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2020 (2) TMI 1487 - AT - Income TaxTP Adjustment - AMP expenses for the promotion of its products or services - HELD THAT - There has been no agreement between Essilor International which owns the various brands set out by the TPO in his order and the Assessee to incur any Advertisement and Marketing or Sales promotion expenses. None of the other reasons given by the TPO which have been explained by the Assessee and set out in the earlier paragraph can be the basis to hold that there was in fact an international transaction in the matter of incurring of AMP expenses by the Assessee. The order of the Tribunal in Assessee s own case for A.Y.2009-10 and 2010-11 in our view requires to be followed and there are no reasons whatsoever to take a different view. Consequently, there could not be any exercise of determining the ALP of the AMP expenses by comparing the expenses incurred by the Assessee with comparable companies. In view of the above conclusions, the other aspects whether the comparable companies chosen by the TPO are in fact comparable in terms of Functions performed, Assets employed and Risks assumed (FAR) analysis and other aspects of determination of ALP does not require any consideration. Therefore the addition made on account of determination of ALP of AMP expenses in AY 2011-12 to 2014-15 is directed to be deleted. We are of the view that the expenditure in question cannot be regarded as capital in nature. Even the TPO has considered these expenses as routine selling expenses. From the nature of these expenses which are set out in Paragraph-5 of this order, it can be seen that they are routine selling expenses and cannot be regarded as capital expenditure. The decision of the Delhi High Court in the case of Spice Distribution Ltd.. 2014 (9) TMI 732 - DELHI HIGH COURT supports the plea of the Assessee in this regard. The order of the DRP which does not give any reason for holding the aforesaid expenditure to be capital expenditure is therefore reversed and the addition made in this regard is directed to be deleted. Disallowance of expenses incurred in earning exempt income u/s 14A - submission of the ld. counsel for the assessee was that the assessee incurred no expenses for earning dividend income - HELD THAT - We are of the view that such general statement will not help the plea of the assessee. Sec.14A contemplates disallowance having regard to the book of accounts of the assessee. It is therefore, necessary to allow the expenses debited in P L account and come to a conclusion as to what would be the expenses incurred in earning dividend income. The exercise has to be done while considering the nexus between the expenses incurred and exempt income earned. No such exercise has been carried out by the assessee or by the AO. Rather the assessee has sought to plead based on several judicial pronouncements for the deletion of the addition, without any factual background regarding the nature of expenses debited in the P L account. We therefore, deem it fit and proper to set aside the order of the AO and remand the issue of determination of quantum of disallowance u/s 14A of the Act to the AO after due opportunity to the assessee. As far as disallowance of expenses u/s 8D(2)(ii) of the Rules is concerned, the AO is directed to see the availability of own funds and also to see whether the borrowed funds on which interest was paid for the purpose of making investments that can yield dividend income. The AO is also directed to keep in mind the decision of the Hon ble Karnataka High Court in the case of M/s Micro Labs India Pvt.Ltd 2016 (4) TMI 219 - KARNATAKA HIGH COURT . In so far as the disallowance u/s 8D(2)(ii) of the Rules is concerned, the AO shall examine the disallowance afresh in the light of the directions given in this regard while deciding the identical grounds of appeal in assessment year 2011-12. For assessment year 2013-14 DRP however, did not deal with any of this submissions and preferred to uphold the order of the AO. The learned counsel for the Assessee has also filed a statement before us showing availability of own funds and the investments which actually yielded the dividend income. The same is placed on record. After considering the rival submissions we are of the view that the issue in assessment year 2013-14 needs to be decided afresh by the AO and order of the DRP/AO is set aside, to be decided afresh by the AO in the light of the directions given in similar issue in assessment year 2012-13. For assessment year 2014-15 Before the DRP the assessee submitted that no borrowed funds were used for the purpose of making investments that yielded dividend income. The DRP however, confirmed the order of the AO without examining the claim of the assessee by merely observing that it would be difficult to draw inference that the borrowed funds were not used to make investments which yielded dividend income. This inference of the DRP is contrary to the law laid down by the Hon ble Karnataka High Court in the case of Micro labs India Pvt.Ltd.