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* IN THE HIGH COURT OF DELHI AT NEW DELHI
15.
+ ITA 137/2014
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr G.C. Srivastava, Mr Daksh S.
Bhardwaj, Mr Akash Vajpai and Mr Rohit Madan,
Advocates.
versus
CANON INDIA PRIVATE LIMITED ..... Respondent
Through: Mr Mukesh Butani, Mr Vishal Kalra, Mr
Gaurav Gupta and Mr S.S. Tomar, Advocates.
AND
16.
+ ITA 138/2014
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr Rohit Madan and Mr Akash Vajpai,
Advocates.
versus
CANON INDIA PRIVATE LIMITED ..... Respondent
Through: Mr Mukesh Butani, Mr Vishal Kalra, Mr
Gaurav Gupta and Mr S.S. Tomar, Advocates.
CORAM:
HON'BLE DR. JUSTICE S. MURALIDHAR
HON'BLE MR. JUSTICE VIBHU BAKHRU
ORDER
% 03.08.2015
ITA 137/2014 & 138/2014 Page 1 of 11
Vibhu Bakhru J.
1. The present Appeals are filed by the Revenue against a common order dated
3rd May, 2013 passed by the Income Tax Appellate Tribunal (hereafter
`Tribunal') in respect of ITA Nos. 4602/Del/2010, 5593/Del/2011 and
6086/Del/2012; these appeals were filed by the Assessee challenging the orders
of the Dispute Resolution Panel (DRP) passed under Section 143(3)/144C of
the Income Tax Act, 1961(hereafter 'The Act') in respect of Assessment Years
(hereafter `AY's') 2006-07, 2007-08 and 2008-09 respectively.
2. The Assessee is a wholly owned subsidiary of M/s Canon Singapore Pvt.
Ltd. (hereafter `CSPL'). The Assessee started its operations in India in 1996.
During the course of its business, the Assessee entered into various
agreements/transactions with the Canon Group of Companies. These
transactions pertained to purchase and resale of Canon products such as
photocopiers, printers, scanners and cameras in India. The Assessee is also
engaged in software development and as a part of its business, exports software
and provides software related services to other Canon Group of Companies.
3. The Assessee filed its return of income for the AYs in question and
disclosed the transactions with its Associated Enterprises (hereafter the `AEs').
The Assessing Officer (hereafter `AO') made a reference under Section 92CA
of the Act to the Transfer Pricing Officer (hereafter `TPO') for determination
of Arm's Length Price (hereafter `ALP') in respect of various transactions
entered into by the Assessee during the relevant AYs.
ITA 137/2014 & 138/2014 Page 2 of 11
4. On 28th September, 2010 and 17th October, 2011 the TPO completed the
transfer pricing reports for the AYs 2007-08 & 2008-09 respectively. The TPO
found that the reported international transactions entered into by the Assessee
with its AE's were at arm's length. However, the TPO found that the Assessee
had incurred Advertisement, Marketing and Promotional (hereafter `AMP')
expenditure, which was much in excess of the expenditure incurred by other
comparable entities. On the aforesaid basis, the TPO concluded that the part of
the AMP expenditure was incurred by the Assessee on building/promoting the
brand `Canon' and the corresponding benefit of such excess expenditure had
been passed on to the Assessee's holding company - CSPL. The TPO,
accordingly, made transfer pricing adjustments (`TP adjustments') and directed
the AO to add Rs. 33,25,04,380/- and Rs. 52,19,78,244/- to the taxable income
of the Assessee for the AY's 2007-08 and 2008-09 respectively.
5. On the basis of the TPO's report, the AO issued draft Assessment Orders
dated 10th December, 2010 and 28th December, 2011 for AYs 2007-08 and
2008-09 respectively. These were objected to by the Assessee before the DRP.
However, the Assessee was unsuccessful and the TP adjustments made on
account of AMP expenditure were upheld by the DRP. Resultantly, the AO
passed the final assessment orders dated 25 th October, 2011 and 29th October,
2012 for AYs 2007-08 and 2008-09 respectively, making the additions as
directed by the DRP.
6. In addition to the above, the AO also added Rs.7,62,58,434/- which was
unutilised subsidy, to the total income of the Assessee for the AY 2007-08.
Similarly, the AO added a sum of Rs.10,51,00,000/- to the total income of the
ITA 137/2014 & 138/2014 Page 3 of 11
Assessee for the AY 2008-09 which reflected unutilised subsidy received by
the Assessee from its holding company - CSPL. The AO observed that the
subsidies received by the Assessee became its property notwithstanding that
the same had not been spent for the purposes for which they were received.
And, on the aforesaid basis, the AO held that the subsidies received by the
Assessee were required to be treated as its income for the relevant previous
year.
