ACER INDIA PRIVATE LIMITED,BANGALORE vs. ASST. C.I.T., BANGALORE

Upon receipt of reference, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB. Ld.TPO observed that assessee had following international transaction with its associated enterprises: Particulars Paid Received Import of computer 3,82,73,00,938/- components for manufacturing Sale of components and 16,62,526/- spare parts Import of computer 9,36,80,13,861/- notebooks, finished goods and parts for trading Reimbursement of 23,37,60,722/- advertisement expenses 4. Ld.TPO observed that assessee incurred expenses in the nature of advertisement, trade discounts and sales commission which resulted into brand promotion. Ld.TPO was of the opinion that associated enterprises forced assessee to incur AMP expenses amounting to these Rs.1,61,86,95,964/-. Ld.TPO thus applied bright line test and determined 0.23% of gross sales to be towards AMP expenses.

Ld. AO/TPO treated entire consideration paid by assessee towards purchase of computer software as ‘royalty’ under India- Page 4 of 15 IT(TP)A 458/Bang/2016 & IT(TP)A 473/Bang/2016 A. Y: 2011 – 12 Malasia DTAA, thereby disallowed the expenses section 40 (a) (i) of the Act for not deducting TDS on such payments. Aggrieved by addition made by Ld.AO/TPO, assessee raised objections before DRP.

Before DRP assessee submitted that, it is wholly subsidiary of Acer Holding Inc. British Virgin Islands, and is the only group entity in India which is authorised under long term royalty fee arrangement to manufacture/distribute Acer products in the market. It was submitted that assessee is engaged in manufacturing of text of computers, servers and distribution of laptops, monitors, projectors and peripherals products under the license from its AE’s. Assessee submitted that all these products are sold to distributors, who in turn resell the same to the sellers or retailers located in India. It is also been submitted that assessee also sells products to final end customer in certain cases. Assessee submitted that for these activities, assessee imports certain components and parts from its associated enterprises in relation to its manufacturing activity and also imports laptops, monitors, projectors another finished products from its associated enterprises for distribution in India, without any corresponding royalty charged from the AE’s.

Assessee submitted that it bears all internal risk and receives limited assistance from its AE is in respect of its operations. It was submitted that during assessment proceedings before Ld. TPO, international transactions undertaken by assessee with associated enterprises was examined and accepted to be at arm’s length, under manufacturing and distribution segments. However, adverse observation was made by Ld. TPO that assessee incurred Page 5 of 15 IT(TP)A 458/Bang/2016 & IT(TP)A 473/Bang/2016 A. Y: 2011 – 12 huge expenses for purposes of advertisement, market promotion and development of intangibles of AEs and concluded that such expenses should be reimbursed by AE along with a mark-up. Ld. TPO thus computed adjustment at Rs.1,56,75,58,922/-.

DRP upon analysing submissions of assessee, directed Ld. AO/TPO to delete proposed addition on account of AMP expenses. However, it was directed that expenses amounting to Rs.4.96 crore incurred on media advertisement are in the nature of capital expenditure which resulted in enduring benefit in the form of creating brand of assessee, and therefore cannot be said to have been incurred wholly and exclusively for business carried out. DRP thus directed advertisement expenses to be disallowed under section 37 (1) of the Act.

Upon receipt of DRP directions, Ld.AO/TPO disallowed expenses incurred towards media advertisement under section 37 (1) of the Act. Assessing Officer observed that assessee incurred software expenses, against which assessee did not deducted tax at source. Accordingly, same was disallowed under provisions of section 40(a) (ia) of the Act.

Ld.AO/TPO further disallowed warranty provisions amounting to Rs.30,92,90,373/-. Ld.AO/TPO disallowed foreign currency loss incurred by assessee related to trading receipt incurred on purchase of computer systems/equipment's/raw materials/spare parts for purposes of trading/operations in ordinary course of business. Aggrieved by additions/deletion made by Ld.AO/TPO, assessee as well as revenue are in appeal before us now. Assessee’s Appeal:

Ground No. 4: Ld. AR submitted that assessee do not wish to press this ground. Accordingly, the same is dismissed.

