Toshiba India (P) Ltd., New Delhi V. Deputy Commissioner of Income-tax, New Delhi

ITA 1101/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91048 (ITAT-DELHI)
• Duration Of Justice: 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 21-05-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 24-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY PRASAD
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 92B; 10B; 2

Judgement Text

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., E-20, 1 ST & 2 ND FLOOR, HAUZ KHAS, NEW DELHI. PAN : AABCT4829N VS. DCIT, CIRCLE 25(1) & 25(2), NEW DELHI. (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 TH E FINAL ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 6.1.2015 U/ S 143(3) READ WITH ITA NO.1101/DEL/2015 2 SECTION 144C(13) OF THE INCOME-TAX ACT, 1961 (HEREI NAFTER 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 TRAN SFER PRICING ADJUSTMENT TOWARDS ADVERTISING, MARKETING AND PROMO TION (AMP) EXPENSES. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, AN INDIAN COMPANY, IS A WHOLLY OWNED SUBSIDIARY OF TOSHIBA CO RPORATION, JAPAN. IT IS ENGAGED IN THE TRADING OF CONSUMER DURABLES, IT PRODUCTS AND ALSO PROVIDING REPRESENTATIVE AND MARKETING SUPPORT SERV ICES TO TOSHIBA GROUP COMPANIES WORLDWIDE. THE ASSESSEE REPORTED C ERTAIN INTERNATIONAL TRANSACTIONS, WHICH HAVE BEEN ENLISTED ON PAGE 2 OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER (TPO). THE ASSESSEE E MPLOYED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DEMONSTRATING THAT ITS INTERNATIONAL TRA NSACTIONS WERE AT ARMS LENGTH PRICE (ALP). ON A REFERENCE MADE BY T HE AO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO NS, THE TPO ACCEPTED ITA NO.1101/DEL/2015 3 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 IN CURRED 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 WO RKED OUT NON-ROUTINE EXPENDITURE IN EXCESS OF BRIGHT LINE AT RS.38.16 CR ORE. ADDING MARK-UP OF 12.50% AMOUNTING TO RS.4.77 CRORE AND ADJUSTING THE REIMBURSEMENTS, HE WORKED OUT A TRANSFER PRICING AD JUSTMENT OF RS.40,14,26,892/-. THE ASSESSEE REMAINED UNSUCCESS FUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP). EVENTUALLY, THE AO VIDE HIS FINAL IMPUGNED ORDER MADE ADDITION OF RS.40.14 CRORE ON T HIS 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 ITA NO.1101/DEL/2015 4 AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B OF THE ACT AND THAT THE TPO HAS JURISDICTION TO COMPUTE THE AL P OF THIS INTERNATIONAL TRANSACTION DESPITE THE SAME NOT HAVI NG BEEN SPECIFICALLY REFERRED TO BY THE AO. ON THE QUESTION OF DETERMIN ATION OF THE ALP OF THIS INTERNATIONAL TRANSACTION, THE SPECIAL BENCH A PPROVED THE APPLICATION OF BRIGHT LINE TEST FOR WORKING OUT THE AMOUNT OF N ON-ROUTINE AMP EXPENSES AND HELD THAT THE ALP OF AMP EXPENSES SHOU LD 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 WI TH THE SALES DO NOT LEAD TO BRAND PROMOTION AND HENCE SHOULD NOT BE BRO UGHT WITHIN THE AMBIT OF AMP EXPENSES. THE SPECIAL BENCH LAID DOWN CERTAIN PARAMETERS TO BE TAKEN INTO CONSIDERATION FOR DETER MINING THE ALP OF AMP EXPENSES. IN THE ULTIMATE ANALYSIS, THE MATTER WAS SENT BACK TO THE TPO FOR UNDERTAKING THE EXERCISE AFRESH IN THE LIGH T 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 ITA NO.1101/DEL/2015 5 AO/TPO FOR DECIDING THIS ISSUE IN CONFORMITY WITH T HE DIRECTIONS GIVEN BY THE SPECIAL BENCH IN LG ELECTRONICS (SUPRA) . SEVERAL ASSESSEES AS WELL AS THE REVENUE PREFERRED THEIR RESPECTIVE APPE ALS BEFORE THE HONBLE HIGH COURTS AGAINST THE TRIBUNAL ORDERS FOL LOWING 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 HONBLE DELHI HIGH COURT, DELIVERI NG JUDGMENT ON 16 TH MARCH, 2015, UPHOLDING THE MAJORITY VIEW OF SPECIAL BENCH IN LG ELECTRONICS (SUPRA) TREATING AMP AS AN INTERNATIONAL TRANSACTION AND A LSO 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 EXPENS ES SHOULD BE BUNDLED OR AGGREGATED WITH OTHER INTERNAT IONAL TRANSACTION CARRIED OUT BY THE ASSESSEE AS A DISTRIBUTOR, WHO E ITHER SIMPLY ACTS AN AGENT OF MANUFACTURER OR PURCHASES GOODS FROM THE M ANUFACTURER FOR RESALE AT HIS OWN ACCOUNT. HOWEVER, IN THE CASE OF A MANUFACTURER, THE IMPORT OF RAW MATERIAL HAS BEEN HELD TO BE AN INDEP ENDENT TRANSACTION OF MARKETING AND DISTRIBUTION. IN THE CASE OF A DISTR IBUTOR, THE HONBLE ITA NO.1101/DEL/2015 6 HIGH COURT HELD THAT WHERE TNMM HAS BEEN APPLIED AS THE MOST APPROPRIATE METHOD, WHICH METHOD HAS NOT BEEN DISTU RBED BY THE TPO, THEN, THE INTERNATIONAL TRANSACTIONS OF AMP AND DIS TRIBUTION ACTIVITIES SHOULD BE CLUBBED. IT FURTHER HELD THAT FOR DETERMI NING THE ALP OF SUCH TRANSACTIONS UNDER A COMBINED APPROACH, ONLY SUCH C OMPARABLES SHOULD BE CHOSEN WHICH CONFORM TO THE AMP FUNCTIONS AND OT HER DISTRIBUTION FUNCTIONS CONDUCTED BY THE ASSESSEE. IF THERE IS S OME DIFFERENCE IN THE FUNCTIONS UNDER THESE INTERNATIONAL TRANSACTIONS, I NCLUDING THAT OF AMP, BETWEEN THE ASSESSEE AND THE COMPARABLES, THEN, SUI TABLE ADJUSTMENT SHOULD BE MADE TO BRING BOTH THE TRANSACTIONS AT PA R. 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 SH OULD BE DONE AND THE INTERNATIONAL TRANSACTION OF AMP SPEND SHOULD B E SEPARATELY PROCESSED UNDER THE TRANSFER PRICING PROVISIONS FOR THE PURPOSES OF DETERMINING ITS ALP SEPARATELY. IN SUCH DETERMINAT ION OF ALP OF AMP EXPENSES IN A SEGREGATED MANNER, PROPER SET OFF ON ACCOUNT OF EXCESS ITA NO.1101/DEL/2015 7 PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED. THE V IEW TAKEN BY THE TRIBUNAL IN SEGREGATING ROUTINE AND NON-ROUTINE EXP ENSES ON THE BASIS OF BRIGHT LINE TEST HAS BEEN SET ASIDE BY THE HONBLE HIGH COURT. THE VIEW TAKEN BY THE SPECIAL BENCH THAT THE EXPENSES CONCER NED WITH THE SALES, SUCH AS, REBATES AND DISCOUNTS ETC., SHOULD BE EXCL UDED FROM THE AMBIT OF AMP EXPENSES, HAS BEEN UPHELD. 6. WE CAN SUMMARIZE THE RELEVANT POSITION EMANA TING FROM THE JUDGMENT OF THE HONBLE 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 TH E INTERNATIONAL TRANSACTION OF AMP EXPENSES [PARA 50 OF THE JUDGMENT]; INTER-CONNECTED INTERNATIONAL TRANSACTIONS CAN BE A GGREGATED 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] ; ITA NO.1101/DEL/2015 8 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 [PARA S 91, 121 & OTHERS] ; FOR DETERMINING THE ALP OF THESE TRANSACTIONS IN A BUNDLED MANNER, SUITABLE COMPARABLES HAVING UNDERTAKEN SIMI LAR ACTIVITIES OF DISTRIBUTION OF THE PRODUCTS AND ALSO INCURRING OF AMP EXPENSES, SHOULD BE CHOSEN [PARAS 194(I), (II), (VI II) & 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 FUNCTI ONS IN A SIMILAR MANNER ARE AVAILABLE, THEN, SUITABLE ADJU STMENT SHOULD BE MADE TO BRING INTERNATIONAL TRANSACTIONS AND COMPAR ABLE 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 [P ARAS 100, 121, 194(III) & (VI)] ; ITA NO.1101/DEL/2015 9 IN THE ABOVE EVENTUALITY, INTERNATIONAL TRANSACTION OF AMP SHOULD BE VIEWED IN A DE-BUNDLED MANNER OR SEPARATELY [PAR AS 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 EXPE NSES, A PROPER SET OFF/PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED FROM THE OTHER TRANSACTION OF DISTRIBUTION OF THE PRODUC TS [PARA 93] ; SELLING EXPENSES CANNOT BE CONSIDERED AS PART OF AM P EXPENSES [PARAS 175 & 176 OF THE JUDGMENT]. 7. WITH THE ABOVE BACKGROUND OF THE RATIO DECIDENDI OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT, LET US EX AMINE THE CONTENTION PUT FORTH BY THE LD. AR IN SUPPORT OF THE DELETION OF ADDITION. SHE SUBMITTED THAT THE ASSESSEE APPLIED TNMM AS THE MOS T APPROPRIATE METHOD. SINCE THE PROFIT MARGIN DECLARED BY THE AS SESSEE WAS FAVOURABLY COMPARABLE WITH THE AVERAGE MARGIN OF TH E COMPARABLES, ITA NO.1101/DEL/2015 10 WHICH FACT HAS NOT BEEN DISPUTED BY THE TPO, THEN, NO ADJUSTMENT SHOULD BE MADE ON ACCOUNT OF AMP EXPENSES BECAUSE SUCH EXP ENSES 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 PROPO SITION. 8. WE ARE UNABLE TO ACCEPT THE ARGUMENT ADVANCED ON BEHALF OF THE ASSESSEE FOR DELETION OF THE ADDITION TOWARDS AMP E XPENSES ON THE PLAIN LOGIC OF THE ASSESSEES PROFIT MARGIN MATCHING WITH THOSE OF COMPARABLES. THERE IS A BASIC FALLACY IN THE ARGUM ENT OF THE LD. AR. IT IS PERTINENT TO NOTE THAT THE TPO EXAMINED AND GOT SATISFIED WITH THE ASSESSEES PROFIT MARGIN VIS--VIS THE COMPARABLES ONLY QUA THE INTERNATIONAL TRANSACTIONS OF DISTRIBUTION FUNCTION . HE DETERMINED THE ALP OF AMP EXPENSES BY APPLYING BRIGHT LINE TEST AN D IN THIS PROCESS SIMPLY COMPARED THE QUANTITATIVE FIGURES OF AMP EXP ENSES INCURRED BY THE ASSESSEE AND COMPARABLES FOR WORKING OUT THE NO N-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 ITA NO.1101/DEL/2015 11 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 HO NBLE 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 ACTIVI TY AND AMP ACTIVITY HAS ALSO BEEN SET OUT BY THE HONBLE 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 C OMPARABLES, AND IF PROBABLE COMPARABLES HAVING PERFORMED BOTH THE FUNC TIONS ARE NOT AVAILABLE, THEN TO DETERMINE THE ALP OF AMP EXPENSE S 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 FUN CTIONS ARE THE MEANS BY WHICH THE AMP ACTIVITY IS PERFORMED, THE A MP EXPENSES ARE THE AMOUNT SPENT ON THE PERFORMANCE OF SUCH MEANS ( FUNCTIONS). TO PUT ITA NO.1101/DEL/2015 