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TMI Blog2019 (4) TMI 1868X X X X Extracts X X X X X X X X Extracts X X X X ..... ase it is observed that assessee has used 6 comparables and the PLI chosen was gross profit margin being GP/sales. CIT(A) upon verification of accounts of comparables approved comparables being Falcon Tyres Ltd, Monotona Tyres Ltd and TVS Srichakra Ltd. Ld.CIT (A) compared accounts of comparables. He rejected Kesoram Industries Ltd. and India Tyres and Rubber Company Ltd., as quantitative details of sales were not available. From the order of Ld.TPO, it is observed that Ld.TPO has considered India Tyre and Rubber company, to be best comparable. Under such circumstances it is desirable to set aside this issue to Ld.AO/TPO, with a direction to determine ALP of subject transaction with RPM as most appropriate method. Assessee is directed to provide gross profit of comparables Kesoram Industries Ltd and India Tyres and Rubber Company Ltd. and then ALP should be determined by considering GP/sales of comparable companies as discussed above. - Decided against revenue. Disallowance of advertising and publicity expenses stating that these expenses are revenue in nature - HELD THAT:- AO disallowed 50% of expenditure incurred for advertising and publicity expenses without any basis. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee deducted 15% TDS on ₹ 56,54,369.07 which Ld.TPO accepted and did not deduct TDS on ₹ 5,43,533.98. There is nothing on record produced by assessee prove that ₹ 5,43,533.98 represent the foreign exchange loss, neither before authorities below nor before us. We therefore do not find any infirmity in the view taken by ld.CIT(A) and the same is upheld. - Decided against assessee. AMP expenditure not being an international transaction - HELD THAT:- No merit in the argument advanced by Ld.Counsel regarding AMP spent not being an international transaction. However we do not agree with application of BCT by Ld.TPO for computing the ALP. Alternate plea regarding the AMP reimbursement received during F.Y. 2010-11 being subjected to Tax and accordingly filed rectification application u/s 154 - HELD THAT:- n our considered opinion offering of reimbursement received during F.Y. 2010-11 cannot be a reason not to determine the ALP of the international transaction. In present facts conduct of assessee and AE has already established that AMP is an International Transaction. Once a transaction has been held to be an international transaction, ALP needs to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of ₹ 20,277/- made on account of excess claim of depreciation on printer and UPS @ 60% as computer peripherals are not part of the computer? 6. That the order of Ld.CIT(A) is erroneous and is not tenable on facts and in law. 7. That the grounds of appeal are without prejudice to each other. 8. That the appellant craves leave to add, alter, amend or forego any grounds of appeal raised above at the time of hearing. ITA No. 3306/Del/2013 The following grounds of appeal are mutually exclusive and without prejudice to, each another. 1. That on the facts and in law, the Learned Commissioner of Income Tax (Appeals) - XX, New Delhi (hereinafter referred to as the Learned CIT(A) ) erred in assessing the income of the Appellant for the relevant assessment year at ₹ 7,551,500 as against the returned income of Rs. (-)84,208,938. 2. Grounds on Principles of Natural Justice 2.1 That on facts and in law the order s passed by the learned Assessing Officer ( AO ) /Transfer Pricing Officer ( TPO ) / Commissioner of Income-tax (Appeals) are bad in law and void ab-initio. 2.2 That the order passed by the learned CIT(A) is bad in law as it failed to give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned TPO / Learned CIT(A) have failed to appreciate that such an unilateral action of the Appellant (to incur such expense) cannot be regarded as an international transaction as per the provision of Section 92B read with Section 92F of the Act. 4.2 That the Learned TPO / Learned CIT(A) have grossly erred both in law and on facts while benchmarking the impugned transaction of the Appellant without following the scientific process prescribed under the Indian transfer pricing regulations. The Learned TPO / Learned CIT(A) did not conclusively determine a most appropriate method prescribed under the Act and instead arbitrarily used a Brightline approach, which is not a method under the Act. 4.3 That the Learned TPO / Learned CIT(A) have grossly erred in adopting a myopic view of the expense / profitability of the Appellant in the subject year, and has deliberately not given any credence to the fact that the Appellant (being the sole distributor of Michelin products in India) is the primary