2023 (3) TMI 656 - AT - Income Tax

TP Adjustment - AMP Expenses - whether AMP expenditure is an international transaction or notselection of MAM? - HELD THAT - As relying on Maruti Suzuki India Ltd 2015 (12) TMI 634 - DELHI HIGH COURT we delete the AMP TP adjustment and the mark up thereon. Disallowance of provision for leave encashment - AO disallowed the said provision under section 43B(f) for the reason that leave encashment can be claimed as deduction only on actual payment basis - HELD THAT - The Calcutta High Court in Exide Industries Ltd v UOI 2007 (6) TMI 175 - CALCUTTA HIGH COURT struck down the provisions of section 43B(f). However, the Supreme Court in UOI v Exide Industries Ltd 2008 (9) TMI 921 - SC ORDER held that clause (f) of section 43B is constitutionally valid and operative for all purposes. Thus, the provision for leave encashment was righty disallowed by the AO and we confirm the same. The assessee has taken an alternate plea that AO be directed to grant relief in respect of payment made towards provision for leave encashment in subsequent years. The direction to allow deduction for subsequent years is not pertaining to the year under consideration and hence we refrain from giving such directions. However, we direct the AO to verify the actual payments made during the previous year relevant to the assessment year under consideration towards leave encashment and allow the same as deduction under section 43B(f). The AO shall also ensure that the assessee does not get double deduction on provision basis and payment basis. Disallowance of depreciation on intangibles - AO has disallowed the same following the earlier years assessment orders - HELD THAT - The Kamataka High Court in assessee's own case for AY 2000-01 2020 (12) TMI 672 - KARNATAKA HIGH COURT has decided this issue in favour of the assessee. Disallowance of interest on customs duty - AO disallowed the same for the reason that interest on customs duty is allowable on actual payment basis u/s 43B - HELD THAT - In the instant case, the AO has not examined the nature of levy of interest on customs duty. If the interest on customs duty is payable for keeping the imported goods in the customs warehouse beyond the statutory period the said interest would not be covered by section 43B and would be allowable as deduction even if it is not paid. However, if the interest on customs duty is payable for the arrears of customs duty or delayed payment of customs duty then the said interest would be regarded as part and parcel of the customs duty. In such circumstances, the assessee cannot get deduction for interest payable as such interest is directly linked to non-payment or late payment of customs duty. As customs duty is allowable only on payment basis under section 43B, interest levied on arrears or late payment of customs duty is also allowable on actual payment basis under section 43B. The AO is directed to verify the nature of levy of interest on customs duty and decide the allowability of deduction as per our above direction. It is ordered accordingly. Negative movement of deferred revenue - HELD THAT - As decided in own case 2022 (3) TMI 1506 - ITAT BANGALORE AO is directed to grant consequential relief in accordance with the decision of the coordinate bench of the Tribunal in terms of adjustment of TDS credit and negative movement in the deferred revenue. The AO is directed accordingly and that a reasonable opportunity of being heard to be given to the assessee before the final decision.

Summary

Issues Involved:

1. Transfer Pricing Adjustment on AMP Expenses
2. Disallowance of Provision for Leave Encashment
3. Disallowance of Depreciation on Intangibles
4. Disallowance of Interest on Customs Duty
5. Consequential Relief on Deferred Revenue
6. Other Grounds (General Grounds and Penalty Proceedings)

Detailed Analysis:

1. Transfer Pricing Adjustment on AMP Expenses:

The assessee, engaged in importing computer peripherals and rendering support services, had its international transactions scrutinized. The Transfer Pricing Officer (TPO) made a TP adjustment of Rs. 29,03,35,855 for excess Advertising, Marketing, and Promotion (AMP) expenses, applying the Bright Line Test (BLT). The assessee contended that BLT is not a prescribed method under transfer pricing provisions and cited various judicial precedents, including the Delhi High Court's ruling in Maruti Suzuki India Limited, which emphasized that AMP expenditure is not an international transaction and should be benchmarked on an aggregate basis using the Transactional Net Margin Method (TNMM). The Tribunal, following these precedents, deleted the TP adjustment and the associated markup, concluding that the AMP expenses incurred by the assessee were not at the instance of the associated enterprise (AE) and thus, no separate TP adjustment was warranted.

2. Disallowance of Provision for Leave Encashment:

The AO disallowed the provision for leave encashment amounting to Rs. 10,68,47,430 under section 43B(f) of the Act, which allows such deductions only on an actual payment basis. The Tribunal upheld this disallowance, referencing the Supreme Court's validation of section 43B(f) in UOI v. Exide Industries Ltd. However, the Tribunal directed the AO to verify and allow any actual payments made during the relevant assessment year towards leave encashment, ensuring no double deduction.

3. Disallowance of Depreciation on Intangibles:

The AO disallowed depreciation on intangibles amounting to Rs. 28,73,837, despite favorable decisions for the assessee in earlier years. The Tribunal referenced the Karnataka High Court's decision in the assessee's own case, which upheld the allowance of depreciation on goodwill and intangibles. Consequently, the Tribunal allowed the depreciation claim for the year under consideration.

4. Disallowance of Interest on Customs Duty:

The AO disallowed interest on customs duty amounting to Rs. 34,68,84,164, treating it as allowable only on an actual payment basis under section 43B. The Tribunal noted conflicting judicial precedents on whether interest on customs duty falls under section 43B. It directed the AO to verify the nature of the interest'whether it was for keeping goods in customs warehouse beyond the statutory period or for non-payment of customs duty. Depending on this verification, the AO was instructed to decide the allowability of the deduction accordingly.

5. Consequential Relief on Deferred Revenue:

The issue of consequential relief on negative movement of deferred revenue was considered based on pending adjudications in earlier years. The Tribunal directed the AO to grant relief in accordance with the decisions of the coordinate bench of the Tribunal for earlier years, ensuring a reasonable opportunity for the assessee to be heard before the final decision.

6. Other Grounds (General Grounds and Penalty Proceedings):

General grounds and grounds related to penalty proceedings under section 271(1)(c) were not pressed by the assessee during the hearing and were thus dismissed by the Tribunal.

Conclusion:

The appeal was partly allowed, with the Tribunal providing specific directions on each issue, emphasizing adherence to judicial precedents and ensuring fair verification processes by the AO.