2012 (11) TMI 175 - AT - Income Tax

Deduction u/s. 37(1) of the Income tax Act - expenditure incurred on advertisement under the head Media-Technical Held that - Expenditure was incurred in respect of promoting ongoing products of the assessee and, therefore, the expenditure is for promotion of the products of the assessee which is revenue in nature - expenditure has been incurred by the assessee for production of ad-films , advertisement in electronic and print media, in respect of promotion of its on-going products - expenditure has rightly been treated as revenue in nature by CIT(A), which was incurred by the assessee wholly and exclusively for the purpose of its business deduction allowed Determination of arm s length prices - resale price method (RPM) alleged that appellant is consistently incurring losses in India and hence the pricing policy is not at arm s length whether to determine ALP in respect of business activity relating to distribution segment of the assessee with the AE is to be considered by RPM or TNMM. Held that - Order of TPO in the preceding assessment years substantiate that RPM is the most appropriate method to determine ALP - RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method - the assessee buys products from its AEs and sells to unrelated parties without any further processing. - assessee has also produced certificates from its AEs that margin earned by AEs on supplies to the assessee is 2% to 4% or even less. - TPO s contention that AEs have earned higher profit is not based on facts - margin of profit earned by AEs themselves is also reasonable and, therefore, it could not be said that there is shift of profits by the assessee to its AEs at overseas addition deleted Addition assessee is in receipt of services and benefit from its Associative Enterprises in lieu of the marketing fee payments Revenue submitted that ld CIT(A) has considered additional documents which were produced before him without seeking Remand Report from the Assessing Officer. He submitted that TPO has categorically stated that the assessee could not furnish evidence to justify that the assessee has received any benefit from the cost sharing arrangement and, therefore, in ALP study determined the same at Nil Held that - Fresh documents were submitted by the assessee before ld CIT(A) which were considered while allowing the claim of the assessee and deleting the disallowance made by the AO - matter remanded to the file of the AO to examine whether the assessee has received any benefit under cost sharing arrangement for which assessee made the said payment - appeal filed by the department is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Nature of advertisement expenditure.
2. Appropriate method for determining Arm's Length Price (ALP) for international transactions.
3. Receipt of services and benefit from marketing fee payments to Associated Enterprises (AE).

Issue-wise Detailed Analysis:

1. Nature of Advertisement Expenditure:
The primary issue was whether the expenditure of Rs. 2,70,58,119 on advertisement under the head 'Media-Technical' is capital or revenue in nature. The Assessing Officer (AO) deemed it capital expenditure, citing it created a benefit of enduring nature, relying on the Supreme Court's decision in Alembic Chemical Works Co. Ltd. v. CIT. However, the CIT(A) and the Tribunal concluded that the expenditure was revenue in nature. The Tribunal noted that the purpose and effect of the expenditure were to promote ongoing products, which aligns with business realities rather than creating a new asset. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's ruling in CIT v. Geoffrey Manners & Co. Ltd., which held similar advertisement expenditures as revenue in nature.

2. Appropriate Method for Determining ALP:
The second issue concerned the method for determining the ALP for the assessee's international transactions related to the import of finished goods. The AO, following the Transfer Pricing Officer (TPO), applied the Transactional Net Margin Method (TNMM) instead of the Resale Price Method (RPM) adopted by the assessee. The TPO argued that the assessee's consistent losses indicated non-arm's length pricing and that RPM was unsuitable due to substantial value addition through selling and distribution expenses. The CIT(A) disagreed, stating that RPM is appropriate for distribution activities where goods are resold without further processing. The Tribunal upheld the CIT(A)'s decision, noting that RPM had been consistently accepted in previous and subsequent years, and the assessee's losses were due to market penetration strategies rather than transfer pricing policies.

3. Receipt of Services and Benefit from Marketing Fee Payments:
The third issue was whether the assessee received services and benefits from its AE in lieu of marketing fee payments amounting to Rs. 1,14,28,409. The TPO and AO disallowed the deduction, stating the assessee failed to provide evidence of receipt of services. The CIT(A) reversed this, accepting additional documents submitted by the assessee showing receipt of services. However, the Tribunal noted that these documents were not reviewed by the AO and remanded the issue back to the AO for verification by the TPO. The Tribunal directed the AO to allow the deduction if the assessee could substantiate the benefit received from the cost-sharing arrangement.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on the nature of advertisement expenditure and the appropriate method for determining ALP, while remanding the issue of marketing fee payments back to the AO for further examination. The appeal was partly allowed for statistical purposes.