and only direct beneficiary of the Advertisement, Marketing and Promotion ( AMP ) expenses incurred locally, and any benefit what-so-ever which may have been derived by the AEs is purely inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) to effect for. 4.8 Without prejudice to the above grounds, the Learned TPO / Learned CIT(A) have erred in facts and circumstances of the case in alleging that the Appellant has effectively provided brand building services to its AEs thereby seeking additional compensation for the assumed intra-group services provided by the Appellant. The Learned TPO / Learned CIT(A) have extended the absurdity of the analysis by applying a mark-up of 13.04% using highly inappropriate comparable companies. The Appellant craves leave to add, amend, vary, omit or substitute, any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal. Additional ground: As per Application dated 11.06.2018 4.9. Without prejudice to any other ground and also to our contention that no addition on account of advertisement, marketing and promotion (AMP) expenses is justified in appellant s case, authorities have failed to adopt similar methodology as applied by Hon ble CIT(A) for AY 2010-11. 2. Brief facts of case are as under: The Michelin Group is one of the three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India tyre and Rubber Company (India) Limited 3.93% Kesoram Indsutries Limited 1.19% Monotona Tyres 2.26% TVS Srichakra Limited 4.07% Arithmetic mean 3.57% 2.4. It is important to note that TPO rejected 2 companies, namely, Krypton Industries Ltd. and Ecowheels Pvt. Ltd. which were appearing in TP documentation for the reason that first company was not trading in tyre and for second company profit and loss account was not available in public domain. The appellant has not pressed for acceptance of these companies. TPO selected 1 comparable by name Monotona Tyres from TP study for subsequent year as comparable for this year also. However, all comparables were selected by assessee itself. The comparables, at entity level under TNMM had mean OP/OR of 3.69%. As a result, an addition of ₹ 21,29,85,061/- was proposed in TP order. Subsequently, TPO also undertook determination of ALP of international transaction involved in AMP separately and determined ALP at ₹ 6,70,57, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering cost of those functions. Ld.Sr. DR also pointed out that assessee is maintaining a very high inventory which is evident from scheduled 12 of profit and loss account which indicates that products are not moving fast for correct applicability of RPM. He submitted that RPM is more accurate where it is realised within a short time of reseller s purchase of goods, as more time that lapses between the original purchase and resale more likely it is that other factors like changes in the market in rates of exchange in cost etc will need to be taken into account in any comparison. It has been emphasised by Ld.Sr.DR that the level of inventory and cost involved in keeping inventory have to be adjusted which may not be possible based on the information available in the public domain. 8. Another factor which Ld.Sr.DR emphasised for non-applicability of RPM is functions that are generally performed by a reseller like advertising, marketing, distribution and guaranteeing goods, financing stocks and warranty risks. One would have to look into whether cost of these functions are accounted for as cost of goods or not. He submitted that if costs are accounted for as a part of cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section (2) of section 92C provides that most appropriate method referred to in sub-section (1) shall be applied for determination of ALP in the manner as may be prescribed. Rule 10B sets out the procedure under above referred five methods. Rule 10B(1) states that ALP of an international transaction shall be determined by any of the prescribed methods being most appropriate method, given in section 92C(1) at the material time and such computation can be done only in the manner as is prescribed under the rule. The instant controversy narrows down to examining and deciding as to whether, RPM or TNMM is the most appropriate method in present circumstances. 12.2. Before ascertaining most appropriate method as may be applicable in present factual scenario, it is sine qua non to look at the functions performed and nature of activity undertaken by assessee under this segment. 