12 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 TRANS ACTION OF AMP SPEND, EITHER IN A SEGREGATE OR AN AGGREGATE MANNER. WHAT THEIR LORDSHIPS HAVE HELD IS TO BUNDLE THE DISTRIBUTION ACTIVITY WITH TH E AMP ACTIVITY, BEING TWO SEPARATE BUT CONNECTED INTERNATIONAL TRANSACTIO NS, FOR THE PURPOSES OF DETERMINATION OF THE ALP OF BOTH THESE INTERNATIONA L TRANSACTIONS IN A COMBINED MANNER. THE ARGUMENT OF THE LD. AR, IF TA KEN TO A LOGICAL CONCLUSION, WILL MAKE THE AMP SPEND AS A NON-INTERN ATIONAL TRANSACTION, WHICH, IN OUR CONSIDERED OPINION, IS NOT APPROPRIAT E. ONCE AMP EXPENSE HAS BEEN HELD TO BE AN INTERNATIONAL TRANSA CTION, IT IS, BUT, NATURAL THAT THE FUNCTIONS PERFORMED BY THE ASSESSE E UNDER SUCH A TRANSACTION NEED TO BE COMPARED WITH SIMILAR FUNCTI ONS 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 CONTENTIO N OF THE LD. AR THAT ITA NO.1101/DEL/2015 13 THE ADDITION ON ACCOUNT TRANSFER PRICING ADJUSTMENT OF AMP EXPENSES BE DELETED WITHOUT ANY EXAMINATION OF THE AMP FUNCTION S CARRIED OUT BY THE ASSESSEE AS WELL AS COMPARABLES, THIS WILL AMOU NT TO SNATCHING AWAY THE TAG OF INTERNATIONAL TRANSACTION FROM AMP EXPE NSES, ASSIGNED BY THE HONBLE 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 AGGR EGATED. 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 A SSESSEE MUST BE NECESSARILY DONE IN THE FIRST INSTANCE, WHICH SHOUL D BE THEN COMPARED WITH SIMILAR FUNCTIONS PERFORMED BY SOME PROBABLE COMPARABLES. IF THE DISTRIBUTION AND AMP FUNCTIONS PERFORMED BY THE ASS ESSEE TURN OUT TO BE DIFFERENT FROM THOSE PERFORMED BY PROBABLE COMPAR ABLES, THEN, A SUITABLE ADJUSTMENT SHOULD BE MADE TO THE PROFITS O F THE COMPARABLE SO AS TO COUNTERBALANCE THE EFFECT OF SUCH DIFFERENCES . IF HOWEVER DIFFERENCES EXIST IN SUCH FUNCTIONS, BUT NO ADJUSTM ENT CAN BE MADE, THEN, ITA NO.1101/DEL/2015 14 SUCH PROBABLE COMPARABLE SHOULD BE DROPPED FROM THE LIST OF COMPARABLES. IF, IN DOING THIS EXERCISE, THERE REMA INS NO COMPANY DOING COMPARABLE DISTRIBUTION AND AMP FUNCTIONS, THEN, BO TH THE INTERNATIONAL TRANSACTIONS ARE REQUIRED TO BE SEGREGATED AND THEN EXAMINED ON INDIVIDUAL BASIS BY FINDING OUT PROBABLE COMPARABLE S 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 WIT H THE AMP FUNCTIONS PERFORMED BY A PROBABLE COMPARABLE. IF BO TH ARE FOUND OUT TO BE SIMILAR, THEN THE MATTER ENDS AND A COMPARABLE I S FOUND AND ONE CAN GO AHEAD WITH DETERMINING THE ALP OF SUCH A TRANSAC TION. IF THE AMP FUNCTIONS PERFORMED BY THE TWO ENTITIES ARE FOUND T O 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 ASS ESSEE 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 M AY BE SIMILAR BUT ITA NO.1101/DEL/2015 15 WITH VARYING STANDARDS, WHICH WILL ALSO CALL FOR AN ADJUSTMENT. CRUX OF THE MATTER IS THAT THE AMP FUNCTIONS PERFORMED BY T HE ASSESSEE MUST BE SIMILAR TO THOSE DONE BY THE COMPARABLE, IN THE SAM E MANNER AS SUCH FUNCTIONS ARE COMPARED IN ANY OTHER INTERNATIONAL T RANSACTION. HOWEVER, IN COMPUTING ALP OF AMP SPEND, THE ADJUSTMENT OR SE T OFF, IF ANY, AVAILABLE FROM THE DISTRIBUTION FUNCTION, SHOULD