2017 (7) TMI 949 - AT - Income Tax

TPA - TPO has determined the AMP expenses to be international transaction - Held that - We are of the considered view that when the TPO has determined the AMP expenses to be international transaction, he had no occasion to follow the ratio of the judgments in Rayban Sun Optics India Ltd. vs. CIT 2016 (9) TMI 1293 - DELHI HIGH COURT , Pr. CIT vs. Toshiba India Pvt. Ltd. 2016 (8) TMI 1175 - DELHI HIGH COURT and Pr. CIT vs. Bose Corporation (India) Pvt. Ltd. (2016 (8) TMI 1177 - DELHI HIGH COURT) rendered by Hon ble jurisdictional High Court discussed in the preceding paras. Aforesaid decisions have consistently been followed by coordinate Benches of the Tribunal. In these circumstances, we are of the considered view that it would be in the interest of justice if the impugned order is set aside and the matter is restored to the file of TPO/AO for fresh determination of the question to determine, as to whether AMP expenditure is international transaction , in the light of the judgments rendered by Hon ble Delhi High Court discussed in preceding paras. In case the existence of such an international transaction is not proved, there shall not be any transfer pricing addition. However, in case the international transaction is proved to be existed, then the TPO will determine such international transaction in the light of the judgment rendered by Hon ble jurisdictional High Court after providing an opportunity of being heard to the assessee. Disallowing write off of demonstration equipment inventory - whether such inventory should have been valued at cost disregarding the fact that Net Realizable Value (NRV) or demonstration inventory is lower than the cost - Held that - DRP predominantly decided the issue on the ground that taxpayer has failed to discharge the onus cast upon it to disprove that NRV actually remains sufficiently above the cost price of the equipment and hence as per the accounting policy of the company and the AS-2 of ICAI prescribing valuation of the closing stock, the taxpayer should have adopted cost value of the valuation of the closing stock of the demo equipment. DRP also held that it appears that the provision of demo equipment is based upon pure assumption, hence the same cannot be treated as real expenses and before the AO, taxpayer could not produce any documentary evidence like sale bill to prove that any of the demo equipments was sold at 42% of its normal sale price. The assessee company has also not submitted the particulars of scrap sale for last five years before DRP. Thus we deem it necessary to provide an opportunity of being heard to the assessee company to produce the documentary evidence

Summary

Issues Involved:
1. Determination of AMP expenses as an international transaction.
2. Disallowance of write-off of demonstration equipment inventory.
3. Disallowance of advertisement charges as deferred revenue expenditure.
4. Partial credit of tax deducted at source.
5. Initiation of penalty proceedings.

Detailed Analysis:

1. Determination of AMP Expenses as an International Transaction:
The primary issue was whether the Advertisement, Marketing, and Promotion (AMP) expenses incurred by the assessee constituted an international transaction. The TPO and DRP concluded that the assessee promoted Bose products and developed marketing intangibles for its AE, which required compensation. The AMP expenditure was treated as an international transaction under section 92B(1) read with clause (v) of section 92F. The TPO benchmarked the AMP expenses using comparables and determined an adjustment of ?7,92,95,484/- along with a mark-up of 15.27%. However, the Tribunal referred to various judgments, including Maruti Suzuki India Ltd. and Whirlpool of India Ltd., which held that AMP expenses were not international transactions. The Tribunal decided to restore the matter to the TPO/AO for fresh determination in light of the judgments, providing an opportunity for the assessee to be heard.

2. Disallowance of Write-off of Demonstration Equipment Inventory:
The assessee challenged the disallowance of ?45,61,318/- for the write-off of demonstration equipment inventory. The DRP upheld the AO's decision, stating that the assessee failed to prove the Net Realizable Value (NRV) was lower than the cost. The DRP noted that the NRV adopted by the assessee was significantly lower than the sale price and cost price of the equipment. The Tribunal, however, decided to provide the assessee an opportunity to produce documentary evidence to support its claim and directed the AO to decide afresh.

3. Disallowance of Advertisement Charges as Deferred Revenue Expenditure:
The AO disallowed ?6,10,91,813/- (being 4/5th of the total expenditure) paid towards advertisement charges, treating it as deferred revenue expenditure. The assessee argued that the entire expenditure should be allowed as revenue expenditure in one year. The Tribunal noted that the AO's action resulted in double taxation since an addition had already been made on AMP expenditure by the TPO. The Tribunal restored the matter to the AO for fresh consideration.

4. Partial Credit of Tax Deducted at Source:
The assessee contended that the AO erred in giving only partial credit of tax deducted at source amounting to ?12,78,043/- instead of ?15,25,403/- as claimed in the return of income. The Tribunal directed the AO to verify and provide the correct credit for tax deducted at source.

5. Initiation of Penalty Proceedings:
The assessee challenged the initiation of penalty proceedings under sections 271(1)(c), 271BA, and 271AA of the Act. The Tribunal did not specifically address this issue in detail, as the main issues were restored to the AO/TPO for fresh determination.

Conclusion:
The Tribunal allowed both the appeals filed by the assessee and the Revenue for statistical purposes, directing the AO/TPO to reconsider the issues afresh in light of the judgments and providing the assessee an opportunity to present its case. The order emphasized the need for a thorough re-evaluation of the AMP expenses as an international transaction and the write-off of demonstration equipment inventory, ensuring compliance with legal precedents and proper documentation.