2020 (3) TMI 674 - AT - Income Tax

TP Adjustment - transactions for purchase of one product, viz. Nicorandil, with the said AE - Appellant had purchased the said Product from the AE @ ₹ 20,000 per unit, while the AE sold same product to third party @ Rd. 17,000 per unit - difference in the quality of Product sold by the AE to the Appellant and the Third Party - HELD THAT - Assessee has purchased Nicorandil chemical from its associate enterprises @ 20,000 per Kg, whereas the same chemical are sold in the domestic market for lesser value. We observed from the submission made by Ld. AR that the assessee has purchased chemical from the associate enterprises in order to export the same and assessee has instructed the associate enterprises to supply the quality as per the specification of the buyers and accordingly associate enterprises has supplied the chemical following the above said specification. We are in agreement with the Ld. AR of the assessee that the quality of the product for export has to be as per the specification of the buyers and should go through strict quality check and the parameters of the chemical are as per the specification and name of the product may be similar what is being sold in the domestic market. However, the quality specification may vary according to the specifications required by the buyers. We cannot go with the name of the product rather we have to verify the name of the products with specifications which are sold in the domestic as well as international market. There may be specific requirement of particular quality for export with proper testing. From the assessment records, it is not clear whether the AO/TPO has verified in the above said specifications and we notice that AO has merely verified the name of the chemical in the documents submitted before him. Addition proposed by the TPO are negligible compared to the value of exports made by the assessee, therefore we are inclined to delete the above said addition in favour of the assessee. Accordingly, ground no. 1 is allowed. Disallowance of sales promotion expenses - HELD THAT - It is common practice that whenever customers are entertained and they are accompanied by the executive of the company and the payment made invariably through plastic money and the payment vouchers are being reimbursed by the company, therefore in this case also, directors of the company has incurred this expenditure and we may have to accept the general practice of the industry. Therefore, considering the fact that assessee is in export business and it has to entertain the visitors. We can consider this expenditure incurred only for the purpose of business. Therefore, this expenditure is allowed as business expenditure. We do not agree with the AO that the payment made through credit card owned by the director are only for personal expenditure. Accordingly, ground no. 2 is allowed.

Summary

Issues Involved:
1. Addition of ?1,89,480/- on account of Arm’s Length Price (ALP) in respect of domestic transfer pricing with an Associate Enterprise (AE).
2. Disallowance of sales promotion expenses amounting to ?1,73,901/-.

Issue-wise Detailed Analysis:

1. Addition of ?1,89,480/- on account of ALP in respect of domestic transfer pricing with an AE:

The assessee, engaged in the manufacturing of pharmaceutical products, entered into specified domestic transactions with an AE amounting to ?15 crores. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP). The TPO proposed an addition of ?1,89,480/- to the income of the assessee, which was confirmed by the AO in the assessment order.

The assessee argued that the higher price paid for the product Nicorandil was justified due to more stringent specifications required for export, including more purification stages, particle analysis, use of a special solvent, higher analysis expenses, testing by an outside laboratory, special packing, and refrigerated transportation. The TPO, however, computed the ALP at ?17,000 per unit, suggesting an upward adjustment of ?1,89,480 based on the comparison with the third-party sale price of ?17,000 per unit.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the TPO’s adjustment, noting that the invoices did not substantiate the claim of superior quality and that the product description was the same for both the assessee and third parties. The CIT(A) concluded that the additional stringent specifications applied only to the export process and not to the purchase price.

Upon appeal, the ITAT observed that the quality of the product for export must meet specific buyer requirements and undergo strict quality checks. The ITAT noted that the AO/TPO had not verified the specifications and had only considered the product name. Given the negligible addition compared to the total value of exports, the ITAT deleted the addition of ?1,89,480, allowing the appeal in favor of the assessee.

2. Disallowance of sales promotion expenses amounting to ?1,73,901/-:

The AO disallowed sales promotion expenses of ?1,73,901/- incurred through a credit card in the name of the company director, deeming them personal in nature. The disallowed expenses included purchases from Canali India Pvt. Ltd. (?1,09,500), Yauatcha (?20,751), Paul & Shark (?35,990), and Manharekar Wines (?7,660).

The assessee contended that these expenses were for business purposes, such as gifts and entertainment for foreign clients, and that the director used his credit card as the company could not have one. The CIT(A) upheld the disallowance, categorizing the expenses as personal.

The ITAT, however, recognized that it is common practice in the industry to entertain clients and reimburse such expenses. Considering the assessee’s export business and the necessity to entertain visitors, the ITAT allowed the sales promotion expenses as business expenditures, rejecting the AO’s view that the expenses were personal due to the use of the director’s credit card.

Conclusion:

The appeal filed by the assessee was allowed, with the ITAT deleting the addition of ?1,89,480 on account of ALP and allowing the sales promotion expenses of ?1,73,901 as business expenditures. The ITAT emphasized the need to consider industry practices and the specific requirements of export transactions in their decision.