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2017 (11) TMI 860 - HC - Income TaxTPA - Determination of ALP - Provision of expenses - allowable expenditure - A.O. concededly adopted a method of averaging out the entire expenditure after taking into account the total sum. - Held that - This Court is of the opinion that the reasoning of the ITAT, cannot be faulted. The Assessing Officer concededly adopted the same characteristic to all parties related and unrelated as to the prevailing and local market conditions. There may be several reasons why an Assessee or a commercial venture might be compelled to provide discounts/price support etc. for ensuring the marketability of its product at the price that they proposes. ITAT held that the debit and credit of provision in the price support account is not a provision in the real sense, but an actual expenditure or its adjustment. The amount of provision of ₹ 15 created at the end of each month is credited to the respective bottler s account ant the payment made does not enter into the price support account to the extent of the provision already debited. The AO has misunderstood the provision debited and credited to the price support account as a mere provision and not as an actual expense. When this provision is a part and parcel of the total price support expense, such part of provision, which actually represents the expenditure incurred, cannot be disallowed. Having regard to these, the method of averaging, to say the least, is illegal, this Court, therefore, is of the opinion that no question of law arises on this aspect.
Issues:
1. Interpretation of excessive price support expenses under the Income Tax Act, 1961. 2. Validity of the method of averaging out expenditure by the Assessing Officer. 3. Disallowance under Section 40(a)(ia) of the Act. Analysis: Issue 1: Interpretation of excessive price support expenses The Revenue's Appeal challenged the ITAT's decision to reverse the addition of ?12,04,92,210 brought to tax due to excessive price support paid by the assessee. The Assessee's business model involved sales of products to distributors, with a claim for deduction of ?50.95 crores for price support expenses. The Assessing Officer determined an average expenditure of 11.79% for price support to various parties. The ITAT, after considering submissions, found the Assessing Officer's method of averaging out expenditure unfounded and unsustainable. It noted that the Assessee provided price support to related and unrelated parties, and the averaging exercise lacked legal sanctity. The ITAT overturned the addition, emphasizing the need for a specific examination of each party receiving discounts to ascertain genuineness and compliance with business requirements. Issue 2: Validity of the method of averaging by the Assessing Officer The Revenue's counsel argued that the ITAT erred in interfering with the Assessing Officer's determination, which was based on the Assessee's lack of information and rationale for high price support rates. The ITAT's order highlighted the inadequacy of the Assessing Officer's approach in picking certain parties for averaging price support percentages. It emphasized that the provision debited and credited in the price support account represented actual expenses, not mere provisions. The Court agreed with the ITAT, stating that the method of averaging was illegal, considering the varying factors influencing price support expenses in different regions. It concluded that no legal question arose regarding the ITAT's decision on this issue. Issue 3: Disallowance under Section 40(a)(ia) of the Act Regarding the disallowance under Section 40(a)(ia) of ?15,41,815.78, the Court noted the Tribunal's consistent approach based on previous orders for different assessment years. As the Tribunal's decision was in line with its earlier rulings, the Court found no legal question to arise on this matter. Consequently, the Appeal was dismissed based on the reasoning that the ITAT's decision was sound and legally justified in both the issues discussed. This detailed analysis of the judgment highlights the key legal issues, arguments presented, and the Court's reasoning in dismissing the Appeal.
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