2020 (1) TMI 774 - AT - Income Tax

TPA - Applicability of Most Appropriate Method - Revenue has applied Transactional Net Margin Method TNMM whereas the assessee alleges Resale Price Method RPM as Most Appropriate Method - whether subvention revenue is part of operating profit thereby affecting PLI - HELD THAT - RPM method identifies the price at which product purchased from the AE is resold to unrelated party; then in the case of resellers, who do not alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e. resale is made without any value addition, then in such facts and circumstances, RPM method is to be applied as method to benchmark the international transaction undertaken. We hold so and allow the ground raised by the assessee on this issue. The Assessing Officer is directed to apply the RPM method in order to benchmark the international transaction undertaken by the assessee in the distribution segment, after allowing reasonable opportunity of hearing to the assessee Subvention income - whether the same is part of operating margin - HELD THT - As decided in NALCO WATER INDIA LIMITED VERSUS ASST. COMMISSIONER OF INCOME TAX, CIRCLE 2, PUNE 2019 (9) TMI 609 - ITAT PUNE subvention amount received by the assessee before us is operating in nature and the same has to be included as operating income, while computing PLI in the hands of the assessee. The assessee in the present appeal has not raised any issue about its taxability and hence, the said status is not disturbed Adjustment on account of AMP spent - HELD THAT - There is no provision either in the Act or in the Rules to justify the application of BLT for computing the arms length price and also in the absence of BLT, the existence of an international transaction vis -vis the AMP expenditure cannot exist. Further, we hold that there cannot be a quantification of adjustment for determining the AMP expenses incurred by the assessee after applying the BLT, to hold the same to be excessive and thereby an existence of international transaction between the assessee and its AE. We find no merit in exercise carrying of Assessing Officer/DRP/TPO in this regard and delete the Transfer pricing adjustment made on account of AMP expenditure. Accordingly, we delete the adjustment on account of transfer pricing analysis of AMP expenditure.

Summary

Issues Involved:
1. Applicability of the Most Appropriate Method (MAM).
2. Adjustments on account of Advertising, Marketing, and Promotion (AMP) expenses.
3. Additions on account of corporate issues.

Detailed Analysis:

1. Applicability of the Most Appropriate Method (MAM):
The primary dispute was whether the Transactional Net Margin Method (TNMM) or the Resale Price Method (RPM) was the most appropriate method for benchmarking international transactions. The Revenue applied TNMM, while the assessee argued for RPM, asserting that it only undertook distribution activities without adding value to the goods imported. The Tribunal, referencing the assessee's case from a previous year, concluded that RPM was indeed the most appropriate method. The Tribunal emphasized that since there was no value addition by the assessee, RPM should be applied. The Tribunal directed the Assessing Officer to apply RPM for benchmarking the international transaction in the distribution segment.

2. Adjustments on Account of Advertising, Marketing, and Promotion (AMP) Expenses:
The Tribunal deliberated on whether AMP expenses constituted an international transaction requiring benchmarking. The Revenue had posited that AMP expenses, incurred for promoting drugs imported from the AE, were an international transaction. However, the Tribunal found no agreement or arrangement between the assessee and its AE mandating such expenses. The Tribunal held that in the absence of any such arrangement, AMP expenses were purely domestic transactions and not governed by transfer pricing regulations. Consequently, the Tribunal deleted the transfer pricing adjustment made on AMP expenses.

3. Additions on Account of Corporate Issues:
For the assessment year 2011-12, the Tribunal noted that the assessee failed to furnish details or evidence regarding the corporate issues raised. Consequently, the Tribunal upheld the findings of the lower authorities and dismissed the assessee's grounds related to corporate issues.

Subvention Income:
The Tribunal also addressed whether subvention income received by the assessee from its AE should be considered part of the operating margin. The Assessing Officer had excluded this income from operating income, treating it as an extraordinary item. The Tribunal, referencing prior decisions, held that subvention income, being inextricably linked to the distribution activity, should be included as operating income while computing the Profit Level Indicator (PLI).

Conclusion:
- The Tribunal allowed the assessee's appeal regarding the applicability of RPM and inclusion of subvention income as operating income.
- The Tribunal deleted the transfer pricing adjustment on AMP expenses.
- The Tribunal dismissed the grounds related to corporate issues due to lack of evidence.
- The Tribunal dismissed the Revenue's appeal as it was consequential to the findings in the assessee's appeal.

Final Judgments:
- ITA No. 1382/DEL/2016: Allowed
- ITA No. 1909/DEL/2016: Partly Allowed
- ITA No. 1563/DEL/2016: Dismissed