2018 (4) TMI 1595 - AT - Income Tax

Disallowance of expenditure incurred on management service fees - revenue v/s capital expenditure - Held that - There is a clear finding that incurrence of management fee expenditure is to acquire the managerial support services for the day to day operations of the assessee s business and ongoing basis for which quarterly payments were made there was no endeavor benefit or any underline nature of service obtain by the assessee which involves transfer of technology or asset or technical information/knowhow in any manner. It is pertinent to note that the Revenue in particular years has accepted this expenditure as Revenue Expenditure and segregated this particular year by disallowing it as capital expenditure but while doing so, the Revenue has not given any finding to the extent that as to why these are capital expenditure. Disallowance of expenditure incurred on Software EDP Charges paid to Swarovski Hong Kong Ltd. - revenue v/s capital expenditure - Held that - The said charges are business expenditure and cannot be treated as capital expenditure. The assessee has field all the invoiced to that effect. There was no assets acquired by the assessee and it is a period cost but from the order of the Assessing Officer it can be seen that the said details as contemplated by the assessee was not before the Assessing Officer . Therefore, this aspect has to be verified at the level of. Therefore, this issue is remanded back to the file of the Assessing Officer to see these expenses according to the evidence produced by the assessee. Disallowance of 2/3rd expenditure incurred on an advertisement and capacity expenses on the ground that benefit will accrue over a period of 3 years - Held that - Following the view taken in our order for the A.Y. 2004-05, we hold that the entire amount of advertisement and publicity expenses should be allowed as deduction in the year of incurring itself. It is however, made clear no further deduction for 2/3rd of the total expenditure for the earlier years be granted as the same will lead to double deduction. If such a deduction has already been allowed, then the same should be reversed to that extent. This ground of the Revenue is not allowed.

Issues Involved:
1. Disallowance of expenditure on management service fees.
2. Disallowance of expenditure on software and EDP charges.
3. Disallowance of advertisement and publicity expenses.
4. Adjustment of brought forward losses.
5. Levy of interest under sections 234B and 234D.
6. Penalty proceedings under section 271(1)(c).
7. Transfer pricing adjustment related to AMP expenses.
8. Disallowance of interest on late deposit of service tax.

Detailed Analysis:

1. Disallowance of Expenditure on Management Service Fees:
The CIT(A) confirmed the disallowance of ?18,38,562 incurred on management service fees, treating it as a capital expenditure. The assessee argued that this expenditure had been consistently allowed as a revenue expenditure in previous and subsequent years. The Tribunal noted that the CIT(A) in a subsequent year ruled that the expenditure was for managerial support services for day-to-day operations, which did not confer any enduring benefit or involve the transfer of technology or assets. The Tribunal found that the Revenue had not provided any specific reason for treating this expenditure as capital in this particular year and ruled in favor of the assessee.

2. Disallowance of Expenditure on Software and EDP Charges:
The CIT(A) confirmed the disallowance of ?10,46,963 paid to Swarovski Hong Kong Ltd., treating it as capital expenditure. The assessee contended that these were business expenses and did not result in the acquisition of any assets. The Tribunal remanded the issue back to the Assessing Officer for verification of the expenses according to the evidence produced by the assessee, allowing the ground for statistical purposes.

3. Disallowance of Advertisement and Publicity Expenses:
The CIT(A) disallowed two-thirds of the expenditure amounting to ?2,49,15,519, on the ground that the benefit would accrue over three years. The Tribunal referenced previous decisions, including the Hon’ble jurisdictional High Court's judgment in CIT vs. Citi Financial Consumer Fin. Ltd., which held that the entire expenditure on publicity and advertisement is allowable fully in the year incurred. Consequently, the Tribunal ruled in favor of the assessee, allowing the entire amount as a deduction in the year incurred.

4. Adjustment of Brought Forward Losses:
The ground regarding the adjustment of brought forward losses was not pressed by the assessee and hence was dismissed.

5. Levy of Interest under Sections 234B and 234D:
The Tribunal noted that these grounds were consequential and would depend on the final outcome of the other issues.

6. Penalty Proceedings under Section 271(1)(c):
The Tribunal noted that this ground was also consequential and would depend on the final outcome of the other issues.

7. Transfer Pricing Adjustment Related to AMP Expenses:
For A.Y. 2010-11, the Tribunal remanded the issue of AMP expenses back to the TPO/AO for fresh determination in light of relevant judgments, including the Hon’ble Delhi High Court's judgment in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT. The Tribunal instructed the TPO/AO to determine whether there exists an international transaction of AMP expenses and, if so, to determine the ALP of such a transaction.

8. Disallowance of Interest on Late Deposit of Service Tax:
The Tribunal allowed the expenditure of ?9,601 incurred as interest on the late deposit of service tax, noting that it was an allowable expenditure.

Conclusion:
The Tribunal provided detailed rulings on each issue, remanding some matters back to the Assessing Officer for further verification and allowing others based on precedents and the merits of the case. The judgments reflect a thorough consideration of the facts and applicable legal principles, ensuring that the assessee is given a fair opportunity to present evidence and arguments.

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