2013 (6) TMI 458 - AT - Income Tax

Transfer pricing adjustment - Whether there can be two separate elements comprised in the promotion of the brand for which separate valuation has to be done? - Held that - The amount on one side of Bright Line, was the amount on AMP expenditure incurred on normal business of the assessee, whereas the balance amount represented expenses incurred for and on behalf of FMC for creating and maintaining its marketing intangible which was the Ford logo. Only addition could be made was by considering the excess AMP spends, and the addition done by the lower authorities considering 1% of sales, as brand development fee was not justified. There was indeed a duplication in measuring the brand development fee for working out the ALP. Only the excess AMP expenditure incurred over and above the average of such expenditure as a percentage of sales of comparable entities - in favour of assessee. ALP of brand building activity - Held that - Agreement between assessee and FMC, was not exclusive, in that it did not preclude either party from going solo or having other arrangements. There was a remote possibility of FMC giving the knowhow to any other company or person in India and they could also market products carrying Ford logo through any other person in India. Thus, there was an international transaction for creating and improving the marketing intangible comprised in the logo Ford by the assessee for and on behalf of FMC. FMC was a non-resident and such transaction was of the nature of provision of service as held in the case of L.G. Electronic's case (2013 (6) TMI 217 - ITAT DELHI). Thus no fault of revenue for treating the transaction of brand building as an international transaction - in favour of Revenue. Suo motu cognizance of a transaction for ALP analysis by TPO - Held that - Once there was no reporting of an international transaction by the assessee, as held in L.G. Electronics India Pvt. Ltd. (2013 (6) TMI 217 - ITAT DELHI) it was well within the power of the TPO to consider such transaction also, whether or not it was referred by Assessing Officer to him, under sub-section (1) of Section 92CA - in favour of the Revenue. Whether Bright Line test applied for determination of ALP of AMP fit into any one of the methods allowed u/s 92C(1) r.w.r. 10B of Income-tax Rules - Held that - As held in L.G. Electronics India Pvt. Ltd. 2013 (6) TMI 217 - ITAT DELHI steps mentioned in Rule 10B(1)(c) have necessarily to be followed while working out arm's length price. Non-following of the steps in a given methodology can at the best be a lacuna in applying a procedural provision, in the sense that ALP was not computed strictly as per the force of the prescribed method. Therefore, BL test applied by the TPO did fall within the method prescribed under Section 92C and the lacuna was only in not following the steps mentioned in the Rule 10B(1)(c) in the manner prescribed. Selling expenses - whether be excluded from AMP while making a comparative study? -Held that - As said in L.G. Electronics India Pvt. Ltd. (2013 (6) TMI 217 - ITAT DELHI) AMP referred only to advertisement, marketing and publicity expenses. A divider had to be placed between expenditure for promotion of sales on one hand and expenditure in connection with sales on the other. These expenses have to be treated differently. Thus sales expenditure, which had no connection with the building of the logo Ford , but which were directly in connection with sales, had to be excluded - in favour of the assessee. Selection of comparables - Held that - Comparable domestic cases not using foreign brand alone can be considered. Whatever may be the comparison attempted, it is cardinal that the selected entities were having uncontrolled comparable transactions. The selected entities should not be doing any piggybacking on or of a foreign brand owned by an Associate Enterprise abroad. Thus, while holding that comparables selected by the TPO might not have been appropriate, we also reject the comparables selected by the assessee. A.O./TPO has to identify a different set of comparables and they can even consider the same entities selected earlier with proper adjustments carried out on the figures for making good the deficiencies noted in such comparables in the case of Maruti Suzuki's case (2010 (7) TMI 84 - DELHI HIGH COURT). Disallowance of product design expenditure - Held that - As both the assessee as well as FMC had benefitted from the product development expenditure incurred. Fruits of the improvement, which was better engineered cars, was enjoyed by the assessee whereas ownership was with M/s FMC. Assessee had an economic advantage derived out of such product development expenditure. Therefore, it cannot be said that the expenditure was incurred solely for the benefit of FMC. As long as FMC and assessee were separate legal entities having separate legal existence, it cannot be said that expenditure incurred by the latter was wholly for the benefit of former, when specific economic advantage was derived by the assessee as well. Thus 50% of the advantage derived on account of product development spendings ensued to the assessee and the balance 50% to FMC - partly in favour of assessee. Provision made for bad and doubtful debts disallowed - Held that - Facts apropos are that assessee had made a provision towards doubtful advances and claimed it stating that such money could not be recovered from its suppliers, since it represented value of rejected parts. However, nothing was shown before us to prove that there was any actual write-off. A mere provision in the account will not be equivalent to a write-off. At the best be considered as a provision for unascertained liability. Nothing was brought on record to show that correspondingly debtors accounts were reduced. Thus the addition was rightly made by the AO. No interference is required. Disallowance of penalty paid under Central Excise & Service Tax Law - Held that - Nothing was brought by the A.R. to show that these payments were not for any infringement of law. Explanation to Section 37 would squarely apply and therefore, the disallowance was rightly made. Vendor compensation disallowed treating it as capital outgo - Held that - There is no dispute that the compensation given by the assessee was to its vendors. These were paid for assessee's failure to lift the whole of the ordered quantity, since it had stopped manufacture of certain models. Thus such compensation given for failure to honour the commitment for purchasing agreed quantities, could never be considered capital outgo. What was contemplated for purchase was only raw material, which was to become a part of the running stock of the assessee. Such compensation, was only in revenue field - disallowance was not called for & be deleted. Subsidy of ₹ 1 Crore received under Mega Projects Scheme of Tamil Nadu Government - whether be considered as revenue receipt? - Held that - The subsidy scheme clearly mentions that it was being given as a special incentive for boosting mega investments in the State of Tamil Nadu & if the investments were between ₹ 200 Crores and ₹ 300 Crores, an industry would be eligible for capital subsidy. Thus the amount received by the assessee could only be considered as capital receipt and not a revenue receipt. In Shree Balaji Alloys (2011 (1) TMI 394 - Jammu and Kashmir High Court) even subsidy in the nature Excise duty refund, interest subsidy and insurance subsidy were held to be capital receipts and not revenue receipts after considering the decision of Sahney Steel & Press Works Ltd. v. CIT (1997 (9) TMI 3 - SUPREME Court) and CIT v. Ponni Sugars & Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT). Thus subsidy cannot be considered as revenue receipt. The addition stands deleted.

