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2016 (5) TMI 969 - AT - Income TaxAddition of AMP expenses - TPA - Held that - In the case under consideration, the AO/TPO has not brought anything on record that there existed and agreement, formal or informal, between the assessee and the AE to share/reimburse the AMP expenses incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction-in-question an IT remains unfulfilled. Conducting FAR analysis or adopting an appropriate method is the second stage of TP adjustments. The first thing is to find out whether the disputed transaction in is IT or not. Without crossing the first threshold second cannot be approached, as stated earlier. In the case under consideration, we are of the opinion that AMP expenditure is not an IT and therefore we are not inclined to restore back the issue to the file of the AO. Considering the facts and circumstances of the case under consideration, we are of the opinion that the FAA was not justified in upholding the order of the TPO. Therefore, reversing his order, we decide second ground in favour of the assessee. Disallowance of deduction in respect of payment for additional excise duty payable by third-party manufacturers - Held that - provision made by the assessee for the amount payable to third party manufacturers/convertors on account of excise duty payable by them as per the agreement had not been crystallised or ascertained during the year under consideration as the sum was not paid by the third party manufacturers/convertors but was disputed by them, which dispute was not settled in the year under consideration. The said liability was a contingent liability and it was not while computing the business income of the assessee for the year under consdiration. In that view of the matter, we uphold the impugned order of the ld. CIT(A) confirming the disallowance made by the A. O. - Decided against assessee Disallowance of appreciation on marketing know-how (in pursuance of worldwide stock and asset purchase agreement entered into by Pfizer US and the parent company of the assessee) - Held that - When the AO has accepted the payment in question for goodwill then in view of the judgment of the Hon ble Supreme Court in the case of M/s SMIFS SECURITIES LTD (2012 (8) TMI 713 - SUPREME COURT ), the depreciation is allowable on the marketing knowhow Disallowance made u/s. 14A - Held that - Disallowance should be restricted to 2% of the exempt income
Issues Involved:
1. Disallowance of royalty payment. 2. Disallowance of AMP expenses. 3. Disallowance of deduction for additional excise duty payable by third-party manufacturers. 4. Disallowance of depreciation on marketing know-how. 5. Disallowance under Section 14A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of Royalty Payment: The first issue concerns the disallowance of ?7.30 crores out of the royalty payment made by the assessee to its associated enterprise (AE), M/s. Cadbury Schweppes Overseas Ltd. (CSOL), UK. The Assessing Officer (AO) found that the royalty payment was not at arm's length price (ALP). The Transfer Pricing Officer (TPO) opined that the royalty paid on trademarks could not be allowed. The First Appellate Authority (FAA) upheld the disallowance. The Tribunal, however, decided in favor of the assessee, referencing similar cases from previous years where the royalty payments were deemed at arm's length. The Tribunal concluded that the royalty payment on trademark usage did not call for any adjustment and decided the ground in favor of the assessee. 2. Disallowance of AMP Expenses: The second issue pertains to the disallowance of AMP expenses amounting to ?71 lakhs. The TPO observed that the assessee's advertisement and marketing expenses were significantly higher than the industry average, suggesting that a portion of these expenses should be allocable to the AE. The FAA upheld the TPO's decision. The Tribunal, however, found that the AMP expenses were incurred wholly and exclusively for the assessee's business in India and were not an international transaction. The Tribunal cited several judgments, including those from the Delhi High Court, which emphasized that AMP expenses incurred for local market promotion do not constitute an international transaction. The Tribunal reversed the FAA's order, deciding the ground in favor of the assessee. 3. Disallowance of Deduction for Additional Excise Duty: The third issue involves the disallowance of deduction in respect of payment for additional excise duty payable by third-party manufacturers. The Tribunal noted that this issue had been consistently decided against the assessee in previous years. The Tribunal upheld the disallowance, citing that the liability was contingent and not crystallized during the year under consideration. 4. Disallowance of Depreciation on Marketing Know-how: The fourth issue is the disallowance of depreciation on marketing know-how. The assessee argued that this issue had been decided in its favor in previous years. The Tribunal agreed, referencing a Supreme Court judgment that allowed depreciation on goodwill as an asset under Section 32 of the Income Tax Act. The Tribunal concluded that the depreciation on marketing know-how should be allowed and decided the ground in favor of the assessee. 5. Disallowance Under Section 14A: The fifth issue concerns the disallowance made under Section 14A of the Income Tax Act, amounting to ?2,00,52,715/-. The AO had disallowed a portion of the expenses based on the proportionate contribution of exempt income to the net profit. The FAA partially allowed the appeal, reducing the disallowance. The Tribunal, referencing previous decisions, concluded that a reasonable disallowance would be 2% of the exempt income. The Tribunal modified the orders of the authorities below and decided the ground in favor of the assessee, in part. Conclusion: The appeals filed by the assessee and the AO were partly allowed. The Tribunal's order was pronounced in the open court on 18th May 2016.
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