2017 (9) TMI 1023 - AT - Income Tax

Transfer pricing adjustment in respect of international transaction related to purchase of capital goods - deferred revenue expenditure - Held that - We find that the first contention of the assessee in this regard is that the same computation of the assessee with regard to purchase of capital assets was accepted by the Revenue in preceding assessment year as well as in subsequent assessment year. This proposition has not been disputed by the Revenue. In these circumstances we note that there is no change in the facts and circumstances of the case. No reason has been brought out by the authorities below as to why they are making deviation. There is no doubt that res judicata does not apply to taxation proceedings. Still Courts have uniformly held that unless there is a change in the facts or law, rule of consistency and uniformity needs to be adhered. Selection of comparable - Held that - Assessee is not engaged in any full-fledged trading activity of heavy machinery, rather are engaged in simpler functions of purchasing the fixed asset from its associated enterprise which the AE purchases from third party. The Associated Enterprise purchase fixed on behalf of the assessee and sell them with cost plus mark-up of 10%, thus companies functionally different with that of assessee need to be deselected from final list of comparability. Disallowance with respect to advertisement and sales promotion expenses - Held that - Assessee has incurred expenditure on advertisement and sales promotion. The assessing officer & DRP have held on an adhoc basis that a certain portion out of the above is aimed at brand building and the same is to be held as capital expenditure and the assessee can be granted depreciation their upon. When this is considered in light of the fact that the brand doesn t belong to the assessee and it is not the case of the revenue that assessee has incurred expenditure aimed at benefiting the associated enterprise this addition is clearly not sustainable. When the brand doesn t belong to the assessee there is no question of incurring expenditure over building of brand and assessee creating any intangible rights assignable over a number of years. Deferred revenue expenditure - there is no question of disallowance of the same as it is also settled law that in taxation laws there is no concept of deferred revenue expenditure. The case laws referred by the learned Counsel of the assessee duly indicate that expenditure incurred by the assessee company to maintain its corporate image which resulted in increased sales of the product is to be allowed as revenue expenditure. We find that these case laws are duly applicable to the facts of the present case. We set aside the orders of the authorities below which allocated ad hoc percentage out of advertisement and sales promotion as depreciable capital expenditure. We hold that the entire expenditure is a revenue expenditure allowable as such.

Summary

Issues Involved:
1. Transfer pricing adjustment in respect of international transaction related to purchase of capital goods.
2. Disallowance with respect to advertisement and sales promotion expenses.

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment in Respect of International Transaction Related to Purchase of Capital Goods:

Facts of the Case:
The assessee, engaged in the manufacture and sale of luggage and travel accessories, entered into various international transactions with its Associate Enterprises (AEs). The Transfer Pricing Officer (TPO) accepted all transactions except the purchase of capital goods and spares, which were priced at cost plus a 10% markup as per the Samsonite group re-billing policy.

TPO's Analysis:
The TPO compared the markup with margins earned by distributors of heavy equipment in India, finding an average markup of 4.07%. Consequently, the TPO made an upward adjustment of ?29,58,333.

Assessee's Contentions:
The assessee argued that the TPO erred in calculating the Profit Level Indicator (PLI) of comparable companies by considering total costs instead of direct costs. The assessee also highlighted that its method was accepted in previous and subsequent years, invoking the rule of consistency.

DRP's Findings:
The Dispute Resolution Panel (DRP) upheld the TPO's action, rejecting the assessee's contention about the cost base and confirming the adjustment.

Tribunal's Decision:
The Tribunal found merit in the assessee's arguments, noting the rule of consistency and functional differences between the assessee and the comparables used by the TPO. The Tribunal directed the deletion of the upward adjustment of ?29,58,333, emphasizing that functionally different comparables cannot be used for benchmarking.

2. Disallowance with Respect to Advertisement and Sales Promotion Expenses:

Facts of the Case:
The assessee incurred ?64,04,38,650 on advertisement and sales promotion, which the Assessing Officer (AO) scrutinized due to its significant proportion of total expenses. The AO observed that a substantial part of the advertisement expenses promoted the brand "Samsonite" rather than specific products, thus benefiting the brand owner.

AO's Analysis:
The AO treated 50% of advertisement expenses and 60% of sales promotion expenses as capital expenditure, allowing depreciation on the capitalized amount. The AO concluded that these expenses contributed to brand building, creating intangible rights.

Assessee's Contentions:
The assessee argued that the expenses were solely for product promotion, not brand building, and were thus revenue in nature. The assessee emphasized that the brand belonged to the AE, not the assessee, and cited several case laws supporting the treatment of such expenses as revenue expenditure.

DRP's Findings:
The DRP upheld the AO's decision, agreeing that the expenses contributed to the creation of intangible rights and were capital in nature.

Tribunal's Decision:
The Tribunal rejected the AO's and DRP's findings, noting that the brand did not belong to the assessee. It emphasized that there was no evidence of expenditure aimed at benefiting the AE. The Tribunal held that the entire expenditure was revenue in nature and allowable as such, setting aside the orders of the authorities below.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the deletion of the transfer pricing adjustment and treating the entire advertisement and sales promotion expenses as revenue expenditure. The judgment emphasized the importance of functional comparability in transfer pricing and the principle that expenses aimed at business promotion should be treated as revenue expenditure, especially when the brand does not belong to the assessee.