IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM
ITA No.1101/Del/2015
Assessment Year : 2010-11
Toshiba India (P) Ltd., Vs. DCIT,
E-20, 1st & 2nd Floor, Circle 25(1) & 25(2),
Hauz Khas, New Delhi.
New Delhi.
PAN : AABCT4829N
(Appellant) (Respondent)
Assessee By : Ms Rashmi Chopra, Advocate
Department By : Shri Sanjay Prasad, CIT, DR
Date of Hearing : 21.05.2015
Date of Pronouncement : 25.05.2015
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the final order
passed by the Assessing Officer (AO) on 6.1.2015 u/s 143(3) read with
ITA No.1101/Del/2015
section 144C(13) of the Income-tax Act, 1961 (hereinafter also called
`the Act') in relation to the assessment year 2010-11.
2. First issue raised in this appeal is against the addition of
Rs.40,14,26,892/- made by the AO on account of transfer pricing
adjustment towards Advertising, Marketing and Promotion (AMP)
expenses.
3. Briefly stated, the facts of the case are that the assessee, an Indian
company, is a wholly owned subsidiary of Toshiba Corporation, Japan.
It is engaged in the trading of consumer durables, IT products and also
providing representative and marketing support services to Toshiba
group companies worldwide. The assessee reported certain international
transactions, which have been enlisted on page 2 of the order passed by
the Transfer Pricing Officer (TPO). The assessee employed the
Transactional Net Margin Method (TNMM) as the most appropriate
method for demonstrating that its international transactions were at
arm's length price (ALP). On a reference made by the AO for
determining the ALP of the international transactions, the TPO accepted
2
ITA No.1101/Del/2015
the reported international transactions at ALP. He, however, observed
that AMP expenses to the tune of Rs.45,27,63,518/-, including discount
and rebates amounting to Rs.22,65,33,296/-, were incurred by the
assessee during the year in question. To determine the ALP of the
international transaction of AMP expenses, he chose certain comparable
companies. By applying the bright line test, he worked out non-routine
expenditure in excess of bright line at Rs.38.16 crore. Adding mark-up
of 12.50% amounting to Rs.4.77 crore and adjusting the
Reimbursements, he worked out a transfer pricing adjustment of
Rs.40,14,26,892/-. The assessee remained unsuccessful before the
Dispute Resolution Panel (DRP). Eventually, the AO vide his final
impugned order made addition of Rs.40.14 crore on this issue. The
assessee is aggrieved against this addition.
4. We have heard the rival submissions and perused the relevant
material on record. Special Bench of the Tribunal in the case of LG
Electronics India Pvt. Ltd. Vs. ACIT (2013) 152 TTJ (Del) 273 (SB), by
its majority decision held, inter alia, that AMP is a transaction and also
3
ITA No.1101/Del/2015
an international transaction within the meaning of section 92B of the Act
and that the TPO has jurisdiction to compute the ALP of this
international transaction despite the same not having been specifically
referred to by the AO. On the question of determination of the ALP of
this international transaction, the Special bench approved the application
of bright line test for working out the amount of non-routine AMP
expenses and held that the ALP of AMP expenses should be determined
on Cost plus method by treating AMP transaction as a separate and
distinct from other international transactions. It was further held that the
selling expenses directly incurred in connection with the sales do not
lead to brand promotion and hence should not be brought within the
ambit of AMP expenses. The Special bench laid down certain
parameters to be taken into consideration for determining the ALP of
AMP expenses. In the ultimate analysis, the matter was sent back to the
TPO for undertaking the exercise afresh in the light of its directions.
