2022 (7) TMI 1366 - AT - Income Tax

TP Adjustment - upward adjustment on account of A M expenditure - HELD THAT - 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. 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. As regards to the deemed international transaction i.e. third party vendors, the 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. Without prejudice to the above, the 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 - 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 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.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Advertising & Marketing (A&M) Expenses.
2. Transfer Pricing Adjustment on Import of Raw Materials.
3. Disallowance of Payments to Hindustan Unilever Limited (HUL) for Non-Deduction of TDS.

Detailed Analysis:

Issue 1: Transfer Pricing Adjustment on Advertising & Marketing (A&M) Expenses
The primary contention revolves around whether the A&M expenses incurred by the appellant constitute an international transaction. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) inferred that the appellant incurred excessive A&M expenses compared to comparables, presuming that the benefit of this expenditure enured to its foreign Associated Enterprise (AE). The appellant argued that the TPO/DRP should not have re-characterized the A&M expenses as an international transaction and that the inference of benefit to its foreign AE was based on surmises and conjectures without any explicit arrangement or agreement.

The Tribunal referenced previous decisions, including Maruti Suzuki India Ltd. vs. CIT, which held that in the absence of an explicit arrangement, it cannot be presumed that the benefit of A&M expenses enured to the foreign AE. The Tribunal reiterated that the existence of an international transaction cannot be inferred merely by comparing the expenses incurred by the appellant with those of comparables. The Tribunal concluded that the revenue failed to prove the existence of an international transaction and that the provisions of Chapter X could not be invoked without machinery provisions to compute the arm's length price (ALP). Consequently, the Tribunal allowed the appellant's appeal on this issue.

Issue 2: Transfer Pricing Adjustment on Import of Raw Materials
The appellant challenged the TPO's use of the Transactional Net Margin Method (TNMM) instead of the Comparable Uncontrolled Price (CUP) method for benchmarking the transaction of import of raw materials. The appellant provided certificates from third-party vendors and AEs to substantiate that the prices charged were at arm's length. The TPO rejected these certificates, considering the third-party vendors as deemed AEs and questioning the reliability of the evidence provided.

The Tribunal noted that the contention that third-party vendors are not AEs remained unaddressed. Therefore, the certificates from third-party vendors confirming discounts and lower prices could not be ignored. The Tribunal remanded the matter to the AO/TPO to examine the benchmarking analysis provided by the appellant and proceed accordingly. The Tribunal also considered the appellant's alternate claim to benchmark the transaction based on gross margins, referencing decisions in similar cases. The Tribunal directed the AO/TPO to examine this approach if the initial benchmarking analysis was found unacceptable.

Issue 3: Disallowance of Payments to Hindustan Unilever Limited (HUL) for Non-Deduction of TDS
The draft assessment order included disallowances for payments made to HUL on account of A&M expenses, employee deputation costs, and selling discounts due to non-deduction of TDS. The Dispute Resolution Panel (DRP) sustained the addition on A&M expenses but directed the AO to allow claims for additional discounts and reimbursement of employee costs, subject to verification of certificates in Form No. 26A.

The Tribunal upheld the DRP's directions, emphasizing that the AO should verify the certificates and allow the claims accordingly. The Tribunal found no merit in the revenue's appeal challenging the DRP's direction to restrict the TP adjustment to international transactions alone, referencing jurisdictional High Court decisions supporting the DRP's stance.

Conclusion:
The Tribunal allowed the appellant's appeal on the A&M expenses issue, remanded the matter of import of raw materials for further examination, and upheld the DRP's directions regarding disallowances for non-deduction of TDS. The revenue's appeal was dismissed.