2020 (2) TMI 248 - AT - Income Tax

TP Adjustment - MAM selection - HELD THAT - Assessee is a wholly owned subsidiary of Brother Japan. It is engaged in the business of distribution of information and communication equipments such as printers and facsimile machines by importing from AE and selling in the local market. RPM is a transfer pricing method where the resale price to the independent party is reduced by comparable resale price margin to arrive at ALP of the product transferred between the related parties. Resale price margin is a margin representing the amount out of which a reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed) make an appropriate profit. It is well settled that RPM is to be used for determining ALP only when goods purchased from the associated enterprise are resold to unrelated parties and there is very little value addition involved. In CIT v. L Oreal India (P.) Ltd. 2012 (10) TMI 1191 - ITAT MUMBAI it is held that in case of distribution or marketing activities when goods are purchased from associated entities and sales are effected to unrelated parties without any further processing, then, RPM (resale price method) is most appropriate method to determine ALP of said transaction. In ACIT v. L Oreal India (P.) Ltd. 2015 (2) TMI 407 - BOMBAY HIGH COURT it is held that where assessee buys products from its AEs and sells to unrelated parties without any further processing, RPM is most appropriate method to determine ALP. Having examined the facts of the present case, we are of the considered view that the principles laid down in the above decisions are applicable here. Therefore, we set aside the order of the Ld. CIT(A) on the above grounds of appeal and delete the adjustment made by the AO u/s 92CA(3) of the Act. Adjustment as the compensation for its Advertisement Marketing and Promotion ('AMP') services - appellant incurs 'excessive' AMP expenses in relation to its distribution activities thereby qualifying as 'services' as per the arm's length principle - HELD THAT - We find that out of total expenses on advertisement of ₹ 1.22 crore, only ₹ 36.34 lacs are expenses towards brand promotion, while the remaining expenses of ₹ 86 lacs pertain to the selling expenses such as incentives and other benefits paid to dealers/distributors for promoting sale and not the brand name of the AE. In Maruti Suzuki India Limited v. CIT 2015 (12) TMI 634 - DELHI HIGH COURT , the Hon ble Delhi High Court held that there being no international transaction on AMP spend with an ascertainable price, neither substantive nor machinery provision of Chapter X were applicable to the transfer pricing adjustment exercise . In Honda Siel Power Products Limited 2015 (12) TMI 1333 - DELHI HIGH COURT again held that when assessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of AE, hence benefit of creation of marketing intangibles for foreign AE on account of AMP expenses can at best said to be incidental . All the more, since the AMP expenses of the assessee, after reducing selling expenses are just 0.91%, which is nearly equivalent to the average AMP expenses of comparables at 0.9%, the same meets the ALP standard under the Act and hence, no adjustment is required - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment of ?11,917,839 related to international transactions.
2. Adjustment of ?42,70,636 as compensation for Advertisement Marketing and Promotion (AMP) services.
3. Disallowance of advertisement and sales promotion expenses of ?2,84,514.
4. Disallowance of provision of warranty of ?11,61,620.
5. Procedural error in directing the TPO to make inquiries and collect documents about comparables.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of ?11,917,839:
The assessee, a wholly owned subsidiary of Brother Japan, engaged in the distribution of information and communication equipment, selected the Resale Price Method (RPM) to benchmark its trading transactions. The Transfer Pricing Officer (TPO) rejected RPM and adopted the Transaction Net Margin Method (TNMM), resulting in an adjustment of ?11,917,839. The Commissioner of Income Tax (Appeals) [CIT(A)] restored the matter to the TPO for further inquiries. However, the Tribunal found that RPM is appropriate for transactions involving resale without significant value addition, as supported by several judicial precedents (e.g., CIT v. L’Oreal India (P.) Ltd., Nokia India (P.) Ltd. v. DCIT). Consequently, the Tribunal deleted the adjustment of ?11,917,839, allowing the assessee's appeal on this ground.

2. Adjustment of ?42,70,636 as Compensation for AMP Services:
The TPO proposed an adjustment of ?42,70,636 for AMP expenses, arguing that the assessee incurred excessive AMP expenses qualifying as services to its Associated Enterprises (AEs). The CIT(A) directed the TPO to re-examine the AMP expenses. The Tribunal noted that the assessee’s AMP expenses, after excluding selling expenses, were just 0.91% of sales, nearly equivalent to the comparables' 0.9%. Citing judicial precedents (e.g., Maruti Suzuki India Limited v. CIT, Bausch & Lomb Eyecare (India) Pvt. Ltd. v. Additional Commissioner of Income Tax), the Tribunal held that no adjustment was warranted as the AMP expenses met the arm's length standard under the Act. Thus, the adjustment of ?42,70,636 was deleted.

3. Disallowance of Advertisement and Sales Promotion Expenses of ?2,84,514:
The CIT(A) confirmed the disallowance based on the observation that the expenses were debited thrice. The Tribunal found that the disallowance needed re-verification and restored the matter to the Assessing Officer (AO) for proper verification, directing the assessee to provide relevant documents. Thus, this ground of appeal was allowed for statistical purposes.

4. Disallowance of Provision of Warranty of ?11,61,620:
The CIT(A) confirmed the disallowance, observing that the actual warranty expense had been debited to the profit & loss account, leading to a double claim. The Tribunal directed re-verification by the AO, allowing the assessee to submit relevant evidence. This ground of appeal was also allowed for statistical purposes.

5. Procedural Error in Directing the TPO to Make Inquiries:
The Revenue argued that the CIT(A) erred in directing the TPO to make inquiries and collect documents about comparables instead of calling for a remand report or analyzing the comparables himself. Since the Tribunal deleted the adjustments of ?11,917,839 and ?42,70,636, the Revenue's appeal did not survive and was dismissed.

Conclusion:
The Tribunal partly allowed the assessee's appeal, deleting the adjustments related to transfer pricing and AMP expenses, and remanded the disallowances of advertisement and sales promotion expenses, and provision of warranty for re-verification. The Revenue's appeal was dismissed.