9911796707
TMI Blog2020 (12) TMI 1073X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance on account of impairment of stock - HELD THAT:- AO has disallowed this claim made by the taxpayer on the ground that the provision for impairment of stock was not ascertained liability - when the AO has not questioned the method of recognizing the value of stock at the close of the year i.e as per AS-2 of Accounting Standard and the stock or net realizable value, whichever is less, the disallowance on the basis of surmises is not permissible. Hence, we find no scope to interfere into the findings returned by Ld. CIT(A) and accordingly, aforesaid grounds in A.Y. 2009-10 and A.Y. 2010-11 raised by the Revenue are dismissed. Addition on account of AMP expenses by treating the same as capital expenses - HELD THAT:- We are of the considered view that Assessing Officer has merely made disallowance by following order passed in A.Y. 2008-09 in which taxpayer has incurred identical AMP expenditure for the purpose of Dealer signage and boards; Printing of Brochures, tyre technical guides, merchandise; Product launches; Print advertisements in newspapers and magazines; Seminars and Exhibitions; Hoardings, etc. which was deleted by the Ld. CIT(A) and order of Ld. CIT(A) was uphel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the taxpayer to compute the adjusted gross margin only if it relates to import of finished goods for resale. Gross profit margin computation - HELD THAT:- Following the decision rendered by Hon ble Delhi High Court in case of Soni Ericssion Mobile Pvt. Ltd. [ 2015 (3) TMI 580 - DELHI HIGH COURT] wherein it is held that gross profit margin should be computed after including AMP expenditure and RPM is considered as the most appropriate method for import segment for resale. So far as question of rejecting Brightline test (BLT) by the Ld. CIT(A) in A.Y. 2010-11 is concerned it has been rejected in a number of judgments by the Hon ble High Courts on the ground that brightline test has no statutory mandate for benchmarking AMP expenses. - Shri Anil Chaturvedi, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : Shri Nageshwar Rao, Adv. For the Revenue : Shri Ajit Kr. Singh, CIT-DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER Since common question of facts and law is involved in all the aforesaid cross appeals, the same are taken up together for disposal by way of composite order to avoid repetition of discussion. 2. Appellant, M/s. Michelin India Pvt. Ltd. (he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant s claim of brought forward losses amounting to ₹ 6,50,98,677 collectively for the AY 2005-06 and AY 2006-07, thereby ignoring the fact that the matter is pending before the Hon ble Tribunal for disposal. 2.5 That the Ld. AO erred in levying interest under section 234C of the Act. 2.6 That the Ld. AO has erred in facts and circumstances of the case by initiating penalty proceedings under section 271(1)(c) of the Act, which is bad in law. 3. Grounds pertaining to Transfer Pricing Matters 3.1 That the Hon ble CIT(A) / Ld. TPO erred in law and on facts in inappropriately applying Transfer Pricing provisions to benchmark specific domestic expenses incurred to fulfill Appellant s own business interests, and without appreciating that such unilateral action of the Appellant (to incur such expense) cannot be regarded as an international transaction as per the provision of Section 92B of the Act. 3.2 That the Hon ble CIT(A) / Ld. TPO erred in law and on facts while benchmarking the impugned transaction of the Appellant without conclusively determining a method prescribed under the Act and used the Brightline approach, which is not a method under the Act. 3.3 That the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us claim and have committed another absurdity by applying a mark-up 15% using highly inappropriate data points. ITA No.6128/Del./2014, A.Y. 2009-10- Revenue s appeal 1. Whether on the facts and circumstances of the facts in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 5,31,75,329 1- on account of advertising and publicity expenses stating that these expenses are revenue in nature by completely ignoring the detailed reasons given by AO and without appreciating that the facts that above expenditure was not uncured wholly and exclusively for the purpose for the purpose of business and was also capital in nature? 2. Whether on the facts and circumstances of the facts in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 12,83,663/- on account of impairment of stock ignoring the facts that AO has established that assessee has tried to claim a provision, which is neither ascertained not is in fact, liability of assessee? 3. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law. 4. That the grounds of appeal are without prejudice to each other. 