2018 (3) TMI 1900 - AT - Income Tax

TP Adjustment - addition on account of transfer pricing adjustment in Advertisement marketing and promotion (AMP) expenses - direction of DRP requiring the AO to consider domestic brand owners as comparable for the purpose of computing bright line limit - HELD THAT - Similar issue came up for consideration before the Tribunal in the assessee s own case for the immediately preceding three assessment years namely 2006-07 to 2008-09. Vide order 2017 (6) TMI 873 - ITAT DELHI on the assessee s request remitted the matter to the file of Assessing Officer/TPO for taking a fresh decision on the existence or otherwise of the international transaction of AMP expenses and then determining the ALP of such international transaction of AMP expenses if it is found to exist. The Tribunal further directed that selling expenses should not be considered within the ambit of AMP expenses. The ld. AR fairly conceded that the issue of AMP expenses for the instant year may also be restored to the file of Assessing Officer/TPO for taking a fresh decision in line with the directions given by the Tribunal for the preceding three years. The ld. DR did not raise any objection to it. Addition on account of transfer pricing adjustment - Payment of consultancy expenses in relation to its Distribution operations - HELD THAT - Details have been given in respect of 12 payments which apparently show that most of the services provided by the expats are in connection with the setting up of the factory. At the same time it is also vivid that some services have been rendered by the expats qua the running business of Distribution which are of the revenue nature. It goes without saying that an expenditure incurred in relation to setting up manufacturing unit cannot be considered as of revenue nature and the same has to be capitalized. Since complete details of such amount are not available we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of Assessing Officer/TPO. We order accordingly and direct him to examine each and every item of payment of consultancy fee and then capitalize such amounts as relate to the setting up of manufacturing unit. Since the DRP has simply directed the TPO/A.O. to capitalize the expenditure relating to manufacturing unit and the ALP of the same has neither been directed to be nor actually determined by the TPO/A.O. we cannot enlarge the controversy by directing the authorities to determine the ALP of the amount to be capitalized. Once the international transaction of Payment of consultancy fee is segregated from the international transactions of Manufacturing segment the former transaction under consideration needs to be separately benchmarked. Considering the nature of the international transaction of receipt of consultancy services the same in our considered opinion needs to be more appropriately benchmarked on a comparison with another similar transaction of service under the CUP method rather than on profit level under the TNMM. We therefore approve the application of the CUP as the most appropriate method for determining the ALP of the remaining amount of consultancy expenses paid after excluding the amount to be capitalized as relating to the setting up of manufacturing unit in terms of our foregoing discussion. Addition u/s 37(1) - AO in his draft order has taken the ALP of the international transaction at Nil on the basis of such recommendations of the TPO without carrying out any independent investigation for the deductibility or otherwise of such a payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi of Cushman Wakefield India (P.) Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT the TPO was required to simply determine the ALP of the international transaction unconcerned with the fact if any benefit accrued to the assessee and thereafter it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act we find the actions of the AO/TPO running in contradiction with the ratio laid down in Cushman Wakefield (supra). In these circumstances we set aside the impugned order on this score and send the matter to the file of AO/TPO for deciding it afresh. Addition on account of Payment of consultancy and training expenses treating the same as not at ALP - not allowing Capacity adjustment in the Manufacturing segment - HELD THAT - We find that complete financials of all the comparable companies are not available on record. Thus it is not possible at our end to work out the amount of capacity adjustment in the manner discussed. Ergo we set aside the impugned order and direct the TPO/AO to work out the amount of capacity utilization adjustment afresh in terms of our above observations. It is made clear that the capacity adjustment will be considered in the hands of the comparables by taking into account Installed capacity vis- -vis the actual production and not the Licensed capacity vis- -vis the actual production. Further the production on double shift or triple shift basis in case of certain comparables also needs to be suitably adjusted. Needless to say the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.

Summary

Issues Involved:
1. Transfer pricing adjustment in Advertisement, Marketing, and Promotion (AMP) expenses.
2. Transfer pricing adjustment for consultancy expenses in the distribution segment.
3. Capitalization of consultancy expenses related to the manufacturing unit.
4. Determination of Arm's Length Price (ALP) for consultancy and training expenses.
5. Capacity utilization adjustment in the manufacturing segment.

Detailed Analysis:

1. Transfer Pricing Adjustment in AMP Expenses:
The Revenue contested the Dispute Resolution Panel (DRP)'s direction to include domestic brand owners as comparables for computing the bright line limit for AMP expenses. The assessee also challenged the addition of ?5,58,24,315/- on account of transfer pricing adjustment in AMP expenses. The Tribunal noted that similar issues were remitted to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) in previous years (2006-07 to 2008-09) for fresh decisions. Following this precedent, the Tribunal remitted the issue back to the AO/TPO for fresh adjudication, excluding selling expenses from AMP expenses.

2. Transfer Pricing Adjustment for Consultancy Expenses in Distribution Segment:
The assessee reported an international transaction of consultancy services amounting to ?7,94,14,638/-, which was benchmarked using the Transactional Net Margin Method (TNMM). The TPO disagreed, applying the Comparable Uncontrolled Price (CUP) method and proposed an ALP of Nil, resulting in a transfer pricing adjustment of ?7.94 crore. The DRP partially agreed, directing the TPO to capitalize consultancy expenses related to the manufacturing unit. The AO followed this, treating ?4,96,20,173/- as capital expenditure and ?8,44,864/- as revenue expenditure but with Nil ALP. The Tribunal remitted the matter back to the AO/TPO to re-examine each consultancy payment and capitalize amounts related to the manufacturing unit while benchmarking the remaining consultancy expenses using the CUP method.

3. Capitalization of Consultancy Expenses Related to Manufacturing Unit:
The Tribunal noted that the assessee's manufacturing unit was under setup during the year, requiring capitalization of related expenses. The DRP identified several consultancy payments connected to the setup. The Tribunal directed the AO/TPO to review each payment and capitalize those related to the manufacturing unit, without determining the ALP for capitalized amounts.

4. Determination of ALP for Consultancy and Training Expenses:
For the assessment year 2010-11, the TPO determined Nil ALP for consultancy and training expenses of ?9,77,68,737/-, citing lack of evidence of services received. The Tribunal found the approach inconsistent with the Delhi High Court's judgment in CIT v. Cushman & Wakefield (India) (P.) Ltd., which limits the TPO's role to determining ALP, leaving the AO to assess deductibility under Section 37(1). The Tribunal remitted the issue back to the AO/TPO for fresh determination, adhering to the Cushman & Wakefield judgment.

5. Capacity Utilization Adjustment in Manufacturing Segment:
The assessee's claim for idle capacity adjustment was denied by the TPO due to lack of reliable data. The Tribunal emphasized the need for capacity utilization adjustments under the TNMM, adjusting fixed costs based on capacity utilization differences between the assessee and comparables. The Tribunal directed the TPO/AO to re-calculate capacity utilization adjustments using installed capacity and adjusting for production shifts, ensuring comparability.

Conclusion:
The appeals were allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh adjudication in line with the Tribunal's directions and relevant legal precedents. The order was pronounced on 19.03.2018.