2017 (2) TMI 691 - AT - Income Tax

Transfer pricing adjustment - Whether CUP is the most appropriate method ? - the assessee imported Crystal goods as well as Crystal components from its AE - Held that - It is an admitted position that the AE did not sell any Crystal goods to its customers in India directly and only Crystal components were sold in India by the AE, which are further not meant for domestic consumption, but, to be utilized for export by such parties. The international transaction reported by the assessee is a common pool of both the Crystal goods and Crystal components, without there being any separate identification for each of them. We have noticed above that Crystal goods and Crystal components are different in terms of utility and value etc. and it is evident that the range of comparables is restricted to Crystal components alone. In view of the fact that the assessee did not report any comparable uncontrolled transaction of Crystal goods, we fail to appreciate as to how such rates charged in transactions of Crystal components can be considered as a benchmark for Crystal goods as well. In such circumstances, applicability of CUP to a single combined international transaction of Import of Crystal goods and Crystal components, cannot be considered as the most appropriate method.We, therefore, countenance the view taken by the TPO in rejecting the CUP as the most appropriate method. TNMM vs. RPM - Held that - We find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of Import of Crystal goods and Crystal components . We direct the AO/TPO to determine the ALP of the transaction of Import of Crystal goods and Crystal components, firstly, by applying the RPM. It is hereby clarified that the manner of application of RPM is open at large before the TPO who will decide it in the way he thinks expedient. Contention of the ld. AR that the comparables should be restricted to the ten companies which it cited before the ld. CIT(A) or twenty companies which the ld. CIT(A) suo motu chose for making TP adjustment on account of AMP expenses, cannot be accepted. We do not intend to eclipse the power of the TPO by restricting the exercise, which he has yet to undertake for the first time. It is further clarified that if due to one reason or the other as discussed above, such a method cannot be applied, then, resort should be made to the TNMM in the way enshrined in rule 10B(1)(e) of IT Rules, 1962, taking care of the infirmities discussed above in the earlier calculation made by the TPO. TP addition of AMP Expenses - Held that - It would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter would end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon ble High Court, after allowing a reasonable opportunity of being heard to the assessee. Addition on account of Provision for doubtful debts and Provision for doubtful advances - Held that - The assessee is admittedly not a scheduled bank and the ld. AR was fair enough to candidly accept that the case is covered under clause (vii) and not clause (viia)of section 36(1). Going by the language of clause (vii) of section 36(1), as it stands for the relevant assessment year, there can be no deduction at the time of creating a provision for doubtful debts. The legislature has clarified this position beyond any shadow of doubt by retrospectively inserting Explanation 1 to clause (vii) w.e.f. 1.4.1989 that For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee . This clinches the issue and clarifies the position beyond an iota of doubt that a mere provision for doubtful debts is not deductible in the case of a non-banking assessees. We are, therefore, persuaded to uphold the impugned order in so far as the disallowance of provision for doubtful debts is concerned. However, it is clarified that the amount of actual write off during the year should be allowed as deduction. The chart at page C-5 of the paper book shows such amount written off at ₹ 98,078/-. The AO is directed to verify if such amount has been actually written off in the books of account. If it is so, then, deduction should be allowed to that extent. As regards the Provision for doubtful advances unlike section 36(1)(vii) which provides for deduction on account of simple write off of bad debt subject to the fulfillment of conditions laid down in section 36(2), a write off of advances, falls in a separate compartment. In order to be eligible for such a deduction, the assessee is particularly required to prove the event of occurrence of loss. Unless the loss is proved to have been occurred, there can be no question of any deduction. Here is a case in which the assessee is claiming write off of an amount due from Customs Department. It goes without saying that no amount from a Government Department can be considered as irrecoverable under any circumstance so as to characterize it as a loss. We, therefore, following the view taken by the Tribunal in its order for the A.Y. 2002-03, uphold the disallowance. It is also clarified that a reversal of such a provision should not attract any tax as has been discussed qua the Provision for doubtful debts. In the like manner, it should also be ensured that there is no double deduction in view of the decision allowing deduction at the time of creation of a similar provision in relation to the A.Y. 2003-04. Disallowance of Mediclaim personal accidental insurance policy taken for the benefit of staff members - Held that - We are unable to concur with the view adopted by the ld. CIT(A) in sustaining the disallowance. Admittedly, insurance policy was taken by paying premium to National Insurance Company Ltd. We fail to appreciate as to how the assessee can bring material on record to demonstrate that the insurance policy taken from National Insurance Company Ltd. was approved by IRDA. There is an underlying presumption that all the nationalized insurance companies follow guidelines of IRDA. It is too much to cast such a burden on the assessee to prove that a particular insurance policy taken by it for its employees from National Insurance Company Ltd. was approved by IRDA. Since the assessee paid premium in respect of insurance policy taken for the benefit of its employees, the deduction has to be allowed. We, therefore, allow this ground of appeal. Disallowance of depreciation on foreign exchange loss capitalized in the block of Buildings. - Held that - Block of assets increases with the actual cost of any asset falling within that block, acquired during the previous year. Forex gain or loss effects the cost of an asset only u/s 43A and that too w.r.t. the translation of foreign currency at the time of making payment. This section applies only when the assessee acquires any asset in any previous year from a country outside India. Section 43A is not applicable when an asset is acquired from India, albeit with a loan obtained in foreign currency. Thus it is overt that forex loss in respect of assets acquired in India cannot be treated as cost of acquisition so as to increase the value of block of assets for entitling the assessee to depreciation. If the contention of the ld. AR is accepted that such increase due to forex loss is contemplated u/s 43(1) itself and there is no need to approach section 43A, then the very existence of section 43A becomes meaningless. Placement of a separate section 43A shows that increase in the actual cost due to forex loss, and that too at the time of making payment, is not permissible but for this provision, which applies only to an asset acquired from a country outside India only. As the assessee acquired Building in India, neither section 43 nor section 43A can apply and consequently no capitalization of such forex loss can be allowed. We, therefore, hold that the authorities below were justified in denying depreciation on increase in the cost of Buildings effected by the assessee due to translation of foreign currency loan at the end of the year. This ground fails. Disallowance of advertisement and publicity expenses - CIT(A) deleted this disallowance - Held that - This issue is no more res integra in view of the judgment in CIT vs. Citi Financial Consumer Fin. Ltd. (2011 (3) TMI 622 - Delhi High Court) in which it has been held that the entire expenditure on publicity and advertisement is allowable fully in the year in which it is incurred. We, therefore, uphold the impugned order on this score. Similar view has been taken by the Tribunal in the assessee s own case for the A.Y. 2002- 03. It is however, made clear that no further deduction for the remaining 2/3rd of the total expenditure, directed to be allowed by the AO in subsequent two years, be granted as the same will lead to double deduction. If such a deduction has been allowed, then the same be accordingly reversed pro tanto. This ground of the Revenue is not allowed.