5. That the appellant craves leave to add, alter, amend or forego any ground(s) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order and sub-contract management etc.) as an intangible asset i.e. acquisition of right to use the application, thereby allowing depreciation at the rate of 25% as against the Appellant s claim of 60% in the return of income. 2.3 That the Ld. CIT(A) / AO grossly erred by disallowing the Appellant s claim of brought forward losses amounting to ₹ 26,85,56,128 collectively for AY 2006-07 and AY 2007-08, thereby ignoring the fact that the matter is pending before the Hon ble Tribunal for disposal. 2.4 That the Ld. AO grossly erred in not giving the full credit for tax withheld at source and self- assessment tax deposited by the Appellant while computing the tax demand due from the Appellant. 2.5 That the Ld. AO erred on facts and in law by levying interest under section 234B and section 234C of the Act. 2.6 That the Ld. AO erred on facts and in law by initiating penalty proceedings under section 271(l)(c) of the Act, which is bad in law. 3. Grounds pertaining to Transfer Pricing Matters 3.1 That the Ld. CIT(A) / TPO erred in not following the Central Board of Direct Taxes (CBDT) Instruction 3/2016 and making a transfer pricing adjustment under Chapter X of the Act in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld require multiple comparability adjustments leading to unreliable arm's length price? 2. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding RPM as most appropriate method to compute the arm s length price of AMP expenditure without taking into account that AMP expenditure adds value to the product by enhancing its saleabil ty accordingly, RPM was not most appropriate method to determine arm s length price (ALP) of AMP expenditure i.e. marketing intangibles? 3. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding RPM as most appropriate method to determine ALP of AMP expenditure even when the AMP expenditure effects net profit instead of gross profit? 4. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding RPM as most appropriate method without considering the amended provisions of section 92 of the Income Tax Act, 1961 (the Act) which makes a departure from profit determination to price determination and that AMP services rendered by the AE needs to be benchmarked separately? 5. Whether on facts and in circumstances of the case, Ld. C1T(A) is legally j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleting disallowance of ₹ 4,78,89,110/- u/s 37(1) of the Act on account of advertising and publicity expenses ignoring the fact that the expenses incurred by the assessee have created marketing intangibles the capital asset as defined under Explanation below section 92B(2) of the Act? 12.Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in deleting disallowance of ₹ 9,90,383/- on account of provision for impairment of stocks ignoring the fact that the expenses claimed in profit loss account were in nature of uncertain liability and hence, was not allowable u/s 37(1) of the Act? 13. That the appellant craves leave to add, amend, alter or forgo any ground/s of appeal either before or at the time of hearing to appeal. BRIEF FACTS ITA No. 5774/DEL/2014 OF A.Y. 2009-10- Taxpayer s appeal AND ITA No. 6128/DEL/2014 OF A.Y. 2009-10- Revenue s appeal 3. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Michelin India Pvt. Ltd. is into import and resale (or trading) of tyres for passenger cars, trucks and buses under the brand name Michelin . During the year under assessment, the taxpayer entered into Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . TPO has also applied the mark-up of 13% on the cost of CPM (15% assured markup on all costs minus 2% = 13%) and computed arm s length price of AMP expenses as under :- Arm s length margin for markup Arm s Length AMP Expenses (A) 10,62,67,247 AMP expenses incurred by the assessee(B) 25,08,53,510 Expenditur incurred oncreation of intangibles (B-A) 14,45,86,263 Mark up @ 15% 2,16,87,939 ALP of AMP expenses 16,62,74,202 Reimbursement assured 14,74,77,988.3 Difference 1,87,96,214 8. Assessing Officer while examining the corporate tax perused the notes to account and profit and loss account and noticed that the taxpayer has paid ₹ 54,698,578/- as management fee to its AE i.e. Michelin Asia Pacific Pte. Ltd. ( MAP ). AO perused the service agreement to know the nature of the services provided by MAP to the taxpayer and reached the conclusion that the assessee has incurred huge brought forward cost and establishment cost which include salary and wages of 14.60 crore as compared to 9.21 crore of last year. Taxpayer has also incurred legal and professional expenses of ₹ 2.58 crore as against 1.43 crore of last year, travelling expenses of directors and others to the tune of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement, Marketing and Promotional (AMP) expenses to expand the reach of the AE s brand in India. The taxpayer has also created marketing intangible in favour of its AE and called upon the taxpayer to explain as to why the huge AMP expenses should not be subjected to benchmarking as international transaction. 