2016 (7) TMI 21 - AT - Income Tax

Transfer pricing issue w.r.t. to payment of trademark fee - whether the payment of trademark fees was validly benchmarked applying TNMM as most appropriate method ? -payment of royalty - Held that - There exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. Further, the ld. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities.The Hon ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014 (5) TMI 897 - DELHI HIGH COURT ) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. Accordingly, in view of the aforesaid, we are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm s length applying TNMM as the most appropriate method. Transfer pricing issue w.r.t. to Advertising, Marketing and Promotion ( AMP ) Expenses - Held that - the adjustment made by the TPO is squarely covered by the decision of Delhi High Court in the case of Maruti (2015 (12) TMI 634 - DELHI HIGH COURT ) and Honda Siel Power Products (2015 (12) TMI 1333 - DELHI HIGH COURT ) and therefore, in the absence of any international transaction of brand building of Goodyear brand, undertaken by the assessee with its AE, there cannot be any adjustment under the transfer pricing provisions. Further, as held by the Hon ble High Court, Chapter X of the Act does not authorize the revenue to make quantitative adjustment under the transfer pricing provisions, such as AMP expense. The contention of the ld. DR about abnormal increase in advertisement expenses in comparison to preceding year, does not render any help to the Revenue, keeping in view the proportionate rise in turnover of assessee. We accordingly direct the assessing officer to delete the adjustment made on this account. Transfer pricing issue w.r.t. to export of goods - netting off of export incentive - Held that - We uphold the order of the TPO to the extent of netting off of export incentive from the cost of goods sold and set aside the issue of netting off of rebate/discount from the cost of goods sold, to the file of assessing officer/TPO, for verification of the claim in light of our decision for the assessment year 2006-07. Needless to add that the assessee should be given reasonable opportunity of being heard. Disallowance of machinery repair expenses - Held that - As in the appellant s own case for the assessment year 2008-09, deleted the similar ad-hoc disallowance of 20% of expenditure incurred on machinery repair and maintenance expenses, proposed by the assessing officer. Disallowance of provision for warranty - Held that - As during the financial year ended on 31st March 2007 the appellant, had incurred /made provision for warranty claims to the extent of ₹ 17,72,000 on the basis of past trend and experience of actual warranty claims. The provision for warranty is made on a scientific and actual basis and not an adhoc provision. The assessee has duly submitted and demonstrated the computation of its claim for warranty along with past data. In fact, the basis of computation of warranty was found to same as computed in the preceding year, i.e. AY 2006-07, in which this co-ordinate Bench of Tribunal in the assessee s own case has allowed the appeal and directed the assessing officer to delete such disallowance. Accordingly, respectfully following the decision of the co-ordinate bench of Tribunal in the assessee s own case for the assessment year 2006-07, we hold that provision for warranty made by the assessee is allowable. Ad-hoc disallowance of advertisement expenditure under section 37(1) - Held that - We have already held that the advertisement expenditure incurred by the assessee is incurred wholly for the purpose of its business and profession and ought to be allowed deduction in entirety. Further, the assessing officer has clearly made an ad-hoc disallowance of advertisement expenditure incurred by the assessee, which is not permissible under the law. We are of the considered view that AO was not justified in making such ad-hoc disallowances and therefore, direct the assessing officer to delete the adjustment on this account.

Issues Involved:
1. Transfer pricing issue regarding payment of trademark fees.
2. Transfer pricing adjustment related to Advertising, Marketing, and Promotion (AMP) expenses.
3. Transfer pricing issue related to export of goods.
4. Disallowance of machinery repair expenses.
5. Disallowance of provision for warranty.
6. Ad-hoc disallowance of advertisement expenditure.
7. Levy of interest under Section 234B and 234C.
8. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Issue Regarding Payment of Trademark Fees:
The appellant, a subsidiary of Goodyear USA, paid trademark fees to the AE based on a Trademark License Agreement. The Transfer Pricing Officer (TPO) rejected this payment, determining the arm's length price as NIL, arguing no recognizable benefit was provided to the appellant. The appellant contended that the payment was benchmarked using the Transactional Net Margin Method (TNMM) and was within RBI limits. The tribunal upheld the appellant's contention, citing that the trademark fee was part of a global practice and necessary for business operations. The tribunal directed the deletion of the adjustment.

2. Transfer Pricing Adjustment Related to AMP Expenses:
The TPO made an adjustment for AMP expenses, arguing these expenses promoted the AE's brand, thus creating marketing intangibles. The appellant contended that the expenses were incurred unilaterally for its business and should not be considered an international transaction. The tribunal, referencing the Delhi High Court's decision in Maruti Suzuki, held that AMP expenses incurred for the appellant's business could not be adjusted under transfer pricing provisions. The tribunal directed the deletion of the AMP adjustment.

3. Transfer Pricing Issue Related to Export of Goods:
The appellant argued that export incentives should be deducted from the cost of goods sold when computing gross profit margin. The TPO disagreed, stating that export incentives are not part of the invoice price. The tribunal upheld the TPO's decision, referencing its earlier ruling in the appellant's case for the assessment year 2006-07, which stated that export incentives should not be deducted from the cost of goods sold.

4. Disallowance of Machinery Repair Expenses:
The assessing officer disallowed 20% of the machinery repair expenses, treating them as capital expenditure. The appellant argued that these were routine repair and maintenance expenses. The tribunal, referencing its earlier decisions, upheld the appellant's contention, stating that ad-hoc disallowances in audited cases are not justified. The tribunal directed the deletion of the disallowance.

5. Disallowance of Provision for Warranty:
The assessing officer disallowed the provision for warranty, terming it a contingent liability. The appellant argued that the provision was based on past trends and actual warranty claims. The tribunal, referencing the Supreme Court's decision in Rotork Controls India Ltd. and its earlier decision in the appellant's case, held that the provision for warranty is allowable. The tribunal directed the deletion of the disallowance.

6. Ad-hoc Disallowance of Advertisement Expenditure:
The assessing officer made an ad-hoc disallowance of 50% of the increase in advertisement expenses. The appellant argued that the expenses were incurred for business purposes and should be allowed in full. The tribunal, referencing the Delhi High Court's decision in Whirlpool of India Ltd., held that ad-hoc disallowances are not permissible and directed the deletion of the adjustment.

7. Levy of Interest Under Section 234B and 234C:
The tribunal noted that the issues related to the levy of interest under Section 234B and 234C are consequential and do not require specific adjudication.

8. Initiation of Penalty Proceedings Under Section 271(1)(c):
The tribunal noted that the initiation of penalty proceedings under Section 271(1)(c) is premature and does not require specific adjudication at this stage.

Conclusion:
The tribunal allowed the appeals on most grounds, directing the deletion of various adjustments and disallowances made by the assessing officer and TPO. The tribunal upheld the appellant's contentions regarding the payment of trademark fees, AMP expenses, machinery repair expenses, provision for warranty, and advertisement expenditure, while also setting aside some issues for verification. The appeals were partly allowed.

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