transfer Pricing Adjustments on Account of Delay in Receipt of Receivables:
The Tribunal noted that the outstanding payables to the associated enterprises were higher than the receivables, and no interest was charged by the AEs on the delay in payment. Referring to the decision in Satyam Venture Engg. Services Pvt. Ltd., the Tribunal deleted the addition of Rs. 10,04,075/- for AY 2017-18 and Rs. 7,17,113 for AY 2018-19 on account of notional interest on outstanding receivables.

4. Transfer Pricing Adjustments on Account of Purchase and Sale of Finished Goods:
The assessee used the Transactional Net Margin Method (TNMM) to benchmark its trading segment. The Tribunal found that the detailed working submitted by the assessee was not examined by the TPO or DRP. The issue was set aside to the TPO for fresh adjudication, thus partly allowing the grounds for statistical purposes.

5. Transfer Pricing Adjustments on Account of Regional Service Charges and Accounting Support Services Fees:
The Tribunal observed that the assessee had not demonstrated the actual expenses incurred by the AE and the mark-up charges. The issue was referred back to the TPO for fresh adjudication with directions to the assessee to provide detailed evidence. The grounds were partly allowed for statistical purposes.

6. Disallowance of Advertisement and Publicity Expenses:
The Tribunal referred to its previous decisions in the assessee's own case and found that the advertisement expenses were incurred wholly for the purpose of business. The ad-hoc disallowance of 30% was deleted, allowing the grounds in favor of the assessee.

7. Disallowance Related to Late Deposit of Employee Contributions to Employee State Insurance:
The Tribunal upheld the disallowance of Rs. 19,452/- for late deposit of employee contributions, referring to the Supreme Court decision in Checkmate Services Pvt. Ltd. vs. CIT-1, which held that contributions deposited after the due date cannot be allowed as a deduction.

8. Incorrect Determination of Dividend Distribution Tax (DDT):
The ground regarding DDT was not pressed by the assessee and was thus dismissed.

9. Incorrect Charging of Interest Under Section 234C of the Act:
The Tribunal set aside the issue to the AO for de-novo consideration to determine the correct interest, thus partly allowing the ground for statistical purposes.

10. Charging of Interest Under Section 234B of the Act:
This ground was dismissed as it was consequential in nature.

11. Initiation of Penalty Proceedings Under Section 270A of the Act:
The ground regarding initiation of penalty proceedings was considered premature and was not adjudicated.

Conclusion:
The appeals for both assessment years were partly allowed, with specific directions for fresh adjudication on certain issues and deletion of certain additions and disallowances. The Tribunal emphasized consistency with its previous decisions in the assessee's own case and required detailed evidence for certain claims.

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