14. Declining the contentions raised by the taxpayer, the Ld. TPO reached the conclusion that assessee being a distributor has undertaking the marketing activities on behalf of its AE to create intangible in its favour and has not paid any royalty and after applying the Resale Price Method (RPM) on the trading activities treated the incurring of AMP expenses and the resultant creation of marketing intangibles as a separate international transaction and benchmarked the same separately. Ld. TPO selected five companies in A.Y. 2010-11 as comparables namely Dunlop India Ltd. ; T V S Srichakra Ltd. ; Krypton Industries Ltd. ; Eco Wheels Private Limited ; Falcon Tyres Limited. Having AMP/ Sales ratio of 3.05% as against 11.30% in case of the taxpayer which is into similar activities. 15. Ld. TPO applied bright line test and computed the arm s length of AMP i.e. the bright line at 3.05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no. 1 of both the appeals are general in nature, hence, need no specific findings. Ground No. 2.1, 2.2, 2.3 of ITA No. 5774/Del/2014, A.Y. 2009-10 Taxpayer s appeal AND Ground No. 2.1, 2.1.1, 2.1.2, 2.1.3, 2.1.4, 2.1.5 of ITA no. 3167/Del/2017, A.Y. 2010-11 22. Ld. AR for the taxpayer challenging the impugned disallowance of management fee of ₹ 5,46,98,578/- and ₹ 8,17,64,492/- of AY. 2009-10 and 2010-11 respectively by the Ld. CIT(A)/ AO contended that this issue has already been decided in favour of taxpayer in its own case in ITA No. 2415/Del/2014, A.Y. 2008-09. However, Ld. DR for the revenue filed written submissions which have been made part of the judicial file contended that facts of cases at hand are largely distinguishable than the case decided in AY 2008-09 and further contended that the deficiency and shortcomings brought out by the department in the documents/ evidences in form of service agreement and mail exchanges furnished by the assessee have not been appreciated by the tribunal. However, on putting specific queries the Ld. DR has failed to bring on record distinguishable facts of the cases at hands vis- -vis case of the taxpayer of A.Y. 2008-09. 23. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e its operation in a more efficient way. 9. Reliance was placed on various decisions for the allowability of the said claim. The Assessing Officer notes as under:- .In the above mentioned Agreement, it appears that the assessee has received advices in the matter of variety of fields, which include general business and administration service, economic planning and accounting services, industrial assessment services, marketing training and planning, training and personnel services, financial advisory services, economic and investment research and analysis, credit control and administration, product distribution planning and logistics services, quality control services, legal services, information telecommunication services .. 10. The Assessing Officer observed that submissions of the assessee were not correct as the assessee had incurred huge personnel cost and establishment cost. He also observed that from the details filed, it appears that the assessee had full team of management consisting of Mr. Jean Paul Caylar as Director and Mr. Herve Dub, as Director. The assessee had incurred huge expenses on their salaries and other perquisites. The Assessing Officer further observed that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the TPO had accepted the transaction to be at arm s length. It was further pointed out by the Ld.AR that the expenses were incurred from year to year; and once the expenditure has been incurred, it is not necessary to prove whether any benefit arose to the assessee or not. He further pointed out that the department case was that the evidences filed by the assessee for availment of support services were not sufficient and adequate. In such scenario, he stressed that the same does not warrant entire disallowance of expenses. He further stated that the losses had reduced over the period of years hence, the assessee had benefited from availment of such support services from its AE. The Ld.AR then referred to the additional evidence filed by the assessee. He also pointed out that though the Tribunal had decided the issue against the assessee but the same was on the premises that only one bill for the month of March 2008 was filed. He also brought to our notice that Miscellaneous Application was filed and pending against the order of the Tribunal relating to Assessment Year 2007-08. However, he stated that he was ready to argue the appeal for the instant assessment year. 13. The Ld.DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation and maintenance of industrial tools. 