2015 (12) TMI 961 - AT - Income Tax

Transfer pricing adjustment - adoption of Most Appropriate Method (MAM) - Held that - We direct the TPO to adopt RSPM as the MAM in this case. Transfer pricing adjustment of AMP expenses - Held that - As agreed by both the parties this issue is set aside to the file of the AO/TPO for fresh adjudication in line with the propositions laid down by the Special Bench of the Tribunal in the case of L.G.Electronics India 2013 (6) TMI 217 - ITAT DELHI Treating foreign exchange loss as an item of non operating expenditure - Held that - The Ld.Counsel for the assessee agreed with the contention of the Ld.D.R. that safe harbour rules should not be the basis of decision making. In view of the above contentions, we modify the directions of the DRP to the extent that safe harbour rules should not be applied while considering foreign exchange fluctuation loss while arriving at net operating margins. Decided in favour of revenue Addition on prior period expenses - Held that - None of the expenditure identified by the AO has been claimed in AY 2009-10, as the relevant provisions were made in AY 2008-09 and the said provision expenditure ahs been allowed by the AO in AY 2008-09. Thus, the addition proposed by the AO does not survive - Decided in favour of assessee. Relief granted by the DRP on account of provision for warranty - Held that - On the ground that the assessee has made provisions of warranty on a consistent and rational basis, the dRP directed the AO to grant deduction. We find no infirmity in this finding. Hence this ground of the Revenue is dismissed. - Decided in favour of assessee. Disallowance made u/s 40(a)(ia) with respect to advertisement expenditure - DRP delted the addition - Held that - The DRP recorded that the assessee had complied with the statutory requirement of deducting tax at source and hence the disallowance u/s 40(a)(ia) is not warranted. There is no infirmity in this finding and hence this ground of Revenue is dismissed.- Decided in favour of assessee.

Issues Involved:
1. Selection of the Most Appropriate Method (MAM) for determining the Arms Length Price (ALP) in transfer pricing.
2. Transfer pricing adjustments related to purchases and expenditures.
3. Treatment of foreign exchange fluctuation loss.
4. Transfer pricing adjustment of Advertising, Marketing, and Promotion (AMP) expenses.
5. Prior period expenses.
6. Provision for warranty.
7. Disallowance under section 40(a)(ia) for non-deduction of Tax Deducted at Source (TDS).

Issue-Wise Detailed Analysis:

1. Selection of the Most Appropriate Method (MAM) for Determining the Arms Length Price (ALP):
The assessee, a wholly-owned subsidiary of Luxottica Holland B.V., engaged in trading sunglasses and frames, initially adopted the Transaction Net Margin Method (TNMM) as the MAM and also used the Resale Price Method (RPM) to corroborate the ALP. The Transfer Pricing Officer (TPO) initially proposed RPM as the MAM but later accepted TNMM due to revenue considerations. The Dispute Resolution Panel (DRP) upheld the TPO's decision, stating that TNMM provides more flexibility. However, the Tribunal held that RPM is the MAM for the assessee as it is a trader without value addition, citing various Tribunal decisions supporting RPM for traders. The Tribunal directed the TPO to adopt RPM as the MAM.

2. Transfer Pricing Adjustments Related to Purchases and Expenditures:
The Assessing Officer (AO) made additions/disallowances concerning prior period expenses, provision for warranty, and disallowance on account of non-deduction of TDS under section 40(a)(ia) for advertisement expenditure. The DRP resolved these issues in favor of the assessee. The Tribunal upheld the DRP's decision, noting that the assessee had complied with the statutory requirements for TDS and that the provision for warranty was made on a consistent and rational basis.

3. Treatment of Foreign Exchange Fluctuation Loss:
The Revenue objected to the DRP's direction to apply safe harbor rules for treating foreign exchange fluctuation loss as non-operating expenditure. The Tribunal agreed with the Revenue that safe harbor rules should not be the basis for decision-making and modified the DRP's directions accordingly.

4. Transfer Pricing Adjustment of Advertising, Marketing, and Promotion (AMP) Expenses:
The Tribunal set aside the issue of AMP expenses to the AO/TPO for fresh adjudication in line with the propositions laid down by the Special Bench of the Tribunal in the case of L.G. Electronics India. This decision was consistent with the view taken in the assessee's appeal.

5. Prior Period Expenses:
The DRP examined the matter and found that the AO had not appropriately analyzed the provisions for expenses created by the assessee. The DRP directed the AO to reverify the factual claims of the assessee and take necessary action if discrepancies were found. The Tribunal found no infirmity in the DRP's findings and dismissed the Revenue's ground on this issue.

6. Provision for Warranty:
The DRP applied the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT and other relevant judgments, concluding that the assessee had made provisions for warranty on a consistent and rational basis. The Tribunal upheld the DRP's decision, finding no infirmity in the DRP's application of legal precedents.

7. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The DRP recorded that the assessee had complied with the statutory requirement of deducting tax at source, and hence, the disallowance under section 40(a)(ia) was not warranted. The Tribunal found no infirmity in the DRP's findings and dismissed the Revenue's ground on this issue.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the TPO to adopt RPM as the MAM and set aside the issue of AMP expenses for fresh adjudication. The Tribunal also upheld the DRP's decisions on prior period expenses, provision for warranty, and compliance with TDS requirements. The Revenue's appeal was partly allowed, with the Tribunal modifying the DRP's directions regarding the treatment of foreign exchange fluctuation loss.

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