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TMI Blog2012 (4) TMI 752X X X X Extracts X X X X X X X X Extracts X X X X ..... During the course of assessment proceedings, it was stated that the said expenditure was on the production of films and on models. The Assessing Officer stated that the said expenditure resulted in creating benefit of enduring nature and relying on the decision of Hon'ble apex Court in the case of Alembic Chemical Works Co. Ltd vs CIT(1989) 177 ITR 377(SC), held that the said expenditure is capital in nature and cannot be allowed as deduction under section 37(1) of the Act. Being aggrieved, the assessee filed appeal before the first appellate authority. 4. Before the CIT(A), on behalf of the assessee, it was contended that considering the business of the assessee of manufacturing and trading in cosmetic products i.e. Fast Moving Consumer Goods(FMCG), there is a cut-throat competition and it was imperative for the assessee to come out with a new and better advertisement films on a continuous basis to attract, retain-customers. It was contended that advertisement does not result in creation of any new asset and/or benefit of enduring nature as these advertisements only increases the basic awareness of the products. It was further contended that the advertisements relate to brands w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for promotion films, slides, advertisement films and treated as capital expenditure. In appeal, ld CIT(A) held that the films were in the form of advertisement whose life term could not be ascertained and, therefore, they could not be held as capital expenditure. The Tribunal upheld the order of ld CIT(A). In further appeal before Hon'ble High Court, it was held that the expenditure was incurred in respect of promoting ongoing products of the assessee and, therefore, the expenditure is for promotion of the products of the assessee which is revenue in nature. In the case before us also, the expenditure has been incurred by the assessee for production of 'ad-films', advertisement in electronic and print media, in respect of promotion of its 'on-going products'. Hence, we hold that the said expenditure has rightly been treated as revenue in nature by CIT(A) , which was incurred by the assessee wholly and exclusively for the purpose of its business. We, therefore, uphold the order of ld CIT(A) and reject the ground No.1 taken by the revenue. 7. Ground No.2 is as under: "Whether on the facts and in the circumstances of the case and in law, the ld CIT(A) erred in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in of comparable companies of 0.36% on sales. Accordingly, the TPO applied profit margin of 0.36% on sales in respect of distribution segment and computed the ALP for the purchase of finished goods at Rs. 2,70,81,000 as against the actual value of Rs. 7,60,88,729 to arrive at addition of Rs. 4,90,07,000. The AO made the addition as suggested by TPO. Being aggrieved, assessee filed appeal before the CIT(A). 10. On behalf of the assessee, it was submitted that as per OECD Guidelines and the guidance note issued by the ICIA, RPM is the most appropriate method in case of distribution and marketing activities, especially when the goods are purchased from Associated Enterprise(AE) and resold to unrelated parties. The OECD Guidelines in para 2.22 was referred to, which has been reproduced by ld CIT(A) in para 7.11 of the impugned order, which reads as under: "2.22 An appropriate resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. In contrast, it may be more difficult to use the resale price method to arrive at an arm's length price where, before resale, the goods are further processed or incorporated into a more complic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the arm's length price in case of TNMM is determined in an indirect manner from net margins. A significant weakness of TNMM has been highlighted in paragraphs 3.29 and 3.35 of the OECD guidelines, which states that the net margins of a taxpayers can be influenced by various factors that either do not have an effect, or have a less substantial effect on price or gross margins, because of the potential for variation of operating expenses across enterprises. The appellant has submitted that the TPO made a huge adjustment of approx. 67% to the value of imports results in an anomalous situation. The appellant has further assumed a hypothetical situation where if the net margins of the comparable companies were to be 10.36%, the adjustment made would be of entire purchase value (i.e. more that 100% addition) thereby implying that the appellant should have procured the goods at nil cost/price. This is because net margins is affected by several factors and not only purchase price." 