2013 (9) TMI 155 - AT - Income Tax

Rejecting the assessee's internal TNMM as there was a huge expenditure on advertisement and promotion of sales in both the segments - The assessee's key business activities comprised of manufacturing and marketing of various international brands of alcoholic beverages in India - The assessee has maintained segmental accounts with regard to international transactions with the A.E. and transactions with the non-A.E. - The A.E. transactions were mostly related to whisky segment whereas transactions with unrelated parties consist of other than whisky segment viz. Vodka, Rum, Gin, Brandy, etc. In the transfer pricing report, the assessee had submitted that it had carried out comparability analysis between the transactions involving the A.E. and the domestic transactions treating it to be the internal comparable under the TNMM - The assessee also submitted 15 external comparables wherein the average profit margin worked out to 0.96% as compared to assessee's operating profit upon total sales at (-) 20.71% - The TPO, after rejecting the internal TNMM adopted by the assessee in the transfer pricing report benched marked the operating profit margin with that of the 15 external comparables and made an upward adjustment of ₹ 1.56 crores. The main reason for rejecting the assessee's internal TNMM was that there was a huge expenditure on advertisement and promotion of sales in both the segments Held that - Reliance has been put on decision of the Tribunal in L.G. Electronics India P. Ltd. 2013 (6) TMI 217 - ITAT DELHI . Further held that with regard to the issue that such a nature of transaction is an international transaction within the ambit of section 92B r/w section 92F, has been settled by the Special Bench deciding that it does fall within the realm of international transaction and, hence, transfer pricing mechanism is triggered. In the present case, the TPO has chosen 15 external comparables by applying TNMM for bench marking the percentage of cost of advertisement and brand promotion expenses with the net sales and by taking the average cost of 7.95% to be bright line and over and above this line, the expenditure is deemed to increase the value of brand intangible for the A.E. The DRP has also endorsed the observation and conclusion of the TPO except for the fact that the DRP has directed the TPO to apply CUP method by considering the value of advertisement and brand promotion expenses incurred by the independent enterprise as percentage of the sales - Applying the ratio of the decision in L.G. Electronics India P. Ltd. (supra), the computation of ALP in the present case to be done Decided in favor of Assessee.

Issues Involved:
1. Transfer pricing adjustment on account of purchase of raw materials.
2. Adjustment on account of advertisement and business promotion expenses.
3. Disallowance of software expenditure.
4. Disallowance of club expenses.
5. Levy of interest under section 234B.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Purchase of Raw Materials:

The assessee challenged the final draft assessment order dated 31st October 2011, which included transfer pricing adjustments made by the Transfer Pricing Officer (TPO) for Rs. 1.56 crores on the purchase of raw materials. The TPO rejected the internal Transactional Net Margin Method (TNMM) adopted by the assessee and instead used 15 external comparables to benchmark the average arithmetic mean of 0.96% against the assessee's operating margins. The TPO's rejection was based on the significant advertisement and promotion expenses incurred by the assessee. The tribunal upheld the assessee's contention that internal comparables should be given priority, citing the Third Member decision in Teconimont ICB Pvt. Ltd. The tribunal concluded that the internal TNMM should be accepted as the assessee's segmental results were more appropriate for determining the arm's length price (ALP).

2. Adjustment on Account of Advertisement and Business Promotion Expenses:

The TPO observed that the assessee incurred substantial advertisement and business promotion expenses amounting to Rs. 94.95 crores, which was 58.75% of the total turnover. The TPO concluded that these expenses primarily benefited the Associated Enterprises (A.E.) and made an adjustment of Rs. 64.81 crores. The Dispute Resolution Panel (DRP) partially modified this adjustment. The tribunal remanded the issue back to the TPO for fresh adjudication in light of the Special Bench decision in L.G. Electronics India Pvt. Ltd., directing the TPO to consider the income from contract bottling units, exclude sales-related expenditure, apply the Comparable Uncontrolled Price (CUP) method, and consider the absence of mark-up in the adjustment.

3. Disallowance of Software Expenditure:

The assessee challenged the disallowance of software expenditure of Rs. 34,630. Both parties agreed that this issue had been decided in favor of the assessee in the previous assessment year (2006-07). The tribunal followed the earlier decision, treating the software expenditure as revenue expenditure and allowing the ground.

4. Disallowance of Club Expenses:

The assessee also challenged the disallowance of club expenses of Rs. 63,325. The tribunal noted that this issue was covered in favor of the assessee by the decision in the previous assessment year (2006-07) and the judgment of the Hon'ble Jurisdictional High Court in CIT v. Raychem RPG Ltd. Consequently, the tribunal allowed the ground.

5. Levy of Interest Under Section 234B:

The assessee contended that the levy of interest under section 234B was consequential in nature. The tribunal directed the Assessing Officer (A.O.) to give consequential effect in accordance with the law while re-computing the income.

Conclusion:

The tribunal partly allowed the assessee's appeal for statistical purposes, directing fresh adjudication on the advertisement and business promotion expenses issue and upholding the assessee's contentions on other grounds. The order was pronounced in the open court on 19th July 2013.

← Previous Next →