2014 (6) TMI 440 - AT - Income Tax

Transfer pricing adjustment International transaction of the provision of agency and marketing support services Held that - The findings returned by the TPO - the assessee assuming substantial risks; doing critical functions for its AEs; and allowing the user of its highly-valued intangibles to such AEs - are all in air without any bedrock - there is no reference to the names of such comparables in the TPO s order - the TPO embarked upon the PSM throughout the length and breadth of his order - The alternative approach of TNMM was not given any serious consideration - Even there is no discussion about the comparables chosen by the assessee and how they were acceptable or not thus, the matter is to be remitted back to the AO for fresh determination of the ALP of the disputed international transactions of Provision of Agency and marketing support services - the assessee will be allowed a reasonable opportunity of being heard in such de novo determination of the ALP. Disallowance u/s 37(1) of the Act 50% of club expenses Held that - Following CIT vs. Groz Beckert Asia Ltd. 2013 (2) TMI 375 - PUNJAB & HARYANA HIGH COURT - payment of corporate membership fee has to be allowed as a revenue expenditure in the hands of the company - the amount spent on club membership fee of company s directors is deductible as business expenditure Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment of Rs.30,14,08,000.
2. Disallowance of 50% of Club Expenses amounting to Rs.5,03,647.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of Rs.30,14,08,000:
The first issue pertains to the addition of Rs.30,14,08,000 made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) suggestion regarding transfer pricing adjustment. The assessee, a wholly owned subsidiary of Marubeni Corporation, Japan, primarily engages in agency services and trading. Five international transactions were reported, with the controversy centered on the 'Provision of Agency and Marketing Support Services' for which the assessee was compensated Rs.32,18,11,018.

The assessee used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of OP/OC, declaring a profit rate of 16.87%, which was within the +5% range. However, the TPO observed that the assessee provided critical services to its Associate Enterprises (AEs), including feasibility studies, industry analysis, and project evaluations, which were not adequately compensated. The TPO applied the Profit Split Method (PSM), concluding that 70% of the total profit earned by AEs from goods traded from or to India should be given to the assessee, resulting in a transfer pricing adjustment of Rs.30.14 crore.

The Dispute Resolution Panel (DRP) upheld the TPO's application of PSM. However, the Tribunal found that the TPO's findings were not based on substantial evidence. The Tribunal noted that the assessee's role was limited to mediating between AEs and Indian suppliers/customers, with minimal risk and capital employed. The Tribunal also observed that the TPO's reliance on the Tribunal's order in M/s Li & Fung (India) Pvt. Ltd. was misplaced as the High Court had reversed that decision.

The Tribunal concluded that the TPO's findings of the assessee assuming substantial risks and using valuable intangibles were unfounded. The Tribunal set aside the transfer pricing adjustment of Rs.30.14 crore and directed the TPO/Assessing Officer to re-determine the ALP using TNMM, providing the assessee with a reasonable opportunity to be heard.

2. Disallowance of 50% of Club Expenses amounting to Rs.5,03,647:
The second issue involves the disallowance of 50% of club expenses claimed by the assessee under section 37(1) of the Act. The assessee claimed a deduction of Rs.10,07,294 for club memberships and annual subscriptions paid on behalf of its directors. The AO disallowed 50% of these expenses, considering them not wholly and exclusively for business purposes.

The Tribunal referred to the Full Bench judgment of the Punjab & Haryana High Court in CIT vs. Groz Beckert Asia Ltd. and other similar judgments from the Madras and Bombay High Courts, which held that corporate membership fees are allowable as revenue expenditure. Consequently, the Tribunal ordered the deletion of the disallowance of Rs.5,03,647.

Conclusion:
The appeal was partly allowed. The Tribunal set aside the transfer pricing adjustment of Rs.30.14 crore and directed a fresh determination of the ALP using TNMM. Additionally, the disallowance of 50% of club expenses amounting to Rs.5,03,647 was deleted.