TaxTMI 
TaxTMI 
2020 (3) TMI 622
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....e are that the assessee-company is a wholly owned subsidiary of the Swatch Group Limited, Switzerland. Swatch India is distributor of watches manufactured by Swatch Group brands, in India. The company commenced its operations from January 2002 in India. The company also provides customer services in the nature of after sales services to customers. Swatch Group India has the exclusive license to undertake wholesaling operations of Swatch Group brands in India. Swatch Group India adapts global advertising campaigns for its products in India. 4. For all brands present in the country, international celebrities are used in local periodicals and mainline, which mention brand retailers in specially created dealer panels. In addition to primary advertising in the print media, the company relies on below-the-line marketing activities, which includes in-store promotions, sales promotions and public relations campaign. Swatch Group India relies solely on the print media, and does not use television or radio as a medium. 5. Group India directly sells to the retailers. There are no subdistributors involved in the entire network. Swatch Group India supplies to approximately 160 retail outl....
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.... 150.350.604 Other expenses related to purchases 1.107,890 Less : Closing stock 98,957,492 Cost of Goods Sold 296.367.509 Gross Profit 104.698.187 Gross Margin 26.10% 9. The TPO observed that in the purchase value of traded products, purchase value of traded product has been used net of marketing subsidy. The marketing subsidy is of Rs. 3,43,44,890/-. In audited profit and loss account, pricing support/subsidy has been shown under the head 'Service Income' and for calculation of accounting ratio, this marketing subsidy has not been taken either in the sales or in the cost of sales. Accordingly, a show cause notice was issued to the assessee asking it to justify its claim of aggregation of marketing subsidy with cost of import, wages and sale thereof. 10. In its reply, the assessee explained that it forced to follow-price lines that are acceptable in the Indian market, and hence sold Swatch products at competitive prices in order to push sales volumes. Therefore, in order....
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.... 16. The TPO finally concluded by holding that the GP margin of comparables identified as above, will be used for bench marking of international transaction and ALP was determined as under: G.P. sales of comparable - 28.25% = ALP Sales of Swatch India - 40.26,80.400 Arm's length GP - 0.2825X40.26,89,460 G.P. Shown by Swatch India - 11,37,59,772 Adjustment required - 7,36,12,010 Value of international transaction - 4,01,47,762 ALP of international transaction - 23,41,86,927 % of adjustment to ALP - 19,40,39,165 20.6% Adjustment of Rs. 4,01,47,762 (20.6%) is more than 5%, proviso to section 92c(2) is not applicable. 17. The assessee agitated the matter before the ld. CIT(A) and vehemently stated that the comparables used by the TPO were not in accordance with the provisions of law. It was brought to the notice of the ld. CIT(A) that foreign comparables have been used and it was contended that when the tested party is an Indian taxpayer, Indian companies should have been selected as comparables to test the arm's length nature of the international transactions. 18. It was....
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....y and do not have to spend the same proportion of import duty cost as the assessee. Hence, in view of the provision of Rule 10B(2)(d) and 10B(3) of the Rules, appropriate adjustments for differences on account of geographical location, size of market, level of competition, government regulations is called for and the ld. CIT(A) accordingly, held that reasonable quantitative adjustments should be made in order to make a comparison of the profitability of the assessee vis a vis the comparable companies and computed the gross margin as under: Year ending 31^st March 2004* Sales 401,065,696 Opening Stock 44,024,469 Add: Purchase value of traded products Purchase Value of traded products (net of marketing subsidy) 199,842,038 Customs Duty (normalizing to 5 percent of purchase value) 9,992,102 Other expenses related to purchases 1,107,890 Less: Closing stock 98,957,492 Cost of Goods Sold 156,009,007 Gross Profit 245,056,689 Gross Margin 61.10% 24. Since the gross margin computed as above was 61.10% which was higher than the margin of the comparable companies, the ld. CIT(A) directed for....
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....ity analysis is to examine as to whether or not, the values stated for the international transactions are at ALP. We are of the view that the regulations do not restrict or provide that adjustments cannot be made on the results of the tested party. We are also of the view that net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of Rule 10B(1)(e) of the Rules. There is no specific provision in Rule 10B(1)(e)(iii) of the Rules, which would impede the adjustment of the profit margin of the tested party. 30. As far as rate of custom duty is concerned, it can be easily taken from the official website of the European Union and we find that the rate at the relevant point of time was 4.5% whereas the custom duty paid by the assessee accounts for more than 75% of the purchase value and 50% of the total cost of goods sold. In our considered opinion, such difference on account of custom duty paid by the assessee and that existing in the location where comparable companies operate, cannot be ignored. Considering all these facts in totality, we decline....
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.... an allowable expenditure only that expenditure is allowable which is wholly and exclusively for the purpose of business and it is not in the nature of capital expenditure or personal nature. There is no such clause which allows the Assessing Officer to amortize the advertisement expenditure unless it falls under the category of capital expenditure. Accordingly, the ld. CIT(A) directed for deletion of addition of Rs. 1,86,81,972/-. 35. Before us, the ld. DR strongly supported the findings of the Assessing Officer. It is the say of the ld. DR that the assessee has incurred AMP expenses for brand building. The ld. DR further stated that the assessee itself has entered into an agreement with its AE for providing test marketing services and expenses on brand promotion is evidently capital expenditure and has been rightly treated as such by the Assessing Officer. 36. Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the ld. counsel for the assessee that Swatch Group companies which own respective brands have directly engaged or signed celebrities as brand ambassadors and the spend of the assessee is to promo....