2017 (7) TMI 1188 - HC - Income Tax

Addition being adjustment on account of compensation to be received by the assessee from its Associated Enterprise (AE) for creating marketing intangibles and promoting the brand name of its AE - AMP expenses - Held that - Tribunal while considering the expenses of the associated enterprise (AE) for creating marketing intangibles and promoting the brand name of its AE it is for the marketing people to look new products which has competition in the national level or grass route level and International level. It is always for the Company to decide on what ratio the expenses are to be incurred at grass route and on that ratio for promoting their product. In that view of the matter unless the amount which was found to be not genuine merely because excess amount has been spent on advertisement will not not be a ground for disallowing the expenses. Decided in favour of assessee Adjustment made on account of Arm s Length interest to be charged by the assessee on the outstanding receivables from its AEs - Held that - As relying on Indo American Jewellery 2013 (1) TMI 804 - BOMBAY HIGH COURT there is complete uniformity in the act of the apellant in not charging interest from both AE s and non-AEs and adjustment in realization to notional interest on outstanding receivable cannot be made.

Summary

Issues:
1. Deletion of addition on account of compensation for creating marketing intangibles.
2. Treatment of Advertisement, Marketing, and Promotion (AMP) expenditure as not an international transaction.
3. Deletion of Arm's Length service fee payment.
4. Disallowance of inventories written off.
5. Adjustment of Arm's Length interest on outstanding receivables.
6. Disallowance of restructuring expenses being capital expenditure.

Analysis:

Issue 1: The Tribunal deleted the addition of compensation for creating marketing intangibles. The Court held that the Company has the discretion to decide on the ratio of expenses for promoting products, and excess advertisement expenses alone cannot justify disallowing the expenses. The Tribunal's decision was upheld as no error was found.

Issue 2: The Tribunal held that AMP expenditure was not an international transaction despite performing brand-building activities for the Associated Enterprise (AE). The Court agreed with the Tribunal's decision, emphasizing that the mere excess of advertisement expenses does not warrant disallowance.

Issue 3: The Tribunal deleted the Arm's Length service fee payment addition due to the lack of cost-benefit analysis and proof of availing services. The Court noted that the department did not appeal this issue, and it was covered by the Tribunal's earlier decision, leading to no substantial question of law.

Issue 4: The Tribunal deleted the disallowance of inventories written off due to insufficient details and supporting evidence. The Court found no error in the Tribunal's decision, especially since the department failed to provide justifications for disallowance.

Issue 5: The Tribunal addressed the adjustment of Arm's Length interest on outstanding receivables, ruling in favor of the assessee. The Court concurred with the Tribunal's reasoning that notional interest on overdue receivables cannot be charged if no interest is levied on non-AEs, and there was no substantial question of law.

Issue 6: The Tribunal deleted the disallowance of restructuring expenses, treating them as capital expenditure. The Court agreed with the Tribunal's decision, stating that the department could not compel the assessee to charge interest if it did not do so previously.

In conclusion, the Court dismissed the appeals, upholding the Tribunal's decisions on the various issues raised. The judgment emphasized the importance of substantiating claims and the discretion of companies in determining expenses, ultimately finding no substantial questions of law in the appeals.