9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2015 (8) TMI 429 - HC - Income TaxDetermination of Arm s Length Price - Transfer pricing adjustment - ITAT directing exclusion of the expenses in the nature of Subsidy from the ambit of the AMP expenditure - Held that - Unable to accept the Revenue s contention that the unutilised subsidy is required to be recognised as income of the Assessee in the year of its receipt. This would be contrary to the matching concept, which is the substratal principle for computing income during a relevant period. It is necessary that income be recognised along with the corresponding expenditure incurred for earning the income. Thus, where an Assessee follows the Accrual/Mercantile system of Accounting as in this case income can be recognised only when the matching expenditure is also accounted for irrespective of the cash outflows/inflows during the year. It would thus, not be correct to recognise the subsidies received for incurring specific expenditure as income without accounting for the corresponding expenditure. In the circumstances, we find no infirmity with the Tribunal s view on this issue. Decided in favour of the Assessee and against the Revenue. Whether subsidy received by the Assessee has to be excluded from AMP expenditure at the threshold before making any TP adjustments - Held that - The said question would be inextricably linked with the manner in which ALP of the relevant international transaction is determined. This court has remanded the issue as to the determination of ALP to the Tribunal in terms of the decision of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. (2015 (3) TMI 580 - DELHI HIGH COURT). In our view, it would be premature to consider this issue in isolation and without reference to the determinative exercise to be conducted by the Tribunal or the concerned Income Tax Authority. The question whether subsidy has to be reduced from the AMP expenditure incurred by the Assessee at the threshold or by way of a later adjustment would depend on various factors including the comparables selected for the purposes of determining the ALP as also the methodology adopted. Needless to mention, it would be open for the Revenue as well as the Assessee to take all available contentions with respect to this aspect before the concerned authority.
Issues Involved:
1. Exclusion of specific expenses from AMP expenditure. 2. Characterization of unutilized subsidy as income. Detailed Analysis: 1. Exclusion of Specific Expenses from AMP Expenditure: The Tribunal held that certain expenses should be excluded from the scope of AMP expenditure, specifically: - Subsidy - Trade discount in volume rebate - Cash discount - Commission The Revenue contended that these exclusions were incorrect, arguing that the nature of expenses adjudicated by the ITAT, Chandigarh Bench, in a different case (M/s Glaxo Smithkline Healthcare Limited) were completely different. The Revenue's position was that the entire AMP expenditure incurred by the Assessee should be considered in determining whether the same required any TP adjustments. However, the Tribunal's decision to exclude these expenses was based on the principle that the AO should exclude the amount of subsidy received for meeting AMP expenses at the threshold itself before commencing the exercise of benchmarking the AMP expenditure. 2. Characterization of Unutilized Subsidy as Income: The AO added unutilized subsidies to the Assessee's total income for the relevant AYs, arguing that the subsidies became the property of the Assessee notwithstanding that the same had not been spent for the purposes for which they were received. The Tribunal, however, found that unspent subsidy was not the income of the Assessee but was held in trust by the Assessee to be spent for the specific purposes for which it had been remitted by CSPL. The Assessee explained that subsidies were received for meeting specific advertisement and sales promotion expenditure and were not to be utilized for any other purpose. The Tribunal recorded that the AO had the duty to exclude the amount of subsidy received for meeting AMP expenses at the threshold itself. The Tribunal also noted that the unspent amount was to be held in trust on behalf of CSPL, which was confirmed by CSPL. The Revenue did not dispute that subsidies were received against a specific obligation to incur expenditure on specific activities and that the Assessee was accountable to CSPL for the amount received. The Tribunal concluded that it would be impermissible for the Assessee to appropriate and reflect the amount of unutilized subsidy as its income. Instead, the Assessee rightly reflected the same as a current liability. The Tribunal's view was that revenue could only be recognized on the application of the subsidy for the specified purposes. Thus, the Assessee could credit the Profit & Loss Account with the quantum of subsidy only if the corresponding expenditure was also debited to the Profit and Loss Account maintained by the Assessee. The Tribunal found no infirmity in this approach, and the court agreed, stating that recognizing the unutilized subsidy as income in the year of its receipt would be contrary to the matching concept, which is essential for computing income during a relevant period. Conclusion: The appeals were disposed of with the court affirming the Tribunal's view that unutilized subsidies should not be treated as income of the Assessee and that the subsidies received should be excluded from AMP expenditure at the threshold before making any TP adjustments. The court emphasized that the determination of ALP and related adjustments should be conducted by the Tribunal or the concerned Income Tax Authority, with all available contentions open for consideration.
|
