2014 (11) TMI 262 - AT - Income Tax

Transfer pricing adjustment Determination of ALP Held that - The ALP in almost all the (nonpurchase) transactions has been determined at nil either in view of the assessee being not able to furnish the complete details or because the Revenue is of the view that there was no economic justification for the assessee to have incurred the relevant expenditure - The payments to, and the assistance from the AE having crystallized, it is the operating margin as obtaining that is to be determined, and on the adequacy of which, i.e., with reference to that of the comparables, reckoned on an average, that the TP adjustment, if any, shall arise - the reason/s for effecting the adjustment notwithstanding, the TNMM at the entity level shall substitute as the most appropriate method for all the international transactions. Validity of the comparables - ADS Diagnostics Ltd. - Held that - The company has two segments, namely medical diagnostics services and trading activities - The trading, which is also in the health care segment, is of high-end medical equipments, viz. bone denstimeters, digitizers, mammographic equipments - The other ground on which the assessee seeks to distinguish its case is that the said company has also commission income. As such, without prejudice, even if the said company is considered as a comparable, the income ought to be excluded while drawing the comparison, doing which would reduce its income to 1.36% - the company was also engaged in distribution of medical devices and equipments - The commission income was only marginal - Both the assessee and the comparable are operating in the health care segment, dealing in premium products - The commission is only on the distribution activity, so that the income is essentially against services relating to distribution activity - The assessee s business profile, which also includes marketing, pre/after sales and training services, thus matches with the comparable. Advanced Micronic Devices Ltd. Held that - Given the broad range of the assessee s activities (and functions), its stating of being a limited risk distributor is internally inconsistent, if not anomalous - both the aforesaid comparables have been rightly included in the list of comparables by the Revenue, resulting in the profit level indicator (PLI), which has been accepted as the operating margin on sales, at a mean of 8.88%. Adjustment of business development expenses and disallowance made u/s 37(1) Held that - All the expenditure incurred by the assessee during the year and, therefore, including on the WT event, shall form part of its operating statement for the year, even clarifying that even where any such expenditure stands directly recovered, the same would need to be incorporated in the operating statement - The assessee, as a part of its business profile, is to market, sale and distribute the principal s products, as well as provide technical services related thereto. The participants are all doctors from India - the assessee claims a quantum increase in both its sale as well as customer base, i.e., for the relevant year, vis- -vis the immediately preceding year, with the most of the new customers being participants of the event - The assertions have not been rebutted by the Revenue in any manner - an incidental third party benefit would not oust the claim the claim for deduction u/s. 37(1) Decided in favour of assessee. Provision for obsolete and non-moving inventory disallowed Provision for sales return Held that - The drop in the sale value (Rs.7.74 lacs), separately provided, forms only a part of the total provision of ₹ 70.65 lacs, so that the basis for the balance, stated to be a provision toward non-moving and slow items, would need to be ascertained and verified - This would also meet the Revenue s objection, which, in essence, states of the provision being contingent and not based on facts thus, the matter is to be remitted back to the AO for examination Decided in favour of assessee.

Issues Involved:

1. Timeliness of the appeal.
2. Transfer Pricing Adjustments.
3. Business Development Expenses.
4. Provision for Obsolete and Non-Moving Inventory.
5. Provision for Sales Return.
6. Levy of Interest under Sections 234A, 234B, and 234D.

Detailed Analysis:

1. Timeliness of the Appeal:

The appeal was initially observed to be time-barred by 332 days. However, upon clarification and review of the records, it was determined that the correct date of communication of the order was 17.01.2014, not 17.01.2013, making the appeal timely.

2. Transfer Pricing Adjustments:

The assessee, a wholly-owned subsidiary of Nobel Biocare Asia-Africa Holding AG, Sweden, reported several international transactions involving the import of dental products, capital assets, business development support expenses, recovery of expenses on a world tour, and reimbursement of professional training, traveling, and other expenses. Adjustments were made and confirmed for these transactions.

The relationship between the assessee and its Principal NBH is governed by distribution agreements, ensuring a specific operating margin for the assessee. The assessee argued that since it was allowed all expenses incurred by its supplier AE, no TP adjustment should arise. However, the Tribunal found that each international transaction must be benchmarked separately to determine the Arms' Length Price (ALP). The Tribunal agreed that the operating margin should be computed by treating the assistance from AE as a reduction in operating costs.

The Tribunal addressed the validity of comparables, ultimately agreeing with the Revenue's inclusion of ADS Diagnostics Ltd. and Advanced Micronic Devices Ltd. in the list of comparables, resulting in a mean profit level indicator of 8.88%.

3. Business Development Expenses:

The assessee incurred expenses on a world tour event organized in Mumbai, which the Revenue argued was for the benefit of the AE. The Tribunal found that all expenditures, including those for the world tour event, should form part of the assessee's operating statement, and the assistance from AE should be factored into the operating margin. The Tribunal also found that the organization of the event had economic justification, benefiting the assessee's business, and thus allowed the assessee's grounds.

4. Provision for Obsolete and Non-Moving Inventory:

The assessee made a provision for non-moving and slow-moving items, which was in line with its accounting policy and AS-2 issued by ICAI. However, the Tribunal found that the assessee did not provide sufficient details to substantiate its claim. The matter was remanded back to the Assessing Officer (A.O.) for examination and decision on merits.

5. Provision for Sales Return:

The provision for sales return was based on empirical data from the past three years. The Tribunal found that the relevant details were not on record and remanded the matter back to the A.O. for factual determination. The Tribunal clarified that the law regarding the deductibility of the provision was well-settled.

6. Levy of Interest under Sections 234A, 234B, and 234D:

The assessee contested the levy of interest under these sections, but the grounds were not pressed during the hearing. The Tribunal noted that the levy of interest is mandatory and not appealable, directing the assessee to follow procedural law for any genuine hardship cases.

Conclusion:

The Tribunal partly allowed the assessee's appeal and partly allowed it for statistical purposes, providing detailed directions for the A.O. to re-examine specific issues.

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