5. Following the said order, various benches of the Tribunal decided
several cases involving AMP expenses, restoring the matter to the file of
4
ITA No.1101/Del/2015
AO/TPO for deciding this issue in conformity with the directions given
by the Special Bench in LG Electronics (supra). Several assessees as
well as the Revenue preferred their respective appeals before the
Hon'ble High Courts against the tribunal orders following the Special
bench order. A batch of such appeals led by Sony Ericson Mobile
Communications India Pvt. Ltd. Vs. CIT has been disposed of by Their
Lordships of the Hon'ble Delhi High Court, delivering judgment on 16th
March, 2015, upholding the majority view of Special Bench in LG
Electronics (supra) treating AMP as an international transaction and also
conferring jurisdiction in the TPO to determine the ALP of the
international transaction of AMP expenses. The Hon'ble High Court has
held, inter alia, that the international transaction of AMP expenses
should be bundled or aggregated with other international transaction
carried out by the assessee as a distributor, who either simply acts an
agent of manufacturer or purchases goods from the manufacturer for
resale at his own account. However, in the case of a manufacturer, the
import of raw material has been held to be an independent transaction of
marketing and distribution. In the case of a distributor, the Hon'ble
5
ITA No.1101/Del/2015
High Court held that where TNMM has been applied as the most
appropriate method, which method has not been disturbed by the TPO,
then, the international transactions of AMP and distribution activities
should be clubbed. It further held that for determining the ALP of such
transactions under a combined approach, only such comparables should
be chosen which conform to the AMP functions and other distribution
functions conducted by the assessee. If there is some difference in the
functions under these international transactions, including that of AMP,
between the assessee and the comparables, then, suitable adjustment
should be made to bring both the transactions at par. If probable
comparables are not performing similar functions as done by the
assessee and no adjustment is possible for bringing the international
transactions of the assessee in an aggregate manner at par with those
undertaken by the comparables, then, segregation should be done and
the international transaction of AMP spend should be separately
processed under the transfer pricing provisions for the purposes of
determining its ALP separately. In such determination of ALP of AMP
expenses in a segregated manner, proper set off on account of excess
6
ITA No.1101/Del/2015
purchase price adjustment should be allowed. The view taken by the
Tribunal in segregating routine and non-routine expenses on the basis of
bright line test has been set aside by the Hon'ble High Court. The view
taken by the Special Bench that the expenses concerned with the sales,
such as, rebates and discounts etc., should be excluded from the ambit of
AMP expenses, has been upheld.
6. We can summarize the relevant position emanating from the
judgment of the Hon'ble High Court, as under : -
AMP expense is an international transaction [Paras 52 & 53 of
the judgment] ;
The TPO has jurisdiction to determine the ALP of the
international transaction of AMP expenses [Para 50 of the
judgment];
Inter-connected international transactions can be aggregated and
section 92(3) does not prohibit the set-off [Paras 80 & 81];
AMP is a separate function. An external comparable should
perform similar AMP functions. [Paras 165 &166] ;
7
ITA No.1101/Del/2015
Bright line test cannot be applied to work out non-routine AMP
expenses for benchmarking [Para 194(x)];
ALP of AMP expenses should be determined preferably in a
bundled manner with the distribution activity [Paras 91, 121 &
others] ;
For determining the ALP of these transactions in a bundled
manner, suitable comparables having undertaken similar activities
of distribution of the products and also incurring of AMP
expenses, should be chosen [Paras 194(i), (ii), (viii) & others];
The choice of comparables cannot be restricted only to domestic
companies using any foreign brand [Para 120] ;
If no comparables having performed both the functions in a
similar manner are available, then, suitable adjustment should be
made to bring international transactions and comparable
transactions at par [Para 194 (iii)] ;
If adjustment is not possible or comparable is not available, then,
the TNMM on entity level should not be applied [Paras 100, 121,
194(iii) & (vi)] ;
8
ITA No.1101/Del/2015
In the above eventuality, international transaction of AMP should
be viewed in a de-bundled manner or separately [Paras 121&
194(xi)] ;
In separately determining the ALP of AMP expenses, the TPO is
free to choose any other suitable method including Cost plus
method [Para 194(xiii)];
In so making a TP adjustment on account of AMP expenses, a
proper set off/purchase price adjustment should be allowed from
the other transaction of distribution of the products [Para 93] ;
Selling expenses cannot be considered as part of AMP expenses
[Paras 175 & 176 of the judgment].
7. With the above background of the ratio decidendi of the judgment
of the Hon'ble jurisdictional High Court, let us examine the contention
put forth by the ld. AR in support of the deletion of addition. She
submitted that the assessee applied TNMM as the most appropriate
method. Since the profit margin declared by the assessee was
favourably comparable with the average margin of the comparables,
9
ITA No.1101/Del/2015
which fact has not been disputed by the TPO, then, no adjustment should
be made on account of AMP expenses because such expenses stand
subsumed in the overall operating profit. This was countered by the ld.
DR with reference to certain paras of the judgment in Sony Ericsson
(supra) not permitting the acceptance of such a wide proposition.
8. We are unable to accept the argument advanced on behalf of the
assessee for deletion of the addition towards AMP expenses on the plain
logic of the assessee's profit margin matching with those of
comparables. There is a basic fallacy in the argument of the ld. AR. It
is pertinent to note that the TPO examined and got satisfied with the
assessee's profit margin vis-à-vis the comparables only qua the
international transactions of distribution function. He determined the
ALP of AMP expenses by applying bright line test and in this process
simply compared the quantitative figures of AMP expenses incurred by
the assessee and comparables for working out the non-routine expenses.
He did not examine the AMP functions carried out by the assessee and
the comparables. As the bright line test primarily concentrates on the
10
ITA No.1101/Del/2015
quantitative aspects of the AMP expenses alone, it overlooks the
examination of the AMP functions carried out by the assessee on one
hand and the comparables on the other. Now, the Hon'ble High Court in
Sony Ericson Mobile (supra) has held that AMP expense is a separate
international transaction and also bright line test is not applicable for
determining the ALP of AMP expenses. The manner for the
determination of the ALP of the distribution activity and AMP activity
has also been set out by the Hon'ble High Court to be conducted, firstly,
in a bundled manner by considering the distribution and AMP functions
performed by the assessee as well as the probable comparables, and if
probable comparables having performed both the functions are not
available, then to determine the ALP of AMP expenses in a segregated
manner. As such, it becomes immensely important to separately examine
the distribution and AMP functions undertaken by the assessee as well as
probable comparables. It is vital to highlight the difference between the
AMP expenses and AMP functions. Whereas the AMP functions are the
means by which the AMP activity is performed, the AMP expenses are
the amount spent on the performance of such means (functions). To put
11
ITA No.1101/Del/2015
it simply, an examination of AMP functions carried out by the assessee
and the probable comparables is sine qua non in the process of
determination of the ALP of the international transaction of AMP spend,
either in a segregate or an aggregate manner. What Their Lordships have
held is to bundle the distribution activity with the AMP activity, being
two separate but connected international transactions, for the purposes of
determination of the ALP of both these international transactions in a
combined manner. The argument of the ld. AR, if taken to a logical
conclusion, will make the AMP spend as a non-international transaction,
which, in our considered opinion, is not appropriate. Once AMP
expense has been held to be an international transaction, it is, but,
natural that the functions performed by the assessee under such a
transaction need to be compared with similar functions performed by a
comparable case. If AMP functions performed by the assessee turn out
to be different from those performed by a probable comparable
company, then, an adjustment is required to be made so as to bring the
AMP functions performed by the assessee as well as the comparable, at
the same pedestal. If we concur with the contention of the ld. AR that
12
ITA No.1101/Del/2015
the addition on account transfer pricing adjustment of AMP expenses be
deleted without any examination of the AMP functions carried out by
the assessee as well as comparables, this will amount to snatching away
the tag of international transaction from AMP expenses, assigned by the
Hon'ble High Court. What Their Lordships have held in the judgment is
that the distribution activity and AMP expenses are two separate but
related international transactions. It is only for the purposes of
determining their ALP that these two should be aggregated. The process
of such aggregation does not take away the separate character of the
AMP transaction, albeit related. An analysis and examination of the
distribution and AMP functions carried out by the assessee must be
necessarily done in the first instance, which should be then compared
with similar functions performed by some probable comparables. If the
distribution and AMP functions performed by the assessee turn out to be
different from those performed by probable comparables, then, a
suitable adjustment should be made to the profits of the comparable so
as to counterbalance the effect of such differences. If however
differences exist in such functions, but no adjustment can be made, then,
13
ITA No.1101/Del/2015
such probable comparable should be dropped from the list of
comparables. If, in doing this exercise, there remains no company doing
comparable distribution and AMP functions, then, both the international
transactions are required to be segregated and then examined on
individual basis by finding out probable comparables doing such
separate functions similarly. For the international transaction of AMP
spend, this can be done by, firstly, seeing the AMP functions actually
performed by the assessee and then comparing it with the AMP
functions performed by a probable comparable. If both are found out to
be similar, then the matter ends and a comparable is found and one can
go ahead with determining the ALP of such a transaction. If the AMP
functions performed by the two entities are found to be different, then
adjustment is required to be made in the case of a probable comparable,
so as to make it uniform with the assessee. The assessee may have
possibly done, say, four different AMP functions as against the probable
comparable having done, say, only three. In such a scenario, again the
adjustment will be warranted. In another situation, the AMP functions
performed by the assessee and probable comparable may be similar but
14
ITA No.1101/Del/2015
with varying standards, which will also call for an adjustment. Crux of
the matter is that the AMP functions performed by the assessee must be
similar to those done by the comparable, in the same manner as such
functions are compared in any other international transaction. However,
in computing ALP of AMP spend, the adjustment or set off, if any,
available from the distribution function, should be made. The essence
of the judgment in the case of Sony Ericson Mobile (supra) is that the
two international transactions of Distribution and AMP should be
examined on the touchstone of transfer pricing provisions, but on an
aggregate basis. Determining the ALP of two transactions in an
aggregate manner postulates making a comparison of both the functions
of distribution and AMP carried out by the assessee with the
comparables, so that surplus from the distribution activity could be
adjusted against the deficit in the AMP activity. The Hon'ble High Court
has no where laid down that the AMP functions performed by the
assessee should not be compared with those performed by the
comparable parties. On the contrary, it turned down the contention
raised by the ld. AR urging for not treating AMP as a separate function,
15
ITA No.1101/Del/2015
which is apparent from the extraction from para 165 of the judgment :
`On behalf of the assessee, it was initially argued that the TPO cannot
account for or treat AMP as a function. This argument on behalf of the
assessee is flawed and fallacious for several reasons. There are inherent
flaws in the said argument'. It held vide para 165 of the judgment that :
`An external comparable should perform similar AMP functions.'
Thus it is manifest that comparison of AMP functions is vital which
cannot be dispensed with. Let us we go a step further with the
alternative prescription of the judgment that if ALP of both the
transactions of Distribution and AMP cannot be determined in a
combined manner, then the ALP of AMP function should be separately
done. The submission advanced by the assessee of considering the
profit on an entity level without making comparison of AMP functions
done by the assessee as well as the comparable, will render this
alternative approach incapable of compliance. Canvassing such a view
amounts to treating AMP spend as a non-international transaction, which
is patently incapable of acceptance.
16
ITA No.1101/Del/2015
9. Adverting to the facts of the instant case, we find that the TPO
accepted TNMM as the most appropriate method and did not make any
TP adjustment on account of the distribution activity carried out by the
assessee. He, however, espoused the AMP expense as a separate and
distinct. Treating the AMP spend as a separate international transaction,
he applied the Cost plus method and proposed the extant adjustment. In
doing so, he segregated routine AMP expenses incurred by the assessee
for his business from the non-routine AMP expenses by treating such
non-routine AMP expenses leading to the creation of marketing
intangible for its AE. This bifurcation of total AMP expenses was done
by applying bright line test. It is obvious that in the entire exercise
carried out by the TPO, he proceeded on an altogether different line in
examining the quantum of AMP expense for determining the value of
the international transaction of AMP, without looking at the AMP
functions carried out by the assessee and the comparables. Distinct
examination of AMP functions does not find place in this method of
computing the value or the ALP of AMP spend. Now, when we look at
the ratio laid down by the Hon'ble jurisdictional High Court, it becomes
17
ITA No.1101/Del/2015
crystal clear that the approach adopted by the TPO for determining ALP
of AMP expenses has been rendered incorrect. However, the fact
remains that as per the verdict of the Hon'ble High Court, AMP spend
is an international transaction, which is required to be processed under
Chapter X of the Act by taking into account the AMP functions
performed by the assessee and then comparing such functions with those
performed by comparable entities, though, firstly in a combined manner
with the distribution functions. We find no reference to the AMP
functions carried out by the assessee in the order of the TPO. As such,
there can be no question of making any comparison of the assessee's
AMP functions with those of the comparables. Going by the ratio in the
case of Sony Ericson Mobile (supra), it is mandatory to make a
comparison of the AMP functions performed by the assessee and
comparables and then making an adjustment, if any, due to differences
between the two, so that the AMP functions performed by the assessee
and comparable are brought to a similar platform. In fact, this is also the
prescription of Rule 10B(1)(e), which provides as under :-
18
ITA No.1101/Del/2015
` (e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an
international transaction entered into with an associated enterprise is
computed in relation to costs incurred or sales effected or assets
employed or to be employed by the enterprise or having regard to any
other relevant base ;
(ii) the net profit margin realised by the enterprise or by an
unrelated enterprise from a comparable uncontrolled transaction or a
number of such transactions is computed having regard to the same
base ;
(iii) the net profit margin referred to in sub-clause (ii) arising in
comparable uncontrolled transactions is adjusted to take into account
the differences, if any, between the international transaction and the
comparable uncontrolled transactions, or between the enterprises
entering into such transactions, which could materially affect the
amount of net profit margin in the open market ;
(iv) the net profit margin realised by the enterprise and referred to
in sub-clause (i) is established to be the same as the net profit margin
referred to in sub-clause (iii) ;
(v) the net profit margin thus established is then taken into
account to arrive at an arm's length price in relation to the international
transaction.'
10. A perusal of the sub-clause (iii) of this Rule divulges that net profit
margin under a comparable uncontrolled transaction as determined
under sub-clause (ii) should be: "adjusted to take into account the
differences, if any, between the international transaction and the
comparable uncontrolled transactions." It is only such adjusted net
19
ITA No.1101/Del/2015
profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared
with the net profit margin realized by the assessee as per the mandate of
sub-clause (iv) of Rule 10B(1)(e).
11. Sub-rule (2) of Rule 10B provides that `for the purposes of sub-
rule (1)', the comparability of an international transaction with an
uncontrolled transaction shall be judged with reference to the following,
namely -- (a) the specific characteristics of the property transferred or
services provided in either transaction ; (b) the functions
performed, taking into account assets employed or to be employed and
the risks assumed, by the respective parties to the transactions ; (c)
the contractual terms (whether or not such terms are formal or in
writing) of the transactions which lay down explicitly or implicitly how
the responsibilities, risks and benefits are to be divided between the
respective parties to the transactions ; (d) conditions prevailing in the
markets in which the respective parties to the transactions operate,
including the geographical location and size of the markets, the laws and
Government orders in force, costs of labour and capital in the markets,
20
ITA No.1101/Del/2015
overall economic development and level of competition and whether the
markets are wholesale or retail. Sub-rule (3) of Rule 10B stipulates that
an uncontrolled transaction shall be comparable to an international
transaction if (i) none of the differences, if any, between the
transactions being compared, or between the enterprises entering into
such transactions are likely to materially affect the price or cost charged
or paid in, or the profit arising from, such transactions in the open
market ; or (ii) reasonably accurate adjustments can be made to
eliminate the material effects of such differences.
12. On a comparative reading of sub-rules (1), (2) and (3) of Rule
10B, it becomes palpable that the international transaction and the
uncontrolled transaction with which comparison is sought to be made for
determining the ALP, in the first instance, must have overall similar
characteristics. It is vivid that if the goods/services are different, then
no effective comparison can be made. Once the goods/services under
both the transactions are broadly similar but there is a difference in them
because of certain specific characteristics; and/or the products/services
21
ITA No.1101/Del/2015
in both the transactions are identical, but still there are certain
differences due to the contractual terms or the geographical location,
etc., then, a reasonably accurate adjustment should be made for
eliminating the material effects of such differences so as to bring the
international transaction and the comparable uncontrolled transaction on
the same podium. If due to one reason or the other, no reasonable
accurate adjustment can be made due to such differences, then, such
uncontrolled transaction should not be considered as a comparable
transaction.
13. It is discernible that the prescription of Rule 10B is in complete
harmony with the ratio of the judgment in the case of Sony Ericson
Mobile (supra), to the effect that the AMP functions carried out by the
assessee are required to be necessarily compared with the AMP
functions carried out by a comparable entity in determining the AMP of
ALP expenses. Difference between the functions, if capable of
adjustment, should be given effect to in the profit rate of the comparable
and if such difference cannot be given effect to, then, the probable
22
ITA No.1101/Del/2015
comparable should be eliminated from the list of comparables. Going
further, if no proper comparable survives, then the TNMM should be
discarded and an alternative method, may be, Cost plus or any other
suitable method be applied for determining the ALP of AMP expenses.
14. At the cost of repetition, we summarize that the distribution and
AMP functions are two separate international activities, which need to
be compared with uncontrolled transactions. Because of their inter-
twinning, it is only for the purposes of determining their ALP that both
these transactions can be aggregated in the first instance, so that the
surplus from one could be adjusted against the deficit from the other in
an overall approach. It does not mean that because of aggregation, the
AMP expense transaction sheds its character of a separate international
transaction and hence the AMP functions should not be matched with
the AMP functions carried out by probable comparables. If suitable
comparables can be found having performed both distribution and AMP
functions, then, their ALP should be determined on aggregate basis. If,
however, there is some difference in the distribution or AMP functions
23
ITA No.1101/Del/2015
performed by the assessee vis-à-vis the probable comparables, then an
attempt should first be made to iron out such difference by making a
suitable adjustment to the profit margin of comparables. If such an
adjustment is not possible, then such probable comparable should be
eliminated. If, by making a comparative analysis of the distribution and
AMP functions jointly, there remains no comparable case performing
such distribution and AMP functions, then, the international transaction
of AMP should be segregated and its ALP be determined separately by
applying a suitable method. However, in so determining the ALP of
such an international transaction of AMP expenses on separate basis, a
proper set off, if any, available from the distribution activity, should be
allowed.
15. Coming back to the facts of the instant case, we find that no detail
of the AMP functions performed by the assessee is available on record.
Similarly, there is no reference in the order of the TPO to any AMP
functions performed by comparables. In fact, no such analysis or
comparison has been undertaken by the TPO because of his applying the
24
ITA No.1101/Del/2015
bright line test for determining the value of the international transaction
of AMP expense and then applying the cost plus method for determining
its ALP. The ld. AR also failed to draw our attention towards any
material divulging the AMP functions performed by the assessee as well
as comparables. As such, we are handicapped to determine the ALP of
AMP expenses at our end, either in a combined or a separate approach.
