2016 (5) TMI 714 - AT - Income Tax

Transfer pricing adjustment - MAM - comparability - Held that - As the assessee has been admitted by the TPO himself as a contract manufacturer , we fail to see as to how the CPM can not be considered as the most appropriate method in the given circumstances. No contrary view has been brought on record by the ld. DR holding CPM as not the most appropriate method in the case of receipt of job charges by a contract manufacturer. Even otherwise, we find that the CPM, like the CUP method, is a transaction specific method striving to determine ALP on a micro level thereby lending more credibility, rather than the TNMM having a non-transaction specific generalized approach aiming to compute profit on a macro level. In view of the foregoing reasons, we are of the considered opinion that the Cost plus method is the most appropriate method in the given circumstances. As the TPO proceeded to determine the ALP by applying TNMM, which has not been approved by us hereinabove, we are of the considered opinion that it will be just and fair if the impugned order is set aside and the matter is restored to the file of AO/TPO for re-deciding the ALP of the international transaction of job charges of the Pune unit under Cost plus method. It is made clear that we have not examined the comparability or otherwise of the companies chosen by the assessee as comparable. This aspect also needs to be decided at the TPO/AO s end. Care should be taken to select comparables which are rendering job charges in the capacity of a contract manufacturer alone assuming minimal risks and not the fullfledged manufacturers purchasing raw materials and then selling similar finished goods at their own assuming all the manufacturing risks as well. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Addition in respect of amount written off under the head Fixed assets written off - Held that - As the loss on revaluation of fixed assets is in capital field, the same cannot be allowed as deduction. We, therefore, approve the impugned order on this score by dismissing the assessee s ground. We are in agreement with the alternate prayer made by the assessee through the additional ground that such amount of ₹ 22.17 lac should be added to the purchase price of fixed assets. It is so for the reason that once the amount written off is not deductible, it will naturally add to the cost of assets purchased so that the actual purchase price constitutes addition in the respective block of assets during the year thereby allowing depreciation on the full purchase price of the assets. Thus, the additional ground is allowed and the AO is directed to examine the facts on this score and restore the purchase price of such fixed assets in the block of fixed assets and allow depreciation accordingly. Disallowance of amount claimed under the head Provisions for obsolete goods - Loss suffered on the valuation of closing stock - Held that - In support of determining the market price and the resultant loss from obsolescence, the assessee furnished Manual of Swarovski Group laying down mechanism for the write off of crystal products. It is not the case of the Revenue that the valuation done by the assessee does not accord with the method of valuation given in such Manual or such a global policy is defective. It is observed that the assessee purchased en bloc stock from SPA Agencies Ltd., which consisted of both good and obsolete stocks. It was a package deal for purchase of stock. The Revenue has not doubted such purchase transaction of stock as a whole. Once the entire transaction of stock purchase from SPA Agencies has been accepted as genuine and it is found that some of the items out of such purchase were fully or partly obsolete, there cannot be any bar in writing off such obsolete stock in the books of account to bring the same at its market value. In our considered opinion, the loss suffered by the assessee on the valuation of closing stock has to be and is hereby allowed as deduction Disallowance of Provision of doubtful debts and Provision for doubtful advances and Advance written off - Disallowance u/s 36(1)(vii) - Held that - In so far as the first amount is concerned, this represents the amount of debtors acquired by the assessee from SPA Agencies Pvt. Ltd. and written off during the year itself. This amount has never been taken into account in computing the income of the assessee in the current year or any earlier year. Such debts might have been considered in the computation of income of SPA Agencies Ltd. in earlier years, but that does not satisfy the condition in the hands of the assessee. Thus, there is failure on the part of the assessee to fulfill the condition of section 36(2) which is a pre-requisite for allowing deduction u/s 36(1)(vii). The next amount is a provision for advances written off. It is clear and also accepted by the ld. AR that it is the amount of advances and not the debts written off. Firstly, it is not a case of provision for bad debts as these are advances and not any debtors. Once it is so, there can be no question of compliance with the condition set out in section 36(2). The ld. AR s contention for treating this amount as a Business loss , is again sans merit. Unlike bad debt, no amount can be allowed as a business loss on a mere write off. The assessee is required to expressly prove the occurrence of loss. Here is a case in which the amount due from Customs Department has been written off. No amount recoverable from the Government can under any circumstance be considered as loss. This amount in our considered opinion has been rightly disallowed. The assessee has tendered no explanation on the last amount written off by it. We, therefore, approve the action of the ld. CIT(A) in sustaining the disallowance of the above three amounts. Disallowance out of advertisement and publicity expenses - Held that - The disallowance sustained by the ld. CIT(A) is in two parts. The first is 10% of total expenditure on advertisement and publicity treated as a capital expenditure to that extent. In this regard, we find that there is no dearth of decisions from various High Courts holding that the expenditure incurred on advertisement should be allowed as deduction in entirety as revenue expenditure in the year of incurring and no part of the same can be considered as capital expenditure or deferred revenue expenditure. The Hon ble Delhi High Court in CIT vs. Citi Financial Consumer Fin. Ltd. (2011 (3) TMI 622 - Delhi High Court ) has also held to this extent. We, therefore, hold that the ld. CIT(A) was not justified in sustaining the disallowance @ 10% amounting to ₹ 19,99,098/- on account of advertisement expenditure treated as capital by the AO, which is hereby deleted. Disallowance of 10% on account of brand building of Swarovski brand - Held that - There is a reference in the assessment order to the fact that Swarovski AG would make direct sales to customers in the territory of India and the assessee would be paid commission @ 15% of the net value of the direct sales to the listed customers. Such income from commission in the hands of the assessee during the year under consideration stands at ₹ 15,06,754/-. We do not find much discussion in the assessment order about the reasons leading to such conclusion of brand building on behalf of the AE. In our considered opinion, it would be in the fitness of the things if the impugned order on this issue is set aside and the matter is restored to the file of AO for deciding it afresh as per law, after giving detailed reasons.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Addition of Fixed Assets Written Off
3. Provision for Obsolete Goods
4. Provision for Doubtful Debts and Advances
5. Disallowance of Advertisement and Publicity Expenses

