2011 (9) TMI 279 - AT - Income Tax

Transfer price adjustments - Arm s length price (ALPT) - Associated Enterprises (AE) - Held that - The expression used in the statute is participation in control or management or capital but essentially all these three ingredients refer to de facto control on decision making. In terms of the basic rule thus whether one enterprise controls the decision making of the other or whether decisions making of two or more enterprise are controlled by same interests these enterprise are required to be treated as associated enterprise . - In this view of the matter as also bearing in mind entirety of the case the relationship of AEs exist between the assessee the CBU and Diegeo group entities from which raw materials were purchased by the CBU. - the transactions are clearly between the associated enterprises. - Decided against the assessee. Comparabe cost - Held that - segregating all spirits other than whiskey and comparing the results in that segment with the results of whiskey segment would not be appropriate. - As we have rejected the comparability itself we see no need to deal with this issue of comparing financial results of OTW segment with whiskey segment any further. - however AO directed to allow adjustment of 5 per cent in terms of the proviso to section 92C. To sum up so far as grievances regarding arm s length price adjustments are concerned we delete the addition of 31.54 crores in respect of alleged brand promotion of AE and we partly confirm the addition of 1.20 crores in respect of ALP adjustment made to purchase of raw materials from Diageo group entities by CBU of the assessee. - Decided in favor of assessee partly.

Issues Involved:
1. Transfer pricing adjustment of Rs. 31.54 crores on account of advertising, marketing, and promotion expenses.
2. Transfer pricing adjustment of Rs. 1.20 crores on account of purchase of raw material from AEs.
3. Treatment of revenue expenditure of Rs. 2,11,674 on software as capital expenditure.
4. Disallowance of club expenses of Rs. 54,807.
5. Non-granting of depreciation of Rs. 2,90,780 on tax written down value.
6. Levy of interest under section 234B of Rs. 5,05,10,710.

Detailed Analysis:

1. Transfer Pricing Adjustment of Rs. 31.54 Crores:
The issue revolves around the advertising, marketing, and promotion expenses incurred by the assessee, which the Assessing Officer (AO) alleged were for strengthening the brand of the Associated Enterprise (AE). The Transfer Pricing Officer (TPO) noted that the assessee spent a substantial amount on advertisement and sales promotion, which was not compensated by the AE. The TPO concluded that out of the total expenditure of Rs. 37.22 crores, only Rs. 5.68 crores were for the assessee's business, and the remaining Rs. 31.54 crores should have been reimbursed by the AE. The Dispute Resolution Panel (DRP) upheld this adjustment. However, the tribunal found that the AO had not referred this specific transaction to the TPO, making the TPO's adjustment non est. Consequently, the tribunal directed the AO to delete the addition of Rs. 31.54 crores.

2. Transfer Pricing Adjustment of Rs. 1.20 Crores:
The adjustment pertains to the purchase of raw materials by the assessee's contract bottling unit (CBU), Konkan Agro Marine Industries Pvt. Ltd., from the AE. The assessee argued that the CBU is an unrelated party and should not be treated as an AE. However, the tribunal found that the CBU was effectively controlled by the Diageo group through the assessee, thus meeting the de facto control test under section 92A. The tribunal upheld the ALP adjustment in principle but directed the AO to grant a 5% adjustment in terms of the proviso to section 92C.

3. Treatment of Revenue Expenditure on Software:
The AO treated the expenditure on software as capital expenditure, allowing depreciation at 60%, resulting in a net disallowance of Rs. 84,670. The tribunal examined the nature of the software and found them to be routine business applications and attendance recordings, which become obsolete quickly. Following the principle laid down by the Special Bench in the case of Amway Enterprises v. DCIT, the tribunal directed the AO to treat the entire expenditure on these software as revenue expenditure and delete the disallowance.

4. Disallowance of Club Expenses:
The AO disallowed Rs. 54,807 in respect of reimbursement of club expenses to the employees, which were stated to have been incurred for business meetings. The tribunal noted that this issue was covered in favor of the assessee by decisions of the Coordinate Benches in the assessee's own case for earlier years. Consistent with these decisions, the tribunal directed the AO to delete the disallowance.

5. Non-granting of Depreciation:
The AO disallowed the depreciation of Rs. 2,90,780 as the assessee could not furnish necessary details for verification. The AO observed that the claim would be entertained on merits when the relevant details are produced. The tribunal found no reason to interfere with this well-reasoned approach and dismissed the ground.

6. Levy of Interest under Section 234B:
The ground against the levy of interest under section 234B seeks only consequential relief. The tribunal directed the AO to give consequential relief, dismissing the ground subject to this direction.

Conclusion:
The tribunal partly allowed the appeal, directing the deletion of the Rs. 31.54 crores adjustment for brand promotion and partly confirming the Rs. 1.20 crores adjustment for raw material purchases, with a 5% adjustment. The tribunal also allowed the grounds on software expenditure and club expenses while dismissing the grounds on depreciation and interest under section 234B, subject to consequential relief.

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