DCIT, NEW DELHI vs. M/S. SWAROSKI INDIA PVT. LTD., NEW DELHI

ORDER PER R.S. SYAL, AM: These two cross appeals – one by the assessee and the other by the Revenue – arise out of the order passed by the CIT(A) on 26.07.2014 in relation to the assessment year 2005-06. There are two transfer pricing additions which have been challenged by the assessee in its appeal apart from the confirmation of certain non-transfer pricing additions. The Revenue is also aggrieved against the deletion of two non-transfer pricing additions.

I. TRANSFER PRICING ADDITIONS A. TP addition on Import of crystal and crystal components 2.1. The first challenge in the assessee’s appeal is to the addition on account of transfer pricing adjustment in respect of ‘Import of crystal and crystal components’. Briefly stated, the facts of the case are that the assessee company, with its original name of Swaropearl, was incorporated in India in 1996. It is a part of Swarovski group, a globally famous brand for crystal and crystal related products. It is a world-wide market leader in crystal jewellery and accessories, grinding and dressing tools, precision optical equipment and synthetic gemstones. The group has production locations in twelve countries and has sale companies in several countries in Asia, Europe, South America, USA and Canada.

The assessee company was initially registered as a 100% export oriented unit for undertaking activities of coating of raw beads, polishing and knotting of crystals etc. Later on, the assessee also started imports and sale of crystal goods and crystal components. Apart from 100% EOU division in Pune, the assessee carries out its trading activities from a domestic unit in New Delhi which has further two sub-divisions, namely, Consumer Goods Division (CGD) and a Crystal Components Division (CCD). Major customers of CGD and CCD are designers and garment manufacturers etc. The assessee reported certain international transactions in Form no. 3CEB. The Assessing Officer (AO) referred the matter of determination of their arm’s length price (ALP) to the Transfer Pricing Officer (TPO). Reported international transactions include a transaction of ‘Import of crystal and crystal components’ with transacted value of Rs.14,91,85,346/-. Only this international transaction 3 is under dispute. The assessee applied Comparable Uncontrolled Price (CUP) method to demonstrate that the international transaction was at ALP. In order to fortify the adoption of CUP as the most appropriate method, the assessee argued that the imports were made as per the price list provided by its AE which was available for all its sales to group companies (internal comparable). It was also submitted that its AE also made direct sales of crystal components to Indian customers and the amount charged from such independent customers was higher than that charged from the assessee (external comparable). The assessee submitted that it was also taking orders on behalf of its AE from customers in India and forwarding the same for execution to its AE, on which commission @15% of invoice value was being allowed to it. The sum and substance of the assessee’s submissions before the TPO was that the price charged by its AE from any other country through its group company/branch office was the same as that charged from customers in India.

2.2. The TPO, following his view taken for the A.Y. 2004-05, rejected the application of CUP method and applied the TNMM as the most appropriate method. Twenty foreign comparable companies were chosen, which are similar to those chosen in the proceedings for the preceding year. Applying the arm’s length margin of 4.34%, the TPO worked out transfer pricing adjustment amounting to Rs.2,48,81,287/-.

In the first appeal, the ld. CIT(A) accepted the application of the TNMM as the most appropriate method as against the main contention of the assessee for the application of the CUP method or the Resale Price method (RPM) in alternate. As a common order was passed for the A.Ys. 2004-05 and 2005-06, no separate discussion has been made by the ld. CIT(A) for the A.Y. 2005-06. Accordingly, the issue of transfer pricing adjustment was restored. Aggrieved thereby, the assessee is in appeal before us against the adverse findings given by the ld. CIT(A).

2.3. We have heard the rival submissions and perused the relevant material on record. It is noticed that the AO passed the order for the current year by mainly relying on the view taken by him for the A.Y. 2004-05. The ld. CIT(A) has also passed a combined order and there is no separate discussion for the A.Y. 2005-06. The appeal for the A.Y. 2004-05 was argued simultaneously and the submissions made for such earlier year were adopted by both the sides for the instant year as well.

We have passed a separate order for the A.Y. 2004-05 in which rejection of the CUP method by the authorities below has been upheld and further direction has been given to the AO/TPO for a fresh determination of the ALP of this transaction, firstly, by considering the application of RPM and if, due to one reason or the other, the same cannot be applied, then, the TNMM. Detailed discussion made in our order for the A.Y. 2004-05 is applicable and should be read as a part of this order also, to be followed by the TPO in such fresh determination.

