2015 (5) TMI 821 - AT - Income Tax

Transfer pricing adjustment - Advertising, Marketing and Promotion (AMP) expenses - Held that - No detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO because of his applying the bright line test for determining the value of the international transaction of AMP expense and then applying the cost plus method for determining its ALP. The ld. AR also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. Under such circumstances, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon ble High Court in Sony Ericson Mobile (2015 (3) TMI 580 - DELHI HIGH COURT). Ex consequenti, the ground raised about the TPO having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile (supra). Disallowance of Advances written off - Held that - Succinctly, the assessee claimed the above deduction by treating it as bad debts written off. On being called upon to justify the deductibility of the amount, the assessee submitted that it imported certain goods during the financial year under consideration paying Special Additional Duty (SAD). Since the goods in respect of which such amount of SAD was paid became obsolete, the amount of SAD was written off and claimed as deduction. It was stated that the nomenclature of bad debt was inadvertently given, whereas, in fact, this amount was payment of irrecoverable/unadjustable SAD. It was also stated before the DRP that the payment of SAD by any importer is refunded when the goods are further sold. Since the goods in respect of which this SAD was paid, became obsolete and written off in the accounts of subsequent years, the amount of SAD was claimed as deduction in this year. Unconvinced with the assessee s submissions, the DRP approved the view taken by the AO in making the addition. After considering the rival submissions and perusing the relevant material on record, it is noticed that the assessee, as an importer, paid SAD and, hence, would have ordinarily become entitled to its refund on further sale. The amount in question represents the payment of SAD on the goods becoming obsolete and incapable of further sale. As such, the amount of SAD on such goods has ceased to be refundable. When the goods become obsolete, the payment of SAD already made assumes the character of a part of the purchase price of the goods. It can be seen from the assessee s submissions made before the DRP as recorded in para 11.1 of its Direction that the goods became obsolete and were ultimately written off in the books of account in the subsequent years. This shows that the instant amount of SAD paid in relation to such goods cannot be claimed as deduction in the year under consideration because such goods were still appearing as closing stock in the books of account of the assessee. As the payment of SAD in such circumstances is nothing, but, a part of the purchase price, the same cannot be separated from the purchase price of goods, to be written off separately in the year in question, when the corresponding goods are still treated as stock-in-trade. We, therefore, approve the view taken by the AO on this issue. This ground fails. Denial of deduction towards Provision for warranty - Held that - There is no discussion in the assessment order on the assessee s claim for deduction of warranty provision. No addition has been made by the AO on this score. It can be noticed from the DRP s direction that the assessee took up this issue before the DRP claiming deduction of ₹ 7,22,50,345/- on account of warranty provision for the year in question. It is clear from para 12.3 of the Direction given by the DRP that the assessee voluntarily disallowed this amount at the time of filing income-tax return. It is not understandable as to under which circumstances the assessee suo motu disallowed the claim at the time of filing of income-tax return and sprang up claiming deduction during the course of assessment proceedings. The ld. AR also failed to throw any light on this aspect of the matter. The Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT (2009 (5) TMI 16 - SUPREME COURT OF INDIA) has held that a warranty provision made by the assessee on the basis of the past experience is allowable as deduction u/s 37. It has further been held that the deduction can be allowed if the provision is made on some rational basis. Since the necessary facts in this regard are not available before us, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO for deciding it afresh as per law, after allowing a reasonable opportunity of being heard to the assessee. - Decided partly in favour of assesse for statistical purposes

Summary

Issues Involved:
1. Transfer Pricing Adjustment towards Advertising, Marketing, and Promotion (AMP) Expenses.
2. Disallowance of Advances Written Off.
3. Denial of Deduction towards Provision for Warranty.

Issue 1: Transfer Pricing Adjustment towards AMP Expenses

The first issue pertains to the addition of Rs. 40,14,26,892/- by the Assessing Officer (AO) on account of transfer pricing adjustment towards AMP expenses. The assessee, a wholly owned subsidiary of Toshiba Corporation, Japan, employed the Transactional Net Margin Method (TNMM) to demonstrate that its international transactions were at arm's length price (ALP). The Transfer Pricing Officer (TPO) accepted the reported international transactions at ALP but observed that AMP expenses, including discounts and rebates, were incurred by the assessee. By applying the bright line test, the TPO worked out non-routine expenditure in excess of the bright line and proposed a transfer pricing adjustment of Rs. 40,14,26,892/-. The assessee's appeal to the Dispute Resolution Panel (DRP) was unsuccessful, leading to the AO's final order making the addition.

The Tribunal referred to the Special Bench decision in LG Electronics India Pvt. Ltd. Vs. ACIT, which held that AMP is a transaction and an international transaction within the meaning of section 92B of the Act, and that the TPO has jurisdiction to compute the ALP of this international transaction. The Special Bench approved the application of the bright line test for non-routine AMP expenses and determined that the ALP of AMP expenses should be determined on a Cost plus method. However, the Hon'ble Delhi High Court in Sony Ericson Mobile Communications India Pvt. Ltd. Vs. CIT upheld the majority view of the Special Bench but set aside the bright line test for benchmarking non-routine AMP expenses.

The Tribunal summarized the judgment of the Hon'ble High Court, noting that AMP expense is an international transaction, the TPO has jurisdiction to determine the ALP of AMP expenses, and interconnected international transactions can be aggregated. The High Court held that AMP is a separate function, and comparables should perform similar AMP functions. The bright line test was deemed inapplicable for benchmarking non-routine AMP expenses, and the ALP of AMP expenses should preferably be determined in a bundled manner with the distribution activity. If suitable comparables are not available, the transactions should be segregated, and the ALP of AMP expenses should be determined separately.

In conclusion, the Tribunal found that the TPO did not examine the AMP functions carried out by the assessee and comparables, as required by the High Court's judgment. The Tribunal set aside the impugned order and remanded the matter back to the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the High Court's directions.

Issue 2: Disallowance of Advances Written Off

The second issue concerns the disallowance of advances written off amounting to Rs. 8,92,981/-. The assessee claimed the deduction by treating it as bad debts written off, explaining that it represented Special Additional Duty (SAD) paid on imported goods that became obsolete. The DRP upheld the AO's view, disallowing the deduction.

The Tribunal noted that the SAD paid on goods that became obsolete and incapable of further sale assumes the character of a part of the purchase price of the goods. Since the goods were still appearing as closing stock in the assessee's books, the amount of SAD could not be claimed as a deduction in the year under consideration. The Tribunal approved the AO's view, disallowing the deduction.

Issue 3: Denial of Deduction towards Provision for Warranty

The final issue involves the denial of deduction towards the provision for warranty. The assessee claimed a deduction of Rs. 7,22,50,345/- for the warranty provision for the year in question, which was voluntarily disallowed at the time of filing the income-tax return. The DRP noted that the assessee failed to justify the claim during the assessment proceedings.

The Tribunal referred to the Hon'ble Supreme Court's decision in Rotork Controls India (P) Ltd. Vs. CIT, which held that a warranty provision made on the basis of past experience is allowable as a deduction under section 37 if made on a rational basis. Since the necessary facts were not available, the Tribunal set aside the impugned order and remanded the matter to the AO for fresh consideration.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal remanding the issues of AMP expenses and provision for warranty back to the TPO/AO for fresh determination and upholding the disallowance of advances written off. The order was pronounced in the open court on 25.05.2015.