2014 (12) TMI 795 - AT - Income Tax

Determination of ALP AMP expenses to be treated as international transaction or not - Assessee is a wholly owned subsidiary company of Haier Electrical Appliances Corp. Ltd., China engaged in the business of distribution of consumer durables Held that - Following the decision in LG. Electronics India P. Ltd. Versus Assistant Commissioner of Income-tax 2013 (6) TMI 217 - ITAT DELHI the matter is to be remitted back to the TPO for fresh consideration Decided in favour of assessee. Allowability of provision for warranty Expenses to be treated as contingent expenses or not -Held that - Assessee rightly relied upon M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA - it shows that in case the assessee is able to demonstrate that the provision has been made on a scientific basis it has to be treated as an ascertained liability and not a contingent liability - The AO to examine the issue afresh. Validity of penalty imposed u/s 271AA Held that - The fact that the arguments are not found recorded in the order is not a shortcoming as far as the assessee is concerned and the issue may require an internal administrative redressal if so warranted at the end of the FAA - the order under challenge was passed on 29.11.2010 - the assessee has canvassed that part of the expenses were reimbursed which fact has been found to be acceptable on considering the material available on record by the FAA in quantum proceedings - bright line as a concept was introduced for the first time as far as the assessee is concerned in the year under consideration and even otherwise as would be demonstrated from the arguments advanced before the Special Bench assessee rightly contended that there was a reasonable cause on account of which the specific transaction was not disclosed as an international transaction in its Form 3CEB the belief od the assessee was bonafide that the documentation placed on record is correct and as per the requirement of the law at the relevant point of time, thus, penalty u/s 271AA was not attracted Decided in favour of assessee.

Summary

Issues Involved:
1. Adjustment of Arm's Length Price (ALP) by Transfer Pricing Officer (TPO)
2. Provision for warranty treated as contingent liability
3. Disallowance of advertisement expenditure as capital expenditure
4. Penalty imposed under Section 271AA for non-disclosure of AMP expenses as an international transaction

Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP) by Transfer Pricing Officer (TPO):
The assessee, a wholly owned subsidiary of Haier Electrical Appliances Corp. Ltd., China, filed a loss return for the assessment year 2005-06. The TPO proposed an adjustment of Rs. 26,26,83,454/- in the ALP of the assessee. The taxpayer contended that it had the exclusive right to use the "HAIER" trademark in India without royalty payment for the first five years. The taxpayer also argued that the advertisement and sales promotion expenses amounting to Rs. 25.87 crores were for its own benefit and not for the AE, with Rs. 19.01 crores being reimbursed. The CIT(A) partially upheld the TPO's action, excluding rebates and discounts amounting to Rs. 23.13 crores while benchmarking the AMP expenditure and sustained the adjustment to the extent of Rs. 3.12 crores. The Tribunal set aside the orders and restored the issue to the TPO, directing him to decide afresh in terms of the Special Bench's mandate in the L.G. Electronics case and the Tribunal's orders in the assessee's own case for 2004-05, 2006-07, and 2007-08 assessment years.

2. Provision for Warranty Treated as Contingent Liability:
The assessee's claim for treating the provision for warranty as ascertained liability was not accepted by the AO and was upheld by the CIT(A). The assessee relied on the Supreme Court's judgment in Rotork Controls India Pvt. Ltd. vs CIT and the Delhi High Court's decision in CIT vs Whirlpool of India Ltd. The Tribunal restored the issue to the AO for verification, directing the AO to pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard, following the legal precedent in Rotork Controls India Pvt. Ltd. vs CIT.

3. Disallowance of Advertisement Expenditure as Capital Expenditure:
The AO treated the advertising and publicity expenses incurred amounting to Rs. 25.87 crores as deferred revenue expenditure, allowing 1/5 of it and resulting in an addition of Rs. 20.69 crores. The CIT(A) excluded the subsidy of Rs. 19.01 crores and held that 10% of the remaining was to be disallowed as capital expenditure. The Tribunal, considering the judicial precedent in the assessee's own case, set aside the orders and allowed the ground raised by the assessee, holding the expenditure as revenue expenditure.

4. Penalty Imposed Under Section 271AA for Non-Disclosure of AMP Expenses as an International Transaction:
The AO imposed a penalty under Section 271AA, holding that the assessee had not disclosed AMP expenses as an international transaction in the transfer pricing report. The CIT(A) granted partial relief in quantum appeal but confirmed the AO's action for not reporting the transaction. The Tribunal, considering the fact that the Special Bench had to decide whether AMP was an international transaction, held that the issue was debatable and the existence of a "minority view" indicated that the issue remained debatable for penalty proceedings. The Tribunal concluded that there was a reasonable cause for the assessee's non-disclosure and held that penalty under Section 271AA was not attracted.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes, partly allowed the assessee's appeal for statistical purposes, and allowed the assessee's appeal against the penalty imposed under Section 271AA. The Tribunal directed the TPO to re-examine the issues afresh and the AO to verify the provision for warranty following the legal precedent.