2013 (7) TMI 380 - AT - Income Tax

Transfer pricing adjustment - retrospective applicability of sec. 92CA(2B) - powers of assessing officer to make such reference and the powers of TPO to furnish report in this behalf - Held that - Respectfully following the Special Bench judgment in the case of L.G. Electronics India (2013 (6) TMI 217 - ITAT DELHI) these legal grounds are to be decided against the assessee as a consequence thereof, the relevant grounds raised in the memo of appeal, touching these legal aspects stand dismissed. Advertisement, marketing and sales promotion expenses - Scope of AMP Expenses - Whether the AO justified in holding that the assessee should have earned a mark up from the Associated Enterprise in respect of AMP expenses alleged to have been incurred for and on behalf of the AE? - Held that - Merit in the argument of assessee as there being no objection or adverse comment in respect thereof coming from any of the lower authorities i.e. AO/ TPO, DRP and also ld. CIT(DR), there is no justification in setting aside these expenses for verification again to AO/TPO as supported by judgment in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. (2012 (4) TMI 279 - ITAT CHANDIGARH). The figures mentioned at Placitum E of the table are set aside back to the file of AO/TPO to decide the issue of AMP expenses by applying the proper comparables after hearing the assessee - grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes. Provision for warranty disallowed - Held that - The assessee has been consistently following the 4 step method for quantifying the provision for warranty. The amount and procedure of provision for warranty in respective years and consumption of provision of warranty ranges between 99.99% to 62.08%. As in the case of Rotork Controls India (P) Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA) has clearly held that the provision for meeting warranty claims on the sales effected which are computed on the accrual basis by a scientific method and taking into account the past practice, is an allowable expenditure, thus in the present case the provision for warranty on accrual basis on the basis of sales is an allowable deduction. Unrealized subsidy - Held that - It is a trite law that every receipt does not tantamount to income, as per charging sections 4 & 5 of the I.T. Act. From the record it clearly emerges that the subsidy provided by CSPL is in lump sum with specific direction that this amount is to be spent only for specified purposes and the unspent amount is to be held in trust for and on behalf of CSPL. This is duly confirmed by CSPL and this fact is further corroborated by the fact that unutilized amount is not credited to the P&L A/c but taken to balance-sheet as a current liability. Once it is acknowledged as current liability assessee does not become owner of this amount and the receipt of unspent amount does not become income of the assessee. Besides, this method of accounting has been followed by the assessee consistently unspent subsidy being not income of the assessee but a liability to be spent for specified purposes and recoverable for non-utilization for specific purposes cannot be treated as income of the assessee. Club expenses - Held that - The issue is squarely covered in favour of the assessee by cases of Samtel colour Ltd. (2009 (1) TMI 26 - DELHI HIGH COURT) and Nestle India Ltd. (2007 (4) TMI 180 - DELHI HIGH COURT). Besides, DRP itself has allowed the expenditure in AY 2008-09. Thus allow club expenses. Depreciation on printers, scanners, UPS and switches etc. - 60% or 15% - Held that - As decided in CIT v. BSES Yamuna Power Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT computer accessories and peripherals form an integral part of a computer system and therefore, depreciation has to be allowed at the rate of 60%. Claim of double taxation relief in respect of deduction of tax in Japan for A.Y. 2008-09 - the tax withheld by Canon Japan comes to Rs. 42,76,065/- against which the assessee has claimed foreign tax credit amounting 24,44,934/- in accordance with Article 23 of Indo-Japan DTAA - profit margin of 3.35% by AO as against 8.63% given to assessee - Held that - When the eligible income from STPI is sought to be determined and the relevant facts and figures are available, in such circumstances, the income from software development from STPI unit is to be estimated by taking relevant figures and not adopting adhoc approach by applying the lower profit margin of 3.35% which is relatable to trading activities. Merit in the contention of the assessee and 8.63% being undisputed income from the export of software to STPI double taxation benefit claimed by the assessee as per Article 23 of Indo-Japan DTAA is justified and is to be allowed. This ground of the assessee is also allowed. Appeals filed by the assessee are partly allowed for statistical purposes.

