2012 (9) TMI 434 - AT - Income Tax

Computation of Arm s length price - disallowance for administration charges/rebate being reimbursement of expenses - Held that - As admitted that there was no element of profit in the transactions of payments made by the assessee to The parent company Braitrim U.K (BUK) which in turn was paid by BUK to its retailers. This is an expenditure, incurred by the assessee, routed through BUK, necessarily to get new customers via BUK. The assessee further submitted that there was no dispute by the AO, on the factum of payment of commission by the assessee to BUK and BUK to its retailers, which is the reason, that the AO had infact, restricted the addition only to the amount determined by the DRP. As seen from the reconciliation, that the assessee has recorded its expenditure on the basis of sales made by it to the manufacturers, whereas BUK has recorded them on the basis of invoices raised by them on the assessee, which is at a later date/time - As that the deduction allowed by the AO is on the basis of the direction of the DRP, which had based its findings on the amounts recorded in its books in the earlier year and the expenditure booked for the current year for which BUK raised invoices in the subsequent year, then there cannot be any reason for disallowance in the current year, because, the assessee, being a company, has to follow mercantile system of accounting and guided by the accounting standards, wherein the assessee has to record its expenditure of commission/discount at the time of making its sales, irrespective of the date of raising of invoice by BUK. - As the assessee submission of reconciliation had not been submitted before the DRP it would be just and reasonable if the assessment order is set aside and the matter is restored to the file of the DRP with the directions to consider the reconciliation statement - in favour of assessee for statistical purposes.

Summary

Issues Involved:

1. Disallowance of Rs. 1,88,85,035/- on computation of ALP for administration charges/rebate, being reimbursement of expenses.

Issue-wise Detailed Analysis:

Disallowance of Rs. 1,88,85,035/- on Computation of ALP for Administration Charges/Rebate, Being Reimbursement of Expenses

The appeal concerns the disallowance of Rs. 1,88,85,035/- related to the computation of the Arm's Length Price (ALP) for administration charges/rebate, which are reimbursements of expenses. The assessee, Braitrim India Private Limited (BIL), a subsidiary of Braitrim U.K (BUK), entered into international transactions, including the payment of administration charges amounting to Rs. 4.87 crores to BUK.

During the assessment proceedings, the Assessing Officer (AO) referred these transactions to the Transfer Pricing Officer (TPO) under section 92CA(1) to determine the ALP. The TPO concluded that the discount due to Indian hanger purchasers was being passed on to a foreign entity, thereby shifting the revenue base from India to the UK. Consequently, the TPO determined the ALP at NIL and proposed an adjustment of Rs. 4,87,30,339/-. The Dispute Resolution Panel (DRP) reduced this adjustment to Rs. 1,88,85,035/-.

The DRP noted that BUK, the AE of the taxpayer, negotiated globally with various retailers to use hangers manufactured by the Braitrim group. BUK agreed to pass on a discount at the rate of 1% of sales, which was subsequently recovered from its group companies, including BIL. The DRP found that the taxpayer benefited from this arrangement, as evidenced by the lack of marketing or advertisement expenses in its profit and loss account for the FY 2006-07. The DRP accepted that the discount given by BUK to retailers helped the taxpayer get business without much marketing effort.

The DRP determined the ALP based on the audit report by Deliotte & Touche LLP, UK, which audited the invoices raised by the assessee to BUK. The DRP converted GBP into Indian Rupees, determining the ALP at Rs. 2,98,45,304/-, resulting in a transfer pricing adjustment of Rs. 1,88,85,035/-.

Before the Tribunal, the Authorized Representative (AR) reiterated the submissions made before the revenue authorities, arguing that no adjustment was called for. The AR explained that BIL recorded transactions in its books at the time of making sales to customer companies, while BUK raised invoices at a later date. The AR submitted a reconciliation statement showing that invoices raised by BUK in the current year related to transactions recorded by the assessee in the preceding year.

The Tribunal considered the arguments and the reconciliation statement. It noted that the assessee followed the mercantile system of accounting and recorded its expenditure of commission/discount at the time of making sales, irrespective of the invoice date by BUK. The Tribunal found it reasonable to set aside the assessment order on this issue and restore the matter to the DRP for reconsideration of the reconciliation statement. The DRP was directed to give its findings under section 144C after allowing reasonable and adequate opportunity to the assessee. The AO was instructed to pass a consequential order based on the revised direction from the DRP.

The appeal was treated as allowed for statistical purposes.