2022 (2) TMI 1319 - AT - Income Tax

Addition on account of ALP adjustment - assessee has been held to be a trader and goods sourced from India by its AE has been added back as its operating expenses /cost and thus resultant TP adjustment was made - assessee s own case the adjudicating authority held that assessee is in nature of business support service provider and FOB value of goods sourced from India shall not be included while computing operating margins - HELD THAT - The Co-ordinate Bench of the Tribunal 2017 (8) TMI 1355 - ITAT DELHI held that in view of the undisputed fact that AEs of the taxpayer is into trading activities of various products, such as, textiles, machinery, information and communications related products, metals, products related to oil and other energy resources, general merchandise chemicals, provisions and food and the taxpayer is merely rendering business support services to these AEs in the form of facilitation services to source goods from India. So, the limited activities carried out by the taxpayer for its AEs in the nature of licensing and facilitation of business of its AEs separates the taxpayer from the Sogo Shosha traders. Furthermore, when the taxpayer is not proved to be a risk bearer in the nature of credit risk, price risk, inventory risk, storage and handling risk etc., it cannot be treated as a trader. Moreover when undisputedly the taxpayer has not developed any intangible or accorded locational savings to its AEs and has earned net operating profit margin on cost of 129.34% against the margin of comparable at 14.05%, it cannot be said that the taxpayer has not been adequately compensated. We find no reason to interfere with the impugned order of ld. CIT (A), hence present appeal filed by the Revenue is hereby dismissed on this ground. Disallowance of gift expenses - HELD THAT - We find that these expenses relate to the gifts presented to dignitaries and participants in the meetings, conferences, tea expenses and Diwali gifts, farewell gift which are of token gifts in nature cannot be considered as disallowable. Hence, the appeal of the assessee on this ground is allowed. Business Promotion Expenses - AO disallowed an amount being the 20% the total amount claimed - AO categorically mentioned that the assessee suo motou agreed for the disallowance of the 20% of the expenses claimed. The assessee, therefore, deemed to have foreclosed the enquiry. We have also gone through the ledger placed and find that certain expenses cannot be treated as business promotion expenses. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Summary

Issues Involved:
- Transfer Pricing Adjustment
- Addition of Gift Expenses
- Addition of Business Promotion Expenses

Transfer Pricing Adjustment:
The appeal involved a dispute regarding the arm's length price adjustment made by the Assessing Officer (AO) under section 154/143(3) r.w.s. 144C of the Income Tax Act, 1961. The Transfer Pricing Officer (TPO) determined a difference in arm's length price in the international transactions of the assessee with its Associated Enterprises (AE) at Rs.8,67,98,011/-. The AO disallowed certain expenses related to gift expenses and business promotion expenses. The ld. CIT(A) deleted the addition made on account of ALP but confirmed the addition made on account of gift and business promotion expenses.

Analysis:
The Co-ordinate Bench of the Tribunal analyzed the nature of the taxpayer's business functions and risk profile. It was established that the taxpayer undertakes limited business functions and does not bear significant risks associated with trading activities. The Tribunal referred to previous judgments and held that the taxpayer, engaged in business support services, should not be treated as a trader. The Tribunal emphasized that the taxpayer had not developed any intangibles or provided locational savings to its AEs. The judgment of the Hon'ble High Court in a similar case was cited to support the decision.

Gift and Business Promotion Expenses:
Regarding the gift expenses and business promotion expenses, the AO disallowed certain amounts which were later challenged by the assessee. The Tribunal examined the nature of these expenses and found that the gift expenses were related to token gifts presented to dignitaries and participants, which were not disallowable. Similarly, the business promotion expenses were partially disallowed by the AO, but the Tribunal found that certain expenses were not related to business promotion and declined to interfere with the ld. CIT(A)'s order on this issue.

Conclusion:
In conclusion, the Tribunal dismissed the revenue's appeal on the grounds of transfer pricing adjustment and allowed the cross-objection of the assessee partially concerning gift and business promotion expenses. The judgment provided a detailed analysis of the taxpayer's business functions, risk profile, and the applicability of transfer pricing regulations, supported by relevant legal precedents and judgments.