Detailed Analysis:

I. Transfer Pricing Adjustment
1. Selection of the Most Appropriate Method:
- The assessee used the Cost Plus Method (CPM) to demonstrate that the international transaction of 'Coating of raw beads' was at arm's length price (ALP). The Transfer Pricing Officer (TPO) applied the Transactional Net Margin Method (TNMM) instead, which the CIT(A) upheld.
- The Tribunal concluded that the TPO used TNMM, not CPM, as evident from the application of a 4.4% profit margin on operating costs. The Tribunal found that CPM was more appropriate for the assessee, a contract manufacturer, as supported by UN Transfer Pricing guidelines and the TPO's acceptance of CPM in subsequent years.

2. Computation of ALP under the Most Appropriate Method:
- The Tribunal found discrepancies in the assessee's calculation of ALP under CPM, including unsubstantiated cost allocations and artificial reduction of the cost base.
- The Tribunal directed the AO/TPO to re-determine the ALP using CPM, ensuring comparables are contract manufacturers assuming minimal risks.

II. Addition of Fixed Assets Written Off
1. Facts and Decision:
- The assessee wrote off ?22,17,399/- as a revaluation loss on fixed assets purchased from SPA Agencies (P) Ltd. The AO treated this as a capital loss, which the CIT(A) upheld.
- The Tribunal agreed, stating the loss was capital in nature and not deductible as revenue expenditure. However, the Tribunal allowed the assessee's additional ground to add the written-off amount to the purchase price of the fixed assets for depreciation purposes.

III. Provision for Obsolete Goods
1. Facts and Decision:
- The assessee claimed a provision for obsolete goods amounting to ?99,95,581/-, which the AO disallowed, citing lack of evidence and the recent start of the business.
- The Tribunal allowed the provision, noting the assessee's adherence to a global policy for inventory valuation and the acceptance of the purchase transaction from SPA Agencies, which included obsolete stock.

IV. Provision for Doubtful Debts and Advances
1. Facts and Decision:
- The AO disallowed provisions for doubtful debts (?2,89,475/-) and advances (?5,10,254/-), and an advance written off (?4,218/-), citing non-compliance with Section 36(2) and lack of evidence.
- The Tribunal upheld the disallowance, noting the failure to meet the conditions of Section 36(2) and the lack of substantiation for the advances written off.

V. Disallowance of Advertisement and Publicity Expenses
1. Facts and Decision:
- The AO disallowed 10% of advertisement expenses as capital expenditure and another 10% for brand building of the AE, which the CIT(A) upheld.
- The Tribunal deleted the 10% capital expenditure disallowance, citing precedents allowing full deduction of advertisement expenses. However, it remanded the issue of brand building disallowance to the AO for a detailed examination and fresh decision.

Conclusion:
The Tribunal partially allowed the appeal, directing re-examination of certain issues and providing specific instructions for the AO/TPO to follow in re-determining the ALP and other disallowed expenses. The order emphasized the need for accurate method selection and substantiation of claims in transfer pricing and other deductions.