Summary

Issues Involved:
1. Transfer Price Adjustments
2. Suo Motu Cognizance by TPO
3. Bright Line Test (BLT) Method
4. Exclusion of Selling Expenses from AMP
5. Appropriateness of Comparables
6. Disallowance of Product Development Expenditure
7. Provision for Bad and Doubtful Debts
8. Disallowance of Penalty under Central Excise & Service Tax Law
9. Vendor Compensation
10. Depreciation on UPS
11. Subsidy as Revenue Receipt
12. Disallowance under Section 40(a)(ia)

Detailed Analysis:

1. Transfer Price Adjustments:
The assessee challenged the transfer price adjustments made by the Assessing Officer (AO) under the directions of the Dispute Resolution Panel (DRP). The grounds included the alleged errors in confirming the proposed addition of Rs. 1,629,435,321 and the failure to satisfy conditions under Section 92C(3) of the Act. The assessee also contested the TPO's jurisdiction and the characterization of the assessee as a contract manufacturer and provider of brand building services. The TPO's application of the Bright Line Test (BLT) and the selection of comparable companies were also disputed.

2. Suo Motu Cognizance by TPO:
The TPO took suo motu cognizance of the alleged international transaction not specifically referred by the AO. The Tribunal held that the TPO was within his rights to consider such transactions, as clarified by the addition of clause (2B) to Section 92CA by Finance Act, 2012, with retrospective effect from June 1, 2002.

3. Bright Line Test (BLT) Method:
The Tribunal noted that the BLT method used by the TPO to determine the excess AMP expenditure was effectively a form of the Transaction Net Margin Method (TNMM). The Tribunal found that the BLT was a method allowed under Section 92C(1) of Rule 10B, as it was essentially a Cost Plus method, despite not following all procedural steps.

4. Exclusion of Selling Expenses from AMP:
The Tribunal held that selling expenses not related to brand promotion should be excluded from AMP expenses. This included remuneration to sales consultants, training expenses, and customer satisfaction surveys.

5. Appropriateness of Comparables:
The Tribunal found that the comparables selected by the TPO might not have been appropriate. The Tribunal rejected the comparables selected by the assessee as well, directing the AO/TPO to identify a different set of comparables or make proper adjustments to the figures of the earlier selected comparables.

6. Disallowance of Product Development Expenditure:
The Tribunal partially allowed the assessee's claim, holding that 50% of the product development expenditure benefitted the assessee, while the remaining 50% benefitted FMC. Therefore, 50% of the expenditure was to be recouped from FMC.

7. Provision for Bad and Doubtful Debts:
The Tribunal upheld the disallowance of the provision for bad and doubtful debts, as the assessee failed to show any actual write-off or reduction in debtors' accounts.

8. Disallowance of Penalty under Central Excise & Service Tax Law:
The Tribunal upheld the disallowance of the penalty paid under Central Excise & Service Tax Law, as the payments were for infringement of law and fell under the Explanation to Section 37.

9. Vendor Compensation:
The Tribunal allowed the assessee's claim, holding that the compensation paid to vendors for not lifting the contracted quantum of parts was a revenue outgo and not a capital expenditure.

10. Depreciation on UPS:
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

11. Subsidy as Revenue Receipt:
The Tribunal held that the subsidy received under the Mega Projects Scheme of Tamil Nadu Government was a capital receipt and not a revenue receipt, relying on the decision of the Hon'ble High Court of Jammu & Kashmir in Shree Balaji Alloys v. CIT.

12. Disallowance under Section 40(a)(ia):
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

Conclusion:
The Tribunal partly allowed the appeal, setting aside the orders of the authorities below regarding the determination of ALP of brand building activity and remitting the issue back to the AO/TPO for fresh consideration. The Tribunal upheld the disallowance of the provision for bad and doubtful debts and the penalty under Central Excise & Service Tax Law but allowed the claims regarding vendor compensation and subsidy as a capital receipt.