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2019 (10) TMI 1499 - AT - Income TaxTP Adjustment - Selection of MAM - rejection of Transactional Net Margin Method (TNMM) as the most appropriate method - rejection of comparables selected while benchmarking the transaction relating to import of finished goods from the Associated Enterprises (AE) - HELD THAT - We do not discount the proposition that in case of distribution/resale of goods imported from A.E., RPM could be a proper method to benchmark the ALP, however, when both the assessee as well as the Transfer Pricing Officer admit that sufficient information relating to gross margin in uncontrolled transaction is not available, no useful purpose would be served in restoring the issue to the Assessing Officer for fresh benchmarking under RPM. In view of the decision of the Hon'ble Jurisdictional High Court in Audco India Ltd. 2019 (5) TMI 694 - BOMBAY HIGH COURT the contention of the Revenue that learned Commissioner (Appeals) having accepted RPM as the most appropriate method should have undertaken a fresh benchmarking under RPM cannot be accepted. In such circumstances, when no other method is applicable, as a method of last resort, TNMM has to be applied as most appropriate method. It is further noticed, in subsequent assessment years, not only the assessee has benchmarked the import of finished goods from the AE by applying TNMM, but the Transfer Pricing Officer has also accepted it as the most appropriate method. Even the very same comparables, as selected in the impugned assessment year, have been accepted as good comparables in the subsequent assessment years. For the aforesaid reasons, we do not feel the necessity to restore the issue to the Assessing Officer/Transfer Pricing Officer for fresh adjudication. Transfer pricing adjustment in respect of advertisement, marketing, promotion (AMP) expenditure - HELD THAT - Undisputedly, the assessee is a distributor of finished products, imported from the AE. The assessee sells these products to third parties in India. The entire AMP expenditure incurred by the assessee was spent in India and have been paid to third parties. No material has been brought on record by the Departmental Authorities to even remotely suggest that there is an agreement or arrangement between the assessee and its AE to incur AMP expenditure for promoting the brand of the AE. That being the case, the expenditure incurred by the assessee on AMP would not come within the purview of international transaction as per section 92B of the Act. Pertinently, identical issue arising in assessee s own case came up for consideration before the Tribunal in assessment year 2010 11 held that incurring of AMP expenditure does not come within the purview of international transaction. Transfer pricing adjustment on account of direct sales made by the AE to third parties in India - HELD THAT - Addition on account of commission on direct sales made by the AE to third customer in India was made on notional basis. Notably, identical dispute arising in assessee s own case for the assessment year 2002 03 (supra), came up for consideration before the Tribunal and while deciding the issue, the Tribunal held that no such addition on account of notional commission can be made without using any prescribed method. Accordingly, the Tribunal restored the issue back to the Assessing Officer / Transfer Pricing Officer to verify whether there was any involvement of the assessee in the direct sales made by the AE in India. Similar view was expressed by the Tribunal while deciding the issue in assessment years 2003 04 and 2004 05. Following the consistent view of the Tribunal cited supra, we restore the issue to the Assessing Officer for fresh adjudication in terms with the directions of the tribunal in the preceding assessment years as referred to above. Grounds are allowed for statistical purposes. Disallowance being expenditure incurred on gift articles - HELD THAT - There is no dispute with regard to the factual aspect involved in the issue. It is the claim of the assessee that the expenditure incurred towards gift items given to the customers is wholly and exclusively for the purpose of assessee s business. It is also evident, Commissioner (Appeals) as well as the AO have disallowed the expenditure following the decision taken by the Departmental Authorities in the past years. Notably, while deciding identical issue in assessment years 2003 04 and 2004 05, in the orders referred to above, the Co ordinate Bench has held that the expenditure incurred on gift items being wholly and exclusively for the purpose of assessee s business, is an allowable expenditure. Following the consistent view of the Tribunal in assessee s own case, we delete the addition made by the Assessing Officer. These grounds are allowed. Disallowance of expenditure incurred in respect of foreign trip of doctors - HELD THAT - Following the consistent view of the Tribunal in assessee s own case as well as the other decisions cited before us, we delete the addition made by the Assessing Officer. Ground raised is allowed. Disallowance of depreciation on goodwill - assessee claimed depreciation @ 25% on the written down value (WDV) of goodwill by treating it as an intangible asset - Denial of assessee s claim by holding that goodwill is not an intangible asset under section 32(1)(ii) - HELD THAT - The issue relating to depreciation on goodwill by treating it as an intangible asset under section 32(1)(ii) of the Act is no more res integra in view of the decision of the Hon'ble Supreme Court in CIT v/s Smifs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT as held that goodwill is in the nature of any other business or commercial right or similar in nature, hence, is to be treated as intangible asset. - Decided in favour of assessee. Depreciation on non compete fee - Additional ground of appeal - HELD THAT - The issue raised in the additional ground can be decided without making investigation into fresh facts. Therefore, we are inclined to admit the additional ground raised by the assessee. Undisputedly, in the year of payment of non compete fee i.e., A.Y. 2002 03, the assessee had claimed it as revenue expenditure. However, the Departmental Authorities as well as the Tribunal held that the expenditure incurred by the assessee is capital in nature. Of course, the Tribunal allowed depreciation on non compete fee by treating it as an intangible asset. Notably, in subsequent assessment years i.e., 2003 04, 2004 05, 2008 09, 2011 12, 2012 13 and 2013 14, the Tribunal has allowed assessee s claim of depreciation on non compete fee while entertaining additional ground raised by the assessee. Therefore, following the consistent view of the Tribunal, we direct the Assessing Officer to allow depreciation on the opening WDV of the non compete fee. This ground is allowed
