2020 (3) TMI 622 - AT - Income Tax

Addition on account of difference in Arm s Length Price - HELD THAT - For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party whose data would generally be easily accessible. Rule 10B(3)(ii) provides for making reasonably accurate adjustments for eliminating any material differences between the two transactions being compared. It is an undisputed fact that import of watches carry heavy customs duty which may not be there in so far as Italian companies are concerned. The purpose or intent of the comparability analysis is to examine as to whether or not, the values stated for the international transactions are at ALP. We are of the view that the regulations do not restrict or provide that adjustments cannot be made on the results of the tested party. We are also of the view that net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of Rule 10B(1)(e) of the Rules. There is no specific provision in Rule 10B(1)(e)(iii) of the Rules, which would impede the adjustment of the profit margin of the tested party. As far as rate of custom duty is concerned, it can be easily taken from the official website of the European Union and we find that the rate at the relevant point of time was 4.5% whereas the custom duty paid by the assessee accounts for more than 75% of the purchase value and 50% of the total cost of goods sold. In our considered opinion, such difference on account of custom duty paid by the assessee and that existing in the location where comparable companies operate, cannot be ignored. Considering all these facts in totality, we decline to interfere with the findings of the ld. CIT(A). Ground No. 1 is, accordingly, dismissed. Addition on account of advertisement and business promotion - AO was of the firm belief that the advertisement expenses were capital in nature and bring enduring benefit to the assessee and accordingly, amortized the expenditure in three years and thereby allowed 1/3rd of the expenditure in the current A.Y and balance 2/3 of the expenditure was added back - HELD THAT - We have to say that considering the names of the brand ambassadors as mentioned elsewhere, we are of the considered opinion that the advertisement spend by the assessee is peanuts to the face value of these celebrities - Expenditure incurred on advertisements in the aforesaid manner has to be treated as revenue in the nature and was therefore fully allowable. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of difference in Arm’s Length Price (ALP) for international transactions.
2. Deletion of addition on account of advertisement and business promotion expenses.

Detailed Analysis:

1. Deletion of Addition on Account of Difference in Arm’s Length Price (ALP):

Facts and Background:
The assessee-company, a wholly-owned subsidiary of the Swatch Group Limited, Switzerland, operates as a distributor of Swatch Group brands in India. The company undertook several international transactions, including the import of watches and spares, pricing support/subsidy, and other reimbursements. The Transfer Pricing Officer (TPO) analyzed these transactions using the Resale Price Method (RPM) and made adjustments based on the comparables selected.

TPO’s Observations and Adjustments:
The TPO observed that the marketing subsidy received by the assessee should not be aggregated with the cost of imports. The TPO excluded the subsidy amount from the international transactions and selected new comparables, primarily Italian companies, for benchmarking. The TPO determined an adjustment of ?4,01,47,762 based on the gross profit margins of these comparables.

CIT(A)’s Findings:
The CIT(A) agreed with the use of foreign comparables but emphasized the need for adjustments due to differences in customs duty rates between India and Italy. The CIT(A) noted that high customs duty rates in India significantly impact the gross margins of the assessee. The CIT(A) computed the gross margin after normalizing the customs duty and found it to be 61.10%, higher than the comparables, leading to the deletion of the adjustment.

ITAT’s Analysis and Conclusion:
The ITAT upheld the CIT(A)’s decision, stating that adjustments for differences in customs duty are necessary to ensure comparability. The ITAT noted that the regulations do not restrict adjustments to the tested party’s results and highlighted the significant impact of customs duty on the assessee’s margins. The ITAT dismissed the Revenue’s ground, affirming the CIT(A)’s deletion of the adjustment.

2. Deletion of Addition on Account of Advertisement and Business Promotion Expenses:

Facts and Background:
The assessee claimed an expenditure of ?2,80,22,958 on advertisement and business promotion, which the Assessing Officer (AO) treated as capital expenditure, amortizing it over three years. The AO allowed only 1/3rd of the expenditure for the current assessment year and added back the balance.

CIT(A)’s Findings:
The CIT(A) observed that advertisement expenditure is allowable under Section 37 of the Income Tax Act as it is wholly and exclusively for business purposes and not capital in nature. The CIT(A) directed the deletion of the addition made by the AO.

ITAT’s Analysis and Conclusion:
The ITAT referred to a similar issue in the assessee’s case for the A.Y. 2005-06, where the Delhi High Court held that advertisement expenditure is revenue in nature and fully allowable. The ITAT noted that the Supreme Court dismissed the Revenue’s SLP against the High Court’s decision. Considering these precedents, the ITAT upheld the CIT(A)’s deletion of the addition related to advertisement expenses.

Final Judgment:
The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 30.01.2020.