2014 (5) TMI 740 - AT - Income Tax

Transfer pricing adjustment u/s 92CA(3) of the Act Import of finished goods for resale Computation of ALP of international transaction Held that - The amendment u/s 92C(4) by Finance Act, 2007 w.e.f. 01.06.2007 is merely procedural in nature - the AO after receipt of the order of the TPO has again required the assessee to submit his objection to the addition proposed by the TPO and after considering such objections, the AO has made the adjustment - the ground of the assessee that AO has made the addition without making any independent examination is devoid of any merit and is dismissed - the AO/TPO are well within their rights to reject the TP study filed by the assessee and determine the ALP of the transaction independently, though such determination may be challenged by the assessee. The TPO has accepted the ALP of all other international transactions except in respect of import of goods for resale/for packaging and sale - The TPO by rejecting the segmental analysis and the comparables selected by the assessee has determined the operating margin at entity level by considering 5 other comparables - the difference between the operating margin of the assessee and the comparable cases is determined at 3.83% (16.50% - 12.67%) and this difference is applied to total turnover of Rs.412.14 crores to make adjustment of 15.75 crores in the ALP of the finished goods imported by the assessee - adjustment is to be restricted to the international transaction and not to the entire turnover of the assessee Relying upon Deputy Commissioner of Income-tax , Circle 16(3), Mumbai Versus Ankit Diamonds 2010 (11) TMI 565 - ITAT, MUMBAI - Determination of ALP of an international transaction has to be only at the transaction level or at the level of a class of transactions - TPO is not authorized to determine the net operational profits at the enterprise level but he shall determine only ALP of international transaction. The fact that the TPO himself has admitted that assessee is a market leader and it will be extremely difficult to identify the comparables and the fact that neither in earlier years nor in subsequent years any adjustment has been made by comparing the results at entity level - the international transaction entered by the assessee with the AE even at entity level is at arm s length and therefore the adjustment made by the AO is not justified - Decided in favour of Assessee. Disallowance of claim of investors written off Held that - Disallowance of claim of investors written off - The details of inventory written off as well as procedure for written off is explained before the AO as decided in assessee s own case for the earlier assessment year, it has been held that, the write off for obsolesce of such identified items is allowable deduction - no provision is created in books of accounts but only the nomenclature of provision for obsolesce is used - in the balance sheet also no such provision is appearing either in the liabilities side or as reduction from asset side thus, the claim of the inventory written off is allowed Decided in favour of Assessee. Disallowance out of travelling and conveyance expenses Held that - The AO has stated that assessee has produced entire module, bill and vouchers of expenses for verification as desired - in making disallowance out of the expenses after submission of month wise details of the expenses by the assessee, AO has not required assessee to furnish the details of any specific expenses - on these expenses, FBT is paid and that such ad hoc disallowance is not made in the past - the AO is directed to set aside the disallowance of Rs. 50 lacs made by him Decided in favour of Assessee. Disallowance of advertisement and sale promotion expenses Held that - Group M Media India Pvt. Ltd. is an Indian Co. as is evident from the company master details the company is incorporated on 29.11.2001 having registered office at Mumbai - it is an Indian Co. as defined u/s 2(26) and is a company resident in India u/s 6(3) - All payment made to this company towards advertisement charges is in Indian currency - Tax is deducted at source on such payment u/s 194C - Sec. 195 is applicable when payment is made to a non-resident - payment to Group M Media India Pvt. Ltd. is a payment to resident and not a non-resident - section 195 is not attracted. The disallowance made by the AO is incorrect, against law and the same is set aside - So far as expenses on trade incentive is concerned, the incentives given as per various schemes in earlier years has been allowed - The observation of AO that services has been received by the assessee against the payment - he should have deducted tax at source on the value of the gift is ill founded in as much as the payment is not against the services but against the sale of goods to the distributors and therefore TDS provisions are not applicable - the disallowance made by the AO is set aside Decided in favour of Assessee. Disallowance of depreciation on vehicles Evidences not submitted Held that - All the vehicles which are referred in the assessment order are registered in the name of the assessee the assessee is the owner of the vehicles and it is entitled to depreciation on these vehicles - the disallowance made by the AO is set aside Decided in favour of Assessee. Addition of DDA provision Details could not be furnished Held that - The amount is appearing in the details of other liabilities as old provision - No material is placed by the department that the provision is made during the year by debit to P&L A/c - similar addition made in AY 96-97 while processing the return was deleted by the AO himself in order u/s 154 dated 30.06.1998 - no amount is debited to the P&L a/c during the year on account of the provision thus, the addition is set aside Decided in favour of Assessee. Disallowance out of miscellaneous expenses Held that - The AO has made the disallowance without specifying any particular expenses which is not verifiable or not incurred wholly and exclusively for the purpose of business when he has given a finding that bills and vouchers of expenses as desired were produced for verification and examined on test check basis - ad hoc disallowance is not approved by the DRP in A.Y. 07-08 thus, the ad hoc disallowance made by AO is set aside Decided in favour of Assessee.