B E 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 PROV ISIONS, BUT ON AN AGGREGATE BASIS. DETERMINING THE ALP OF TWO TRANSAC TIONS 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. T HE HONBLE HIGH COURT HAS NO WHERE LAID DOWN THAT THE AMP FUNCTIONS PERFO RMED BY THE ASSESSEE SHOULD NOT BE COMPARED WITH THOSE PERFORME D BY THE COMPARABLE PARTIES. ON THE CONTRARY, IT TURNED DOW N THE CONTENTION RAISED BY THE LD. AR URGING FOR NOT TREATING AMP AS A SEPARATE FUNCTION, ITA NO.1101/DEL/2015 16 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 ARGUME NT ON BEHALF OF THE ASSESSEE IS FLAWED AND FALLACIOUS FOR SEVERAL REASO NS. THERE ARE INHERENT FLAWS IN THE SAID ARGUMENT. IT HELD VIDE PARA 165 OF THE JUDGMENT THAT : ` AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP F UNCTIONS. THUS IT IS MANIFEST THAT COMPARISON OF AMP FUNCTION S IS VITAL WHICH CANNOT BE DISPENSED WITH. LET US WE GO A STEP FURT HER WITH THE ALTERNATIVE PRESCRIPTION OF THE JUDGMENT THAT IF AL P OF BOTH THE TRANSACTIONS OF DISTRIBUTION AND AMP CANNOT BE DET ERMINED IN A COMBINED MANNER, THEN THE ALP OF AMP FUNCTION SHOUL D BE SEPARATELY DONE. THE SUBMISSION ADVANCED BY THE ASSESSEE OF C ONSIDERING THE PROFIT ON AN ENTITY LEVEL WITHOUT MAKING COMPARISON OF AMP FUNCTIONS DONE BY THE ASSESSEE AS WELL AS THE COMPARABLE, WIL L RENDER THIS ALTERNATIVE APPROACH INCAPABLE OF COMPLIANCE. CANV ASSING SUCH A VIEW AMOUNTS TO TREATING AMP SPEND AS A NON-INTERNATIONA L TRANSACTION, WHICH IS PATENTLY INCAPABLE OF ACCEPTANCE. ITA NO.1101/DEL/2015 17 9. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE F IND THAT THE TPO ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD AND DI D NOT MAKE ANY TP ADJUSTMENT ON ACCOUNT OF THE DISTRIBUTION ACTIVI TY CARRIED OUT BY THE ASSESSEE. HE, HOWEVER, ESPOUSED THE AMP EXPENSE AS A SEPARATE AND DISTINCT. TREATING THE AMP SPEND AS A SEPARATE INT ERNATIONAL TRANSACTION, HE APPLIED THE COST PLUS METHOD AND PROPOSED THE EX TANT ADJUSTMENT. IN DOING SO, HE SEGREGATED ROUTINE AMP EXPENSES INCURR ED 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 A MP EXPENSES WAS DONE BY APPLYING BRIGHT LINE TEST. IT IS OBVIOUS THAT I N THE ENTIRE EXERCISE CARRIED OUT BY THE TPO, HE PROCEEDED ON AN ALTOGETH ER DIFFERENT LINE IN EXAMINING THE QUANTUM OF AMP EXPENSE FOR DETERMINING THE VALUE OF THE INTERNATIONAL TRANSACTION OF AMP, WITHOUT LOOKI NG AT THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THE COMPARABLES. D ISTINCT 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 HONBLE JURISDICTIONAL HIGH COURT , IT BECOMES ITA NO.1101/DEL/2015 18 CRYSTAL CLEAR THAT THE APPROACH ADOPTED BY THE TPO FOR DETERMINING ALP OF AMP EXPENSES HAS BEEN RENDERED INCORRECT. HOWEV ER, THE FACT REMAINS THAT AS PER THE VERDICT OF THE HONBLE 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 F UNCTIONS WITH THOSE PERFORMED BY COMPARABLE ENTITIES, THOUGH, FIRSTLY I N A COMBINED MANNER WITH THE DISTRIBUTION FUNCTIONS. WE FIND NO REFERE NCE 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 O F THE ASSESSEES 