TMI Blog2020 (3) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of Rule 10B(1)(e) of the Rules. There is no specific provision in Rule 10B(1)(e)(iii) of the Rules, which would impede the adjustment of the profit margin of the tested party. As far as rate of custom duty is concerned, it can be easily taken from the official website of the European Union and we find that the rate at the relevant point of time was 4.5% whereas the custom duty paid by the assessee accounts for more than 75% of the purchase value and 50% of the total cost of goods sold. In our considered opinion, such difference on account of custom duty paid by the assessee and that existing in the location where comparable companies operate, cannot be ignored. Considering all these facts in totality, we decline to interfere with the findings of the ld. CIT(A). Ground No. 1 is, accordingly, dismissed. Addition on account of advertisement and business promotion - AO was of the firm belief that the advertisement expenses were capital in nature and bring enduring benefit to the assessee and accordingly, amortized the expenditure in three year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des in-store promotions, sales promotions and public relations campaign. Swatch Group India relies solely on the print media, and does not use television or radio as a medium. 5. Group India directly sells to the retailers. There are no subdistributors involved in the entire network. Swatch Group India supplies to approximately 160 retail outlets in India. It is also responsible for providing after sales support and service facility to its dealers. It has a network of 13 service centres all over the country. Its India s headquarters at New Delhi office is the mother service centre for Omega, Longines, Swatch and Tissot. The standard warranty for Swatch Group watches is two years on the watch mechanics. The warranty does not extend to the exterior of the watch and holds good only if the guarantee card is complete with vendor s name, date of sale and other details specified therein. 6. During the year, the assessee has undertaken the following international transactions: Sl No. International Transactions Method Value (In Rs.) 1 Import of watches and spares for resale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing stock 98,957,492 Cost of Goods Sold 296.367.509 Gross Profit 104.698.187 Gross Margin 26.10% 9. The TPO observed that in the purchase value of traded products, purchase value of traded product has been used net of marketing subsidy. The marketing subsidy is of ₹ 3,43,44,890/-. In audited profit and loss account, pricing support/subsidy has been shown under the head Service Income and for calculation of accounting ratio, this marketing subsidy has not been taken either in the sales or in the cost of sales. Accordingly, a show cause notice was issued to the assessee asking it to justify its claim of aggregation of marketing subsidy with cost of import, wages and sale thereof. 10. In its reply, the assessee explained that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Calvellini pietro Spa 28.11% 28.99% 3 DA RO Dassi Roveda Spa 32.24% 29.04% 4 Faro Spa 14.16% 11.35% 5 Italgala Spa NA 18.43% 6 Promotional Spa 18.27% 19.85% 7 Songa Antonio Spa 22.34% 20.37% Average Gross Profit Margin 28.25% 26.24% 16. The TPO finally concluded by holding that the GP margin of comparables identified as above, will be used for bench marking of international transaction and ALP was determined as under: G.P. sales of comparable - 28.25% = ALP Sales of Swatch India - 40.26,80.400 Arm s length GP - 0.2825X40.26,89, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. However, the ld. CIT(A) further observed that although the use of foreign comparables has been agreed, but it is essential to undertake reasonable adjustments to establish comparability between the foreign comparables used and the assessee. One of the adjustments related to customs duty. The ld. CIT(A) was of the opinion that the TPO while selecting the foreign comparables did not consider the differences in custom duty rate prevalent in India vis a vis Italy. 22. The first appellate authority observed that the high custom duty rates on luxury watches in India accounted for 32.37% of the net sales of the assessee and custom duty paid by the assessee on the import of watches and spares was above 50% of the total cost of goods sold. According to the ld. CIT(A), high custom duty rates in India are bound to have significant bearing on the gross margins as well as operating margins of the assessee vis a vis Italian comparables. 23. Accordingly, the ld. CIT(A) was convinced that high cost of importing goods into India should be adjusted for, since the foreign comparables operating in Italy enjoy the benefit of NIL or negligible customs duty and do not have to spend the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well within his powers for making adjustment himself. The ld. counsel for the assessee stated that if there is any error in calculation of the ld. CIT(A), the ld. DR should have pointed out the same and there is no need for restoration of the issue to the file of the TPO. 27. We have given thoughtful consideration to the orders of the authorities below. There is no dispute in so far as the application of the most appropriate method is concerned. The assessee has used Resale Price Method as the most appropriate method in bench marking its international transactions and the TPO has accepted the same. In our considered view, the entire quarrel revolves around the adjustment of custom duty given by the ld. CIT(A) in the hands of the appellant. Reliability and accuracy of adjustment would largely depend upon the availability of reliable and accurate data. 28. In our considered opinion, for certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party whose d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned that the expenditure was primarily incurred by the assessee on the visuals, banners and other visibility material installed at retailers premises including business expenses for holding retailers conferences, participation in exhibitions, in-store expense for various new stores opened during the year, printing of banners and leaflets, etc. It also included expenses on advertisements in newspapers, magazines and electronic media in India. It was strongly contended that since the assessee is engaged in distribution of watches of various Swatch Group brands in India viz. Omega, Rado, Tissot, Longines and Swatch, it is imperative for the assessee s business to have a marketing strategy in place to promote distribution of products dealt in. 33. Therefore, any expenditure incurred on marketing strategy essentially to promote business objectives and sale of products dealt in is legitimate business expenditure which was incurred in the ordinary course of assessee s distribution business and hence it is purely a revenue expenditure. It was explained that such expenditure on advertisement is an ongoing and continuous process. In a competitive scenario, it would be difficult to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbassadors as mentioned elsewhere, we are of the considered opinion that the advertisement spend by the assessee is peanuts to the face value of these celebrities. Further, we find that similar issue arose in A.Y 2005-06 and the matter travelled upto the Hon'ble High Court of Delhi. The relevant findings of the Hon'ble High Court read as under: The return filed by the assessee for the A.Y. 2005-06 had reflected expenditure of ₹ 6,38,01,509/- incurred on advertisement and publicity of its brand namely swatch for promotion of its business. It is an admitted case that Assessee Company operates in the medium and high end luxury watch segments in India. The expenditure was incurred by the assessee on sponsorship of the events, newspaper/ magazine/electronic media advertisement, banners, wall painting and hoardings etc. The Assessing Officer was of the view that such expenditure will give benefit of enduring nature to the assessee because the expenses will help the assessee to promote its brand and products for a longer period. On this premise the Assessing Officer amortized the total expenses for three years allowing deduction of 1/3rd of expenses only for the year i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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