(supra). Since facts having been properly examine in respect of the disallowance u/s 14A of the Act, both Rule under 8D2(ii) and (iii) of the Rules we set aside the order of DRP/AO to re-consider the issue in the light of the above discussion. Disallowance marked to market losses - HELD THAT - We are of the view that the claim had to be allowed. The DRP has rejected the claim of the assessee for the assessment year 2013-14 and in doing so seems to have placed reliance on the decision of the ITAT B Bench in the case of M/s Shankara Infrastructure 2015 (2) TMI 401 - ITAT BANGALORE . On perusal of the aforesaid decision, we find in that case, the forward contracts were entered into by the assessee without any reference to the transactions connected with the business of the assessee and therefore the transactions were not regarded as hedging transactions to safeguard loss on revenue account. In other words, the forward contracts had no nexus with the business of the assessee and therefore, recorded as speculated. In the present case, however, it is undisputed that the forward contracts were entered into by the assessee to safeguard itself from exchange losses on realization of trade payables. In such circumstances, the nexus between the forward contracts and the assessee s business is clearly established. Secondly, the loss in question cannot be recorded as notional loss as laid down by the Hon ble Supreme Court in the case of CIT Vs M/s Woodward Governor India Pvt.Ltd. 2009 (4) TMI 4 - SUPREME COURT . Looked at from any angle the claim of the assessee deserves to be accepted. Disallowance of foreign exchange losses - AO disallowed the claim of assessee as well as foreign exchange loss by holding it to be capital in nature - HELD THAT - Before the DRP the assessee pleaded that all the foreign exchange loss was on account of transaction which were revenue in nature but the plea was not accepted by the DRP for want of proper details. The ld.counsl for the assessee made a prayer for remand of the issue to the AO to enable the assessee to file the required details so that the AO can decide the nature of the loss as to capital or revenue. The plea is accepted and the issue is set aside to the AO for fresh consideration after due opportunity to the assessee. Disallowance u/s 43B - sum disallowed u/s 43B of the Act were not paid on or before the due date for filing the return of income - assessee pleaded before the DRP that a portion of the sum that was disallowed u/s 43B of the Act had been paid before the due date for filing the return of income, as is evident from by the details available in Form-3CD - HELD THAT - As assessee prayed that the issue should be set aside to the AO so that the assessee can explain the correct date of payment and satisfy the AO that no disallowance u/s 43B is warranted. We accept the prayer of the ld. counsel for the assessee and set aside the issue to the AO for fresh consideration after due opportunity to the assessee. Appeals of the Assessee are partly allowed while the appeal by the Revenue is dismissed.
Issues Involved:
1. Addition of Advertising and Market Promotion (AMP) expenditure as an international transaction. 2. Disallowance of expenses incurred in earning exempt income under Section 14A. 3. Disallowance of marked-to-market losses. 4. Disallowance of warranty expenses. 5. Disallowance of foreign exchange losses. 6. Disallowance under Section 43B for unpaid amounts before the due date for filing returns. Detailed Analysis: 1. Addition of Advertising and Market Promotion (AMP) Expenditure: The primary issue was whether the AMP expenditure incurred by the assessee to promote the brand name of its foreign associated enterprise (AE) constituted an international transaction requiring an Arm’s Length Price (ALP) determination. The Transfer Pricing Officer (TPO) argued that the AMP expenses were unusually high and should be reimbursed by the AE, applying the 'Bright Line Test'. The Dispute Resolution Panel (DRP) deleted the addition, following the Delhi High Court's decisions in Maruti Suzuki India Ltd. and Sony Ericsson Mobile Communications Pvt. Ltd., which held that AMP expenses did not constitute an international transaction. The Tribunal upheld the DRP's decision, noting the absence of an explicit arrangement between the assessee and its AE for incurring AMP expenses and rejecting the application of the Bright Line Test. 2. Disallowance of Expenses Incurred in Earning Exempt Income (Section 14A): The assessee contested the disallowance of expenses under Section 14A, arguing that no expenses were incurred in earning dividend income. The Tribunal noted the lack of specific examination by the Assessing Officer (AO) and remanded the issue for a fresh determination, directing the AO to consider the nature of expenses and the availability of own funds versus borrowed funds. 3. Disallowance of Marked-to-Market Losses: The assessee claimed deductions for marked-to-market losses on forward contracts used to hedge against foreign exchange fluctuations. The AO disallowed the claim, considering it notional. The Tribunal, relying on the Supreme Court's decision in CIT vs. Woodward Governor India Pvt. Ltd., held that such losses are allowable as they are not notional and are incurred in the course of business. The Tribunal directed the AO to verify the assessee's claim that a sum of ?35.40 lakhs was already taxed. 4. Disallowance of Warranty Expenses: The issue of disallowance of warranty expenses was not pressed by the assessee and was dismissed as not pressed. 5. Disallowance of Foreign Exchange Losses: For the assessment year 2014-15, the AO disallowed foreign exchange losses, considering them capital in nature. The DRP upheld the AO's decision due to lack of proper details. The Tribunal remanded the issue to the AO for fresh consideration, allowing the assessee to provide the required details to determine the nature of the loss. 6. Disallowance under Section 43B: The AO disallowed certain amounts under Section 43B, stating they were not paid before the due date for filing returns. The assessee argued that a portion of these amounts was paid before the due date. The Tribunal remanded the issue to the AO to verify the payment dates and determine if the disallowance was warranted. Conclusion: The Tribunal allowed the appeals of the assessee partly and dismissed the appeal by the Revenue, providing detailed directions for fresh consideration of specific issues by the AO. The decision emphasized the need for proper examination of facts and adherence to judicial precedents in determining the allowability of expenses and losses.
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