2014 (6) TMI 892 - AT - Income Tax

Transfer pricing adjustment - Transfer Pricing Officer while making upward adjustment in the purchase cost has reduced the cash discount given by the assessee to its debtors and outward freight charges from selling price - Held that - Transfer Pricing Officer has erred in equating cash discounts with trade discount. The cash discounts in the present case has been offered after the completion of sales and are entirely different in nature from trade discounts. Therefore the contention of the Transfer Pricing Officer to reduce it from the selling price is misconceived. Similarly the Transfer Pricing Officer has erred in reducing freight and storage expenses from the selling price. The expenditure is towards the cost of packing and transportation of goods from the warehouse of the assessee to the customers. The expenditure incurred by the assessee on outward freight is in the nature of selling and distribution expenses. Therefore by no stretch of imagination it can be reduced from the selling price to determine the cost of goods sold. We accept the submissions made by the learned authorised representative and direct the Assessing Officer to treat the cash discount and outward freight and storage charges towards selling and distribution expenses instead of reducing the same from the selling price. Consideration of Multiple year data of the comparables for determining gross profit margin - Held that - Since the gross profit margin of the assessee after the deletion of the downward adjustment of purchase cost would be 14.69 per cent. therefore it will fall within 5 per cent. range of gross profit margin of the comparables reworked by the Transfer Pricing Officer. Thus the arithmetic mean 18.74 per cent. determined by the Transfer Pricing Officer will have no bearing on the transfer pricing study. Transfer pricing adjustment to marketing expenditure - Held that - Undisputedly the assessee itself has categorised the expenditure into two sub-heads herein above i.e. the advertisement head comprises of expenses which have been incurred for brand building . The other head is of business promotion expenses. Admittedly there is no dispute about the category and nature thereof. Hence we hold the advertisement expenses have been incurred for brand building ; whereas the busi ness promotion expenses deserve to be treated as directly connected with the sales undertaken by the assessee. Thus we partly accept the assessee s submissions and hold that only advertisement expenses out of the total amount are liable to be considered for the purpose of advertisement marketing and promotion leading to brand building - Decided partly in favour of assesse for statistical purposes.

Summary

Issues Involved:
1. Downward adjustment of purchase cost from associated enterprises.
2. Upward adjustment of development and business promotion expenses.
3. Computation of gross profit margins by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Downward Adjustment of Purchase Cost from Associated Enterprises:
The primary contention revolves around the downward adjustment of the purchase cost made by the TPO. The assessee argued that the TPO erred in reducing the cash discount of Rs. 5,27,00,970 and outward freight charges from the selling price. The Tribunal noted that cash discounts are financial charges offered post-sales for early payment and should not be equated with trade discounts. Similarly, outward freight and storage expenses are selling and distribution expenses and should not be deducted from the selling price. The Tribunal directed the Assessing Officer to treat these expenses as selling and distribution expenses instead of reducing them from the selling price.

2. Upward Adjustment of Development and Business Promotion Expenses:
The assessee contested the upward adjustment made by the TPO on marketing expenditure. The Tribunal referred to its earlier decision in the assessee's own case for AY 2007-08, where it was held that only advertisement expenses leading to brand building should be considered for adjustment. Business promotion expenses directly connected with sales should not be included in brand building expenses. Following this precedent, the Tribunal directed the TPO to re-evaluate the marketing expenses, distinguishing between brand-building and sales-specific expenses.

3. Computation of Gross Profit Margins by the TPO:
The dispute involved the determination of the selling price and calculation of the gross profit margin. The assessee used the Resale Price Method (RPM) and Transactional Net Margin Method (TNMM) for determining the arm's length price. The TPO, however, reduced cash discounts and outward freight charges from the selling price, resulting in a lower gross profit margin for the assessee. The Tribunal found that the TPO's adjustments were incorrect and directed that the gross profit margin should be recalculated without these deductions. The Tribunal also noted that the TPO should have considered multiple-year data for comparables, as used by the assessee, instead of relying solely on the financial year 2007-08 data.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to re-evaluate the adjustments made to the purchase cost and marketing expenses and to recompute the gross profit margin without the incorrect deductions. The Tribunal emphasized the need to distinguish between brand-building and sales-specific expenses in marketing expenditure and to consider multiple-year data for comparables in determining the gross profit margin.