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 AS SESSEE AND COMPARABLES AND THEN MAKING AN ADJUSTMENT, IF ANY, DUE TO DIFFERENCES BETWEEN THE TWO, SO THAT THE AMP FUNCTIONS PERFORME D 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 U NDER :- ITA NO.1101/DEL/2015 19 ` (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (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 MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE 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 ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 10. A PERUSAL OF THE SUB-CLAUSE (III) OF THIS RU LE 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 TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS ONLY SUCH ADJUSTED NET ITA NO.1101/DEL/2015 20 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 TR ANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO THE FOLLOWING, NAMELY (A) THE SPECIFIC CHARACTERISTICS OF THE PR OPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION ; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR T O BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICI TLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (D) CONDI TIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRAN SACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, ITA NO.1101/DEL/2015 21 OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. SUB-RULE (3) OF R ULE 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 ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSA CTIONS IN THE OPEN MARKET ; OR (II) REASONABLY ACCURATE ADJUSTMENTS CA N 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 TRA NSACTION AND THE UNCONTROLLED TRANSACTION WITH WHICH COMPARISON IS S OUGHT TO BE MADE FOR DETERMINING THE ALP, IN THE FIRST INSTANCE, MUST H AVE OVERALL SIMILAR CHARACTERISTICS. IT IS VIVID THAT IF THE GOODS/SE RVICES 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/O R THE PRODUCTS/SERVICES ITA NO.1101/DEL/2015 22 IN BOTH THE TRANSACTIONS ARE IDENTICAL, BUT STILL T HERE ARE CERTAIN DIFFERENCES DUE TO THE CONTRACTUAL TERMS OR THE GEO GRAPHICAL LOCATION, ETC., THEN, A REASONABLY ACCURATE ADJUSTMENT SHOUL D BE MADE FOR ELIMINATING THE MATERIAL EFFECTS OF SUCH DIFFERENCE S SO AS TO BRING THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTION ON THE SAME PODIUM. IF DUE TO ONE REASON OR THE OTHER, NO REASONABLE ACCURATE ADJUSTMENT CAN BE MADE DUE TO SUCH DIFFERE NCES, THEN, SUCH UNCONTROLLED TRANSACTION SHOULD NOT BE CONSIDERED A S 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 WI TH THE AMP FUNCTIONS CARRIED OUT BY A COMPARABLE ENTITY IN DET ERMINING 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, T HEN, THE PROBABLE ITA NO.1101/DEL/2015 23 COMPARABLE SHOULD BE ELIMINATED FROM THE LIST OF CO MPARABLES. 