TII Instant Update - 2017-TII-INSTANT-ALL-425

2017-TII-29-ITAT-AHM-INTL

KOREA SOUTH EAST POWER COMAPNY LTD Vs DDIT: AHMEDABAD ITAT (Dated: February 10, 2017)

Income Tax - Sections 143(3), 144C, 44BBB & India-Korea DTAA - Article 13.

Keywords: Fees for technical services - consultancy services & commissioning activities

The assessee is a power company. By way of this appeal, the assessee had challenged correctness of the order passed by the Deputy Commissioner of Income Tax (International Taxation), Rajkot, under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2011-12. The DCIT had noted that the assessee was providing only technical consultancy services to CGPL and is not engaged in any commissioning activities.

Having heard the matter, the Tribunal held that,

Whether an assessee can enjoy the deduction benefits u/s 44BBB when it provides only technical consultancy services and not performs commissioning activities - NO: ITAT

Whethere such income earned as fees for technical services is liable to be taxed under Article 13 of the DTAA - YES:ITAT

+ we have also noticed that none appeared for the assessee before the Dispute Resolution Panel as well. As far as assessee’s claim of section 44BBB is concerned, we have noted categorical finding of the AO to the effect that "the assessee is providing only technical consultancy services to CGPL and is not engaged in any commissioning activities". There is nothing before us to controvert this finding. In our considered view, therefore, the applicability of section 44BBB was rightly declined by the authorities below. Once we come to this conclusion, and in the absence of anything else to establish the contentions of the assessee, we see no infirmity in the action of the authorities below in taxing impugned receipts as fees for technical services under Article 13 of India South Korea DTAA. We, therefore, confirm the impugned action of the authorities below and decline to interfere in the matter. In the result, appeal is dismissed.

Assessee's appeal dismissed

2017-TII-63-ITAT-MAD-TP

NIPPON PAINT INDIA PVT LTD Vs ACIT: MADRAS ITAT (Dated: February 10, 2017)

Income Tax - Sections 92(1), 92B, 92C(1), 143(3), 144C, 271(1)(c) & Rule 10B

Keywords: AMP expenses - brand promotion - excess costs - reimbursement by AEs - mark up costs - Bright Line Test - marketing intangible

The assessee company is engaged in manufacturing-cum-trading of paints, varnishes, primers and other related chemicals. AO found that assessee had entered into various international transactions with its AE. The above transactions were referred to TPO to determine ALP of the International transactions. As per Form No.3CEB, assessee made TP study, FAR Analysis and adopted the RPM as most appropriate method for international transaction and arrived at gross profit margin of comparables at 13.40 % as against the assessee’s gross profit margin of 27.02% and concluded that all the international transactions were at arm’s length and hence no adjustment was made. TPO has gone through the details furnished by assessee and reworked PLI of the tested party at (-) 15.67%. TPO made independent study of TP study and found that assessee had not maintained segmental finances for manufacturing and trading activities separately. Assessee purchased raw materials and further used partly in manufacturing activity and not directly sold in the open market. In such scenario, assessee could not explain the applicability of RPM in international transaction to TPO. Hence, TPO held that TNMM was most appropriate method for computing ALP in relation to the international transaction and selected 3 companies as comparables. Against the comparable margin of 10.36% the tested Party/the assessee’s operating margin was (OP/OI) of (-)15.67% and hence TPO issued show cause notice to adopt the above comparables for bench marking the International transaction and to adopt TNMM as most appropriate method. Assessee submitted reply and after considering the reply, TPO rejected RPM and adopted TNMM as MAM.

TPO issued show cause notice to assessee as to why AMP expenses should not be treated as separate international transaction of brand promotion expenses to be reimbursed by AE. Assessee filed its reply by stating that expenses were normal business expenses and do not have direct bearing to the turnover. The negative profit was due to advertisement, selling and distribution employee cost, depreciation and general overheads. Assessee also objected for set of comparables taken by the TPO. AO held that the advertisement expenses were aimed to promote Nippon brand in India, the legal ownership of brand rests with AE M/s.Nippon Trading Co. Ltd., Japan and placing reliance on M/s.LG Electronics (P) Ltd. vs. ACIT 2013-TII-15-ITAT-DEL-SB-TP, the Special Bench of ITAT, held the AMP expenses as a separate international transaction. TPO made comparable study for arriving margin separately for advertisement with the companies engaged in manufacturing and trading of paints and selected three comparables – Asian Paints, Berger Paints, Kansai Nerolac Ltd., and worked out average mean of expenses to 3.98%. TPO selected seven comparables and worked out mark-up of 12.15% on AMP expenses. Mark up on AMP expenses @12.15% worked out to Rs. 1,52,95,256/- and the aggregate of AMP expenses and the mark-up on AMP was worked out to Rs. 14,11,82,140/- was suggested for adjustment towards the brand promotion under AMP expenses by TPO. AO issued draft Assessment Order proposing the addition of Rs.14.11 Cr. as AMP expenses and the assessee filed objection before DRP.

