Tribunal remits transfer pricing issue, allows depreciation, reverses ad expenditure disallowance

The Tribunal partly allowed the appeals, remitting the transfer pricing adjustment issue to the Transfer Pricing Officer for re-adjudication. The Tribunal directed the Assessing Officer to restate the allowance of depreciation for the disallowed deduction of fixed assets. The disallowance of advertisement expenditure was set aside in favor of the assessee based on precedent.

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Issues Involved:
1. Transfer Pricing Adjustment (A.Y. 2006-07 & A.Y. 2007-08)
2. Disallowance out of Expenditure on Advertisement (A.Y. 2006-07 & A.Y. 2007-08)
3. Disallowance of Deduction Claimed for a Sum of Rs. 1,01,02,335/- (A.Y. 2006-07)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee, a wholly-owned subsidiary of Haier Electrical Appliances Corp. Ltd., China, engaged in the distribution of consumer durables, entered into international transactions. The Assessing Officer (AO) referred these transactions to the Transfer Pricing Officer (TPO) under section 92CA(1) of the I.T. Act. The TPO identified unreported international transactions and proposed an adjustment of Rs. 57,24,40,79/- based on the arm's length price (ALP) of advertisement, marketing, and promotion (AMP) expenses.

The Disputes Resolution Panel (DRP) affirmed the TPO's action. The assessee appealed, citing a Special Bench decision in LG Electronics India Pvt. Ltd. vs. ACIT, which held that benchmarking AMP expenses as an international transaction was permissible. The Tribunal, following the Special Bench's principles, remitted the issue to the TPO to re-adjudicate the ALP, excluding selling expenses from AMP expenses and applying proper comparables.

2. Disallowance out of Expenditure on Advertisement:
The AO disallowed a portion of the advertisement expenditure, treating it as deferred revenue expenditure to be amortized over five years, allowing only 1/5th in the current year. The DRP upheld this view. The assessee appealed, referencing a Tribunal decision in its favor for A.Y. 2004-05, which was upheld by the Hon'ble Delhi High Court. The Tribunal, following this precedent, held that the entire advertisement expenditure should be allowed in the year incurred, thus setting aside the AO's order and deciding in favor of the assessee.

3. Disallowance of Deduction Claimed for a Sum of Rs. 1,01,02,335/-:
The AO disallowed the write-off of glow sign boards, arguing that the provisions of section 32(1)(iii) should apply since the block of assets for furniture and fixtures was still in the schedule of assets. The DRP upheld this view. The assessee appealed, requesting the allowance of depreciation pursuant to the disallowance. The Tribunal remitted the issue to the AO to restate the allowance of depreciation accordingly.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, remitting the transfer pricing adjustment issue to the TPO for re-adjudication and directing the AO to restate the allowance of depreciation for the disallowed deduction of fixed assets. The disallowance of advertisement expenditure was set aside, favoring the assessee based on precedent.

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