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2018 (3) TMI 1900 - ITAT DELHITP Adjustment - addition on account of transfer pricing adjustment in Advertisement, marketing and promotion (AMP) expenses - direction of DRP requiring the AO to consider domestic brand owners as comparable for the purpose of computing bright line limit - HELD THAT:- Similar issue came up for consideration before the Tribunal in the assessee’s own case for the immediately preceding three assessment years, namely, 2006-07 to 2008-09. Vide order [2017 (6) TMI 873 - ITAT DELHI] on the assessee’s request, remitted the matter to the file of Assessing Officer/TPO for taking a fresh decision on the existence or otherwise of the international transaction of AMP expenses and, then, determining the ALP of such international transaction of AMP expenses, if it is found to exist. The Tribunal further directed that selling expenses should not be considered within the ambit of AMP expenses. The ld. AR fairly conceded that the issue of AMP expenses for the instant year may also be restored to the file of Assessing Officer/TPO for taking a fresh decision in line with the directions given by the Tribunal for the preceding three years. The ld. DR did not raise any objection to it. Addition on account of transfer pricing adjustment - `Payment of consultancy expenses’ in relation to its Distribution operations - HELD THAT:- Details have been given in respect of 12 payments which apparently show that most of the services provided by the expats are in connection with the setting up of the factory. At the same time, it is also vivid that some services have been rendered by the expats qua the running business of Distribution, which are of the revenue nature. It goes without saying that an expenditure incurred in relation to setting up manufacturing unit cannot be considered as of revenue nature and the same has to be capitalized. Since complete details of such amount are not available, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of Assessing Officer/TPO. We order accordingly and direct him to examine each and every item of payment of consultancy fee and, then, capitalize such amounts as relate to the setting up of manufacturing unit. Since the DRP has simply directed the TPO/A.O. to capitalize the expenditure relating to manufacturing unit and the ALP of the same has neither been directed to be nor actually determined by the TPO/A.O., we cannot enlarge the controversy by directing the authorities to determine the ALP of the amount to be capitalized. Once the international transaction of `Payment of consultancy fee’ is segregated from the international transactions of `Manufacturing segment’, the former transaction under consideration needs to be separately benchmarked. Considering the nature of the international transaction of receipt of consultancy services, the same, in our considered opinion, needs to be more appropriately benchmarked on a comparison with another similar transaction of service under the CUP method rather than on profit level under the TNMM. We, therefore, approve the application of the CUP as the most appropriate method for determining the ALP of the remaining amount of consultancy expenses paid after excluding the amount to be capitalized as relating to the setting up of manufacturing unit in terms of our foregoing discussion. Addition u/s 37(1) - AO in his draft order has taken the ALP of the international transaction at Nil on the basis of such recommendations of the TPO without carrying out any independent investigation for the deductibility or otherwise of such a payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. [2014 (5) TMI 897 - DELHI HIGH COURT], the TPO was required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction with the ratio laid down in Cushman & Wakefield (supra). In these circumstances, we set aside the impugned order on this score and send the matter to the file of AO/TPO for deciding it afresh. Addition on account of `Payment of consultancy and training expenses’ treating the same as not at ALP - not allowing `Capacity adjustment’ in the `Manufacturing segment’ - HELD THAT:- We find that complete financials of all the comparable companies are not available on record. Thus, it is not possible at our end to work out the amount of capacity adjustment in the manner discussed. Ergo, we set aside the impugned order and direct the TPO/AO to work out the amount of capacity utilization adjustment afresh in terms of our above observations. It is made clear that the capacity adjustment will be considered in the hands of the comparables by taking into account `Installed capacity’ vis-à-vis the actual production and not the `Licensed capacity’ vis-à-vis the actual production. Further, the production on double shift or triple shift basis in case of certain comparables also needs to be suitably adjusted. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.
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