Summary

Issues Involved:

1. Transfer Pricing Additions (Import of Crystal and Crystal Components, AMP Expenses)
2. Non-Transfer Pricing Additions (Provision for Doubtful Debts and Advances, Mediclaim Insurance Policy, Depreciation on Foreign Exchange Loss, Advertisement and Publicity Expenses)

Detailed Analysis:

I. TRANSFER PRICING ADDITIONS

A. TP Addition on Import of Crystal and Crystal Components

1. CUP Method Appropriateness:

The assessee applied the Comparable Uncontrolled Price (CUP) method to demonstrate that the international transaction was at arm's length price (ALP). The Transfer Pricing Officer (TPO) rejected the CUP method, stating that the items imported by the assessee were not imported by third parties, thus making the comparables chosen by the assessee unreliable. The TPO adopted the Transactional Net Margin Method (TNMM) instead, resulting in a proposed transfer pricing adjustment of ?4.72 crore. The CIT(A) upheld the use of TNMM but directed that only the current year’s data should be used. The tribunal agreed with the TPO in rejecting the CUP method due to lack of reliable comparables.

2. TNMM vs. RPM:

The TPO used TNMM, considering data from associated enterprises in South Korea and Singapore, and 20 independent foreign companies. The tribunal found inconsistencies in the TPO's calculations and noted that the TPO's approach of averaging gross and net margins was not in line with the rules. The tribunal also highlighted that transactions involving associated enterprises are controlled transactions and cannot be used as comparables under TNMM. The tribunal directed the AO/TPO to first apply the Resale Price Method (RPM) as the most appropriate method, given that the goods were resold without any value addition. If RPM could not be applied, the TNMM should be used correctly as per the rules.

B. TP Addition of AMP Expenses

The CIT(A) made an addition of ?1,91,94,998/- for AMP expenses. The tribunal noted that the CIT(A) did not have the benefit of recent judicial precedents and restored the matter to the TPO/AO for fresh determination of whether AMP expenses constitute an international transaction. If found to be an international transaction, the TPO should determine the ALP in light of relevant judgments.

II. NON-TRANSFER PRICING ADDITIONS

1. Provision for Doubtful Debts and Advances:

The AO disallowed ?22,52,032/- for provisions for doubtful debts and advances. The tribunal upheld the disallowance, noting that the provision for doubtful debts is not deductible under section 36(1)(vii) unless actually written off. The tribunal directed the AO to verify the actual write-off amount and allow deduction accordingly. The tribunal also upheld the disallowance of provision for doubtful advances, stating that amounts due from government departments cannot be considered irrecoverable.

2. Mediclaim Insurance Policy:

The AO disallowed ?47,47,698/- for Mediclaim insurance policy premiums, treating it as a personal expense. The tribunal disagreed, stating that the insurance policy was for the benefit of employees and should be allowed as a deduction.

3. Depreciation on Foreign Exchange Loss:

The AO disallowed depreciation on ?8,50,330/- capitalized in the block of buildings due to foreign exchange loss. The tribunal upheld the disallowance, stating that forex loss on assets acquired in India cannot be added to the block of assets for depreciation purposes, as per section 43A and relevant judicial precedents.

4. Advertisement and Publicity Expenses:

The AO amortized advertisement and publicity expenses over three years, disallowing 2/3rd of the amount. The CIT(A) deleted the disallowance. The tribunal upheld the deletion, referencing the jurisdictional High Court's judgment that such expenses are fully allowable in the year incurred.

Conclusion:

The tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, directing fresh determinations and adjustments as per the detailed observations and legal precedents.