13. Functions performed by assessee under the segment import of finished goods (tyres and tubes) for resale in India: As per TP study report placed at page 26-83 of paper book, it is observed that during year under consideration, assessee sold certain tyres being finished goods to its associated enterprise b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 4.4. I have carefully examined the issue. The debate regarding RPM vs. TNMM has been settled by the decision of the Hon'ble ITAT in the case of L'oreal (supra) when the underlying international transaction is resale of imported goods. The facts of the case of the appellant are similar to the case of L'oreal because the appellant is a reseller of tyres without any value addition. Therefore, I hold that the ratio of L'oreal is applicable to the facts of the present case. Further, it is not the case of the TPO that appellant is doing any value addition before selling the tyres in India. The functions of advertising, marketing, distribution etc. are not the functions directly related to reselling of goods to be captured while arriving at the gross margin as per the Indian accounting standard as quoted in the earlier paragraphs. It is also a fact that there is no gradation of the most appropriate method to be applied as per law. They are fact specific to each case. 4.5. The factual reason for rejecting RPM is that the expenses like salary, wages, travelling and conveyance etc. are not taken into account while considering the gross profit margin of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the appellant has calculated its gross margin as below (which is extracted from Annexure-5 of TP study): Table-4: Working of gross margin of the appellant for AY 2007-08 (in Rs.) Sales (excluding sales tax) 935,844,603 Add: Change in Stock Opening Stock 114,945,031 Closing Stock 191,585,098 Inventory Written Off - Warrantee expenses reclassified - (76,640,067) Less: Purchase value of traded Purchase Value of traded products 500,161,378 Custom Duty 253,552,099 753,713,477 Cost of Sales 677,073,410 Gross Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies as discussed above. Accordingly, this ground raised by revenue stands dismissed. 14. Ground No. 3 has been raised by revenue against disallowance of ₹ 2,22,39,759/-, being deleted on account of advertising and publicity expenses stating that these expenses are revenue in nature. 15. Ld.Sr.DR submitted that Ld.CIT (A) has not considered the detailed reasons given by Assessing Officer. He submitted that the Ld.CIT (A) failed to appreciate that expenses were not incurred wholly and exclusively for purposes of business of assessee and therefore should be considered as capital expenditure. 16. On the other hand Ld.Counsel submitted that assessee incurred expenditure on sponsorship of events, advertisement and newspaper, magazine, electronic media, banners, wall paintings etc to promote and sale of tyres in India. He submitted that Ld.AO disallowed 50% of advertisement expenses on ad hoc basis by holding that such expenditure are towards brand building of entities owning the grant without giving due cognizance to the fact that the direct beneficiaries of these expenses are assessee itself. 17. We have perused submissions advanced by both sides in light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised by revenue against the deletion of ₹ 1,38,26,742/-on account of provision for impairment of stock. 19. Ld.Sr.DR submitted that impairment in the value of stocks under ascertained liability and no evidence has been brought on record to demonstrate provision was created on scientific basis. He submitted that such provision can be allowed only if same are relating to ascertained liability and have been worked out on actual basis. Ld.Sr.DR contended that in case of trading concerns debit notes are issued to suppliers as inferior manufacture tyres should be liability of the manufacturer and not the trader. 20. Ld.Counsel submitted that assessee while making provision for impairment of stock has followed Accounting Standard 2. He submitted that these stocks cannot be treated as an ascertained liability merely for the purposes of making a disallowance. He submitted that the valuation has been as per the Accounting Standard and therefore the disallowance has been wrongly made by Ld.AO on assumptions and surmises. Placing reliance upon view of Ld. CIT(A), Ld.Counsel submitted that the valuation has been provided for as per the provisions of Accounting Standard and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Marketing training and planning: Assistance in developing marketing strategy and determining actions to be taken. Training and personnel services: Assistance in ensuring proper recruitment, training and human resources management. Financial advisory services: Expertise in all the financial aspects of the business of the Beneficiary. Economic and investment research and analysis: Assistance in financial and economic analysis. Credit control and administration: Assistance in the selection of sources of