| 2017-TII-INSTANT-ALL-506 | 15 November 2017 |
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FEMA NOTIFICATION CASE LAWS PR CIT Vs PEPSI FOODS PVT LTD: DELHI HIGH COURT (Dated: November 13, 2017) Income Tax - Sections 40(a)(ia) & 260A. Keywords: Actual expenditure - Amount of provision - Business requirements - Commercial venture - Excessive price support - Non-related bottlers & Percentage of price. The Assessee-company is engaged in the business of selling bottlers, its various parts and other articles to its distributors across the country. The Assessee filed its return for the relevant AY and claimed deduction on account of price support expenses and its P/L account reflected sale turnover. The Assessee submitted the inter-price support provided to all the purchasers. On a reference by AO, TPO noted the average expenditure that could be reasonably claimed was 11.79%. Following the observations made by the TPO, the AO picked up only 12 parties to whom price support was allowed and, then, took the average of the percentage of price support to total sales as a benchmark for the purposes of disallowance. Further, the AO also picked up certain items of debits and credits from the same price support account which were categorized by the Assessee as provision. While completing the assessment proceeding, the AO noted that the provision for price support could not be allowed as deduction hence, he disallowed the difference between two such totals of debits and credits. However, the aggrieved Assessee tried to rectify the determination made by the AO before the DRP but, was unsuccessful and therefore, the amount was added back. On appeal before the Tribunal, it was observed that the price support was allowed to three related parties however, apart from these three, the Assessee had also paid price support to 18 non-related parties and the percentage of such volume was from 0% to 32.90%. It was then observed that out of 21 parties, the Assessee failed to pay any price support to 8 parties which varied from 3.72% to 32.90%. Hence, the AO had misunderstood the provision debited and credited to the price support account as a mere provision and not as an actual expense. The Tribunal directed to reverse the sum. On appeal, the High Court held that, Whether when the AO is not satisfied with assessee's explanation, it is open to examine genuiness of the parties to whom discount was allowed in order to comply with the business requirements and trade practices - YES: HC Whether therefore, averaging the percentage of price as a benchmark for the purposes of disallowance is not sustainable - NO: HC + the Assessee gave incentive to its related and non-related bottlers in terms of volume discount. We fail to appreciate the view point of the AO in picking up only those 12 parties to whom price support was allowed and, then, averaging the percentage of price support to total sales as a benchmark for the purposes of disallowance. This course of action has no legal sanctity and is unfounded; + if the AO was not satisfied with the explanation given by the Assesses for allowing of discount at varying rates, it was open to him to specifically examine each and every party to whom volume discount was allowed for ascertaining whether it was genuinely paid or not and further whether it was commensurate with the business requirements and trade practices. Nothing of this sort has been done by the AO, who went by a mathematical exercise in making disallowance of Rs.12.04 crore. Such a mechanism for making disallowance in our considered opinion cannot be sustained hence, overturn the order on this score and order for the deletion of this addition; Whether the debit and credit of provision in the price support account is an actual expenditure and not a provision in the real sense and hence, cannot be disallowed - YES: HC + the Assessee is paying price support in two ways. While, to some of the parties, the amount is straight away paid and directly debted to this account to others, a monthly provision is made on the sales made to them during the respective month. Subsequently, such provision is reduced or enhanced with the actual amount of discount; + when the actual amount is paid, respective account of the party is credited without routing it through the price support account. Sometimes, the actual amount of price support is enhanced or reduced from the amount of provision made at the end of the respective month, depending upon the negotiations between the parties and the market conditions; + it is manifest that the debit and credit of provision in the price support account is not a provision in the real sense, but an actual expenditure or its adjustment. The amount of provision of Rs.15 created at the end of each month is credited to the respective bottler's account ant the payment made does not enter into the price support account to the extent of the provision already debited. The AO has misunderstood the provision debited and credited to the price support account as a mere provision and not as an actual expense. When this provision is a part and parcel of the total price support expense, such part of provision, which actually represents the expenditure incurred, cannot be disallowed; + the reasoning of the Tribunal, cannot be faulted. The AO concededly adopted the same characteristic to all parties related and unrelated as to the prevailing and local market conditions. There may be several reasons why an Assessee or a commercial venture might be compelled to provide discounts/price support etc. for ensuring the marketability of its product at the price that they proposes. The method of averaging, to say the least, is illegal, this Court, therefore, is of the opinion that no question of law arises on this aspect; + as far as the other question, with regard to the disallowance u/s 40(a)(ia) of Rs. 15,41,815.78 is concerned, the Court notices that the Tribunal consistently followed its order in directing the inspection of such addition on the basis of its previous orders in AYs 2002-2003, 2003-2004, 2004-05. No question of law, therefore, arises. Therefore, the Appeal is dismissed. Revenue's appeal dismissed MSD PHARMACEUTICALS PVT LTD Vs ADDL CIT: DELHI HIGH COURT (Dated: November 13, 2017) Income Tax - Section 92C Keywords - Determination of Arms Length Price The assessee company is engaged in the production of medicines and pharmaceutical items. For the AY 2011-12, the assessee company claimed expenditure on account of Advertising Marketing Promotion. The AO held the same to be part of the international transaction, during determination of the Arm's Length Price (ALP). The TPO followed the decision of the Special Bench of the Tribunal in LG Electronics, and adopted the 'Bright Line Test' while determining the ALP. The decision in LG Electronics had been set aside by the present court in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. Commissioner of Income Tax. In light of the same, the Tribunal remanded the matter back to the TPO for fresh determination of ALP. The assessee company was aggrieved by the fact that in the two appeals filed in the AY 2010-11, in one matter the Court had restored its matter before the Tribunal for de novo adjudication, but the other matter had attained finality without the Tribunal giving any findings, and so such matter should not have been remanded to the AO. On hearing the matter, the Tribunal held that, Whether when a finding of facts on merit is absent, it is a fit case for remand - YES: ++ the present court in ITA Nos.432/2017 (Pr. Commissioner of Income Tax vs. MSD Pharmaceuticals Pvt. Ltd.) and 524/2017 (MSD Pharmaceuticals Pvt. Ltd. vs. Additional Commissioner of Income Tax), had recorded certain observations. Following the same order in these two appeals, which was rendered on 19.07.2017, the impugned order is, hereby, modified. The ITAT shall consider deciding the appeals on the questions urged by the parties. It goes without saying that the appellant’s contentions with respect to what it considers to be the matters settled shall also be gone into and a finding on the merits rendered. Assessee's Appeals partly allowed MSD PHARMACEUTICALS PVT LTD Vs DCIT: DELHI ITAT (Dated: May 25, 2017) Income Tax - Sections 92B, 92C, 92F(v), 144C & (5) & 271(1)(c) Keywords - Disallowance of Advertisement Marketing Promotion expenses The assessee company is engaged in the production of medicines and pharmaceutical products. For the relevant AY, the AO made certain additions to and disallowances from the total income of the assessee. Amongst others, the assessee had claimed expenses on account of advertisement marketing and promotion (AMP), which were related to the selling and distribution. Subsequent to directions given by the DRP, the AO passed the assessment order disallowing such expenses claimed by the assessee, and determined the assessee's income at INR 95,57,51,350. Hence the present appeal. On hearing the matter, the Tribunal held that, Whether disallowance of AMP expenses, based upon a precedent judgement, merits fresh consideration, where such precedent was subsequently set aside - YES : ITAT ++ it is noticed that the main issue relating to AMP expenses agitated by both the parties has been restored to the file of the TPO/AO for fresh determination in assessee’s own case in ITA No. 1423/Del/2015 for the assessment year 2010-11 vide order dated 22.11.2016. Considered relevant findings in said order. Since facts for the year under consideration relating to AMP expenses issue are similar to the facts involved in aforesaid referred to case. So, respectfully following the aforesaid referred to order dated 22.11.2016 in ITA No. 1423/Del/2015 for the assessment year 2010-11 in assessee’s own case, the issue relating to transfer pricing i.e. AMP expenses, is restored to the file of the AO/TPO for fresh adjudication as directed in the said order, after providing due and reasonable opportunity of being heard to the assessee. Case remanded |
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