7. The aforementioned final orders passed by the AO were assailed by the
Assessee before the Tribunal. Insofar as the TP adjustments on account of
AMP expenditure are concerned, the Tribunal held that the following
receipt/expenses were to be excluded from the scope of AMP expenditure:
(i) Subsidy;
(ii) Trade discount in volume rebate;
(iii) Cash discount;
(iv) Commission.
8. The Tribunal further held 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. Both, the Revenue and the
Assessee, challenged the order of the Tribunal in respect of the AY 2006-07 in
this court by filing ITA No. 132/2014 and ITA 521/2013 respectively. These
appeals were considered by a Division Bench of this Court in Sony Ericsson
Mobile Communications India Pvt. Ltd. v. Commissioner of Income Tax:
(2015) 374 ITR 118 (Delhi) and the said appeals were disposed of by
ITA 137/2014 & 138/2014 Page 4 of 11
remanding the matter to the Tribunal for a de novo consideration in accordance
with the principles of law as enunciated in the said decision.
9. Mr. Srivastava, learned counsel for the Revenue submitted that the said
decision in Sony Ericsson Mobile Communication India Pvt. Ltd. (supra)
would also cover the present appeals in almost all the aspects. However,
according to him, two issues still remained for consideration, viz., the issue
relating to exclusion of subsidy from AMP expenditure and the issue as to the
character of the unutilised subsidy. He referred to questions (A) & (C)
proposed by the Revenue which read as under:
"A. Whether the Hon'ble ITAT was correct in law and in facts
in directing exclusion of the expenses in the nature of
(i)Subsidy; (ii)Trade discount and volume rebate; (iii) Cash
discount & (iv) Commission from the ambit of the AMP
expenditure following the decision of the ITAT,
Chandigarh Bench, in the matter of M/s Glaxo
Smithkline Healthcare Limited, while the nature of
expenses adjudicated by ITAT, Chandigarh Bench, in the
matter of M/s Glaxo Smithkline Healthcare Limited
(supra) were completely different and dealt with (i)
Discount Sales; (ii) Market Research; (iii) Sales Promotion;
(iv) Selling and Distribution and (v) Service Charge(s) paid
to Selling Agent(s);
C. Whether the character of the subsidy has to be determined
w.r.t. the purpose for which the subsidy is given and
therefore, the total subsidy received by Canon India from
Canon Singapore was liable to be treated as Revenue
Receipt and therefore the unutilized portion of the subsidy
in the hands of Respondent/Canon India was liable to be
added back to the income of the Respondent/Assessee;"
ITA 137/2014 & 138/2014 Page 5 of 11
10. Mr. Srivastava submitted that question (A), to the extent that it relates to
subsidy, and question (C) would require consideration. Mr. Srivastava
submitted that although the quantum of subsidy received would have to be
considered at the time of making TP adjustments but the same could not be
reduced from the AMP expenditure at the threshold to arrive at the net
expenditure on AMP for considering whether the same were at ALP and
determining the consequent TP adjustment, if any. He submitted that the entire
AMP expenditure incurred by the Assessee would have to be considered in
determining whether the same required any TP adjustments. Mr. Srivastava did
not dispute that while making such adjustments the quantum of subsidy
received by the Assessee would have to be considered. However, he urged that
the subsidy received could not be reduced from the expenditure at the
threshold.
11. Mr. Srivastava further submitted that the Tribunal had erred in not treating
the unutilised subsidy as income of the Assessee.
12. Countering the arguments advanced on behalf of the Revenue, Mr. Mukesh
Butani, learned counsel appearing for the Assessee submitted that subsidy was
received by the Assessee for meeting specific advertisement and sales
promotion expenditure and the Assessee was obliged to utilise the amount of
subsidy for the specified purposes. In the circumstances, the unutilised subsidy
could not be treated as income in the hands of the Assessee.
13. Insofar as the issue of deducting the subsidy received from the AMP
expense is concerned, Mr. Butani submitted that the said issue had been
ITA 137/2014 & 138/2014 Page 6 of 11
conclusively decided in favour of the Assessee by the decision of the
Tribunal's Special Bench in the case of LG Electronics Private Limited 2013
(24) ITR (Trib.) 634 (Del). He referred to paragraph 4.2.2 of the impugned
order passed by the Tribunal and submitted that the Tribunal had recorded that
the AO had the duty to exclude the amount of subsidy received for meeting
AMP expenses at the threshold itself, that is, before commencing the exercise
of benchmarking the AMP expenditure. He further submitted that the aforesaid
aspect had not been contested by the Revenue before the Tribunal and has been
raised for the first time in oral submissions before this Court. He pointed out
that the said issue also did not find any specific mention in the petition. Mr.
