Outward Freight not to be considered for TP adjustment as same doesn’t operate from transaction perspective

Michelin India Pvt. Ltd. Vs DCIT (ITAT Delhi)

Conclusion: Outward freight in India except the freight for import of material distributed be not considered for adjustment as it is not operating from transaction perspective.

Held:  Assessee-company was into import and resale (or trading) of tyres for passenger cars, trucks and buses under the brand name ‘Michelin’. During the year under assessment, the taxpayer entered into International Transaction with its Associate Enterprises (AE). TPO noticed that the taxpayer had incurred huge Advertisement, Marketing and Promotional (AMP) expenses to expand the reach of the AE’s brand in India.  TPO reached the conclusion that assessee being a distributor had undertaken the marketing activities on behalf of its AE to create intangible in its favour and had not paid any royalty and after applying the Resale Price Method (RPM) on the trading activities treated the incurring of AMP expenses and the resultant creation of marketing intangibles as a separate international transaction and benchmarked the same separately. TPO selected three companies in A.Y. 2009-10 as comparables namely ; Dunlop India Ltd.; T V S Srichakra Ltd. ; Krypton Industries Ltd having AMP/ Sales ratio of 4.79% as against 11.30% in case of the taxpayer which was into similar activities. TPO applied bright line test and computed the arm’s length of AMP i.e. the bright line at 4.79% of sales. The taxpayer spent AMP expenses to the tune of Rs. 25,08,53,510/- and TPO computed the amount in excess of the arm’s length amount of AMP at Rs. 144,586,263/-. TPO had also applied the mark-up of 13% on the cost of CPM (15% assured markup on all costs minus 2% = 13%) and computed arm’s length price of AMP expenses. It was held that CIT(A) had passed order following the decision rendered by Hon’ble Delhi High Court in case of Soni Ericssion Mobile Pvt. Ltd. wherein it was held that gross profit margin should be computed after including AMP expenditure and RPM was considered as the most appropriate method for import segment for resale and  “brightline test” had no statutory mandate for benchmarking AMP expenses. Thus, there was no scope to interfere in the finding returned by CIT(A) by following the decision rendered by Jurisdictional High Court in case of Soni Ericsson Moble Pvt. Ltd.. However, outward freight in India except the freight for import of material distributed be not considered for adjustment as it was not operating from transaction perspective.

FULL TEXT OF THE ITAT JUDGEMENT

Since common question of facts and law is involved in all the aforesaid cross appeals, the same are taken up together for disposal by way of composite order to avoid repetition of discussion.

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