B. TP addition on AMP Expenses 3.1. During the course of first appellate proceedings, the ld. CIT(A) observed that no transfer pricing analysis was done in respect of the international transaction of advertisement, marketing and promotion (AMP) expenses. The assessee was called upon to benchmark this transaction. Taking note of bright line test and other relevant factual details, the ld. CIT(A) made an addition of Rs.2,51,69,338/- towards transfer pricing adjustment on AMP expenses. The assessee is aggrieved against such adjustment.

3.2. The ld. AR reiterated the arguments as made for the preceding year and submitted that the view consistently taken be adopted here also. The ld. DR also reiterated his submission seeking restoration of this matter to the file of TPO for a fresh adjudication in the light of the jurisprudence from the Hon’ble Delhi High Court on this issue and similar order can be passed for this assessee as well.

3.3. We have heard the rival submissions and perused the relevant material on record. On perusal of the order of the ld. CIT(A), it emerges that while holding the AMP expenses to be an international transaction, he did not have the benefit of the judicial precedents now available for consideration, in some of which the transaction of AMP has been held as an international transaction, in others as not an international transactions, while still in some others, the matter has been restored for fresh consideration in the light of the judgment in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del), in which the AMP expenses as an international transaction has been accepted. In another judgment dated 28.1.2016 of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11), the question as to whether AMP expenses is an international transaction, has been restored for a fresh determination.

There are three recent judgments of the Hon’ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). Respectfully following the predominant view of the Hon’ble High Court, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. 8 If the existence of such an international transaction is not proved, the matter would end there and then, calling for no transfer pricing addition.

If, on the other hand, the international transaction is found to be existing, then the TPO would determine the ALP of such an international transaction in the light of the relevant judgments of the Hon’ble High Court, after allowing a reasonable opportunity of being heard to the assessee.

II. NON-TRANSFER PRICING ADDITIONS 5.1. The only issue raised by the assessee in its appeal is against the confirmation of addition in respect of Provision of doubtful debts amounting to Rs.3,24,850/-. The AO did not allow deduction for this sum as it was a provision and not an actual write off. The ld. CIT(A) approved the action taken by the AO in this regard.

5.2. Having heard both the sides perused the relevant material on record, we find that similar issue cropped up before us in appeal of the assessee for the A.Y. 2004-05. This issue has been discussed in detail in such order. As no fresh arguments have been made, similar findings will apply, mutatis mutandis, to the instant year as well. To sum up, the amount of provision is not deductible. Actual amount of write off has to be allowed as deduction u/s 36(1)(vii). Reversal of provision should not lead to taxable income. However, deduction allowed in respect of provision for doubtful debts for the A.Y. 2003-04 should be taken into consideration while allowing deduction on actual write off or reversal of provisions to the relevant extent so that no double deduction gets allowed.

6.1. The first ground taken by the Revenue in its appeal is against the deletion of addition of Rs.54,30,335/- on account of disallowance of advertisement and publicity expenses.

6.2. Both the sides are in agreement that the facts and circumstances of this ground are, mutatis mutandis, similar to those for the A.Y. 2004-05.

Following the view taken in our order for the A.Y. 2004-05, we hold that the entire amount of advertisement and publicity expenses should be allowed as deduction in the year of incurring itself. It is however, made clear no further deduction for 2/3rd of the total expenditure for the earlier years be granted as the same will lead to double deduction. If such a deduction has already been allowed, then the same should be reversed to that extent. This ground of the Revenue is not allowed.

7.1. The only other ground which survives in the appeal of the Revenue is against the allowing of depreciation on computer peripherals at 60%.

7.2. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee claimed depreciation on computer peripherals @ 60% which was restricted by the AO to 25%.

The ld. CIT(A), following the judgment of the Hon’ble jurisdictional High Court in CIT vs. BSES Yamuna Powers Ltd. 2010-TIOL-636-HC- DEL-IT, accepted the assessee’s claim.

7.3. Having heard the rival submissions and perused the relevant material on record, we find that the ld. CIT(A) has taken an appropriate decision on this issue by drawing strength from the judgment of the jurisdictional High Court which is binding on all the authorities under its jurisdiction. The Hon’ble Delhi High Court in the case of BSES Yamuna Powers Ltd.(supra), has held that depreciation on computer peripherals should be allowed at 60%. We, therefore, uphold the view taken by the ld. CIT(A) on this issue. This ground is not allowed.

The order pronounced in the open court on 10.02.2017.