Tribunal Decisions on Royalty, AMP Expenses, Depreciation, and Disallowances

The Tribunal partly allowed the appeals filed by the assessee and the AO. The Tribunal decided in favor of the assessee on the disallowance of royalty payment and AMP expenses, citing that they were at arm's length and not international transactions, respectively. However, the disallowance of deduction for additional excise duty payable by third-party manufacturers was upheld due to contingent liability. The Tribunal allowed the depreciation on marketing know-how, following precedent. Regarding the disallowance under Section 14A, the Tribunal reduced the disallowance to 2% of exempt income.

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Issues Involved:
1. Disallowance of royalty payment.
2. Disallowance of AMP expenses.
3. Disallowance of deduction for additional excise duty payable by third-party manufacturers.
4. Disallowance of depreciation on marketing know-how.
5. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Royalty Payment:
The first issue concerns the disallowance of Rs. 7.30 crores out of the royalty payment made by the assessee to its associated enterprise (AE), M/s. Cadbury Schweppes Overseas Ltd. (CSOL), UK. The Assessing Officer (AO) found that the royalty payment was not at arm's length price (ALP). The Transfer Pricing Officer (TPO) opined that the royalty paid on trademarks could not be allowed. The First Appellate Authority (FAA) upheld the disallowance. The Tribunal, however, decided in favor of the assessee, referencing similar cases from previous years where the royalty payments were deemed at arm's length. The Tribunal concluded that the royalty payment on trademark usage did not call for any adjustment and decided the ground in favor of the assessee.

2. Disallowance of AMP Expenses:
The second issue pertains to the disallowance of AMP expenses amounting to Rs. 71 lakhs. The TPO observed that the assessee's advertisement and marketing expenses were significantly higher than the industry average, suggesting that a portion of these expenses should be allocable to the AE. The FAA upheld the TPO's decision. The Tribunal, however, found that the AMP expenses were incurred wholly and exclusively for the assessee's business in India and were not an international transaction. The Tribunal cited several judgments, including those from the Delhi High Court, which emphasized that AMP expenses incurred for local market promotion do not constitute an international transaction. The Tribunal reversed the FAA's order, deciding the ground in favor of the assessee.

3. Disallowance of Deduction for Additional Excise Duty:
The third issue involves the disallowance of deduction in respect of payment for additional excise duty payable by third-party manufacturers. The Tribunal noted that this issue had been consistently decided against the assessee in previous years. The Tribunal upheld the disallowance, citing that the liability was contingent and not crystallized during the year under consideration.

4. Disallowance of Depreciation on Marketing Know-how:
The fourth issue is the disallowance of depreciation on marketing know-how. The assessee argued that this issue had been decided in its favor in previous years. The Tribunal agreed, referencing a Supreme Court judgment that allowed depreciation on goodwill as an asset under Section 32 of the Income Tax Act. The Tribunal concluded that the depreciation on marketing know-how should be allowed and decided the ground in favor of the assessee.

5. Disallowance Under Section 14A:
The fifth issue concerns the disallowance made under Section 14A of the Income Tax Act, amounting to Rs. 2,00,52,715/-. The AO had disallowed a portion of the expenses based on the proportionate contribution of exempt income to the net profit. The FAA partially allowed the appeal, reducing the disallowance. The Tribunal, referencing previous decisions, concluded that a reasonable disallowance would be 2% of the exempt income. The Tribunal modified the orders of the authorities below and decided the ground in favor of the assessee, in part.

Conclusion:
The appeals filed by the assessee and the AO were partly allowed. The Tribunal's order was pronounced in the open court on 18th May 2016.

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