Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: form 3cd :: TDS :: articles on VAT and GST in India :: VAT Audit :: empanelment :: VAT RATES :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: list of goods taxed at 4% :: Central Excise rule to resale the machines to a new company :: ACCOUNTING STANDARDS :: ACCOUNTING STANDARD :: ARTICLES ON INPUT TAX CREDIT IN VAT :: TAX RATES - GOODS TAXABLE @ 4% :: cpt :: due date for vat payment
 
 
From the Courts »
 Reliance Communications Ltd vs. DDIT (ITAT Mumbai)
  Sushila Devi vs. CIT (Delhi High Court)
 Ashok Prapann Sharma vs. CIT (Supreme Court)a
  Vatsala Shenoy vs. JCIT (Supreme Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 M.K.Overseas Pvt. Ltd. Vs. Pr.Commissioner Of Income Tax-06
 Arshia Ahmed Qureshi Vs. Pr. Commissioner Of Income Tax-21
 CHAUDHARY SKIN TRADING COMPANY Vs. PR. COMMISSIONER OF INCOME TAX-21
  Sushila Devi vs. CIT (Delhi High Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 Deputy Director Of Income Tax Vs. Virage Logic International

Toshiba India (P) Ltd., E-20, 1st & 2nd Floor, Hauz KhasNew Delhi. Vs. DCIT, Circle 25(1) & 25(2), New Delhi.
May, 26th 2015
       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

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Software Work Flow Workflow Software Software Automation Workflow automation Software Design Workflow Design Business Work Flow Workflow automation tools

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions