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2015 (8) TMI 429 - DELHI HIGH COURT

2015 (8) TMI 429 - DELHI HIGH COURT - [2015] 377 ITR 514 (Del) - Determination of Armís Length Price - Transfer pricing adjustment - ITAT directing exclusion of the expenses in the nature of Subsidy from the ambit of the AMP expenditure - Held that:- Unable to accept the Revenueís 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 .....

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hout accounting for the corresponding expenditure. In the circumstances, we find no infirmity with the Tribunalís view on this issue. Decided in favour of the Assessee and against the Revenue.

Whether subsidy received by the Assessee has to be excluded from AMP expenditure at the threshold before making any TP adjustments - Held that:- The said question would be inextricably linked with the manner in which ALP of the relevant international transaction is determined. This court has rem .....

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old 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. - ITA 137/2014, ITA 138/2014 - Dated:- 3-8-2015 - S. Muralidhar And Vibhu Bakhru,JJ. For the Appellant : Mr G.C. Srivastava, Mr Daksh S. Bhardwaj, Mr Ak .....

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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 .....

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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. 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 Asse .....

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ustments ) and directed the AO to add ₹ 33,25,04,380/- and ₹ 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 .....

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ed 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 Tri .....

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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 remanding the matter to the Tribunal for a de novo consideration in accordance with the principles of law as enunciated in the .....

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ad 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 (su .....

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dent/Canon India was liable to be added back to the income of the Respondent/Assessee; 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 t .....

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urther 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 .....

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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 circumst .....

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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 ₹ 19,48,29,160/- for advertisements and sales promotion activities and this amount had been directly reduced from the relevant expenditure. The balance amount of ₹ 7,62,58,434/- remaining after incurring the expenditure was reflecte .....

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Assessee received an amount of ₹ 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 ₹ 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 .....

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m time to time for receiving the advance payment. this debit note contains the details of the particular relevant expenditure to be incurred. (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 .....

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o 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 .....

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ratal 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 spec .....

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