Idle Capacity Adjustment & Customs Duty Adjustment

Assessee submitted that it was in the initial year of operation and it would not utilize its full capacity and, therefore, could not absorb the fixed costs incurred during the period which had resulted in operational losses. During FY 2010-11, Nippon India operated at a capacity of 28% thereby incurring substantial amount of idle capacity costs and significant under recovery of cost resulting lower margins. Comparable companies have been conducting operations for many years and were in the mature stage of their economic life cycle. The average capacity utilized by comparable companies for FY 2010-11 was 78%. Hence, there was a need to eliminate material difference in terms of capacity utilization between Nippon India and comparable companies. The initial cost of production was higher as FY 2010-11 was the second year of operations after commencing the manufacture facility at Sriperumbudur Factory. There were more experiments in terms of new raw material sourcing for both new products and existing products. The economic operations were lower in comparison to the competitors. The company had started expanding the network of decorative paint business by opening new depots across the country. As on 31.03.2010, there were eight depots and in the FY 2010-11, the company had opened 10 new depots in South, North and West Zones. The nationwide distribution network demanded more costs in terms of logistics and administration, freights, rental security communication, travelling, etc. In short, there were fixed overheads from the date of opening, whereas the sales picked up gradually in these depots.

Having heard the matter, the Tribunal held that,

Whether TPO can treat AMP expenditure incurred by assessee for its own sales promotion not obligated under any agreement with its AE, as international transaction for transfer pricing adjustments - NO: ITAT

+ AO followed the Bright Line Test method for determining the ALP of AMP. When assessee has contested vehemently that the expenditure was not incurred for the purpose of brand promotion of Nippon, Japan/AE, it is the burden of the AO/TPO to examine, make enquiries and bring an evidence to show that the expenditure was incurred for brand building of the AE. No such exercise was made by the AO in this case. AO/TPO simply applied Bright Line Test method and benchmarked the difference as AMP expenses and made a mark-up of @12.15% on the cost of AMP. There was no evidence with the Revenue to show that the assessee company has not incurred the expenditure towards its sales promotion which is allowable deduction u/s.37(1) and no evidence to prove that the expenditure in question was in fact a brand building expenditure incurred towards Nippon, Japan. In TP study report of assessee, there was no mention of any AMP expenditure obliged by the assessee by way of any agreement/arrangement or any other mode mentioned in the Income Tax Act. In the assessee’s case, the transaction is not between AE and assessee as far as AMP is concerned. AR of the assessee stated that there was no arrangement or agreement or action in concert are understanding for incurring the AMP expenditure by the assessee to bring it under the ambit of Sec.92B(1). 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 assessee as sales promotion expenses for the purpose of it’s own cause. According to assessee, there was no binding agreement to promote brand of Nippon India by 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. 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 AO/TPO/DRP is not correct in making upward adjustment of brand promotion expenses and the mark-up on brand promotion. The case of assessee is squarely covered by the decision of Maruti Suzuki India Ltd., vs. DCIT 2015-TII-58-HC-DEL-TP . Respectfully following the judicial pronouncements discussed above, we hold that the AMP spent of the assessee is not an international transaction and the addition is deleted;

Other TP adjustments

Whether in case an assessee has not maintained segmental financials for manufacturing and trading account segment separately, resale price method can be used as MAM to determine the ALP - NO: ITAT

+ assessee company has adopted Resale Price Method as most appropriate method to determine the ALP of international transaction. The assessee company has not maintained segmental financials for manufacturing and trading account segment separately. Further, the assessee purchased raw materials and some of the goods were used in manufacturing process. Therefore, AO viewed that TNMM method is most appropriate method. During the appeal, the assessee did not raise any objections before the DRP regarding adoption of TNMM and no argument was advanced by the assessee’s counsel before us during the appeal. Therefore, we hold that TNMM is most appropriate method;

Selection of comparable - Asian Paints Ltd.

Whether it a general rule to exclude high turnover companies from the list while making selection of comparables, unless it is not brought on record that turnover of comparable companies has undue influence on the margin - NO: ITAT

+ assessee has objected for selecting the Asian Paints as comparable to the appellant, since there was a huge difference in scale of operations. AO excluded the AKZO Nobel India Ltd., and retrained the three comparables selected by the assessee. The DRP has rejected the objection of the assessee relying on the decision of the ITAT, Mumbai, in M/s Symantec Software Solutions Pvt. Ltd., 2011-TII-60-ITAT-MUM-TP that the taxpayer has not demonstrated as to how the difference in turnover has resulted in the influence of comparables. Unless and until, it is not brought on record that the turnover of such comparables has undue influence on the margin, it is not general rule to exclude the same. 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 & Customs Duty Adjustment

Whether adjustment for idle capacity can be allowed for finalising comparables, if assessee is in both manufacturing and trading, whereas the comparable engages only in manufacturing activity - YES: ITAT

Whether there is a need to allow adjustment towards the customs duty element when assessee himself selected comparables, worked out the gross profit margin which was more than arm’s length price - NO: ITAT

+ 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. This view is upheld by the ITAT in the case of Mando India Steering Systems Pvt. Ltd., and NSK Sales Company Pvt. Ltd. However, 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. The next claim of assessee was adjustment of customs duty. 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.

Assessee's appeal partly allowed