2022 (7) TMI 487 - AT - Income Tax

TP adjustment on account of advertisement and marketing expenses (AMP) - Primary and secondary adjustment - primary adjustment in respect of AMP expenses relating to marking and sales segment and Rs. 162.02 crores relating to manufacturing segment - TPO also made secondary adjustment of Rs.3.51 crores on the AMP adjustment made in manufacturing segment on account of payment made for training to saloon customers and promotional goods treating the same as advance payments - HELD THAT - We noticed that the issue of primary adjustment relating to AMP expenses and secondary adjustment on account of training, saloon, promotional goods have been deleted by the Coordinate Bench in assessee s own case 2020 (8) TMI 795 - ITAT MUMBAI taking the view that the primary and secondary adjustments made in the hands of the assessee in respect of AMP expenses are not sustainable. Since there is no change in the facts, following the decision rendered by the Coordinate Benches in the earlier years in assessee s own case, we direct the Assessing Officer/TPO to delete primary transfer pricing adjustment made in respect of AMP expenses in both AY 2016-17 and secondary adjustment made in AY 2016-17. Disallowance of claim of depreciation on good will - HELD THAT - We notice that the issue relating to claim of depreciation on good will has been restored to the file of AO in the immediately preceding year and hence the decision taken by the AO in that year shall have bearing on this claim made during the instant year. Accordingly, we restore this issue to the file of AO for examining it in accordance with the decision taken by him in the immediately preceding year. Disallowance of claim of Provision for expenses - HELD THAT - There is distinction between accrual of liability and liability to pay for expenses . There should not be any dispute that the accrued liability cannot be considered as unascertained liability . Accrued liability is an ascertained liability, but the liability to pay it has not arisen. We notice that the the tax officials have been carried away by the fact that the liability to pay shall arise upon the assessee only after the receipt of the relevant bills and have not considered its accrual. The fact that there was an obligation upon the assessee to pay for the liability as a result of past event cannot be denied. By belated receipt of bills, the payment only gets postponed, but not the liability that has already accrued to the assessee. It is also fact that the assessee has been providing for known expenses and losses year after year and the said provision has been verified by the statutory auditors of the assessee company. The Ld A.R submitted that the provision for expenses so created has been accepted by the AO in the past. Accordingly, we are of the view that the tax authorities are not justified in holding that the Provision for expenses is an unascertained liability. As per the accounting principles discussed above, it is an ascertained liability and the same is eligible for deduction while computing total income. Accordingly, we direct the AO to delete the disallowance of Provision for expenses.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Advertisement, Marketing, and Promotion (AMP) Expenses.
2. Disallowance of Depreciation on Goodwill.
3. Disallowance of Provision for Expenses.
4. Claim for Deduction of Education Cess.
5. Contention that the Assessment Order is Time-Barred.

Detailed Analysis:

1. Transfer Pricing Adjustment on Advertisement, Marketing, and Promotion (AMP) Expenses:
The common issue in both appeals relates to the transfer pricing adjustment made in respect of AMP expenses. For AY 2016-17, the TPO made a primary adjustment of Rs. 281.99 crore and a secondary adjustment of Rs. 3.51 crore. For AY 2017-18, the primary adjustment was Rs. 120.81 crore. The assessee argued that identical adjustments had been made in earlier years and were deleted by the Tribunal. The Tribunal observed that the TPO had followed the order for AY 2014-15 and noted that similar adjustments had been consistently deleted in the past. The Tribunal reiterated its previous stance, stating that without any "understanding" or "arrangement" for incurring AMP expenses for brand building of the AE, the provisions of Chapter-X could not be invoked. Accordingly, the Tribunal directed the AO/TPO to delete the primary and secondary adjustments for both AY 2016-17 and 2017-18.

2. Disallowance of Depreciation on Goodwill:
The AO disallowed the depreciation claimed on the WDV of goodwill amounting to Rs. 1,81,03,920/- for AY 2016-17, following the disallowance in AY 2015-16. The Tribunal noted that the issue was restored to the AO in AY 2015-16 for fresh consideration, and hence, the decision in that year would impact the current year. The Tribunal restored the issue to the AO for examining it in accordance with the decision taken in the immediately preceding year.

3. Disallowance of Provision for Expenses:
The assessee made a provision for outstanding expenses of Rs. 96,28,68,265/-, claiming it as a deduction. The AO treated it as an "unascertained liability" and disallowed the deduction. The Tribunal observed that under the mercantile system of accounting and AS-29, a provision for expenses should be made when there is a present obligation, probable outflow of resources, and a reliable estimate of the obligation. The Tribunal held that the provision for expenses was an ascertained liability and eligible for deduction. Therefore, the Tribunal directed the AO to delete the disallowance.

4. Claim for Deduction of Education Cess:
The assessee's claim for deduction of education cess was not pressed during the hearing. Consequently, all grounds relating to this claim were dismissed as not pressed.

5. Contention that the Assessment Order is Time-Barred:
The assessee contended that the assessment order for AY 2017-18 was time-barred. However, since the Tribunal granted relief on the transfer pricing adjustment, this issue became academic. The Tribunal left this issue open without deciding it.

Conclusion:
The appeal for AY 2016-17 was partly allowed, with directions to delete the disallowance of provision for expenses and to reconsider the depreciation on goodwill. The appeal for AY 2017-18 was allowed, directing the deletion of the transfer pricing adjustment on AMP expenses. The claim for deduction of education cess was dismissed as not pressed, and the issue of the assessment order being time-barred was left open.