2021 (2) TMI 867 - AT - Income Tax

Disallowance of depreciation and additional depreciation claimed - Plant Machinery or Furniture and fixtures - Application of functional test for determining what constitutes plant - HELD THAT - As decided in assessee's own case AY 2013-14 certain items of assets are in the nature of Plant and machinery. It is the claim of the assessee that other items are also used as part of Plant and Machinery. Hence, we are of the view that this issue requires fresh examination at the end of the AO in accordance with the decision rendered by the Hon'ble Karnataka High Court in the case of Hindustan Aeronautics Ltd 1992 (8) TMI 13 - KARNATAKA HIGH COURT . Accordingly, we restore this issue to the file of the AO for examining the same afresh. Disallowance made out of Sales Promotion expenses - assessee had incurred expenses on giving of gifts/product information items to Ayurvedic doctors and general chemists - AO noticed that the gifts so given by the assessee consisted of product literature, medical test apparatus apart from small gifts with brand names embossed like wallet, flask, pen stand, note pads etc. - AO disallowed 20% of the amount spent on gifts given to doctors HELD THAT - Identical orders of revenue authorities were considered and decided by the Tribunal in assessee s own case for AY 2013-14 income tax officer cannot sit on the arms chair of a business man and could decide the quantum of expenses. So long as it is seen that the expenses have been incurred for business purposes on commercial considerations, the same is allowable as deduction - . When the AO is accepting 80% of the expenditure, we do not find any justification for disallowing the remaining 20%. Hence, we are unable to sustain the estimated disallowance made by the AO. Transfer pricing adjustment relating to sale/export of goods to associated enterprises - assessee selected Transaction Net Margin Method (TNMM) as most appropriate method - validity of reference made to TPO u/s 92CA - action of TPO in treating the foreign companies as Associated Enterprises of the assessee - HELD THAT - Both the parties agreed that the issue relating to validity of reference made to TPO has been decided against the assessee by the co-ordinate bench in assessee s own case 2018 (7) TMI 1964 - ITAT BANGALORE . Also The issue relating to AE relationship raised in Gr.No.8.6 8.7 was declined to be examined by the co-ordinate bench in the above said year and it appears that the assessee has not objected to the same. Adoption of Cost Plus Method as most appropriate method by the TPO - In assessee s own case 2018 (7) TMI 1964 - ITAT BANGALORE .TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-a-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. Thus in the case on hand reasonably accurate adjustments cannot be made to determine the adjusted profit mark up as per Rule 10B(1)(c), CPM cannot be considered as the MAM. TP Adjustment - As the assessee has declared net profit margin rate @ 1.19% for Domestic Personal care division and @ 12.60% for Exports to AE division . Admittedly, the net profit margin rate of Exports to AEs division is more than the uncontrolled comparable selected by the assessee/TPO. Hence price charged for export of finished goods to AEs is at arms length. In AY 2010-11 also, the coordinate bench has given a finding that the price charged for export of finished goods to AEs is at arms length, since the net profit margin rate was higher in that division vis- -vis the Domestic Personal care division. Accordingly, the co-ordinate bench held that the TP adjustment made in this regard is liable to be deleted. The facts available in this year also are identical and accordingly we hold that the T.P adjustment made by the AO in respect of international transaction of Export to AEs is liable to be deleted. Accordingly we direct the AO to delete the same. Transfer pricing adjustment made in respect of Advertisement and Marketing Promotion (AMP) expenses - HELD THAT - As decided in assessee's own case 2018 (7) TMI 1964 - ITAT BANGALORE AMP transaction is not an international transaction in the absence of specific agreement between assessee and its AE on the matter of incurring of AMP expenses and hence there was no requirement for determining the ALP of the said expenses. Transfer Pricing adjustment relating to royalty - TPO noticed that the assessee is having a Research Development unit in India and accordingly developing all its products - HELD THAT - The product registration/licensing are requirement of statute, without which the said products could not be marketed in those countries. As noticed earlier, such kinds of product registration/license could be obtained by the manufacturer only, in normal circumstances. The traders should have obtained separate license for trading in the drugs/beauty items. Hence, it cannot be said that the traders have exploited the registration/license obtained by the suppliers under the various statutes. Further, the manufacturers and other suppliers of the products sell them at profit and the practice or presumption is that the supplier has determined the selling price by taking into account all relevant costs. Assessee would have collected royalty amount for finished goods exported to unrelated parties. However, the Ld A.R pointed out that the assessee has not collected any amount over and above the selling price either from domestic customers or from non-AEs. Hence, the basic premise of the TPO, which formed the basis for determining ALP of alleged royalty fails here. Accordingly, we are of the view that, in the facts and circumstances of the case, it cannot be taken that the AEs have exploited the product registration/license obtained by the assessee from various Governments. Hence the question of payment of royalty does not arise. Thus we delete the addition made by the AO.

