© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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The Chennai Tribunal rejects the TPO’s approach of reducing cash discount, outward freight, and storage charges from selling price, with regard to computation of Gross Profit Margin

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Recently, the Chennai Bench of the Income-tax Appellate Tribunal in the case of Panasonic Sales & Services (I) Company Limited has directed that cash discount, outward freight, and storage charges are to be considered as part of selling and distribution expenses, instead of reducing the same from the selling price while calculating the Gross Profit Margin while applying the Resale Price Method.

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The Chennai Tribunal rejects the TPO’s approach of reducing cash discount, outward freight, and storage charges from selling price, with regard to computation of Gross Profit Margin

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA The Chennai Tribunal rejects the TPO’s approach of reducing cash discount, outward freight, and storage charges from selling price, with regard to computation of Gross Profit Margin 21 July 2014 Background Recently, the Chennai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Panasonic Sales & Services (I) Company Limited 1 (the taxpayer) has directed that cash discount, outward freight, and storage charges are to be considered as part of selling and distribution expenses, instead of reducing the same from the selling price while calculating the Gross Profit Margin (GPM) while applying the Resale Price Method (RPM). Facts of the case  The taxpayer is a subsidiary of Panasonic Holdings (Netherlands BV) which is ultimately held by Matsushita Electronic Co. Ltd., Japan. The taxpayer is engaged in the import of consumer electronic products from its Associated Enterprises (AE) for sale in the domestic market, and also provides market support services. ______________ 1 Panasonic Sales & Services (I) Company Limited v. ACIT (ITA No. 1957/Mds/2012) – Taxsutra.com  In the Assessment Year (AY) 2008-09, the taxpayer purchased goods from its AE for re-sale in India. It adopted RPM to determine the Arm’s Length Price (ALP) of the goods purchased from the AE with GPM as the Profit Level Indicator (PLI). The taxpayer’s margin was 14.69 per cent in respect of its international transactions, as against 16.47 per cent for comparables on the basis of multiple years’ data, which was within the permissible limit of +/-5 per cent as envisaged by proviso to Section 92C(2) of the Income-tax Act, 1961 (the Act). For the transaction relating to marketing support services, Transactional Net Margin Method (TNMM) was adopted to determine the ALP.  There was no dispute with regard to the value of international transactions and the method adopted by the taxpayer. However, the dispute was with regard to determination of selling price and the calculation of GPM of the taxpayer and the comparable companies. In relation to the same, the Transfer Pricing Officer (TPO)/Assessing Officer (AO), made downward adjustment of purchase cost
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. from the AE amounting to INR145.53 million, and upward adjustment of development and business promotion expenses amounting to INR60.63 million. Transfer Pricing Officer’s order  The TPO while calculating the GPM reduced the cash discount offered by the taxpayer for early realisation of outstanding dues on account of sales.  The TPO also added the freight and storage charges by treating them as direct expenses incurred in relation to purchase of goods.  Further, the TPO did not distinguish between brand promotion and marketing expense, and made an upward adjustment towards development and business promotion expenses. Taxpayer’s contentions  The taxpayer contended that the TPO had erred in equating cash discounts with trade discounts, and further contended that these discounts were given by the taxpayer to its debtors, post sales.  The taxpayer, referring to Rule 10B(1)(b) of the Income-tax Rules, 1962 (the Rules) contended that the TPO erred in adding freight and storage charges to the cost of goods sold, while the Rule clearly explains that only expenses incurred in connection with the purchases are required to be reduced from sales.  The freight and storage expenses are not towards inward but outward sales, and are thus in the nature of selling expenses.  On the issue of brand promotion and marketing expense, the taxpayer relied on its own case 2 . Tribunal’s ruling  On the issue relating to cash discount given by the taxpayer, the Tribunal stressed that cash discounts were offered by the taxpayer to its debtors for early realisation of payments, and were thus in the nature of financial charges. Further, the Tribunal held that the cash discounts were in the nature of incentives for early payments for the sales made by the taxpayer.  On the issue relating to reducing freight and storage expenses from selling price, the Tribunal observed that these expenditures were towards cost of packing and transportation of goods from the warehouse of the taxpayer to the customers, and that the expenditure on outward freight is in the nature of selling and distribution expenses. ________________ 2 Panasonic Sales & Services (India) Pvt. Ltd. v. ACIT [2013] 143 ITD 733 (Chen)  The Tribunal held that the TPO erred in equating cash discounts with trade discount and that the cash discounts in the present case were offered after the completion of sales, and hence is entirely different in nature from trade discounts, and therefore held that the contention of the TPO to reduce it from the selling price was mis-conceived.  The Tribunal held that by no stretch of imagination, can the freight and storage expenses be reduced from selling price to determine the cost of goods sold.  With regard to marketing expenditure, the Tribunal followed the co-ordinate bench decision in the taxpayer’s own case 3 for the AY.2007-08 wherein the Tribunal relied on the decision of the Special Bench (SB Ruling) in the case of LG Electronics 4 . Our comments The Tribunal has dismissed the TPO’s contentions and directed the AO to treat the cash discount, outward freight, and storage charges towards selling and distribution expenses instead of reducing the same from selling price. This decision by the Chennai Tribunal brings more clarity in the determination of selling price for the application of RPM. In respect of development, business promotion, and marketing expenses, the Tribunal has relied on the Special Bench ruling in the case of LG Electronics by upholding AMP adjustment in the case of marketing intangibles. __________________ 3 Panasonic Sales & Services (India) Pvt. Ltd. v. ACIT [2013] 143 ITD 733 (Chen) 4 LG Electronics v. ACIT [2013] 22 ITR (Trib) 1 (Del)(SB)
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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