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 TH E DISTRIBUTION AND AMP FUNCTIONS ARE TWO SEPARATE INTERNATIONAL ACTIVI TIES, WHICH NEED TO BE COMPARED WITH UNCONTROLLED TRANSACTIONS. BECAUS E OF THEIR INTER- TWINNING, IT IS ONLY FOR THE PURPOSES OF DETERMINI NG THEIR ALP THAT BOTH THESE TRANSACTIONS CAN BE AGGREGATED IN THE FIRST I NSTANCE, SO THAT THE SURPLUS FROM ONE COULD BE ADJUSTED AGAINST THE DEFI CIT FROM THE OTHER IN AN OVERALL APPROACH. IT DOES NOT MEAN THAT BECAUSE OF AGGREGATION, THE AMP EXPENSE TRANSACTION SHEDS ITS CHARACTER OF A SE PARATE INTERNATIONAL TRANSACTION AND HENCE THE AMP FUNCTIONS SHOULD NOT BE MATCHED WITH THE AMP FUNCTIONS CARRIED OUT BY PROBABLE COMPARABL ES. IF SUITABLE COMPARABLES CAN BE FOUND HAVING PERFORMED BOTH DIST RIBUTION AND AMP FUNCTIONS, THEN, THEIR ALP SHOULD BE DETERMINED ON AGGREGATE BASIS. IF, HOWEVER, THERE IS SOME DIFFERENCE IN THE DISTRIBUTI ON OR AMP FUNCTIONS ITA NO.1101/DEL/2015 24 PERFORMED BY THE ASSESSEE VIS--VIS THE PROBABLE COMPARABLES, THEN AN ATTEMPT SHOULD FIRST BE MADE TO IRON OUT SUCH DIFFE RENCE BY MAKING A SUITABLE ADJUSTMENT TO THE PROFIT MARGIN OF COMPARA BLES. IF SUCH AN ADJUSTMENT IS NOT POSSIBLE, THEN SUCH PROBABLE COMP ARABLE SHOULD BE ELIMINATED. IF, BY MAKING A COMPARATIVE ANALYSIS O F THE DISTRIBUTION AND AMP FUNCTIONS JOINTLY, THERE REMAINS NO COMPARABLE CASE PERFORMING SUCH DISTRIBUTION AND AMP FUNCTIONS, THEN, THE INTE RNATIONAL TRANSACTION OF AMP SHOULD BE SEGREGATED AND ITS ALP BE DETERMIN ED SEPARATELY BY APPLYING A SUITABLE METHOD. HOWEVER, IN SO DETERMI NING THE ALP OF SUCH AN INTERNATIONAL TRANSACTION OF AMP EXPENSES O N SEPARATE BASIS, A PROPER SET OFF, IF ANY, AVAILABLE FROM THE DISTRIBU TION ACTIVITY, SHOULD BE ALLOWED. 15. COMING BACK TO THE FACTS OF THE INSTANT CASE, W E FIND THAT NO DETAIL OF THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE IS A VAILABLE ON RECORD. SIMILARLY, THERE IS NO REFERENCE IN THE ORDER OF TH E TPO TO ANY AMP FUNCTIONS PERFORMED BY COMPARABLES. IN FACT, NO SU CH ANALYSIS OR COMPARISON HAS BEEN UNDERTAKEN BY THE TPO BECAUSE O F HIS APPLYING THE ITA NO.1101/DEL/2015 25 BRIGHT LINE TEST FOR DETERMINING THE VALUE OF THE I NTERNATIONAL TRANSACTION OF AMP EXPENSE AND THEN APPLYING THE COST PLUS METH OD FOR DETERMINING ITS ALP. THE LD. AR ALSO FAILED TO DRAW OUR ATTENT ION TOWARDS ANY MATERIAL DIVULGING THE AMP FUNCTIONS PERFORMED BY T HE ASSESSEE AS WELL AS COMPARABLES. AS SUCH, WE ARE HANDICAPPED TO DETE RMINE 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 DETERMINI NG THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP SPEND AFRESH IN AC CORDANCE WITH THE MANNER LAID DOWN BY THE HONBLE 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/-. S UCCINCTLY, THE ASSESSEE CLAIMED THE ABOVE DEDUCTION BY TREATING IT AS BAD DEBTS WRITTEN OFF. ON BEING CALLED UPON TO JUSTIFY THE DEDUCTIBI LITY OF THE AMOUNT, THE ITA NO.1101/DEL/2015 26 ASSESSEE SUBMITTED THAT IT IMPORTED CERTAIN GOODS D URING THE FINANCIAL YEAR UNDER CONSIDERATION PAYING SPECIAL ADDITIONAL DUTY (SAD). SINCE THE GOODS IN RESPECT OF WHICH SUCH AMOUNT OF SAD WA S PAID BECAME OBSOLETE, THE AMOUNT OF SAD WAS WRITTEN OFF AND CL AIMED AS DEDUCTION. IT WAS STATED THAT THE NOMENCLATURE OF BAD DEBT WA S INADVERTENTLY GIVEN, WHEREAS, IN FACT, THIS AMOUNT WAS PAYMENT OF IRRECO VERABLE/UNADJUSTABLE SAD. IT WAS ALSO STATED BEFORE THE DRP THAT THE PA YMENT OF SAD BY ANY IMPORTER IS REFUNDED WHEN THE GOODS ARE FURTHER SOLD. SINCE THE GOODS IN RESPECT OF WHICH THIS SAD WAS PAID, BECAM E OBSOLETE AND WRITTEN OFF IN THE ACCOUNTS OF SUBSEQUENT YEARS, TH E AMOUNT OF SAD WAS CLAIMED AS DEDUCTION IN THIS YEAR. UNCONVINCED WIT H THE ASSESSEES SUBMISSIONS, THE DRP APPROVED THE VIEW TAKEN BY THE AO IN MAKING THE ADDITION. 