Ground No. 5-6 are in respect of disallowance made by Ld. AO of sales promotion and advertisement expenses amounting to Rs.4,96,11,362/- under section 37 (1) of the Act. Ld. AR submitted that AMP expenses consists of 3 components:  Trade Discounts-Rs.1,45,10,72,170/-  Advertisement Expenses -Rs.4,96,11,362/-  Sales Commission-Rs.11,18,12,432/- 13.1. It has been submitted that what has been disallowed by Ld.AO/TPO is only the advertisement expenses amounting to Rs.4,96,11,362/-, and that these expenses have been incurred wholly and exclusively for the purpose of assessee’s business and Page 7 of 15 IT(TP)A 458/Bang/2016 & IT(TP)A 473/Bang/2016 A. Y: 2011 – 12 no enduring benefit is derived by assessee. Placing reliance on pages 859-862 of paper book part-II, Ld. AR submitted that these cannot be considered to be capital in nature. He placed reliance upon decision of Hon’ble Karnataka High Court in case of CIT vs Indo Nisan Foods Ltd., reported in (2013) 35 Taxmann.com 637, decision of Hon’ble Bombay High Court in case of CIT vs Asian Paints (India) Ltd., reported in (2016) 75 Taxmann.com 152 and decision of Hon’ble Delhi High Court in case of CIT vs Spice Distribution Ltd., reported in (2015) 54 Taxmann.com 325. Ld. AR submitted that all these decisions are placed in paper book at page 307-316. 13.2 On the contrary, Ld. CIT DR placed reliance upon orders passed by authorities below. 13.3 We have perused submissions advanced by both sides in light of records placed before us. In the decisions relied upon by Ld. AR Hon’ble Courts have discussed the tests of enduring benefit. Hon’ble Court, have opined that expenditure incurred towards advertisement to promote sales can in no way treated as capital expenditure. And that if argument of the revenue is upheld then no expenditure could be considered of having been incurred for purposes of business. Even otherwise there are number of decisions by Hon’ble High Courts which holds advertisement expenses to be revenue in nature because advertisements do not have long-lasting effect and once advertisement stop, effect thereof under general public and customer, diminishes and vanishes. Hon’ble Court observed that, if expenditure is incurred for advertisement is to promote sales, then it cannot be held to be capital in nature.

Ground No.7 is consequential in nature and Ground No.8 is premature at this stage. In the result, appeal filed by assessee stands partly allowed as indicated above. Revenue’s Appeal 15. Ground no.1 is general in nature. Therefore, do not require any adjudication.

Ground no. 2-4 raised by revenue is regarding warranty expenses being allowed by Ld. AO/TPO amounting to Rs.30,92,90, 373/-. 16.1 Ld. CIT DR submitted that assessee has not conclusively proved that, expenditures pertain to actual utilisation of warranty pertaining to sale invoices, which are under warranty period. He thus placed reliance upon orders passed by authorities below. 16.2 On the contrary, Ld. AR submitted, that warranty provision is created based on a scientific methodology and estimation on the basis of actual warranty expenses incurred in the past as ascertained liability. He submitted that, creation of warranty provision does not make it a provision for and under ascertained or contingent liability, as various expenses are certain Page 9 of 15 IT(TP)A 458/Bang/2016 & IT(TP)A 473/Bang/2016 A. Y: 2011 – 12 to be incurred, however estimated and provided for. This does not make the underlying expenses to be contingent in nature. Admittedly, assessee is following a scientific computation of provision for warranty every year consistently. 16.3 We have perused submissions advanced by both sides in light of records placed before us. Ld. AR submitted that, identical issue in assessee’s own case for assessment year 2004-05 to 2006-07 has been dealt with as under: We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset we note that this is a recurring issue for last several assessment years and has been decided in favour of the assessee by this Tribunal. This Tribunal in assessee’s own case for A. Ys : 2007 – 08 & 2008 – 09 vide order dt. 4.11.2015 in & 1180/Bang/2012 has held in paras 9 to 12 as under: