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Commissioner of Income Tax Versus Canon India Private Limited

Determination of Arm’s 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 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 r .....

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tances, we find no infirmity with the Tribunal’s 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 remanded the issue as to the determination of ALP to the Tribunal in .....

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rs 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 Akash Vajpai and Mr Rohit Madan, Advocates For the Respondent : Mr .....

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'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 .....

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n 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 Assessee had incurred Advertisement, Marketing and Promotional (herea .....

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₹ 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 assessme .....

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PL. 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 expenditur .....

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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 said decision. 9. Mr. Srivastava, learned counsel for the Revenu .....

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n 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; .....

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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 the same were at ALP and determining the consequent TP adjustment, .....

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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 a .....

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ting 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 regar .....

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ecific 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 reflected as Current Liabilities by the Assessee in its books. Out of the .....

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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 as recorded in the Assessment Order. 16. The procedure for recei .....

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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 by the Revenue that subsidies were received by the Assessee from .....

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, 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 A .....

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