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE ASSESSEE , AS AN IMPORTER, PAID SAD AND, HENCE, WOULD HAVE ORDINARILY BECOME ENTITL ED TO ITS REFUND ON FURTHER SALE. THE AMOUNT IN QUESTION REPRESENTS TH E PAYMENT OF SAD ON ITA NO.1101/DEL/2015 27 THE GOODS BECOMING OBSOLETE AND INCAPABLE OF FURTHE R SALE. AS SUCH, THE AMOUNT OF SAD ON SUCH GOODS HAS CEASED TO BE REFUND ABLE. WHEN THE GOODS BECOME OBSOLETE, THE PAYMENT OF SAD ALREADY M ADE ASSUMES THE CHARACTER OF A PART OF THE PURCHASE PRICE OF THE GO ODS. IT CAN BE SEEN FROM THE ASSESSEES SUBMISSIONS MADE BEFORE THE DRP AS RECORDED IN PARA 11.1 OF ITS DIRECTION THAT THE GOODS BECAME OB SOLETE AND WERE ULTIMATELY WRITTEN OFF IN THE BOOKS OF ACCOUNT IN THE SUBSEQUENT YEARS. THIS SHOWS THAT THE INSTANT AMOUNT OF SAD PAID IN R ELATION TO SUCH GOODS CANNOT BE CLAIMED AS DEDUCTION IN THE YEAR UN DER 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 W RITTEN OFF SEPARATELY IN THE YEAR IN QUESTION, WHEN THE CORRESPONDING GOO DS ARE STILL TREATED AS STOCK-IN-TRADE. WE, THEREFORE, APPROVE THE VIEW TA KEN BY THE AO ON THIS ISSUE. THIS GROUND FAILS. ITA NO.1101/DEL/2015 28 18. THE LAST ISSUE IS AGAINST THE DENIAL OF DEDUCTI ON TOWARDS PROVISION FOR WARRANTY. THERE IS NO DISCUSSION IN THE ASSESS MENT ORDER ON THE ASSESSEES CLAIM FOR DEDUCTION OF WARRANTY PROVISIO N. NO ADDITION HAS BEEN MADE BY THE AO ON THIS SCORE. IT CAN BE NOTIC ED FROM THE DRPS DIRECTION THAT THE ASSESSEE TOOK UP THIS ISSUE BEFO RE THE DRP CLAIMING DEDUCTION OF RS.7,22,50,345/- ON ACCOUNT OF WARRANT Y PROVISION FOR THE YEAR IN QUESTION. IT IS CLEAR FROM PARA 12.3 OF TH E DIRECTION GIVEN BY THE DRP THAT THE ASSESSEE VOLUNTARILY DISALLOWED THIS A MOUNT 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 HONBLE SUP REME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT (2009) 314 I TR 62 (SC), HAS HELD THAT A WARRANTY PROVISION MADE BY THE ASSE SSEE ON THE BASIS OF THE PAST EXPERIENCE IS ALLOWABLE AS DEDUCTION U/S 3 7. IT HAS FURTHER BEEN HELD THAT THE DEDUCTION CAN BE ALLOWED IF THE PROVI SION IS MADE ON SOME RATIONAL BASIS. SINCE THE NECESSARY FACTS IN THIS REGARD ARE NOT AVAILABLE ITA NO.1101/DEL/2015 29 BEFORE US, WE ARE OF THE CONSIDERED OPINION THAT TH E 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 DE CIDING IT AFRESH AS PER LAW, AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEI NG HEARD TO THE ASSESSEE. 19. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 25.05.201 5. SD/- SD/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DK COPY FORWARDED TO: APPELLANT DATED, 25 TH MAY, 2015. 1. 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.