12. Ld CIT(A) after considering above submissions of the assessee has held that RPM is the appropriate method and, accordingly, deleted the entire addition of Rs. 4,90,07,000 made by TPO, inter alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reduced cost of goods sold from net sale. He submitted that the assessee has not reduced operating expenses from cost of goods sold. Ld D.R. submitted that the assessee is incurring huge expenses on selling and distribution i.e. about Rs. 7,62,05,000/- and hence there is a substantial value addition to the goods sold. Therefore, RPM is not the right method to determine ALP. Ld D.R. referred to the decision of ITAT in the case of M/s. Star Diamond Group vs. DIT in I.T.A. No.3923/M/2008 dt.28.1.2011 and submitted that it was held that RPM is the most appropriate method for determining the ALP with respect to AEs if there is no value addition to the goods. When there is a value addition to the product, RPM cannot be adopted. Ld D.R. also referred to para 2.29 of OECD Transfer Pricing Guidelines 2010 and submitted that with reference to RPM it is provided as under: "An appropriate resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. In contrast, it may be more difficult to use the resale price method to arrive at an arm's length where, before resale, the goods are further processed or incorporated into a more complica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2007-08 and to substantiate his submissions, ld A.R. referred to pages 135 to 140 of paper book which is TPO's order for A.Y. 2004-05, page 171 of PB which is order of TPO for A.Y. 2005-06, page-201 for A.Y 2006-07 and page 228 for A.Y. 2007-08 in respect of orders of TPO. He submitted that order of ld CIT(A) may be confirmed. 17. We have carefully considered the submissions of the representatives of the parties, orders of the authorities below as well as TPO's order in assessee's own case for the preceding assessment year, viz; A.Y. 2002-03 as well as succeeding assessment years to the assessment year under consideration, referred hereinabove and also the ITAT order dated 28.1.2011 (supra). 18. The only question for our consideration is as to whether to determine ALP in respect of business activity relating to distribution segment of the assessee with the AE is to be considered by RPM or TNMM. We observe that TPO has applied TNMM and has suggested adjustment of Rs. 4,90,07,000 by showing desired profits margin of comparable companies at 0.36% on sales as the operating margin of the assessee shown is (-) 19.84%. Accordingly, TPO computed the ALP in the purchase of finished good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing. Further, the assessee has also produced certificates from its AEs that margin earned by AEs on supplies to the assessee is 2% to 4% or even less. The department has not disputed the above certificates. Therefore, the TPO's contention that AEs have earned higher profit is not based on facts. On the other hand, we agree with ld CIT(A) that the margin of profit earned by AEs themselves is also reasonable and, therefore, it could not be said that there is shift of profits by the assessee to its AEs at overseas. Considering the facts of the case and also the order of TPO that RPM method has been accepted in the preceding as well as succeeding assessment years to the assessment year under consideration in respect of distribution segment activity of the assessee, we do not find any infirmity with the order of ld CIT(A) in deleting the addition of Rs. 4,90,07,000 made by the AO. Ground No.2 is accordingly rejected by upholding the order of ld CIT(A). 20. Ground No.3 is as under: "Whether on the facts and in the circumstances of the case and in law, the ld CIT(A) erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO has categorically stated that the assessee could not furnish evidence to justify that the assessee has received any benefit from the cost sharing arrangement and, therefore, in ALP study determined the same at Nil. 24. Ld A.R. admitted that fresh documents were submitted by the assessee before ld CIT(A) which were considered while allowing the claim of the assessee and deleting the disallowance made by the AO. He submitted that he has no objection if the matter is restored to the file of TPO to examine the same in the light of benefits if any derived by the assessee against the said payments to DMI. 25. In view of above submissions of representatives of the parties, we consider it prudent to set aside the orders of authorities below and restore the matter to the file of the AO with a direction that he will get it examined from TPO as to whether the assessee has received any benefit under cost sharing arrangement for which assessee made the said payment of Rs. Rs. 1,14,28,409. In case assessee is able to produce requisite documents to the satisfaction of the TPO that the assessee received benefit under cost sharing arrangement, he will decide the claim of the assessee accordi ..... 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