2016 (8) TMI 204 - AT - Income Tax

Transfer pricing adjustment - MAM - TNMM v/s RPM - Held that - We find that there is a substance in the reasons assigned by the TPO while rejecting the resale price method and particularly in view of the fact that the assessee has incurred huge expenditure on account of sale and distribution as well as sales promotion. The assessee has carried out the trading activity only in the goods imported from the AE and such expenditure incurred by the assessee it is not found in the comparable cases would be relevant factor. As regards the resale price method accepted by the TPO for the Assessment Year 2006-07, we are of the view that res judicata is not applicable in the matter of taxation and further when there is no such similar expenditure on account of selling and distribution expenses and sales promotion expenses in the said year then the rule of consistency cannot be applied. Accordingly, we do not find any error or illegality in the orders of the authorities below in adopting the TNMM as MAM instead of RPM. Appropriate adjustment towards the extra-ordinary expenses - Held that - There is no dispute on the fact that the assessment under consideration is the initial years of the distribution activity of the assessee and therefore it cannot be ruled out that the expenditure incurred by the assessee towards the marketing, advertisement and sales promotion activity is substantially higher because of the initial year. We do agree with the view taken in the case of Skoda Auto India Pvt. Ltd. 2009 (3) TMI 249 - ITAT PUNE-A that if the abnormal expenditure towards the advertisement, marketing and sales promotion is only on account of the beginning of the activity of distribution-ship then an appropriate adjustment has to be allowed while determining the ALP under TNMM. We may clarify that the Assessing Officer has to verify by comparing this expenditure during the year with the subsequent years to find out that the significant expenditure towards the marketing, advertisement and sales promotion is only during the initial year and not in the later year. Accordingly, we set aside this issue to the record of the A.O./TPO for re-examination and adjudication in the above terms.

Issues Involved:
1. Rejection of Transfer Pricing (TP) documentation.
2. Adoption of Transactional Net Margin Method (TNMM) over Resale Price Method (RPM).
3. Adjustment towards significant expenses for marketing, advertisement, and sales promotion.
4. Benefit of lower range of +/-5% in determination of arm's length price.
5. Levy of interest under Sections 234B and 234D of the Income Tax Act.

Detailed Analysis:

1. Rejection of Transfer Pricing (TP) Documentation:
The assessee's TP documentation was rejected by the Transfer Pricing Officer (TPO). The TPO applied the Transactional Net Margin Method (TNMM) instead of the Resale Price Method (RPM) for determining the Arm's Length Price (ALP). The assessee contended that RPM was the Most Appropriate Method (MAM) since it was engaged in pure trading activities without any value addition. However, the TPO and Dispute Resolution Panel (DRP) found that the assessee incurred significant selling and distribution expenses, which were not comparable to the selected comparables, justifying the rejection of RPM.

2. Adoption of Transactional Net Margin Method (TNMM) over Resale Price Method (RPM):
The TPO applied TNMM as the MAM, selecting six comparables. The assessee argued that RPM should be used as it was engaged in pure trading activities. The TPO rejected this, noting the significant selling and distribution expenses incurred by the assessee, which were not present in the comparables. The Tribunal upheld the TPO's decision, emphasizing that the business model and incurred expenses of the assessee differed significantly from the comparables, making TNMM more appropriate.

3. Adjustment Towards Significant Expenses for Marketing, Advertisement, and Sales Promotion:
The assessee argued for an adjustment in the TNMM due to significant expenses incurred for marketing, advertisement, and sales promotion, particularly as it was in the initial years of its distribution operation. The Tribunal acknowledged this, referencing the case of Skoda Auto India Pvt. Ltd., and remitted the matter to the Assessing Officer (AO)/TPO for re-examination. The AO/TPO was directed to verify if the significant expenses were only during the initial year and not in subsequent years, and to allow appropriate adjustments if necessary.

4. Benefit of Lower Range of +/-5% in Determination of Arm's Length Price:
The Tribunal directed that the benefit of the second proviso to Section 92C of the Act, which allows a lower range of +/-5% in determining the arm's length price, should also be considered.

5. Levy of Interest Under Sections 234B and 234D of the Income Tax Act:
The issue of interest levied under Sections 234B and 234D was deemed consequential. The Tribunal did not make a specific ruling on this, as it would depend on the final determination of the other issues.

Conclusion:
The Tribunal partly allowed the appeal, upholding the adoption of TNMM over RPM, and remitted the issue of adjustments for significant marketing and sales promotion expenses to the AO/TPO for re-examination. The benefit of the second proviso to Section 92C was to be considered, and the levy of interest under Sections 234B and 234D was noted as consequential.

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