Butani submitted that in the circumstances, it was not open for the Revenue to
raise the dispute regarding the stage of exclusion of subsidy in the present
proceeding.
14. We have heard the learned counsel for the parties.
15. In the first instance, let us consider the controversy with regard to the
treatment of subsidy. The Assessee had stated before the Tribunal that it had
received sum of Rs. 27,10,87,594/- and Rs. 50,16,13,022/- from CSPL during
the years relevant to AYs 2007-08 and 2008-09 respectively. It was pleaded by
the Assessee that these subsidies were received for meeting specific
advertisements and sales promotion expenditure that had been pre-approved by
CSPL. During the period of the previous year ending 31st December 2007, the
Assessee had utilised a sum of Rs.19,48,29,160/- for advertisements and sales
promotion activities and this amount had been directly reduced from the
ITA 137/2014 & 138/2014 Page 7 of 11
relevant expenditure. The balance amount of Rs.7,62,58,434/- remaining after
incurring the expenditure was reflected as "Current Liabilities" by the Assessee
in its books. Out of the said sum, a further amount of Rs.39,161,177/- was
utilised towards advertisements during the period from January to March 2007
and this amount had been directly debited to "Current Liabilities". According
to the Assessee, the remaining amount of Rs. 37,097,257/- continued to be
reflected as "Current Liabilities" in its books as on 31st March, 2007. In the
subsequent year i.e. the Previous Year relevant to the AY 2008-09, the
Assessee received an amount of Rs. 50,16,13,022/-, which was directly
credited to the account under the head "Current Liabilities". All expenditure
incurred against the aforesaid subsidy was directly debited to the said account.
The unutilised part of the total subsidy as on 31st March, 2008 amounted to
Rs.10,54,11,660/-, which continued to be reflected as Current Liabilities. The
Assessee further pleaded that there were some inadvertent discrepancies in the
amount of unutilised subsidy as recorded in the Assessment Order.
16. The procedure for receipt/reimbursement of subsidies against expenditure,
as explained by the Assessee, was recorded in the order of the Tribunal as
under:
"(a) Initially the assessee forwards a proposal to CSPL for
reimbursement of expenditure to be incurred for specific purpose
(eg display charges of neon sign fabrication charges of neon sign,
advertisement in news papers etc.)
(b) Once the same is approved by CSPL, the assessee prepares
debit notes from time to time for receiving the advance payment.
this debit note contains the details of the particular relevant
expenditure to be incurred.
ITA 137/2014 & 138/2014 Page 8 of 11
(c) Thereafter, CSPL remits the advance in lump sum with a
specific direction that such money is to be spent only for the
specified purposes and any amount of subsidy remaining
unspent/unutilized shall be held by the assessee in trust for and on
behalf of CSPL and the same shall not be utilized by the assessee
for any other purpose."
17. It is not disputed by the Revenue that subsidies were received by the
Assessee from CSPL against specific obligation to incur expenditure on
specific activities and it was not open for the Assessee to divert the amount for
any purpose other than for which it was remitted. It is also not disputed by the
Revenue that Assessee is accountable to CSPL for the amount received. The
Tribunal had examined the relevant facts and also concluded that the unspent
amount is to be held in trust on behalf of CSPL and this was also confirmed by
CSPL.
18. In view of the aforesaid facts, it would, clearly, be impermissible for the
Assessee to appropriate and reflect the amount of unutilised subsidy as its
income. Therefore, the Assessee has not in our view rightly so credited the
subsidies received to its Profit & Loss Account, but reflected the same as a
current liability.
19. In view of the Assessee's obligation to utilise the same for the specific
purposes, the revenue could be recognised only on the application of the
subsidy for the specified purposes. In other words, the Assessee could credit
the Profit & Loss Account with the quantum of subsidy only if the
ITA 137/2014 & 138/2014 Page 9 of 11
corresponding expenditure was also debited to the Profit and Loss Account
maintained by the Assessee.
20. We are, therefore, 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.
21. In the circumstances, we find no infirmity with the Tribunal's view on this
issue. Question (C) as raised by the Revenue must, therefore, be answered in
the negative; that is, in favour of the Assessee and against the Revenue.
22. The next question to be considered is with respect to the issue whether
subsidy received by the Assessee has to be excluded from AMP expenditure at
the threshold before making any TP adjustments. In our view, 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. (supra). In our
ITA 137/2014 & 138/2014 Page 10 of 11
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.
23. The appeals are disposed of with the aforesaid observations.
VIBHU BAKHRU, J
S. MURALIDHAR, J
AUGUST 03, 2015
RK
ITA 137/2014 & 138/2014 Page 11 of 11
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