Issues Involved:
1. Rejection of Transactional Net Margin Method (TNMM) and selection of Resale Price Method (RPM) for benchmarking international transactions. 2. Adjustment on account of Advertisement, Marketing, Promotion (AMP) expenditure. 3. Transfer pricing adjustment on direct sales made by the Associated Enterprises (AE) to third parties in India. 4. Disallowance of expenditure on gift articles. 5. Disallowance of expenditure on foreign trips of doctors. 6. Disallowance of depreciation on goodwill. 7. Allowance of depreciation on non-compete fee. Detailed Analysis: 1. Rejection of Transactional Net Margin Method (TNMM) and selection of Resale Price Method (RPM) for benchmarking international transactions: The assessee challenged the rejection of TNMM as the most appropriate method and the selection of RPM by the Transfer Pricing Officer (TPO) for benchmarking the transaction relating to the import of finished goods from the AE. The TPO found various defects in the assessee's transfer pricing study report and rejected TNMM, considering RPM more appropriate due to the assessee's marketing and distribution activities. The TPO applied a gross profit margin of 42%, based on projected resale discount percentages, resulting in an adjustment of ?23,60,70,527. The Commissioner (Appeals) agreed with the TPO on RPM being the most appropriate method but found the 42% margin incorrect, leading to the deletion of the adjustment. The Tribunal upheld the deletion, noting that the gross profit margin of 42% was a target margin and not based on comparable transactions. The Tribunal emphasized that controlled transactions cannot be used for comparability analysis under RPM and concluded that TNMM should be applied as the most appropriate method in the absence of sufficient data for RPM. 2. Adjustment on account of Advertisement, Marketing, Promotion (AMP) expenditure: The TPO suggested that AMP expenditure exceeding 5% of sales was incurred on behalf of the AE for brand promotion, but did not propose a separate adjustment. The Commissioner (Appeals) added a 10% markup to the AMP expenditure, resulting in an adjustment of ?17,87,32,162. The Tribunal deleted the addition, stating that the AMP expenditure incurred in India does not come under international transactions as per section 92B of the Act. The Tribunal noted the absence of any agreement between the assessee and the AE for incurring AMP expenditure for brand promotion and followed its consistent view in the assessee's own case for previous years. 3. Transfer pricing adjustment on direct sales made by the AE to third parties in India: The TPO added notional profit on direct sales made by the AE to third parties in India, amounting to ?1,51,90,344, based on the view that the assessee, as the distributor, should have been taxed on such sales. The Commissioner (Appeals) sustained the addition but directed recalculating the adjustment based on actual commission received. The Tribunal restored the issue to the Assessing Officer for fresh adjudication, following its consistent view in the assessee's own case for previous years, where such notional additions were not made without using prescribed methods. 4. Disallowance of expenditure on gift articles: The Assessing Officer disallowed ?1,60,911 incurred on gift articles given to customers, reasoning it was not for business purposes. The Commissioner (Appeals) sustained the disallowance. The Tribunal deleted the addition, noting that the expenditure was wholly and exclusively for the purpose of the assessee's business, following its consistent view in the assessee's own case for previous years. 5. Disallowance of expenditure on foreign trips of doctors: The Assessing Officer disallowed ?40,95,984 incurred on foreign trips of doctors for attending seminars, meetings, and conferences, reasoning the benefit was derived by the medical professionals, not the assessee. The Commissioner (Appeals) confirmed the disallowance. The Tribunal deleted the addition, following its consistent view in the assessee's own case for previous years, where such expenditure was allowed as business expenditure under section 37(1) of the Act. 6. Disallowance of depreciation on goodwill: The Assessing Officer and Commissioner (Appeals) disallowed depreciation on goodwill, holding it is not an intangible asset under section 32(1)(ii) of the Act. The Tribunal allowed the depreciation, following the Supreme Court decision in CIT v/s Smifs Securities Ltd., which held that goodwill is an intangible asset. The Tribunal also followed its consistent view in the assessee's own case for previous years. 7. Allowance of depreciation on non-compete fee: The assessee claimed depreciation on non-compete fee paid in the financial year relevant to the assessment year 2002-03. The Tribunal admitted the additional ground and allowed the depreciation, following its consistent view in the assessee's own case for previous years, where depreciation on non-compete fee was allowed by treating it as an intangible asset. Conclusion: The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, providing detailed reasoning for each issue based on consistent views in previous years and relevant legal precedents.
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