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 source 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 comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment, with such decision of businesssman to hold that the group companies were being paid in the name of management fee, though there were sufficient management personnel available. Such observation cannot be the basis for benchmarking the allowability of the expenditure in the case of the assessee. The benefit, if any, arising to the assessee against the availment of such support services is not necessary to be proved by the assessee. The assessee in its wisdom to carry on its business, where the business has worldwide presence, needs to keep its standards high and to maintain similar terms and conditions, not only for running business but for providing services to customers, has to avail such management advices and services from its AE. 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 Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2.4 of ITA No. 5774/Del/2014, A.Y. 2009-10 Taxpayer s Appeal 25. AO/ CIT(A) have disallowed set off of brought forward losses to the tune of ₹ 6,50,98,677/- collectively for A.Y. 2005- 06 and A.Y. 2006-07. AO/CIT(A) have disallowed set off losses by ignoring the fact that the matter is pending before the Tribunal for disposal. So, this issue is remitted back to the AO to verify the facts and grant the set off claimed by the assessee if admissible. Ground No. 2 of ITA No. 6128/Del/2014, A.Y. 2009-10 Revenue s Appeal AND Ground No. 12 of ITA No. 3125/Del/2017, A.Y. 2010-11, 26. Ld. DR for the revenue challenged the impugned deletion of addition of ₹ 12,83,663/- and ₹ 9,90,383/- for A.Y. 2009-10 and 2010-11 respectively by the Ld. CIT(A) by relying on the order passed by the Tribunal. However, Ld. AR for the taxpayer brought to the notice of the bench that this issue has also been decided by the Tribunal in taxpayer s own case in A.Y. 2009-10. This fact has not been controverted by the Ld. DR. 27. We have perused the order of the Co-ordinate Bench of Tribunal passed in assessee s own case bearing ITA No. 2946/Del./2014 for A.Y. 2008-09 in favour of the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co-ordinate Bench of the Tribunal, we are of the considered view that when the AO has not questioned the method of recognizing the value of stock at the close of the year i.e as per AS-2 of Accounting Standard and the stock or net realizable value, whichever is less, the disallowance on the basis of surmises is not permissible. Hence, we find no scope to interfere into the findings returned by Ld. CIT(A) and accordingly, aforesaid grounds in A.Y. 2009-10 and A.Y. 2010-11 raised by the Revenue are dismissed. Ground. No. 1 of ITA No. 6128/Del/2014, A.Y. 2009-10 Revenue s Appeal AND Ground No. 10 11 of ITA No. 3125/Del/2017 A.Y. 2010-11 29. Revenue has challenged the deletion of addition of ₹ 5,31,75,329/- and ₹ 4,78,89,110/- for A.Y. 2009-10 and 2010- 11 respectively by Ld. CIT(A) made by the AO on account of advertising and publicity expenses by treating the same as revenue in nature. Ld. AR for the assessee contended that this issue has also been decided in favour of the taxpayer by the tribunal in taxpayer s own case for A.Y. 2008-09 in ITA No. 2415/Del/2014 and this fact has not been controverted by the Ld. DR. 30. We have perused the order passed by the Co-ordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as upheld by the Hon ble Delhi High Court wherein the advertisement expenses were treated as revenue expenses. The CIT(A) applied the said ratio also and allowed the claim of the assessee. 28. The Ld. DR for the Revenue pointed out that in Assessment Year 2007- 08, the disallowance was made in the hands of the assessee on account of TP adjustment whereas in the present case, the aforesaid disallowance was made u/s 37(1) of the Act hence, the decision of Tribunal for the preceding year is not binding. 29. The Ld.AR for the assessee pointed out that the issue raised was whether any adhoc disallowance can be made in the hands of the assessee out of advertisement and publicity expenses which had been struck down by the Hon ble Delhi High Court in the case of Nestle India Ltd. vs DCIT (supra). 