2019 (5) TMI 533 - AT - Income Tax

TP adjustments in respect of sale of finished goods and AMP activity - selection of MAM - assessee selected TNMM as the MAM for determination of the ALP of the international transactions with its AEs - issued a show cause notice to the assessee proposing to substitute CPM as the MAM in place of TNMM adopted by the assessee - HELD THAT - TPO has accepted the fact that in respect of sale of products in India, the assessee has undertaken marketing, selling and administrative functions and the assessee has not performed any such functions in respect of sales to AEs. The number of differences and adjustments to be carried out for comparability purposes are many in number and therefore, where differences are many, CPM cannot be considered as the MAM. In this view of the matter and following the decision of the Co-ordinate Bench of this Tribunal in the assessee s own case for Assessment Year 2011-12 2018 (7) TMI 1964 - ITAT BANGALORE we hold that TNMM is the MAM. Under the said method, the assessee has earned net margin of 13.39% from exports to its AEs whereas the net loss suffered by the assessee in respect of the personal care division in the domestic segment is (-) 10.16%. As the net margins from the assessee s exports to its AEs is higher when compared to the result of its margins in respect of transactions in the personal care division in the domestic segment, the price of the sale of finished goods are at arms length. In this factual view of the matter, the TP Adjustment made by the TPO by adopting CPM as the MAM is accordingly deleted TP Adjustment on AMP Expenditure - HELD THAT - Findings of the Co-ordinate Bench in the assessee s own case for Assessment Year 2011-12 2018 (7) TMI 1964 - ITAT BANGALORE are squarely applicable for the year under consideration as the facts, basis and reasons for the TPO making the AMP adjustment is identical to that of the earlier year, and, therefore, respectfully following the same, we delete the TP Adjustment of ₹ 26,61,11,989/- made on account of AMP expenditure. Further, as the net margin from the assessee s exports to AEs at 13.39% is higher as compared the net loss of (-)10.16% from the personal care division in the domestic segment, the assessee s international transactions with its AEs are at arms length and therefore no separate adjustment for AMP expenditure is warranted. Consequently, ground No.9 of the assessee s appeal is allowed. Disallowance of interest expenditure - revenue or capital expenditure - AO disallowed the said expenditure claimed by the assessee for the reason that the same relates to the period prior to the date on which the fixed assets / installations were put to use - The AO, however, allowed depreciation on the interest capitalized - DRP uphold on the grounds that it was capital in nature - HELD THAT - The assessee is engaged in the business of manufacture and sale of ayurvedic medicaments and preparations, consumer or personal care products and animal health care products. As per the material on record, no other business is carried on by the assessee. The addition to the building is a part of the already existing factory building located at Makali, Bangalore which included the following viz., (i) new raw material stores (ii) new finished goods stores and (iii) new quality assurance block. This is in addition to the already existing building and ostensibly the same products manufactured at the existing facility were produced at the new facility. Therefore, in our considered view this was an expansion of the existing business - Disallowance of interest expenditure by the AO u/s 36(1)(iii) is untenable and is accordingly deleted. - Decided in favour of assessee. Charging of interest under section 234B - HELD THAT - The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon ble Apex Court in the case of Anjum H. Ghaswala 2001 (10) TMI 4 - SUPREME COURT therefore, uphold the action of the AO in charging the assessee the aforesaid interest u/s 234B

Issues Involved:

1. Rejection of the assessee’s Transfer Pricing (TP) study adopting Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM).
2. Determination of Arm’s Length Price (ALP) using Cost Plus Method (CPM) by the Transfer Pricing Officer (TPO).
3. Denial of adjustments as per Rule 10B(1)(c)(iii).
4. Denial of benefit of proviso to section 92C(2).
5. TP adjustment towards Advertisement, Marketing, and Sales Promotion (AMP) expenditure.
6. Disallowance of interest paid under section 36(1)(iii).
7. Charging of interest under section 234B.

Detailed Analysis:

1. Rejection of the assessee’s TP study adopting TNMM as the MAM:

The assessee selected TNMM as the MAM for determining the ALP of international transactions with its Associated Enterprises (AEs). The TPO substituted CPM for TNMM, leading to a TP adjustment. The Tribunal found that the facts and reasons for the TP adjustment were identical to the previous year (Assessment Year 2011-12), where the Co-ordinate Bench had deleted similar adjustments. The Tribunal held that TNMM was the MAM, as it accounted for differences in functions, assets, and risks between domestic and export transactions. Consequently, the TP adjustment of ?38,84,32,314/- was deleted.

2. Determination of ALP using CPM by the TPO:

The TPO compared the gross margin earned on exports with the gross profit of the domestic consumer product division, proposing a TP adjustment. The Tribunal found that the TPO's approach was erroneous, as it disregarded the mandate of Rule 10B(1)(c) requiring adjustments for functional differences. The Tribunal held that the TPO's application of CPM was incorrect and that TNMM was the appropriate method, leading to the deletion of the TP adjustment.

3. Denial of adjustments as per Rule 10B(1)(c)(iii):

The Tribunal noted that the TPO failed to make reasonably accurate adjustments to eliminate material effects of differences between domestic and export transactions. The Tribunal emphasized that adjustments were necessary to account for differences in marketing, distribution, and sales activities performed by the AEs. The Tribunal concluded that CPM could not be considered the MAM due to the inability to make accurate adjustments and upheld TNMM as the MAM.

4. Denial of benefit of proviso to section 92C(2):

The assessee's ground for claiming the benefit of the second proviso to section 92C(2) was dismissed as untenable.

5. TP adjustment towards AMP expenditure:

The TPO made a TP adjustment for AMP expenditure, which was deleted by the Co-ordinate Bench in the previous year. The Tribunal held that there was no arrangement between the assessee and the AE for incurring AMP expenditure, and the TPO failed to substantiate the existence of an international transaction. The Tribunal followed the decision of the Co-ordinate Bench and deleted the TP adjustment of ?26,61,11,989/- for AMP expenditure.

6. Disallowance of interest paid under section 36(1)(iii):

The AO disallowed interest on borrowed capital, treating it as capital in nature. The Tribunal found that the building/asset in question was put to use in the previous year, and depreciation was allowed. The Tribunal held that the interest expenditure was for an expansion of the existing business, not an extension, and deleted the disallowance of ?2,91,89,882/-.

7. Charging of interest under section 234B:

The Tribunal upheld the charging of interest under section 234B, as it is consequential and mandatory, but directed the AO to recompute the interest while giving effect to the order.

Conclusion:

The appeal was partly allowed, with significant deletions of TP adjustments and disallowances, upholding the assessee's use of TNMM as the MAM and recognizing the expansion of existing business activities.

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