2018 (3) TMI 1665 - AT - Income Tax

TP adjustments under the head AMP expenses - TPO had made the adjustment by applying BLT - sole basis on which the adjustment, under the head AMP expenditure was made was that expenditure incurred by the assessee was significantly higher than that of its comparable is on application of BLT - Held that - The assessee was a new entrant in the field of manufacturing and sale of cosmetic and personal care, that there were already old players-like HUL P & G and Colgate Pamolive- that manufactured same products.Naturally to compete with established manufacturers and brands it had to incur huge advertisement expenses, so that new products would become popular. In our opinion there is a subtle but definite difference between the product promotion and brand promotion.In the first case product is the focus of the advertisement campaign and the brand takes secondary or backseat whereas in second case, brand is highlighted and not the product. In the case under consideration the assessee was introducing new products in the fields of body - care deodorants creams shower soaps. talc first aid dressing etc. If it has to penetrate the local market it will had to promote the products that could compete with the similar products of other players. We find that the issue of AMP expenditure incurred by an assessee, is an IT or not has been deliberated upon in many a cases. We allow the additional grounds of appeal, raised by the assessee for all the five AY.s and hold that the AMP expenses, incurred by it, were not IT.s and that no adjustment should have been made under that head for any of the above AY.s. Disallowance of TV cost/cost of production films - Held that - We find that disallowance of TV cost/cost of production films has been deliberated upon by the jurisdictional High Court in the cases of Geoffrey Manners & Co. Ltd. (2009 (2) TMI 13 - BOMBAY HIGH COURT) if the expenditure is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure but if the expenditure is in respect of an ongoing business and there is no enduring benefit it can be treated as revenue expenditure - Since expenditure was in respect of promoting ongoing products of the assessee they are held as by way of revenue expenditure. TDS u/s 194C - Disallowance of marketing and sales promotion expenses u/s.40(a)(ia) - Held that - We find that the AO had invoked the provisions of section 40(a)(ia for the payments made by the assessee to the super stockists/distributors, that the super stockists/distributors were making payments to the DSR.s/PSR.s/BA.s, that super stockists/distributors had deducted the tax at source for the payments to the representatives or the BA s that for the AY.2011-12 AO did not invoke the provisions of section 40(a)(ia)of the Act.There is no evidence on record to prove that payments in question were not reimbursements. It is a settled legal proposition that expenses in the nature of pure reimbursements do not attract TDS provisions. As decided in the case of Gujarat Narmada Valley Fertilizers Co. Ltd. (2014 (1) TMI 1708 - SUPREME COURT) has held that for reimbursement there was no need to deduct tax at source. we hold that the disallowance u/s.40(a)(ia) of marketing and sales promotion expenses amounting for both the years was not justifiable. MAT computation - taxability of provision for bad debts - Held that - DRP held that the objective of the Act was to tax any income once only. It directed the AO to verify as to whether the disallowance made in the earlier year at the time of creation of provision had been disallowed or not.It further observed that in the event the disallowance of the said sum in the earlier year had become final on account of non-filing of appeal by the assessee before the First Appellate Authority( FAA), the assessee was entitled not to offer tax for the said sum upon its reversal. The AO was finally directed not to tax the disputed amount for the year under consideration, if it was established that the disallowance had become final in 2009-10.The DR stated that matter could be decided on merits. DRP had directed the AO not to tax the disputed amount twice after making verification of the earlier year s assessment. In our opinion there is no legal infirmity in the directions of the DRP.If the AO has not made verifications till date he is directed to make verification and pass necessary orders in that regard within a period of one month of receiving of this order.We allow the Ground raised by assessee for statistical purposes.

Issues Involved:
1. Transfer Pricing (TP) adjustments related to Advertising, Marketing, and Publicity (AMP) expenses.
2. Disallowance of TV cost/cost of production films.
3. Disallowance of marketing and sales promotion expenses under Section 40(a)(ia) of the Income Tax Act.
4. Disallowance of stamp duty charges.
5. Levy of interest under Section 234B of the Income Tax Act.
6. Initiation of penalty proceedings.
7. Non-taxability of provision for bad debts.

Detailed Analysis:

1. Transfer Pricing (TP) Adjustments Related to Advertising, Marketing, and Publicity (AMP) Expenses:
The core issue was the TP adjustments made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) under the head AMP expenses. The TPO observed that the assessee incurred large AMP expenses, creating a valuable marketing intangible for the parent company, which owned the brands. The TPO applied the Bright Line Test (BLT) to segregate routine from non-routine expenditures, arguing that the excessive AMP expenses should be reimbursed by the parent company. The Dispute Resolution Panel (DRP) upheld these adjustments. However, the Tribunal held that in the absence of an agreement or arrangement between the assessee and the associated enterprise (AE) for incurring AMP expenses, no TP adjustment could be made. The Tribunal emphasized that the expenses were incurred to expand the assessee's business in India, not to benefit the AE. The Tribunal also noted that the BLT is not a recognized method under Indian TP regulations and thus should not be applied for making TP adjustments.

2. Disallowance of TV Cost/Cost of Production Films:
The AO treated the TV cost/cost of production films as capital expenditure, arguing that they had a long-term impact. The Tribunal, however, referred to the jurisdictional High Court decisions in Geoffrey Manners & Co. Ltd. and Procter & Gamble Home Products Ltd., which held that such expenses for ongoing business without enduring benefit should be treated as revenue expenditure. The Tribunal decided in favor of the assessee, holding that the advertisements did not have a lifespan of more than a year and did not acquire any capital asset or benefit of enduring nature.

3. Disallowance of Marketing and Sales Promotion Expenses Under Section 40(a)(ia):
The AO disallowed marketing and sales promotion expenses for non-deduction of tax at source. The Tribunal restored the matter to the AO for fresh consideration regarding the TDS made for Rs. 6.34 crores. For the remaining Rs. 4.39 crores, the Tribunal held that these were reimbursements to super stockists/distributors and thus did not attract TDS provisions. The Tribunal relied on the Supreme Court judgment in Gujarat Narmada Valley Fertilizers Co. Ltd., which held that pure reimbursements do not require TDS deduction.

4. Disallowance of Stamp Duty Charges:
The AO made a disallowance of Rs. 15.38 lakhs, treating it as capital expenditure. The Tribunal directed the AO to verify the correct amount and allow depreciation as per rules, noting the AR's claim that the correct amount was Rs. 7.54 lakhs and that depreciation should be granted for the full year.

5. Levy of Interest Under Section 234B:
The Tribunal did not adjudicate this issue, treating it as consequential.

6. Initiation of Penalty Proceedings:
The Tribunal dismissed this ground as premature.

7. Non-Taxability of Provision for Bad Debts:
The AO taxed the reversal of provision for bad debts, which had been disallowed in the previous year, resulting in double taxation. The DRP directed the AO to verify if the disallowance in the earlier year had become final and not to tax the amount twice. The Tribunal upheld this direction, instructing the AO to make necessary verifications and pass orders accordingly.

Conclusion:
The appeals were partly allowed for certain assessment years, with specific issues remanded back to the AO for fresh consideration. The Tribunal emphasized the need for proper verification and adherence to legal precedents in determining the tax liabilities and adjustments.

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