Summary

Issues Involved:

1. Transfer Pricing (T.P.) Adjustments
2. Provision for Warranty
3. Unutilized Subsidy
4. Club Expenses
5. Depreciation on Computer Peripherals
6. Double Taxation Relief

Detailed Analysis:

1. Transfer Pricing (T.P.) Adjustments:

The primary issue pertains to the T.P. adjustments made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) concerning Advertisement, Marketing, and Promotional (AMP) expenditure. The assessee, a subsidiary of a foreign company, argued against the adjustments, stating that the AMP expenses were not excessive and were incurred for its own business purposes, not for the benefit of the associated enterprise. The TPO had included trade discounts, volume rebates, and subsidies received from the parent company in the AMP expenditure, which the assessee contested.

The Special Bench of the ITAT in the case of LG Electronics India Ltd. vs. ACIT was referenced, where it was held that AMP expenses should be benchmarked separately, and selling expenses should not be included in AMP expenses. The Special Bench also emphasized the need to consider factors like business model, contractual arrangements, and receipt of subsidies while benchmarking AMP expenses.

The ITAT directed the AO/TPO to exclude trade discounts, volume rebates, and subsidies from the AMP expenses and to re-evaluate the AMP-related T.P. adjustments by applying appropriate comparables.

2. Provision for Warranty:

The AO disallowed the provision for warranty, considering it an unascertained liability. The assessee argued that the provision was based on a scientific method, following the Supreme Court's decision in Rotork Controls India (P) Ltd., which allows provisions for warranty claims based on past trends and accrual basis.

The ITAT allowed the provision for warranty, recognizing it as a legitimate business expense based on the scientific method and past practice.

3. Unutilized Subsidy:

The AO added the unutilized subsidy to the income of the assessee, considering it as a revenue receipt. The assessee contended that the subsidy was received for specific advertisement and sales promotion activities and any unspent amount was held in trust for the parent company, not as income.

The ITAT ruled in favor of the assessee, stating that the unutilized subsidy held in trust does not constitute income. The subsidy was to be spent for specified purposes, and any unspent amount was a liability, not income.

4. Club Expenses:

The AO disallowed club expenses incurred by the assessee, considering them not wholly and exclusively for business purposes. The assessee argued that these expenses were for networking and marketing, thus meeting the test of commercial expediency.

The ITAT allowed the club expenses, citing the Supreme Court's decision in United Glass MGF Co. Ltd. and the Delhi High Court's decisions in Samtel Colour Ltd. and Nestle India Ltd., which recognize club expenses as business expenditures.

5. Depreciation on Computer Peripherals:

The AO allowed depreciation on computer peripherals at a lower rate of 15% instead of 60%. The assessee argued that peripherals should be eligible for the higher rate applicable to computers.

The ITAT allowed the higher rate of depreciation at 60% on computer peripherals, following the Delhi High Court's decision in CIT vs. Orient Ceramics & Ind. Ltd.

6. Double Taxation Relief:

The AO reduced the foreign tax credit claimed by the assessee, applying a lower profit margin. The assessee contended that the profit margin for software exports should be higher, as accepted by the TPO.

The ITAT ruled in favor of the assessee, allowing the foreign tax credit based on the higher profit margin of 8.63%, as accepted by the TPO for software exports.

Conclusion:

The ITAT partly allowed the appeals for statistical purposes, directing the AO/TPO to re-evaluate the T.P. adjustments concerning AMP expenses and to follow the guidelines set by the Special Bench. The ITAT also allowed the provision for warranty, unutilized subsidy, club expenses, higher depreciation on computer peripherals, and the foreign tax credit based on the higher profit margin.