2013 (10) TMI 592 - AT - Income Tax

Transfer Pricing adjustment - International transaction with Associated enterprise - Held that - It is relevant to note that sub-sec. (2A) is a general provision on the issue of the TPO suo motu taking up an international transaction not referred by the AO whereas sub-sec. (2B) is a special provision limited in its scope only to such international transactions in respect of which the assessee did not furnish report u/s 92E - when there is special provision governing a particular types of cases then such cases stand excluded from the general provision governing all the cases - it is palpable that all the three necessary ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE is non-resident; such transaction is in the nature of provision of service. Resultantly the Revenue authorities were fully justified in treating the transaction of brand building an international transaction in the facts and circumstances of the present case - Following decision of LG Electronics India Pvt. Ltd. Noida vs. ACIT 2013 (6) TMI 217 - ITAT DELHI - Decided against assessee. Transfer pricing adjustment of AMP expenses - Held that - expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof we direct the Assessing officer to exclude the expenses incurred by the assessee in connection with the sales totaling 5500.86 lacs as the same do not fall within the ambit of AMP expenses and hence not to be considered for computing the cost/ value of international transaction - expenditure relating to sales do not lead to the brand promotion and thus cannot be brought within the ambit of advertisement marketing and promotion expenses for determining the cost / value of the international transaction - Following decision of Glaxo Smithkline Consumer Healthcare Ltd. Versus Additional Commissioner of Income-tax Range-IV Chandigarh 2012 (4) TMI 279 - ITAT CHANDIGARH - Decided in favour of assessee. Capital or Revenue expenditure - Disallowance of advertisement expenditure - Held that - Revenue expenditure which is incurred and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years - It has not deferred the expenses at its end in the books rather it claimed that total expenses in the return. The Assessing Officer himself allowed only to the extent of 1/5th - Following decision of Madras Industrial Investment Corporation Limited Versus Commissioner of Income-Tax 1997 (4) TMI 5 - SUPREME Court - Decided in favour of assessee. Deduction u/s 32 - Held that - Assessing Officer is right in observing that provisions of section 32(1)(iii) should be applied for treating the damages to glow sign boards. These glow sign boards pertain to block of assets of furniture and fixtures which is still appearing in the schedule of assets - Matter remitted back - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment (A.Y. 2006-07 & A.Y. 2007-08)
2. Disallowance out of Expenditure on Advertisement (A.Y. 2006-07 & A.Y. 2007-08)
3. Disallowance of Deduction Claimed for a Sum of Rs. 1,01,02,335/- (A.Y. 2006-07)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee, a wholly-owned subsidiary of Haier Electrical Appliances Corp. Ltd., China, engaged in the distribution of consumer durables, entered into international transactions. The Assessing Officer (AO) referred these transactions to the Transfer Pricing Officer (TPO) under section 92CA(1) of the I.T. Act. The TPO identified unreported international transactions and proposed an adjustment of Rs. 57,24,40,79/- based on the arm's length price (ALP) of advertisement, marketing, and promotion (AMP) expenses.

The Disputes Resolution Panel (DRP) affirmed the TPO's action. The assessee appealed, citing a Special Bench decision in LG Electronics India Pvt. Ltd. vs. ACIT, which held that benchmarking AMP expenses as an international transaction was permissible. The Tribunal, following the Special Bench's principles, remitted the issue to the TPO to re-adjudicate the ALP, excluding selling expenses from AMP expenses and applying proper comparables.

2. Disallowance out of Expenditure on Advertisement:
The AO disallowed a portion of the advertisement expenditure, treating it as deferred revenue expenditure to be amortized over five years, allowing only 1/5th in the current year. The DRP upheld this view. The assessee appealed, referencing a Tribunal decision in its favor for A.Y. 2004-05, which was upheld by the Hon'ble Delhi High Court. The Tribunal, following this precedent, held that the entire advertisement expenditure should be allowed in the year incurred, thus setting aside the AO's order and deciding in favor of the assessee.

3. Disallowance of Deduction Claimed for a Sum of Rs. 1,01,02,335/-:
The AO disallowed the write-off of glow sign boards, arguing that the provisions of section 32(1)(iii) should apply since the block of assets for furniture and fixtures was still in the schedule of assets. The DRP upheld this view. The assessee appealed, requesting the allowance of depreciation pursuant to the disallowance. The Tribunal remitted the issue to the AO to restate the allowance of depreciation accordingly.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, remitting the transfer pricing adjustment issue to the TPO for re-adjudication and directing the AO to restate the allowance of depreciation for the disallowed deduction of fixed assets. The disallowance of advertisement expenditure was set aside, favoring the assessee based on precedent.