2017 (3) TMI 1162 - AT - Income Tax

TPA - AMP expenses addition - Held that:- TP Regulations would be applicable to any transaction which is held to be an international transaction. In the instant case, the AO has referred the international transaction in the case of purchase of raw materials, finished goods, purchase of goods, purchase of software management consultancy reimbursement for TP Study and to determine the ALP. During the TP proceedings, the TPO found that there was a huge AMP spent and brought it under the purview of international transaction. The AMP spent was not obligated by AE. The expenditure was incurred by the assessee as sales promotion expenses for the purpose of it’s own cause. According to the assessee, there was no binding agreement to promote the brand of Nippon India by the assessee. The Revenue could not demonstrate that there was an agreement or arrangement or action of concert formal or informal to promote the brand of Nippon in India and to spend towards AMP. The Revenue has not proved that the benefits of AMP expenses are for improving the Nippon brand in India who is the economic owner of Nippon Japan. Therefore, we hold that the AO/TPO/DRP is not correct in making upward adjustment of brand promotion expenses and the mark-up on brand promotion.AMP spent of the assessee is not an international transaction and the addition is deleted - Decided in favour of assessee

TNMM is most appropriate method need to be confirmed.

Exclusion of Asian Paints Ld. as comparables - Held that:- It is seen from the TP study of the assessee that the assessee has selected the Asian Paints Ltd as comparable and worked out the gross margin. The TPO has retained the comparable selected by the assessee. The assessee has not brought on record any other factor which has material effect and can influence the margin such as functions and Risks except the turnover. Hence we do not find any reason or merit in the assessee’s contention for exclusion of Asian Paints Ltd., as comparable. The case law relied upon by the assessee is distinguishable on the set of facts discussed above. Therefore, we do not find any reason to exclude the Asian Paints Ld., as comparables and this ground of appeal is dismissed.

Idle capacity adjustment - Held that:- The assessee has utilized the capacity to the extent of 28% against the average utilization by the comparable companies @71%. Idle capacity is one of the factor which can influence the margins substantially. The reasons for non-utilization of capacity required to be verified with respect to the resources available and the functions performed by the comparable companies. The assessee is in manufacturing and trading and the comparable companies are engaged in manufacturing activity. Therefore we direct the AO to make necessary adjustments for idle capacity taking in to consideration of all the factors. Accordingly, the issue is remitted back to the file of A.O to consider the submissions of the assessee and to allow the idle capacity adjustment.

Adjustment of customs duty - Held that:- The assessee has not furnished the pricing model of the products. Assessee has not furnished the basis of working its price and comparability cost of forming part of the cost basis. Prima facie, margins at gross levels are shown that assessee is able to absorb as part of its selling price, the raw material cost, which includes the BCD element. Only the down line expenses are not able to be absorbed by gross profit leaving an arm’s length return to assessee which is comparable to profit margin of peers industry. In the case of the assessee, the assessee himself has selected the comparables and stated in the TP document that the gross margin is more than the comparable companies. Since, the assessee himself claimed that selected comparables and worked out the gross profit margin was more than at arm’s length, we do not find any reason to make adjustment towards the customs duty. This ground of the assessee is dismissed.

Addition under the head business promotion expenses - Held that:- The expenses were disallowed for non production of bills and vouchers by the AO. Before us also the A.R did not produce any evidence. Therefore, the addition made by the AO is confirmed.