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2023 (1) TMI 262 - AT - Income TaxTP Adjustment - upward adjustment on account of A M expenditure - international transaction - TPO as well as the Hon ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A M expenses incurred by the AE - HELD THAT - Respectfully following the decision of this Tribunal 2021 (3) TMI 71 - ITAT PUNE and 2021 (11) TMI 1124 - ITAT PUNE , (wherein Hon ble AM is party), we allow grounds of appeal No.1 and 2 filed by the assessee. However, we make it clear that we are conscious of the fact that in the final assessment order passed by the AO, no addition on account of A M expenditure was made, as this addition was subsumed in the addition made on account of international transaction of import of raw materials. Therefore, the findings on A M expenditure shall become academic, in view of the addition made by TPO / AO on account of TP adjustment in respect of international transaction of import of raw materials is sustained. Thus, we do not find the direction of the Hon ble DRP to Assessing Officer to make alternative addition u/s 37(1) by disallowing the excesses A M expenditure runs contrary to the well settled legal position. Direction of the Hon ble DRP to make addition alternatively by disallowing the A M expenditure u/s 37(1) - It is settled position that expenditure incurred for the purpose of an assessee s business is allowable as deduction, even if it results an advantage of third party. It cannot be said that the expenditure is not incurred only and exclusively for the business purpose of the assessee. In view of the above well settled position of law, we vacate the direction of the Hon ble DRP to Assessing Officer consider the addition u/s 37 alternatively. TP adjustment on account of international transaction of import of raw materials with AEs - benchmarking of international transaction of import of raw materials - objection raised before the DRP is that the TPO was not justified in using TNMM as most appropriate method for the purpose of benchmarking the transaction of import of raw materials as against CUP method used by the assessee - HELD THAT - The appellant company sought this transaction of import of raw materials to be justified at arm's length price by adopting benchmarking analysis by considering the AE as tested party taking the foreign companies as comparable entities by submitting the documents in the form of confirmation certificates from AE certifying the mark-up charged on supply of raw materials and certificate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the appellant on supply of raw material. Deemed international transaction i.e. third party vendors - Tthe appellant company sought to justify that the transaction of import of raw materials at arm's length by submitting certificates from third party vendors demonstrating that the price charged to the appellant is lower than the market price. The benchmarking analysis carried out by the appellant was rejected by the TPO as well as the DRP. We find that the contention of assessee that the third party vendors are not the AEs of the appellant remained un-adverted. Therefore, the certificate issued by third party vendors, whereby, they confirmed that the discount of 10% to 20% had been given to the appellant on the raw materials supplied during the year and further confirmed that the price they have charged to the appellant company is lower than the price, it would have charged if the appellant had not purchased under global sourcing arrangement cannot be ignored by holding that these certificates were issued by AEs. Similarly, as regards to the import of raw materials from AEs, the contention of appellant company that the price charged by the AEs is lower than the prevailing market price remains uncontroverted. The lower authorities have failed to advert to this submission made by the appellant and therefore, we are of the considered opinion that the matter requires remission to the AO / TPO to examine the above benchmarking analysis furnished by the appellant and then proceed with the benchmarking of the transaction of import of raw materials in accordance with law. Appellant company made an alternate claim that for the purpose of benchmarking the transaction of import of raw materials, the gross margins of appellant company should be compared with the gross margins of comparable companies, as the competition faced by the appellant company effected the net margins of appellant company on account of lower volume and in support of this, he also placed reliance on the decisions of Kirloskar Toyota Textile Machinery Pvt. Ltd. 2016 (5) TMI 1595 - ITAT BANGALORE and 3M India Ltd 2010 (7) TMI 520 - ITAT BANGALORE We are of the considered opinion that, in case the AO / TPO on examination of benchmarking analysis made by the appellant company is found to be not acceptable, the AO / TPO shall examine the relevance of comparison of gross profits of appellant company with the comparable companies and proceed to benchmark the international transaction of import of raw materials. Thus, this ground of appeal stands partly allowed for statistical purposes. The other grounds of appeal become academic in view of above our decision. TP adjustment to international transaction alone - HELD THAT - The direction of DRP is in consonance with the law laid down by Jurisdictional High Court in the case of (i) CIT vs. Hindustan Unilever Ltd., 2016 (7) TMI 1245 - BOMBAY HIGH COURT and (ii) CIT vs. Ratilal Becharlal Sons 2015 (11) TMI 1524 - BOMBAY HIGH COURT . Therefore, we do not find any reason to interfere with the directions of DRP and hence, we do not find any merit in the grounds of appeal filed by the Revenue.
Issues Involved:
1. Transfer Pricing Adjustment on Advertising & Marketing (A&M) Expenses 2. Transfer Pricing Adjustment on Import of Raw Materials 3. Direction of Dispute Resolution Panel (DRP) on Transfer Pricing Adjustments Detailed Analysis: 1. Transfer Pricing Adjustment on Advertising & Marketing (A&M) Expenses: The primary issue was whether the A&M expenses incurred by the appellant constituted an international transaction with its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) and DRP inferred that the appellant incurred excess A&M expenses compared to comparables, presuming the benefit enured to its foreign AE. The appellant argued that there was no explicit arrangement with its AE to incur such expenses, and the inference was based on conjectures. The Tribunal, following precedents, held that the existence of an international transaction cannot be presumed merely based on excess expenditure compared to comparables. The Tribunal cited the Delhi High Court's decision in Maruti Suzuki India Ltd. vs. CIT, emphasizing that in the absence of explicit arrangements and machinery provisions to compute the Arm's Length Price (ALP), Chapter X provisions cannot be invoked. Consequently, the Tribunal allowed the appellant's grounds on this issue and vacated the DRP's direction to make an alternative addition under Section 37(1) of the Income Tax Act, 1961. 2. Transfer Pricing Adjustment on Import of Raw Materials: The appellant contested the TPO's adoption of the Transactional Net Margin Method (TNMM) over the Comparable Uncontrolled Price (CUP) method for benchmarking the import of raw materials. The appellant provided certificates from third-party vendors and AEs to substantiate that the raw materials were purchased at arm's length prices. The TPO rejected these certificates, considering them self-certified and not fitting under the CUP method. The Tribunal noted that the lower authorities failed to address the appellant's contention that third-party vendors were not AEs and that the prices charged were lower than market prices. The Tribunal remanded the matter to the AO/TPO to examine the appellant's benchmarking analysis and, if found unacceptable, to consider the relevance of comparing gross margins with comparable companies. Thus, this ground was partly allowed for statistical purposes. 3. Direction of Dispute Resolution Panel (DRP) on Transfer Pricing Adjustments: The Revenue challenged the DRP's direction to restrict the TP adjustment to international transactions alone. The Tribunal upheld the DRP's direction, aligning with the jurisdictional High Court's rulings in CIT vs. Hindustan Unilever Ltd. and CIT vs. Ratilal Becharlal & Sons. The Tribunal found no merit in the Revenue's grounds and dismissed the appeal. Conclusion: The Tribunal allowed the appellant's appeal for statistical purposes, directing a re-examination of the benchmarking analysis for raw material imports. The Revenue's appeal was dismissed, affirming the DRP's directions on restricting TP adjustments to international transactions. The Tribunal emphasized the necessity of explicit agreements and appropriate machinery provisions to invoke Chapter X for TP adjustments.
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