30. We have heard the rival contentions and perused the record. The assessee was engaged in the trading of world renowned tyres of cars and the expenditure made by the assessee benefitted its business in India. The issue which arises vide Ground No.2 raised by the Revenue is against the allowance of particular expenditure or its part disallowance as made by the Assessing Officer. The expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductible expenditure, one has to take into consideration questions of commercial experience and principle of ordinary commercial trading. Another test is whether the transaction is properly entered into as a part of the Assessee legitimate commercial undertaking in order to facilitate the carrying on of its business and it is immaterial that the third party also benefits thereby ..; 33. Further, the Delhi Tribunal of ITAT in Nestle India Ltd. vs DCIT 111 TTJ 498 (Del. Trib.) had held as under:- 22 .. The expenditure incurred by the Assessee company on advertisement/sales promotion of some Nestle Products in India may give rise to certain benefit to Nestle SA, but this cannot be a ground to disallow the claim of the Assessee, once it is established that the expenditure in question has been incurred by the Assessee for the purpose of business of the Assessee in as much as the expenditure by the Assessee on advertisement/sales promotion has direct nexus with the earning of income by the Assessee. The appeal of the Revenue against the same has been dismissed by Hon ble Delhi High Court. 34. In the entirety of the facts and circumstances of the case, the entire expenses on advertisemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee paid to Oracle by clubbing the said payment with computer and software. So, Ground No. 2.2 of ITA No. 3167/Del/2017, A.Y. 2010-11 raised by the taxpayer is allowed. Ground No. 2.4 of ITA No. 3167/Del/2017, A.Y. 2010-11 Taxpayer s Appeal 34. Ld. AR for the taxpayer contended that AO has not given the full credit for tax deducted at source (TDS) and self-assessment tax deposited while computing the tax demand. We are of the considered view that when taxpayer has brought on record the evidence for deducting the TDS and self tax deposited while computing the tax demand the AO is directed to verify the facts and to provide full credit of TDS and self-assessment tax deposited by the taxpayer in its computation of income. Consequently, Ground No. 2.4 ITA No. 3167/Del/2017, A.Y. 2010-11, Taxpayer s Appeal is determined in favour of the assessee. TRANSFER PRICING ISSUES Ground No. 3.1 to 3.8 of ITA No. 5774/Del/2014, Taxpayer s Appeal AND Ground No. 3.1, 3.1.1 to 3.1.4 of ITA No. 3167/Del/2017, A.Y. 2009-10 and A.Y. 2010-11 respectively Ground No. 1 to 9 of ITA No. 3125/Del/2017, A.Y. 2010-11 Revenue s Appeal 35. Taxpayer in ITA No. 5774/Del/2014, A.Y. 2009-10 by moving two separate appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So, both the applications moved by taxpayer are allowed without prejudice to the merits of this case. 39. So far as Ground No. 3.1 to 3.8 and additional Ground No. 3.9 raised by taxpayer in A.Y. 2009-10 are concerned the taxpayer has brought on record additional evidence giving working of adjustment on the basis of RPM analysis by following order passed by CIT(A) in A.Y. 2010-11 by relying upon decision of Soni Ericsson Mobile Pvt. Ltd. 374ITR 118, rendered by Hon ble Delhi High Court which need to be examined by the TPO. Since, revenue is required to follow the rule of consistency in the identical facts and circumstances of the case these grounds are remitted back to the TPO to decide afresh in view of additional evidence brought on record by the assessee by following order passed by Ld. CIT(A) in taxpayer s own case for A.Y. 2010-11 which is based upon the decision rendered by Hon ble Delhi High Court in case of Soni Ericsson (supra). 40. However, the Ld. AR for the taxpayer contended that freight need not considered for adjustment as it is outward freight and not freight for import of material distributed, hence not operating from transaction perspective. We are of the consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered as international transaction as per the decision of Hon ble Delhi High Court in various decision such as Whirlpool India (ITA No. 228/2015). I am relying on the decision on the jurisdictional High Court in the case of Sony Eracssion Mobile Pvt. Ltd. cited at 374/14- 12-11 where Hon ble High Court has held that gross profit margin should be computed after including AMP expenditure when RPM is considered as most appropriate method. In Present case also RPM is considered as the most appropriate method for import segment for resale. Accordingly the decision of Hon Delhi High Court in the present case will apply. The relevant portion of High Court is reproduced as under:- However, it would be wrong to assert and accept that gross profit margins would not inevitably include cost of AMP expenses. The gross profit margins could remunerate an AE performing marketing and selling functions. This has to be tested and examined without any assumption against the assessed. A finding on the said aspect would require detailed verification and ascertainment. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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