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2012 (4) TMI 752 - AT - Income TaxExpenditure on Advertisements - Revenue or Capital Expenditure? - The AO stated that the advertisement expenditure resulted in creating benefit of enduring nature thus is capital in nature where as CIT(A) treated it as revenue expenditure - HELD THAT - In the case of CIT VERSUS M/S. GEOFFREY MANNERS CO. LTD. (NOW KNOWN AS WYETH LIMITED) 2009 (2) TMI 13 - BOMBAY HIGH COURT it was held that the expenditure was incurred in respect of promoting ongoing products of the assessee and therefore the expenditure is for promotion of the products of the assessee which is revenue in nature. In the present case the expenditure has been incurred by the assessee for production of ad-films advertisement in electronic and print media in respect of promotion of its on-going products . Hence we hold that the said expenditure has rightly been treated as revenue in nature by CIT(A) which was incurred by the assessee wholly and exclusively for the purpose of its business - Decision in favour of Assessee. TP Adjustment - Computation of Arms Length Price in respect of Business Activities - TNMM or RPM? - Assessee is a 100% subsidiary company of L Oreal SA France and is engaged in the business of manufacturing and distribution of products. In respect of business of distribution the TPO while rejecting the Resale Price Method (RPM) as adopted by assessee has suggested some adjustment by applying Transactional Net Margin Method (TNMM) - HELD THAT - We agree with ld CIT(A) that there is no order of priority of methods to determine ALP. RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties RPM is the most appropriate method. Accordingly the appellant s international transaction in respect of imports of finished goods can be said to be at arm s length. Therefore RPM method is accepted - Decision in favour of Assessee. Receipt of services and benefit from AEs in lieu of the marketing fee payments - Assessee has paid to its overseas AEs some amount as cost contribution wherein certain common marketing services were rendered by group entities. TPO stated that in the absence of any direct evidence to indicate the benefit to the assessee it is concluded that the assessee has not benefited at all from the cost sharing arrangement and has considered the cost sharing arrangement at ALP for the same at Nil. HELD THAT - We consider it prudent to set aside the orders of authorities and restore the matter to the file of the AO with a direction that he will get it examined from TPO as to whether the assessee has received any benefit under cost sharing arrangement for which assessee made the payment. In case assessee is able to produce requisite documents to the satisfaction of the TPO that the assessee received benefit under cost sharing arrangement he will decide the claim of the assessee accordingly - Matter Restored back.
Issues Involved:
1. Whether the advertisement expenditure of Rs. 2,70,58,119 is capital or revenue in nature. 2. The appropriateness of the Resale Price Method (RPM) for determining the arm's length price of the assessee's international transactions. 3. The validity of the marketing fee payments amounting to Rs. 1,14,28,409 to the assessee's Associated Enterprises (AEs). Issue-wise Detailed Analysis: 1. Advertisement Expenditure: The primary issue was whether the advertisement expenditure of Rs. 2,70,58,119 incurred by the assessee should be treated as capital or revenue in nature. The assessee, engaged in the manufacturing and trading of cosmetics, argued that the expenditure was essential for creating awareness and did not result in any enduring benefit or creation of a new asset. The Assessing Officer (AO) treated the expenditure as capital, relying on the decision in Alembic Chemical Works Co. Ltd vs CIT, which suggested that expenditures resulting in enduring benefits are capital in nature. Upon appeal, the CIT(A) held that the expenditure was revenue in nature, as it was incurred wholly and exclusively for business purposes. The Tribunal upheld this view, referencing the case of Geoffrey Manners & Co. Ltd., where similar expenditures were deemed revenue in nature. The Tribunal noted that the purpose and effect of the outlay, considering business realities, indicated that the expenditure was for promoting ongoing products and thus revenue in nature. Consequently, the Tribunal upheld the CIT(A)'s decision and rejected the department's ground. 2. Resale Price Method (RPM) for Arm's Length Price: The second issue concerned the appropriateness of the RPM for determining the arm's length price of the assessee's international transactions in the distribution segment. The assessee, a subsidiary of L'Oreal SA France, used RPM, which the Transfer Pricing Officer (TPO) rejected in favor of the Transactional Net Margin Method (TNMM). The TPO argued that the assessee's consistent losses and substantial selling and distribution expenses indicated value addition, making RPM inappropriate. The CIT(A) disagreed, stating that RPM was suitable as the assessee merely resold products without further processing, and the OECD guidelines supported RPM for distribution activities. The Tribunal supported the CIT(A)'s decision, noting that RPM had been accepted in previous and subsequent years for the assessee's distribution segment. It concluded that the TPO's rejection of RPM was unfounded, and the adjustment of Rs. 4,90,07,000 was deleted. 3. Marketing Fee Payments: The final issue was the marketing fee payments of Rs. 1,14,28,409 to the assessee's AEs. The TPO had added this amount to the income, stating the assessee failed to provide evidence of receiving services or benefits. The CIT(A) found that the assessee had submitted documents proving receipt of services and benefits, thus deleting the disallowance. During the Tribunal hearing, it was acknowledged that the CIT(A) considered additional documents without seeking a remand report from the AO. Both parties agreed to remand the matter to the AO for re-examination. The Tribunal set aside the orders of the authorities below and directed the AO to verify the benefits received under the cost-sharing arrangement with the TPO's assistance. If the assessee could substantiate the benefits, the AO would decide accordingly. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal upholding the CIT(A)'s decisions on the first two issues and remanding the third issue for further examination.
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