2017 (5) TMI 473 - AT - Income Tax

Disallowance on account of transit breakages - Held that - The disallowance has been upheld by the Hon ble High Court of Delhi 2015 (10) TMI 491 - DELHI HIGH COURT in assessee s own case for AY 2001-02. In view of the fact that this issue has been decided against the assessee by the Hon ble High Court and against which SLP filed by the assessee was also dismissed, we decide the issue against the assessee and as such these grounds of appeal are dismissed. Transfer pricing adjustment on account of marketing support services - absence of international transaction - Held that - Respectfully following the co-ordinate benches decision in the assessee s own case we direct that the reimbursements have to be included in the cost base and the operating margins have to be computed accordingly. As regards the grounds of appeal raised by the revenue against the partial relief granted by the Ld. CIT (A) towards allocation of costs, no sustainable ground has been presented before us by the revenue and as such the order of the Ld. CIT (A) is confirmed. Hence, these grounds of appeal of the assessee and the revenue are disposed off in terms of these directions. Transfer pricing adjustment on account of Advertisement, Marketing and Promotional ( AMP ) expenses incurred by the assessee for promotion of its brands in India - Held that - As where the products are India specific there cannot be any adjustment in respect of the AMP expenditure since no benefit arises to the AE on account of such expenditure. Accordingly, these grounds of the revenue are rejected and order of the Ld. CIT (A) is confirmed.Our adjudication in favour of the assessee is guided by the undisputed fact that in the case of the assessee the AMP spend was India specific as the said brands were also India specific and there is no possibility that any benefit could have arisen to the non-resident AE. If the product manufactured and sold by the assesse is India specific then it cannot be said that any benefit could have accrued to the AE on account the AMP spend in India in respect of such brands. Disallowance of deduction being provision for commission on sales - Held that - Since there is no discussion by the AO on the issue at hand, we deem it fit and in the interest of justice to set aside the addition and remand the matter to the file of the AO for a fresh consideration in accordance with law and after giving adequate opportunity to the assessee. Addition being 10% of brand expenses made by the AO treating the same as being capital in nature - Held that - We find force in the arguments of the Ld. Counsel that the issue is squarely covered in favour of the assessee as there is a clear finding that such expenditure does not result in any enduring benefit. Hence, these grounds of the revenue are dismissed and the order of the Ld. CIT (A) is confirmed.

Issues Involved:

1. Disallowance on account of transit breakages.
2. Transfer pricing adjustment on account of marketing support services.
3. Transfer pricing adjustment on account of Advertisement, Marketing, and Promotional (AMP) expenses.
4. Disallowance of deduction for provision for commission on sales.
5. Adjustment made to the book profits under section 115JB.
6. Deletion of addition of 10% of brand expenses treated as capital in nature.

Detailed Analysis:

1. Disallowance on Account of Transit Breakages:

The Assessing Officer (AO) disallowed the provision for transit breakages for AY 2004-05 and AY 2005-06, considering it an unascertained liability. The CIT(A) upheld this view but allowed the actual breakages incurred as an expense. The assessee's appeal was dismissed as the Hon'ble High Court of Delhi had upheld the disallowance, and the Supreme Court confirmed this decision. Hence, the provision for transit breakages created during the year was to be disallowed, but any reversals and actual amounts were allowed as deductions.

2. Transfer Pricing Adjustment on Account of Marketing Support Services:

The assessee provided Marketing Support Services to its Associated Enterprises (AEs) and received a fixed fee and reimbursement of actual marketing costs. The Transfer Pricing Officer (TPO) re-allocated expenses to the marketing support services and included reimbursements in the cost base, leading to an adjustment. The CIT(A) partially granted relief by accepting cost allocation on a headcount basis but included reimbursements in the cost base. The Tribunal upheld the CIT(A)'s decision, confirming that reimbursements should be included in the cost base and operating margins computed accordingly.

3. Transfer Pricing Adjustment on Account of AMP Expenses:

The TPO held that AMP expenses incurred by the assessee created marketing intangibles for the AEs and needed to be shared. The CIT(A) deleted the adjustment, noting that the brands were specific to the Indian market and the benefit to the AEs was incidental. The Tribunal agreed with the CIT(A), emphasizing that the AMP spend was India-specific, and no benefit could accrue to the AE. The Tribunal rejected the revenue's request to remand the issue back to the TPO, affirming that the AMP expenditure did not result in an international transaction.

4. Disallowance of Deduction for Provision for Commission on Sales:

The AO disallowed the provision for commission on sales without any discussion in the order. The CIT(DR) did not object to remanding the issue back to the AO. The Tribunal set aside the addition and remanded the matter to the AO for fresh consideration in accordance with the law.

5. Adjustment Made to the Book Profits Under Section 115JB:

The assessee did not press this issue as it was academic in nature and did not impact the assessed income/tax liability. The Tribunal dismissed this ground in limine.

6. Deletion of Addition of 10% of Brand Expenses Treated as Capital in Nature:

The AO disallowed 10% of brand expenses, treating them as capital in nature due to their enduring benefit. The CIT(A) deleted the disallowance, noting that the expenditure was for refreshing consumer memory and did not result in enduring benefit. The Tribunal upheld the CIT(A)'s decision, finding that the issue was covered in favor of the assessee by previous decisions of the Tribunal and the jurisdictional High Court, which held that such expenditure does not result in an enduring benefit.

Conclusion:

The appeals filed by the assessee were partly allowed, and those filed by the revenue were dismissed. The Tribunal confirmed the CIT(A)'s decisions on various issues, emphasizing the importance of factual findings and the application of relevant legal principles.

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