Under such circumstances, we set aside the impugned order and send the
matter back to the file of the TPO/AO for determining the ALP of the
international transaction of AMP spend afresh in accordance with the
manner laid down by the Hon'ble High Court in Sony Ericson Mobile
(supra). Ex consequenti, the ground raised about the TPO having no
jurisdiction to determine the ALP of AMP expenses, is dismissed
following the judgment in the case of Sony Ericsson Mobile (supra).
16. Another issue raised in this appeal is against the disallowance of
Advances written off amounting to Rs.8,92,981/-. Succinctly, the
assessee claimed the above deduction by treating it as bad debts written
off. On being called upon to justify the deductibility of the amount, the
25
ITA No.1101/Del/2015
assessee submitted that it imported certain goods during the financial
year under consideration paying Special Additional Duty (SAD). Since
the goods in respect of which such amount of SAD was paid became
obsolete, the amount of SAD was written off and claimed as deduction.
It was stated that the nomenclature of bad debt was inadvertently given,
whereas, in fact, this amount was payment of irrecoverable/unadjustable
SAD. It was also stated before the DRP that the payment of SAD by
any importer is refunded when the goods are further sold. Since the
goods in respect of which this SAD was paid, became obsolete and
written off in the accounts of subsequent years, the amount of SAD was
claimed as deduction in this year. Unconvinced with the assessee's
submissions, the DRP approved the view taken by the AO in making the
addition.
17. After considering the rival submissions and perusing the relevant
material on record, it is noticed that the assessee, as an importer, paid
SAD and, hence, would have ordinarily become entitled to its refund on
further sale. The amount in question represents the payment of SAD on
26
ITA No.1101/Del/2015
the goods becoming obsolete and incapable of further sale. As such, the
amount of SAD on such goods has ceased to be refundable. When the
goods become obsolete, the payment of SAD already made assumes the
character of a part of the purchase price of the goods. It can be seen
from the assessee's submissions made before the DRP as recorded in
para 11.1 of its Direction that the goods became obsolete and were
`ultimately written off in the books of account in the subsequent years.'
This shows that the instant amount of SAD paid in relation to such
goods cannot be claimed as deduction in the year under consideration
because such goods were still appearing as closing stock in the books of
account of the assessee. As the payment of SAD in such circumstances
is nothing, but, a part of the purchase price, the same cannot be
separated from the purchase price of goods, to be written off separately
in the year in question, when the corresponding goods are still treated as
stock-in-trade. We, therefore, approve the view taken by the AO on this
issue. This ground fails.
27
ITA No.1101/Del/2015
18. The last issue is against the denial of deduction towards Provision
for warranty. There is no discussion in the assessment order on the
assessee's claim for deduction of warranty provision. No addition has
been made by the AO on this score. It can be noticed from the DRP's
direction that the assessee took up this issue before the DRP claiming
deduction of Rs.7,22,50,345/- on account of warranty provision for the
year in question. It is clear from para 12.3 of the Direction given by the
DRP that the assessee voluntarily disallowed this amount at the time of
filing income-tax return. It is not understandable as to under which
circumstances the assessee suo motu disallowed the claim at the time of
filing of income-tax return and sprang up claiming deduction during the
course of assessment proceedings. The ld. AR also failed to throw any
light on this aspect of the matter. The Hon'ble Supreme Court in the
case of Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC),
has held that a warranty provision made by the assessee on the basis of
the past experience is allowable as deduction u/s 37. It has further been
held that the deduction can be allowed if the provision is made on some
rational basis. Since the necessary facts in this regard are not available
28
ITA No.1101/Del/2015
before us, we are of the considered opinion that the ends of justice
would meet adequately if the impugned order on this issue is set aside
and the matter is restored to the file of AO for deciding it afresh as per
law, after allowing a reasonable opportunity of being heard to the
assessee.
19. In the result, the appeal is partly allowed for statistical purposes.
The order pronounced in the open court on 25.05.2015.
Sd/- Sd/-
[C.M. GARG] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
dk
Copy forwarded to:
Appellant
Dated, 25th May, 2015.
1.
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
29
|