funds. Product distribution planning and logistics services: Assistance in the management of products flows, determine resources necessary to ensure the efficient supply of products in a timely manner. Quality control services: Expertise on quality assurance in all the fields of activity from the development of products to the service to final client. Legal services: Legal services in all matters including but not limited to corporate, tax, intellectual property, commerce, finance, partnership, all legal aspects of business. Information and Telecommunication services: Assistance in technical definition, implementation and maintenance of computers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss decision to avail such services which cannot be questioned by the taxing authorities. The only relevant point is whether the appellant has really availed these services? If appellant had not availed these services and still paid for such things, then it is within the power of the AO to disallow such claims. The reason given by the AO that the appellant has suffered losses due to these payments is not a justification for disallowance of such claims. But the evidence shown by the appellant for availing these services are also not adequate. For the sake of argument, it is possible that all the above cited services (in para 15.1 above) may be made available by the parent company or group companies. That itself does not justify the payment made by the appellant unless and until it has availed such benefits. These management services are apparently from a common pool of expertise. The liability to pay for these services occurs only when the appellant draws from such 'pool'. The mere existence of the 'pool' of expertise elsewhere does not justify the payments. I have gone through the limited evidence produced by the appellant. The e- mails are perused. These e-mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as neither produced any such evidences before authorities below, nor before us to substantiate its claim. We therefore do not find any infirmity in view taken by Ld.CIT(A). Accordingly this ground raised by assessee stands dismissed. 35. Ground No. 3.2 has been raised by assessee for the disallowance of ₹ 5,43,533/-, relating to training expenses on account of non-deduction of TDS. 36. Ld.Counsel placed reliance upon the following table: S. No. Date Party name Currency type Amount (Rs.) Nature of expenses 1. 19/09/06 Michelin Tyres PLC 405 EURO 4,806,214.00 Amount payable against Invoice 028940/20.6.2005 for Euro 107,457 for training of truck road staff TDS deducted @ 15% as per treaty with UK (Total invoice amount 5,654,369.07 Less TDS 848,155) 2. 19/09/06 Michelin Tyres PLC 405 EURO 543,533.98 Amount incurred for training of Michelin Road Staff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that the expenses has been incurred for promoting Trade Name which has been owned by Compagnie Financiere Michelin. He thus held that AMP expenditure by assessee to be an international transaction u/s 92B(1) r.w. Clause (v) of Section 92F. He thus selected comparables for determining adjustment by applying Bright Line method and computed adjustment of ₹ 77,35,524/-. 43.2. Aggrieved by Ld.TPO assessee preferred appeal before Ld.CIT(A) who confirmed adjustment made. 43.3. Aggrieved by Ld.CIT(A) assessee is in appeal before us. 44. Ld.Counsel submitted that revenue failed to establish existence of separate international transaction of AMP. All material necessary for the same is on record and it will kindly be noticed that rightly there is not even a whisper about any lack of information. He submitted that Bright Line test (BLT) is no longer acceptable method for bench marking an international transaction pertaining to AMP expenditure, hence, qualification of adjustment is also not in accordance with law. Impugned expenditure resulted in increase of sales in India is not even disputed. It cannot be denied that such expenditure is directly linked to pushing sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a India Online Ltd. 22.70% 3. Goldmine Advertising Ltd. 3.56% 4. Marketing Consultants Agencies Ltd. 14.96% 5. Needwise Advertising Pvt.Ltd. 1.59% 6. Adbut Pvt.Ltd. 0.30% M e a n : 13.04% 46.4. Ld.TPO has not analysed functional similarity/dis-similarity of these comparables vis- -vis that of assessee. 46.5. Further assessee had suggested following comparables with average margin of 3.57%. Company Name % of Adv exp to sales Falcon Tyres Limited 6.39% India tyre and Rubber Co.(India) Ltd. 3.93% Kesoram Industries Ltd. 1.19% Monotona Tyres 2.26% TVS Srichakra Limited 4.07% Arithmetic mean 3.57% 47. Under such c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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