2018 (6) TMI 1563 - AT - Income Tax

TPA - Addition on protective basis on account of the difference in ALP of the international transaction of advertisement, marketing and promotion expenses (AMP expenses) by applying Bright Line Test. - Held that - It is well settled proposition under the jurisdiction of Hon ble Delhi High Court in the case of Sony Erricson 2015 (3) TMI 580 - DELHI HIGH COURT that Bright Line Test Method cannot be applied for making any kind of adjustment under AMP expenses. Disallowance of provision for warranty - Held that - A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations, (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In the case of the assessee, we find that such an estimation based on actuarial certificate has been approved in the earlier year. We direct the Assessing Officer to allow the provision for warranty. Addition u/s.40(a)(ii) - deduction on account of interest paid on delay in deposit of TDS - Held that - Interest charged on the late deposit of TDS is an allowable deduction as interest paid is compensatory in nature - principle amount of TDS has been allowed as deduction and consequently interest thereof should also be allowed as deduction. AO has made the disallowance under the provision of Section 40(a)(ii) which merely provides for disallowance of taxes applicable on profits and gains earned by the assessee. Disallowance of TDS made by the Assessing Officer ostensibly is not sustainable. Accordingly, we hold that no disallowance on interest can be made u/s.40(a)(ii).

Summary

Issues Involved:

1. Addition on account of AMP expenses using Bright Line Test.
2. Disallowance of provision for warranty.
3. Disallowance of deduction for interest on delayed TDS deposit.
4. Charging of interest under sections 234B and 234C of the IT Act.

Issue-wise Detailed Analysis:

1. Addition on account of AMP expenses using Bright Line Test:

The assessee challenged the addition of ?4,26,35,832/- made on a 'protective' basis due to differences in the Arm's Length Price (ALP) of international transactions related to advertisement, marketing, and promotion (AMP) expenses. The adjustment was initially made using the Bright Line Test (BLT). The Tribunal noted that the Hon'ble Delhi High Court, in the case of Sony Ericsson Mobile Communications India Pvt. Ltd., ruled that the BLT method is invalid for AMP expense adjustments. The Tribunal, referencing its own decision in the assessee's case for the Assessment Year 2013-14, confirmed that the BLT method could not be applied, and thus, the protective addition of ?4,26,35,832/- was deleted.

2. Disallowance of provision for warranty:

The assessee created a provision for warranty amounting to ?9,80,20,092/- based on actuarial estimation but only claimed the actual utilization of ?1,43,50,306/-. The Assessing Officer disallowed the provision, citing that fresh claims should be made through a revised return, not during Tribunal proceedings. The Tribunal, however, noted that the provision was certified by an actuarial certificate and referenced the Supreme Court's decision in Rotork Controls India Pvt. Ltd. vs. CIT, which recognized warranty provisions as normal business expenditures. Following the Tribunal's earlier decision for the Assessment Year 2008-09, the provision for ?7,26,60,644/- was allowed.

3. Disallowance of deduction for interest on delayed TDS deposit:

The assessee contested the disallowance of ?1,49,607/- for interest on delayed TDS deposit under Section 40(a)(ii) of the Act. The Tribunal found that interest on delayed TDS is compensatory and not a tax on profits and gains. Therefore, it held that the disallowance under Section 40(a)(ii) was not sustainable and allowed the deduction.

4. Charging of interest under sections 234B and 234C of the IT Act:

The assessee challenged the charging of interest under sections 234B and 234C. The Tribunal noted that this issue is consequential and dismissed the ground.

Conclusion:

The appeal was partly allowed, with the Tribunal deleting the protective addition for AMP expenses, allowing the provision for warranty, and permitting the deduction for interest on delayed TDS deposit. The issue of interest under sections 234B and 234C was dismissed as consequential. The judgment was pronounced on June 18, 2018.