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2016 (9) TMI 1332 - AT - Income TaxAdjustment made by the TPO on account of AMP expenses incurred by the assessee - Held that - Both the parties agreed that in view of the decision of Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communications Vs. CIT (2015 (3) TMI 580 - DELHI HIGH COURT) the matter needs to be restored back to the file of ld. AO/TPO for de novo consideration. Disallowance of market to market loss of restatement of assets and liabilities as on balance sheet date - Held that - Accounting Standard 11 states that all unpaid monetary liabilities should be restated at closing value as on the balance sheet date. Any exchange gain or loss arising thereon is considered as an income or an expenditure as the case might be Thereafter ld. DRP considered the CBDT Instruction relied upon by AO and observed that MTM loss claimed by the tax payer was on actual monetary items appearing in the balance-sheet due to their reinstatement and not on forex derivatives. The department has not brought any material to controvert these factual aspects noted by ld. DRP. We therefore sustain the order of ld. CIT(A) following the decision of Hon ble Supreme Court in the case of Woodward Governor India P. Ltd. (2009 (4) TMI 4 - SUPREME COURT) wherein it has been held that the loss incurred by the assessee on the date of balance-sheet is an allowable loss u/s 37(1).
Issues Involved:
1. Adjustment made by the TPO on account of AMP expenses incurred by the assessee. 2. Disallowance of market-to-market loss of restatement of assets and liabilities as on the balance sheet date. Issue-wise Detailed Analysis: 1. Adjustment Made by the TPO on Account of AMP Expenses Incurred by the Assessee: The primary issue in the assessee's appeal (ITA no. 1515/Del/2014) revolves around the adjustment made by the Transfer Pricing Officer (TPO) concerning the Advertisement, Marketing, and Promotional (AMP) expenses incurred by the assessee. The assessee, a wholly-owned subsidiary of Haier Electrical Appliances Corp. Ltd., had reported eight international transactions. The TPO observed that the Transfer Pricing (TP) study submitted by the assessee was silent about the marketing intangibles developed in India for the products of its Associated Enterprise (AE) by incurring significant AMP expenditure. The TPO issued a show cause notice to the assessee, pointing out that the AMP expenses incurred were significantly higher than those incurred by comparable companies, suggesting brand building efforts for the AE. The TPO proposed benchmarking the AMP expenses using the Comparable Uncontrolled Price (CUP) method with a markup of 15%, leading to an adjustment of ?13,59,01,632/-. The Dispute Resolution Panel (DRP) confirmed the TPO’s action but reduced the markup to 9%, resulting in an adjusted difference of ?1,14,601,751/-. Both parties agreed that in light of the Hon’ble Delhi High Court's decision in Sony Ericsson Mobile Communications Vs. CIT (2015) 374 ITR 118 (Del), the matter should be restored to the file of the AO/TPO for de novo consideration. The High Court had laid down several guidelines for determining the arm's length price in relation to AMP expenses, emphasizing a detailed functional analysis and appropriate comparability analysis. 2. Disallowance of Market-to-Market Loss of Restatement of Assets and Liabilities as on Balance Sheet Date: The sole effective ground in the revenue’s appeal (ITA no. 1582/Del/2014) concerns the disallowance of ?2,93,89,615/- made by the AO on account of the market-to-market (MTM) loss of restatement of assets and liabilities as on the balance sheet date. The AO had disallowed the claim, considering it notional, despite the assessee relying on the Supreme Court’s decision in CIT Vs. Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC), which held that such losses are allowable under section 37(1). The DRP allowed the assessee’s claim, observing that the loss was fully covered by AS-11 and the Supreme Court's decision. The DRP noted that the MTM loss claimed by the taxpayer was on actual monetary items appearing in the balance sheet due to their reinstatement and not on forex derivatives. The department did not bring any material to counter these factual aspects noted by the DRP. The tribunal sustained the DRP’s order, following the Supreme Court’s decision in Woodward Governor India P. Ltd., and dismissed the revenue’s appeal. Conclusion: The assessee’s appeal was allowed for statistical purposes, and the matter was remanded to the AO/TPO for fresh consideration in light of the Delhi High Court's guidelines. The revenue’s appeal was dismissed, upholding the DRP’s decision to allow the MTM loss claimed by the assessee.
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