2016 (7) TMI 21 - ITAT DELHI

Transfer pricing issue w.r.t. to payment of trademark fee - whether the payment of trademark fees was validly benchmarked applying TNMM as most appropriate method ? -payment of royalty - Held that:- There exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. Further, the ld. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities.The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014 (5) TMI 897 - DELHI HIGH COURT ) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO.

Accordingly, in view of the aforesaid, we are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm’s length applying TNMM as the most appropriate method.

Transfer pricing issue w.r.t. to Advertising, Marketing and Promotion (‘AMP’) Expenses - Held that:- the adjustment made by the TPO is squarely covered by the decision of Delhi High Court in the case of Maruti (2015 (12) TMI 634 - DELHI HIGH COURT ) and Honda Siel Power Products (2015 (12) TMI 1333 - DELHI HIGH COURT ) and therefore, in the absence of any international transaction of brand building of ‘Goodyear’ brand, undertaken by the assessee with its AE, there cannot be any adjustment under the transfer pricing provisions. Further, as held by the Hon’ble High Court, Chapter – X of the Act does not authorize the revenue to make quantitative adjustment under the transfer pricing provisions, such as AMP expense. The contention of the ld. DR about abnormal increase in advertisement expenses in comparison to preceding year, does not render any help to the Revenue, keeping in view the proportionate rise in turnover of assessee. We accordingly direct the assessing officer to delete the adjustment made on this account.

Transfer pricing issue w.r.t. to export of goods - netting off of export incentive - Held that:- We uphold the order of the TPO to the extent of netting off of export incentive from the cost of goods sold and set aside the issue of netting off of rebate/discount from the cost of goods sold, to the file of assessing officer/TPO, for verification of the claim in light of our decision for the assessment year 2006-07. Needless to add that the assessee should be given reasonable opportunity of being heard.

Disallowance of machinery repair expenses - Held that:- As in the appellant’s own case for the assessment year 2008-09, deleted the similar ad-hoc disallowance of 20% of expenditure incurred on machinery repair and maintenance expenses, proposed by the assessing officer.

Disallowance of provision for warranty - Held that:- As during the financial year ended on 31st March 2007 the appellant, had incurred /made provision for warranty claims to the extent of ₹ 17,72,000 on the basis of past trend and experience of actual warranty claims. The provision for warranty is made on a scientific and actual basis and not an adhoc provision. The assessee has duly submitted and demonstrated the computation of its claim for warranty along with past data. In fact, the basis of computation of warranty was found to same as computed in the preceding year, i.e. AY 2006-07, in which this co-ordinate Bench of Tribunal in the assessee’s own case has allowed the appeal and directed the assessing officer to delete such disallowance. Accordingly, respectfully following the decision of the co-ordinate bench of Tribunal in the assessee’s own case for the assessment year 2006-07, we hold that provision for warranty made by the assessee is allowable.

Ad-hoc disallowance of advertisement expenditure under section 37(1) - Held that:- We have already held that the advertisement expenditure incurred by the assessee is incurred wholly for the purpose of its business and profession and ought to be allowed deduction in entirety. Further, the assessing officer has clearly made an ad-hoc disallowance of advertisement expenditure incurred by the assessee, which is not permissible under the law. We are of the considered view that AO was not justified in making such ad-hoc disallowances and therefore, direct the assessing officer to delete the adjustment on this account.