2020 (10) TMI 924 - AT - Income Tax

TP Adjustment - adjustment to arm s length price in respect of AMP expenditure - whether Advertising, Marketing and Promotion (AMP) expenditure could be construed as an international transaction? - HELD THAT - As decided in own case 2016 (8) TMI 608 - ITAT MUMBAI AMP expenditure is not an international transaction and hence, no ALP adjustment could be made thereon. Unabsorbed depreciation carried forward and adjusted in view of Section 32(2) - HELD THAT - Issue decided in favour of the assessee by the decision of General Motors India Pvt. Ltd. 2012 (8) TMI 714 - GUJARAT HIGH COURT . Also in case of Times Guarantee Ltd. 2010 (6) TMI 516 - ITAT, MUMBAI on identical issue, by placing reliance on the decision of CIT vs. Hindustan Unilever Pvt. Ltd. 2016 (7) TMI 1245 - BOMBAY HIGH COURT and several other Bombay High Court decisions, had dismissed the claim of the revenue - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of adjustment to arm's length price (ALP) in respect of Advertising, Marketing, and Promotion (AMP) expenditure.
2. Allowability of unabsorbed depreciation pertaining to A.Y. 1998-1999 and up to A.Y. 2001-02 to be carried forward and adjusted.

Issue-wise Detailed Analysis:

1. Deletion of Adjustment to Arm's Length Price (ALP) in Respect of AMP Expenditure:

The primary issue raised by the revenue concerned the deletion of the adjustment to ALP in respect of AMP expenditure by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, engaged in the manufacturing and distribution of "Mattel" toys, had incurred AMP expenditure amounting to ?7.94 Crores against net sales of ?77.39 Crores. The Transfer Pricing Officer (TPO) observed that the AMP expenditure was for promoting brands owned by Associated Enterprises (AE), and issued a show-cause notice for treating the excess AMP expenditure as an adjustment for brand promotion and marketing intangible of the AE in India.

The assessee contended that:
- AMP expenses were not an international transaction.
- No benefit was derived by the AE from these expenses.
- The assessee did not render any services to its AE through the AMP expenditure.

The TPO rejected these contentions and made an adjustment to ALP amounting to ?5,97,12,632/-. The CIT(A), however, deleted the ALP adjustment based on the assessee’s higher operating profit compared to the comparables selected by the TPO, though the preliminary objection that AMP expenditure is not an international transaction was dismissed.

The Tribunal, referencing its own decisions in the assessee’s case for earlier years and the Delhi High Court's decision in Maruti Suzuki India Ltd vs CIT, held that AMP expenditure is not an international transaction and thus, no ALP adjustment is required. The Tribunal emphasized that the provisions of Chapter X of the Income Tax Act aim to prevent tax evasion through intra-group transactions, and AMP expenditure incurred for the assessee’s own business needs does not qualify as an international transaction. Consequently, the Tribunal allowed the assessee’s cross objections and dismissed the revenue’s appeal on this issue.

2. Allowability of Unabsorbed Depreciation Pertaining to A.Y. 1998-1999 and up to A.Y. 2001-02:

The second issue raised by the revenue was regarding the CIT(A)’s decision to allow the carry forward and adjustment of unabsorbed depreciation for A.Y. 1998-1999 to A.Y. 2001-02. The assessee had filed its return for A.Y. 2010-11, setting off brought forward losses of ?12.18 Crores, and paid tax on book profits of ?11.79 Crores under section 115JB of the Income Tax Act. The Assessing Officer (AO) disallowed the carry forward of unabsorbed depreciation on the grounds that the 8-year period for carry forward had expired.

The CIT(A) held that the amendment to section 32(2) of the Act, applicable from A.Y. 2002-03 onwards, allowed unabsorbed depreciation as of 1st April 2002 to be carried forward. The Tribunal supported this view, citing the Gujarat High Court’s decision in General Motors India Pvt. Ltd., which clarified that unabsorbed depreciation from earlier years could be carried forward indefinitely post the amendment. The Tribunal also referenced the Bombay High Court’s decision in Times Guarantee Ltd., which upheld the same principle and dismissed the revenue’s claims.

Respecting the jurisdictional High Court's rulings, the Tribunal found no fault in the CIT(A)’s order and dismissed the revenue’s appeal on this issue.

Conclusion:

The Tribunal dismissed the revenue’s appeal and allowed the assessee’s cross objections, holding that:
- AMP expenditure is not an international transaction, and no ALP adjustment is required.
- Unabsorbed depreciation from A.Y. 1998-1999 to A.Y. 2001-02 is allowable to be carried forward and adjusted as per the amended provisions of section 32(2) of the Income Tax Act.