Tribunal allows appeal, deletes disallowances including Transfer Pricing Adjustment

M/s Pernod Ricard [India] Pvt Ltd. Versus The Dy. C.I.T Central Circle -31, New Delhi

M/s Pernod Ricard [India] Pvt Ltd. Versus The Dy. C.I.T Central Circle -31, New Delhi - TMI Issues Involved:
1. Transfer Pricing Adjustment on Advertisement, Marketing, and Sales Promotion (AMP) Expenses.
2. Disallowance of Brand Expenses under Section 37(1) of the Income-tax Act.
3. Disallowance of Provision for Transit Breakages.
4. Disallowance under Section 40(a)(ia) for Reimbursement of Trade Schemes.
5. Disallowance under Section 14A for Exempt Income.
6. Disallowance of Unexplained Expenses.
7. Disallowance under Section 40A(3) for Cash Payments.
8. Disallowance for Non-Verification of Payments to Certain Parties.
9. Initiation of Penalty Proceedings under Section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment on AMP Expenses:
The assessee challenged the AMP adjustment of Rs. 52.05 crores made by the TPO/Assessing Officer, who used the Bright Line Test (BLT) to benchmark AMP expenses. The assessee argued that the BLT has been discarded by the Delhi High Court in the case of Sony Ericsson Mobile Limited (374 ITR 118). The Tribunal agreed, citing that the BLT is not mandated by the Act or Rules and cannot be used to infer the existence of an international transaction. The Tribunal emphasized that the Revenue must establish the existence of an international transaction with tangible evidence before benchmarking AMP expenses. The Tribunal concluded that the impugned addition on account of AMP expenditure was uncalled for and deserved to be deleted.

2. Disallowance of Brand Expenses under Section 37(1):
The Assessing Officer disallowed Rs. 8,21,29,536/- being 20% of brand expenses, treating them as capital in nature. The assessee argued that this issue had been settled in its favor by the Delhi High Court and the Tribunal in earlier years. The Tribunal, following the High Court's decision, directed the deletion of the addition, stating that the expenditure did not result in any enduring benefit.

3. Disallowance of Provision for Transit Breakages:
The Assessing Officer disallowed Rs. 1,12,16,288/- claimed as a deduction for transit breakages. The assessee conceded that this disallowance had been upheld by the Delhi High Court and confirmed by the Supreme Court. However, the Tribunal directed the Assessing Officer to verify any reversals in the provision and allow the actual amount as a deduction, following the High Court's findings.

4. Disallowance under Section 40(a)(ia) for Reimbursement of Trade Schemes:
The Assessing Officer disallowed Rs. 6,35,40,939/- for reimbursement of trade schemes, treating them as commission without TDS deduction. The Tribunal, noting that similar disallowances had been allowed in the assessee's sister concern after verification, directed the Assessing Officer to verify the nature of the payments and allow the deduction if they were reimbursements.

5. Disallowance under Section 14A for Exempt Income:
The Tribunal noted that Rule 8D does not apply for the assessment year 2007-08 and that there was no exempt income claimed by the assessee. Following the Delhi High Court's rulings in Cheminvest Ltd and CIT vs. Holcim, the Tribunal directed the deletion of the disallowance of Rs. 12,68,781/-.

6. Disallowance of Unexplained Expenses:
The Assessing Officer disallowed Rs. 10.80 lakhs based on a diary seized during a search, which indicated payments to an Excise Inspector and for a license fee. The Tribunal, following its earlier decision, found the document to be a 'dumb document' with no date or year and directed the deletion of the addition.

7. Disallowance under Section 40A(3) for Cash Payments:
The Assessing Officer disallowed Rs. 45,000/- based on a document seized from a third party, indicating cash payments to an Excise Official. The Tribunal found the document to be undated and unrelated to the assessee, directing the deletion of the addition.

8. Disallowance for Non-Verification of Payments to Certain Parties:
The Assessing Officer disallowed Rs. 7,16,79,359/- for payments to certain parties due to non-verification. The Tribunal noted that the assessee had furnished complete details and directed the Assessing Officer to verify the transactions from the recipient parties and allow the deduction if the transactions were genuine.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal found this ground to be premature and dismissed it.

Conclusion:
The Tribunal allowed the appeal in part, deleting several disallowances and directing the Assessing Officer to verify certain claims. The detailed analysis provided a comprehensive understanding of the issues and the Tribunal's rationale for its decisions.