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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 ..... f Rs. 2,22,39,759/- on account of advertising and publicity expenses stating that these expenses are revenue in nature by completely ignoring the detailed reasons given by the AO and without appreciating the fact that the above expenditure was not incurred wholly and exclusively for the purpose of business of the assessee and was also capital in nature. 4. Whether in the facts and circumstances of the case, the ld.CIT(A) erred in deleting the disallowance of Rs. 1,38,26,742/- on account of impairment of stock entirely relying on the submission of the assessee by completely ignoring the detailed reasons given by the AO and without appreciating the fact that no evidence filed by the assessee that the above expenditure was an ascertained liability? 5. Whether in the facts and circumstances of the case, the ld.CIT(A) erred in deleting the disallowance of Rs. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be deleted. 3.3 The Learned AO has erred in disallowing an amount of Rs. 2,297,795 related to demurrage charges, on account of non crystallization of liability and thereby considering the same as contingent in nature, irrespective of the fact that such amount has been paid in respect of goods lying with the port authorities, in order to keep the goods in the safe custody beyond the lay time. Thus the expenses were in the nature of compensatory rental. 4. Grounds pertaining to Transfer Pricing Matters 4.1 That the Learned TPO / Learned CIT(A) have erred both in law and on facts in inappropriately applying Indian Transfer Pricing regulations to determine the arm's length price for amounts paid domestically to independent third parties by the Appellant to fulfill its own business interests. The Learned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as has been laid out in the decision of Hon'ble Special Bench in the case of M/s L.G. Electronics India Private Limited. 4.7 Without prejudice, That the Learned TPO / Learned CIT(A) have erred on facts and in circumstances of the case by conveniently ignoring that the Appellant has received voluntary reimbursement to the extent of Rs. 35,121,600 for such impugned AMP expenses incurred for the subject year, and which has been duly offered to tax in the return of income for FY 2010-11 i.e. the year in which it is received. * Thereby Learned TPO / Learned CIT(A) failed to grant much required relief to the extent of Rs. 35,121,060 while computing the adjustment on AMP expense. In this regard, the application seeking rectification under section 154 of the Act has been already filed before the 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 exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Transfer Pricing Officer (TPO) determined (ALP) of international transaction involved in import of finished goods and other activities mentioned in item 1 to 4 in above table by using TNMM as most appropriate method and Operating Profit/ Operating Revenue (OP/ OR) as (PLI) at entity level. He has taken 5 comparables selected by assessee for this exercise. They are as follows: Table-2: Company Name % of Adv exp to sales Falcon Tyres Limited 6.39% 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le uncontrolled transactions. Ld.Sr.DR submitted that gross profit margin earned by the tested party can then be compared with gross profit margin of comparable which has performed similar functions and has calculated gross margin after 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, distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having regard to nature of transaction or class of transactions or class of associated persons or functions performed by such persons or such other relevant factors. Amongst five specific methods, include, RPM and TNMM. Sub-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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her on facts of present case it is observed that assessee has used 6 comparables and the PLI chosen was gross profit margin being GP/sales. 13.4. Ld. CIT (A) while dealing with the issue has observed as under: "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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin 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 258,771,193 Gross Margin 27.65% 4.7. The appellant had submitted the notes to accounts of all these comparables in the paper book. I have verified the same with the help of these notes to accounts. The gross profit margin is arrived at in the same way as given in ICAI guidelines i.e. the excess of purchases of goods sold over the cost of goods sold before taking into account administration, selling and financial expenses. This principle is applied to both to the comparables as well as the financials of the appellant. In the case of Kesoram Industries Limited and India tyr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 records placed before us. 17.1. We have perused observations of Ld. CIT (A) which is as under: "14.4. I have considered the issue. There is a double addition in the order of the AO. If the AMP expenditure is disallowed in totality, there can be no question of TP addition. Since, the matter was referred to the TPO and TPO has given his considered view on AMP expenditure, which has resulted into addition in this case. I see no reason why AO should disallow the same expenditure all over again. The addition on account of determination of ALP of international transaction under AMP is sustained in this order as well. 14.5. Further, the AO has stated that half of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 should not be held as under ascertained liability. 21. We have perused submissions advanced by both sides in the light of the records placed before us. 22. From submissions filed by assessee before authorities below, it is observed that assessee has valued at inventory based on accounting standard 2 after reducing recorded value of closing stock. The net value of closing stock was then taken to the balance sheet. In our considered opinion this is a recognised method of valuation prescribed under the Companies Act and also recognised under section 145 of the Income Tax Act. We are therefore in conformity with the view taken by Ld. CIT (A). Accordingly this ground raised by revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and telecommunications systems. Support operations management in identifying process evolution requirements and in implementing organizational changes. 31. He submitted that assessee received variety of services to enhance its commercial capabilities and compete against market competitors. Ld.Counsel submitted that services availed during the year are purely genuine business assistance needed by assessee to conduct its business operations in more efficient manner. 32. Ld.Counsel submitted that for purpose of allowability of expenses under section 37 only requirement is to establish that expenses has been incurred for purposes of business. Further it has been submitted that there is no denial by authorities below that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment 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-mails are so routine in nature that it is hard to believe that the same justifies the payments made by the appellant to its AE. For example, the e-mail dated 12.19.2006 along with its chain e-mails talks about a quarterly board meeting and circulation of the resolutions for confirmation and issue of power of attorney in this regard. The e-mail dated 12.26.2006 talks about copy of the Income Tax statement of Mr. Harve Richart and Mr. Harve Coyco. The email dated 12.19.2006 from Katherine Chia talks about tenancy agreement. The e-mail dated 17.11.2006 from Vinod A. Bidkar talks about HDFC bank account and how this bank account is beneficial. Handpicked evidence produced in the so called samples - show that it has no evidentiary potential to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Total 5,349,748 36.1. Ld.Counsel submitted that, amount represents impact of foreign exchange fluctuation which resulted in a loss, while making payment, on which TDS was not to be deducted. 37. Ld.Sr.DR on the contrary submitted that as per Rule 26, read with Section 195 of the Act, assessee is to deduct TDS at the time of credit of income to the account of payee or actual payment, whichever is earlier. 38. We have perused submission advanced by both sides and records placed before us. 39. It is observed that amount payable as on 19/09/2006 as per Invoice dated 20.06.2005 was Rs. 4,806,214/-. But assessee deposited Rs. 5,43,533.98 on 19/09/2006. It is also observed that assessee deducted 15% TDS on Rs. 56,54,369.07 which Ld.TPO accepted and did not deduct TDS on Rs. 5,43,533.98. There is nothing on record produced by assessee prove that Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing sales of MIPL" and bring direct benefit to MIPL and hence bring no direct benefit to the brand of the AE. It was submitted that on this premise itself the entire adjustment deserves to be deleted. 44.1. Ld.Sr.D.R. placed reliance on revised application dated 10.06.2018 filed by assessee on 21.2.19 wherein assessee at page 4 below the computation of Gross Margin of assessee has submitted as under. "In this reference, the Appellant also wishes to submit the audited financial statements for FY 2010-11 (as Annexure I), evidencing the reimbursement amounting to Rs. 3,51,21,060/- received by the Appellant for advertisement and marketing expenses incurred for FY 2006-07." 45. We have perused submissions advanced by both sides in light of records placed before us. 45.1. The submission by assessee reproduced hereinabove shows that entire AMP expenditure raised in the present appeal has been reimbursed by AE during F.Y. 2010-11. This itself makes it an international transaction. 45.2. We therefore do not find any 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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