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2023 (1) TMI 315 - AT - Income TaxTP adjustment - benchmarking of international transaction of import of raw materials - deemed international transaction i.e. third party vendors - objection raised before the DRP is that the TPO was not justified in using TNMM as most appropriate method for the purpose of benchmarking the transaction of import of raw materials as against CUP method used by the assessee - HELD THAT - We find that the contention of assessee that the third party vendors are not the AEs of the appellant remained un-adverted. Therefore, the certificate issued by third party vendors, whereby, they confirmed that the discount of 10% to 20% had been given to the appellant on the raw materials supplied during the year and further confirmed that the price they have charged to the appellant company is lower than the price, it would have charged if the appellant had not purchased under global sourcing arrangement cannot be ignored by holding that these certificates were issued by AEs. Similarly, as regards to the import of raw materials from AEs, the contention of appellant company that the price charged by the AEs is lower than the prevailing market price remains uncontroverted. The lower authorities have failed to advert to this submission made by the appellant and therefore, we are of the considered opinion that the matter requires remission to the AO / TPO to examine the above benchmarking analysis furnished by the appellant and then proceed with the benchmarking of the transaction of import of raw materials in accordance with law. Alternate claim that for the purpose of benchmarking the transaction of import of raw materials, the gross margins of appellant company should be compared with the gross margins of comparable companies, as the competition faced by the appellant company effected the net margins of appellant company on account of lower volume - We are of the considered opinion that, in case the AO / TPO on examination of benchmarking analysis made by the appellant company is found to be not acceptable, the AO / TPO shall examine the relevance of comparison of gross profits of appellant company with the comparable companies and proceed to benchmark the international transaction of import of raw materials. Thus, this ground of appeal stands partly allowed for statistical purposes. In the event as result of above exercise done by the TPO results in TP adjustment in respect of transaction in respect of import of raw material, we find merit in the submissions made by the ld. Sr. Counsel the TP adjustments in respect of this transaction should be restricted in terms of the corresponding sales made from the imports made from Kimberly group of companies and third party vendors which are held to be not at arm s length price as per working given by the assessee before the TPO which is extracted by the DRP in para 5.1 at page no.53 as the PLI adopted was profit earned by sales. Adjustment in respect of A M expenses incurred by the appellant - TPO and DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A M expenses incurred by the AE - HELD THAT - The issue in these grounds of appeal is no more res integra as decided by the Tribunal in assessee s own case for earlier assessment years 2008-09 2021 (3) TMI 71 - ITAT PUNE , 2009-10 2021 (11) TMI 1124 - ITAT PUNE , 2010-11 2022 (7) TMI 1366 - ITAT PUNE and 2011-12 2023 (1) TMI 262 - ITAT PUNE The Hon ble Delhi High Court had been consistently reiterated the law laid down by it in its earlier decisions in the case of Sony Ericsson Mobile Communications India P. Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT and Maruti Suzuki India Ltd. 2015 (12) TMI 634 - DELHI HIGH COURT Thus we allow grounds of appeal No.2 filed by the assessee. However, we make it clear that we are conscious of the fact that in the final assessment order passed by the AO, no addition on account of A M expenditure was made, as this addition was subsumed in the addition made on account of international transaction of import of raw materials. Therefore, the findings on A M expenditure shall become academic, in view of the addition made by TPO / AO on account of TP adjustment in respect of international transaction of import of raw materials is sustained. Direction of the Hon ble DRP to make addition alternatively by disallowing the A M expenditure u/s 37(1) - We vacate the direction of the Hon ble DRP to AO consider the addition u/s 37(1) alternatively.
Issues Involved:
1. Transfer Pricing Adjustment on Import of Raw Materials 2. Transfer Pricing Adjustment on Advertising and Marketing (A&M) Expenses 3. Application of Section 37(1) of the Income Tax Act Detailed Analysis: 1. Transfer Pricing Adjustment on Import of Raw Materials: The appellant, a joint venture company, engaged in the manufacturing of Infant Care and Feminine Hygiene Care Products, reported various international transactions, including the import of raw materials. The Transfer Pricing Officer (TPO) suggested adjustments based on the Transactional Net Margin Method (TNMM), which was contested by the appellant who preferred the Comparable Uncontrolled Price (CUP) method. The appellant provided certificates from third-party vendors and internal benchmarking analysis to justify the arm's length price. The TPO rejected these, considering the certificates as self-certified and the third-party vendors as deemed associated enterprises (AEs). The Dispute Resolution Panel (DRP) upheld the TPO's adjustments, leading to a significant addition in the final assessment order. Upon appeal, it was argued that the third-party vendors were not AEs and that the certificates confirming lower prices under a global sourcing arrangement should be considered. The Tribunal found merit in the appellant's arguments, noting that the lower authorities did not adequately address the appellant's submissions. The Tribunal remanded the matter back to the AO/TPO to re-examine the benchmarking analysis and consider the appellant's evidence. Additionally, the Tribunal allowed the appellant's alternative claim to benchmark the transaction at the gross profit level if the initial analysis was not accepted. 2. Transfer Pricing Adjustment on Advertising and Marketing (A&M) Expenses: The TPO and DRP inferred an international transaction from the appellant's higher A&M expenditure compared to comparables, suggesting that the benefit of this expenditure accrued to the foreign AE. The appellant argued that there was no explicit arrangement or agreement with the AE to incur such expenses and that the inference of an international transaction was based on conjecture. The Tribunal referred to previous decisions, including the Delhi High Court's ruling in Maruti Suzuki India Ltd. vs. CIT, which stated that the existence of an international transaction cannot be presumed without explicit evidence. The Tribunal concluded that the Revenue failed to prove the existence of such a transaction and that the A&M expenses should be treated as part of the aggregate transactions for TNMM application. 3. Application of Section 37(1) of the Income Tax Act: The DRP directed the AO to disallow the A&M expenses under Section 37(1), holding that they were not incurred wholly and exclusively for business purposes. The appellant contended that even if a third party benefits from the expenditure, it should still be allowable if incurred for the appellant's business. The Tribunal agreed, citing precedents that support the allowance of such expenses. Consequently, the Tribunal vacated the DRP's direction to disallow the A&M expenses under Section 37(1). Conclusion: The Tribunal allowed the appellant's appeal, directing the AO/TPO to re-examine the benchmarking analysis for the import of raw materials and to consider the A&M expenses as part of the aggregate transactions for TNMM application. The Tribunal also vacated the DRP's direction to disallow the A&M expenses under Section 37(1), thereby providing relief to the appellant.
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