2020 (12) TMI 1060 - AT - Income Tax

Disallowance of advertisement expenditure - AO noticed that the assessee firm has contributed a sum to a School for the purpose of construction of a swimming pool in that school - HELD THAT - AO has given identical reasoning for disallowing 20% of the expenses on gifts and promotional aids given to doctors. Accordingly, following the decision rendered by the co-ordinate bench in AY 2013-14, we direct the AO to delete the impugned disallowance. TP adjustment made in respect of goods sold to Associated Enterprises (AEs) - MAM selection - HELD THAT - We have earlier rejected the methodology adopted by the TPO and we have upheld the assessee's stand on TNMM and Net profit margin. As in the segmental Profit and Loss account prepared by TPO, certain items of expenses have not been correctly considered, since the aggregate amount of Net profit worked out by the Transfer Pricing Officer did not match with that of the assessee. There should not be any dispute that the methodology consistently followed to work out net profit year after year should be followed in this year also. It should not be tinkered with, unless proper reasons are given. The TPO has not given any reason as to why he altered the aggregate amount of Net profit. Hence the workings made by TPO is liable to rejected. We have noticed that the net profit margin worked out by the assessee in Domestic - Personal care division was 12.31%. The net profit margin worked out for Exports to AEs was 24.03%. Hence the net profit margin earned in the exports to AEs division is higher than its comparable Domestic - Personal care division . Hence it has to be held that the international transactions of making exports to AEs are at arms length and hence no T.P adjustment is called for. Accordingly, we direct deletion of Transfer pricing adjustment made in respect of Exports to AEs. TP adjustment made in respect of Advertisement and Marketing expenses - HELD THAT - Following the decision rendered by the Tribunal in AY 2013-14 and 2011-12 2018 (7) TMI 1964 - ITAT BANGALORE , we direct the AO to delete the transfer pricing adjustment made in respect of Selling and Marketing expenses. Transfer pricing adjustment made in respect of royalty - TPO noticed that the assessee has got Research and Development unit and accordingly developing all its products - HELD THAT - We direct the AO to delete the T.P adjustment made by way of royalty.

Issues Involved:
1. Disallowance of advertisement expenditure for constructing a swimming pool.
2. Disallowance of depreciation and additional depreciation claimed.
3. Disallowance of product promotion expenses incurred with doctors.
4. Transfer Pricing adjustment relating to the sale of goods to associated enterprises.
5. Transfer Pricing adjustment relating to advertisement and market promotion expenses.
6. Transfer Pricing adjustment relating to royalty.

Issue-wise Detailed Analysis:

1. Disallowance of Advertisement Expenditure:
The AO disallowed ?99.66 lakhs claimed by the assessee as advertisement expenditure for constructing a swimming pool in a school, reasoning it was personal expenditure benefiting the family of the firm's controlling partner. The Tribunal upheld this disallowance, referencing the lack of commercial consideration and supporting judicial precedents, confirming that the expenditure was personal and not wholly and exclusively for business purposes.

2. Disallowance of Depreciation and Additional Depreciation:
The AO reclassified certain assets from "Plant & Machinery" to "Furniture & Fixtures," reducing the depreciation rate from 15% to 10% and disallowing additional depreciation. The Tribunal restored this issue to the AO for fresh examination, emphasizing the need to apply the functional test as per the Karnataka High Court's decision in Hindustan Aeronautics Ltd.

3. Disallowance of Product Promotion Expenses:
The AO disallowed 20% of ?10.77 crores spent on gifts to doctors, citing ethical guidelines and lack of detailed records. The Tribunal reversed this disallowance, noting that the AO's reasoning was based on presumptions. It emphasized that the AO accepted 80% of the expenses as business-related, thus no valid reason existed to disallow the remaining 20%.

4. Transfer Pricing Adjustment - Sale of Goods to AEs:
The TPO used the Cost Plus Method (CPM) instead of the Transactional Net Margin Method (TNMM) adopted by the assessee, resulting in a transfer pricing adjustment of ?88.22 crores. The Tribunal favored the assessee, reaffirming TNMM as the most appropriate method, consistent with previous years' decisions. It noted that the net profit margin for exports to AEs was higher than the domestic personal care division, validating the arm's length nature of the transactions.

5. Transfer Pricing Adjustment - Advertisement and Market Promotion Expenses:
The TPO treated excess AMP expenses over 5.25% of sales as non-routine, attributing them to brand promotion for the parent company, resulting in a ?87.47 crore adjustment. The Tribunal rejected this, citing the absence of an agreement mandating the assessee to incur such expenses for the AE's benefit. It reiterated that AMP expenses should be part of the overall TNMM analysis, not a separate transaction, following previous decisions and judicial precedents.

6. Transfer Pricing Adjustment - Royalty:
The TPO imposed a 2% royalty on net sales of AEs for using product registrations obtained by the assessee, resulting in a ?3.40 crore adjustment. The Tribunal deleted this adjustment, noting that product registrations are statutory requirements for marketing and do not constitute a separate intangible asset. It emphasized that the selling price already includes all costs, and no separate royalty is charged in trade practice, aligning with the decision in previous years.

Conclusion:
The Tribunal's detailed analysis and reliance on consistent judicial precedents led to the deletion of several disallowances and transfer pricing adjustments, emphasizing the importance of commercial considerations, trade practices, and proper application of transfer pricing methods.

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