Summary

Issues Involved:

1. Adjustment of Rs. 15,75,28,786/- under section 92C(3) for import of finished goods.
2. Disallowance of inventories written off at Rs. 8,28,35,757/-.
3. Lump sum disallowance of Rs. 50,00,000/- out of traveling and conveyance expenses.
4. Disallowance of Rs. 52,87,28,092/- in respect of advertisement and sales promotion expenses.
5. Disallowance of Rs. 30,57,894/- in respect of depreciation on vehicles.
6. Addition of Rs. 2,15,95,884/- in respect of DDA provision.
7. Lump sum disallowance of Rs. 50,00,000/- out of miscellaneous expenses.
8. Adjustment of Rs. 39,92,973/- in respect of provision for bad and doubtful debts and advances and excess depreciation to the book profit under section 115JB.

Detailed Analysis:

1. Adjustment of Rs. 15,75,28,786/- under section 92C(3) for import of finished goods:
The assessee challenged the adjustment made by the AO based on the TPO's proposal without independent examination. The TPO rejected the transfer pricing study by the assessee and computed the arms-length price at the entity level, leading to an adjustment of Rs. 15.75 crores. The Tribunal found that the adjustment should be restricted to the international transaction and not the entire turnover. The Tribunal also noted that out of the five comparables selected by the TPO, two were not appropriate due to their high manufacturing ratio and association with the assessee. The Tribunal concluded that the international transaction was at arm's length and deleted the adjustment.

2. Disallowance of inventories written off at Rs. 8,28,35,757/-:
The AO disallowed the claim for lack of item-wise details and supporting documents. The Tribunal noted that similar claims had been allowed in previous years and that the details were provided. Following its earlier decisions, the Tribunal allowed the claim and deleted the addition.

3. Lump sum disallowance of Rs. 50,00,000/- out of traveling and conveyance expenses:
The AO made a lump sum disallowance due to a lack of supporting evidence. The Tribunal found that the assessee had produced all necessary documents and that no specific expenses were questioned by the AO. Additionally, the Tribunal noted that fringe benefit tax was paid on these expenses. The Tribunal directed the AO to delete the disallowance.

4. Disallowance of Rs. 52,87,28,092/- in respect of advertisement and sales promotion expenses:
The AO disallowed payments to Group M Media Pvt. Ltd. due to non-deduction of tax under section 195 and lack of an agreement. The Tribunal found that Group M Media Pvt. Ltd. is an Indian company, and section 195 does not apply. The Tribunal also noted that the expenses were genuine and incurred for business purposes. Regarding trade incentives, the Tribunal found that similar expenses were allowed in previous years and that the payments were not for services but for sales promotions. The Tribunal deleted the disallowance.

5. Disallowance of Rs. 30,57,894/- in respect of depreciation on vehicles:
The AO disallowed depreciation on vehicles registered in employees' names. The Tribunal found that the vehicles were registered in the name of the assessee and allowed the claim. The Tribunal also noted that similar disallowances were deleted in previous years.

6. Addition of Rs. 2,15,95,884/- in respect of DDA provision:
The AO added the provision for lack of details. The Tribunal found that the provision was made in earlier years and no deduction was claimed. The Tribunal deleted the addition.

7. Lump sum disallowance of Rs. 50,00,000/- out of miscellaneous expenses:
The AO made an ad hoc disallowance due to a lack of verification. The Tribunal found that the assessee provided all necessary details and that similar disallowances were not made in previous years. The Tribunal deleted the disallowance.

8. Adjustment of Rs. 39,92,973/- in respect of provision for bad and doubtful debts and advances and excess depreciation to the book profit under section 115JB:
The Tribunal noted that the tax payable on regular income was higher than the tax on book profit, making this ground academic. The Tribunal dismissed the ground as infructuous.

Conclusion:
The Tribunal allowed the appeal partly, deleting the major disallowances and adjustments made by the AO, and upheld the assessee's claims for the most part.