2014 (8) TMI 836 - AT - Income Tax

Transfer pricing - selection of comparable - Jurisdiction of TPO Held that - The assessee is a distributor whose remuneration model necessarily is different from a licensed manufacturer as has been held in BMW India Pvt. Ltd. - the transaction to be an international transaction - the applicability of the bright line as a methodology for calculating the AMP is also decided in Revenue s favour - as far as calculation of bright line is concerned the TPO is directed to correctly calculate the bright line keeping in mind that a fresh search of comparables be done following the directions of the Special Bench - the TPO needs to carry out a fresh search for selecting the comparables after a proper FAR analysis making adjustments which are warranted on facts - the TPO is directed to correctly calculate the AMP expenses by excluding the selling expenses as they do not from part of AMP basket of expenses the matter is remitted back to the TPO for application of mark-up by way of a speaking order in accordance with law Decided partly in favour of assessee. Provision for warranty based on actuarial or scientific method or not - Advertisement charges to be treated as deferred revenue expenditure or not - Advance service charges Held that - The calculation is based on neither actuarial valuation nor any other scientific method - the material available on record and the peculiar facts and circumstances of the case and the orders of the Tribunal in the assessee s own case, it is not clear as to on what basis the AO has held the expenditure to be deferred Revenue expense - The factum of incurring the expenditure has not been doubted by the Revenue - the AO is directed to allow the expense as a Revenue expenditure - For income to accrue, it is necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, and a debt must have come into existence and he must have acquired a right to receive the payment - there is nothing to suggest that the assessee has fully contributed to its accruing by rendering services so as to entitle him to receive the entire amount Decided in favour of Assessee.

Issues Involved:
1. Validity of the assessment order under section 143(3) read with section 144C of the Income Tax Act.
2. Transfer Pricing adjustments related to Advertisement, Marketing, and Promotion (AMP) expenses.
3. Disallowance of provision for warranty.
4. Disallowance of advertisement charges as deferred revenue expenditure.
5. Treatment of advance service charges as income.
6. Initiation of penalty proceedings under section 271(1)(c) read with section 274 of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contested the legality of the assessment order passed under section 143(3) read with section 144C of the Income Tax Act. The Tribunal did not find merit in this ground and upheld the assessment order's validity.

2. Transfer Pricing Adjustments Related to AMP Expenses:
The appellant challenged the Transfer Pricing Officer (TPO) and Assessing Officer's (AO) adjustments of Rs. 5,66,19,363 for AMP expenses under section 92CA of the Act. The TPO had applied the "bright line limit" to determine excessive AMP expenses, asserting that the appellant should have been compensated by its associated enterprise (AE) for these expenses, as they resulted in the creation of marketing intangibles benefiting the AE. The Tribunal upheld the TPO's jurisdiction and the applicability of the bright line method but directed the TPO to re-examine the facts and recalculate the AMP expenses, excluding selling expenses and selecting appropriate comparables following the guidelines set by the Special Bench in L.G. Electronics.

3. Disallowance of Provision for Warranty:
The AO had disallowed the provision for warranty amounting to Rs. 31,00,166, treating it as a contingent liability. The Tribunal noted that similar disallowances in previous years had been reversed by the Tribunal and upheld by the High Court. Following this precedent, the Tribunal allowed the appellant's claim for the provision for warranty.

4. Disallowance of Advertisement Charges as Deferred Revenue Expenditure:
The AO had disallowed Rs. 4,70,24,396, being 4/5th of the total advertisement expenditure, treating it as deferred revenue expenditure. The Tribunal observed that the AO had not doubted the factum of incurring the expenditure and that similar disallowances in previous years had been reversed by the Tribunal and upheld by the High Court. Therefore, the Tribunal directed the AO to allow the entire advertisement expenditure as revenue expenditure.

5. Treatment of Advance Service Charges as Income:
The AO had treated advance service charges of Rs. 16,01,163 as income for the year under consideration. The Tribunal referred to its decision in the appellant's case for the previous assessment year, where it was held that service charges received in advance should be recognized as income in the year when services are rendered. Following this precedent, the Tribunal directed the AO to grant relief to the appellant.

6. Initiation of Penalty Proceedings:
The appellant contested the initiation of penalty proceedings under section 271(1)(c) read with section 274 of the Income Tax Act. The Tribunal did not provide a detailed discussion on this issue but noted that it requires no adjudication, implying that it was not relevant for the current appeal's resolution.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the TPO and AO to re-examine specific issues and grant relief based on the Tribunal's directions and precedents set in previous years. The Tribunal emphasized the need for a detailed and fact-specific analysis while applying the principles laid down in relevant judicial decisions.

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