Summary

Issues Involved:
1. Disallowance of Depreciation & Additional Depreciation Claimed
2. Disallowance of Product Promotion Expenses Incurred with Doctors
3. Disallowance of Advertisement Expenditure / Product Promotion Expenditure
4. Transfer Pricing Adjustment Relating to Sale of Goods to Associated Enterprises
5. Transfer Pricing Adjustment Relating to Advertisement and Market Promotion Expenses
6. Transfer Pricing Adjustment Relating to Royalty

Detailed Analysis:

1. Disallowance of Depreciation & Additional Depreciation Claimed:
The assessee claimed depreciation at 15% and additional depreciation at 20% on certain assets, classifying them as "Plant & Machinery." The AO reclassified these assets as "Furniture and Fixtures," allowing only 10% depreciation and disallowing additional depreciation. The Tribunal remanded the issue for fresh consideration, emphasizing the application of the functional test as per the Karnataka High Court's decision in Hindustan Aeronautics Ltd. v. CIT.

2. Disallowance of Product Promotion Expenses Incurred with Doctors:
The AO disallowed 20% of the expenses incurred on gifts to Ayurvedic doctors, citing MCI guidelines and the possibility of cumulative value exceeding ?1000. The Tribunal, following its decision for AY 2013-14, directed the AO to delete the disallowance, noting the lack of evidence for cumulative value exceeding ?1000 and the absence of applicability of MCI guidelines to Ayurvedic doctors.

3. Disallowance of Advertisement Expenditure / Product Promotion Expenditure:
The AO disallowed a portion of sales promotion expenses, including gifts to doctors, on the grounds of excessive expenditure and potential violation of MCI guidelines. The Tribunal, referencing its decision for AY 2013-14, found no justification for the disallowance and directed the AO to delete it.

4. Transfer Pricing Adjustment Relating to Sale of Goods to Associated Enterprises:
The TPO adopted the Cost Plus Method (CPM) instead of the Transaction Net Margin Method (TNMM) and compared gross profit margins. The Tribunal, following its decisions for AYs 2010-11 and 2011-12, held that TNMM was the appropriate method, considering the functional differences and the impracticality of making accurate adjustments under CPM. The Tribunal directed the AO to delete the transfer pricing adjustment.

5. Transfer Pricing Adjustment Relating to Advertisement and Market Promotion Expenses:
The TPO segregated AMP expenses into routine and non-routine, attributing the latter to brand promotion for the AE. The Tribunal, adhering to its decisions for AYs 2010-11 and 2011-12, held that AMP expenses were not international transactions in the absence of an agreement with the AE. The Tribunal directed the AO to delete the transfer pricing adjustment for AMP expenses.

6. Transfer Pricing Adjustment Relating to Royalty:
The TPO determined an ALP for royalty on product registrations/licenses used by AEs, proposing a 2% royalty rate. The Tribunal, referencing its decision for AY 2013-14, found no basis for separate royalty charges over the selling price, noting that product registrations were statutory requirements, not intangibles exploited by AEs. The Tribunal directed the AO to delete the transfer pricing adjustment for royalty.

Conclusion:
The Tribunal's judgment comprehensively addressed each issue, emphasizing the application of appropriate methods and principles, such as the functional test for depreciation classification and the TNMM for transfer pricing adjustments. The Tribunal consistently followed its prior decisions, ensuring a thorough and reasoned analysis of the facts and legal principles involved.