2020 (6) TMI 568 - AT - Income Tax

TP Adjustment - Disallowance of management fee paid to MAP, Singapore - assessee was a trading company and its operating expenses were to the tune of 40% of the total turnover - whether the Assessing Officer had exceeded the jurisdiction cast upon him, while deciding the issue of allowability of claim of management fees paid by the assessee to its AE? - HELD THAT - In the present scenario where the assessee is dealing in items, which were available in international market also, then same practice has to be adopted worldwide and hence the necessity of availment of management services. Merely because the assessee was increasing expenditure on its personnel and other expenses, cannot be the yardstick for deciding whether assessee had any need to avail the services. It is outside the domain of Assessing Officer to traverse in such direction. AO categorically states that assessee had availed services in various fields, but it is outside his domain to decide whether there was any necessity to avail such services or not. The assessee having availed the support services for its day to day running of business, is entitled to claim the expenditure. Hence, we hold so. Assessee during the year itself establishes the case of the assessee that the availment of support services from the AE has benefitted the business of assessee and hence expenditure is business expenditure. Now, coming to the next aspect of the assessee i.e. the evidences of availment of support services from the AE. The assessee before us has furnished evidences in the form of additional evidences to establish its case of availment of services. Such evidences are available filed by the assessee in this regard. The sufficiency of availment of services can be gone into by Assessing Officer, but where evidences have been filed, the Assessing Officer cannot sit in judgement as to allowability of expenditure on the surmise that assessee is already increasing expenditure upto 40%. There is no merit in the stand of the authorities below. Disallowance on account of impairment of stock - whether the said expenses would lead to establishment and promotion of Michelin brand in India? - HELD THAT - Where the assessee is following the systemized way of recognizing the value of stock at the close of the year i.e. as per AS-2 of Accounting Standard and the cost of the closing stock is declared on the basis of cost or net realizable value, whichever is less. Hence, there is no merit in the aforesaid disallowance made in the hands of the assessee. We uphold the order of the CIT(A). Addition on account of AMP expenses - whether the said expenses would lead to establishment and promotion of Michelin brand in India? - HELD THAT - Looking at the nature of expenses incurred, it is apparent that the same primarily pertain, to sales promotion of the products in Indian market. The expenditure being essentially incurred with the object to boost the sales of the assessee though the brand is owned by the AE does not warrant any disallowance in the hands of the assessee. In the entirety of the facts and circumstances of the case, the entire expenses on advertisement and publicity need to be allowed in the hands as business expenditure of the assessee. Appeal of the assessee is allowed

Summary

Issues Involved:
1. Disallowance of management fee paid by the assessee.
2. Deletion of disallowance on account of impairment of stock.
3. Deletion of addition made on account of advertisement and marketing promotion (AMP) expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Management Fee Paid by the Assessee:
The assessee challenged the disallowance of management fees amounting to ?1,75,86,958 paid to its Associated Enterprise (AE), Michelin Asia Pacific Pte. Ltd. (MAP). The Assessing Officer (AO) had disallowed this expenditure, questioning the necessity and commercial expediency of such services, despite the Transfer Pricing Officer (TPO) accepting the transaction to be at arm’s length. The AO observed that the assessee had incurred substantial personnel and establishment costs and had a full management team, which rendered the management fee paid to AE unnecessary. The CIT(A) upheld the AO's disallowance, noting insufficient documentation to prove the benefit of the services availed. However, the Tribunal found that the AO had overstepped his jurisdiction by questioning the business necessity of such services. The Tribunal emphasized that it is the business's prerogative to decide on availing such services for efficient operations. The Tribunal noted that the reduction in losses and eventual profitability indicated the benefit derived from these services. The Tribunal thus allowed the assessee’s appeal, stating that the AO cannot disallow the expenditure merely based on the sufficiency of the evidence provided.

2. Deletion of Disallowance on Account of Impairment of Stock:
The Revenue appealed against the CIT(A)'s decision to delete the disallowance of ?27,83,732 on account of impairment of stock. The AO had disallowed this provision, treating it as an unascertained liability. The CIT(A) found that the assessee had consistently followed Accounting Standard-2 (AS-2), valuing stock at the lower of cost or net realizable value. The Tribunal upheld the CIT(A)’s decision, noting that the assessee had followed a systematic method for valuing closing stock as per AS-2, and there was no merit in the AO's disallowance. The Tribunal dismissed the Revenue's appeal on this ground.

3. Deletion of Addition Made on Account of AMP Expenses:
The Revenue contested the CIT(A)'s deletion of the addition of ?3,36,30,823 made on account of AMP expenses. The AO had disallowed 50% of the AMP expenses, arguing that these expenses benefitted the international brand "Michelin," owned by the parent company, and were not incurred wholly and exclusively for the assessee’s business. The CIT(A) deleted the addition, stating that the AO's disallowance was based on presumption without specific evidence. The Tribunal supported the CIT(A)'s view, referencing the Delhi High Court's decision in the case of Nestle India Ltd., which held that advertisement expenses incurred for business purposes should be allowed as revenue expenses. The Tribunal concluded that the AMP expenses were necessary for the assessee's business operations in India and dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee’s appeal regarding the disallowance of the management fee and upheld the CIT(A)'s decisions to delete the disallowances on account of impairment of stock and AMP expenses. The Revenue's appeal was dismissed in its entirety. The order was pronounced in the open court on 22nd June 2020.