Tribunal ruling: Deductions allowed for interest on advances and apportionment of common expenses under section 80IC

The Tribunal partly allowed the assessee's appeal regarding advertisement expenses, interest on advances to associated enterprises, and apportionment of common expenses for deduction under section 80IC. The Tribunal dismissed the claim for advertisement expenses as business expenditure or irretrievable cash loss, directed computation of interest at LIBOR+2% for advances to AEs, and upheld the AO's allocation of common expenses based on turnover. The order was pronounced on 17th August 2022.

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Issues:
1. Allowability of advertisement expenses as business expenditure or cash irretrievably lost.
2. Charging of interest on advances granted to associated enterprises.
3. Apportionment of common expenses for deduction under section 80IC.

Issue 1: Allowability of Advertisement Expenses
The assessee incurred advertisement expenses paid to its associated enterprises (AEs), which were referred to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP). The TPO determined the ALP as 'Nil' as the economic burden of advertisement belonged to the AEs, resulting in an addition to the income. The Tribunal previously dismissed the appeal on this issue, stating that the benefit derived from the expenditure goes directly to the AEs. The assessee argued that the expenditure should be allowed as business expenditure or irretrievable cash loss. However, the Tribunal held that the dispute was limited to the ALP determination and not under section 37(1), thus dismissing the ground.

Issue 2: Charging of Interest on Advances to AEs
The Tribunal directed the computation of interest on advances granted to AEs at LIBOR+2%, following a previous decision for AY 2003-04. The noncharging of interest was held to attract Transfer Pricing provisions, aligning with a Mumbai Tribunal decision. Consequently, the AO was directed to compute the interest at LIBOR+2%, partially allowing this ground.

Issue 3: Apportionment of Common Expenses
The assessee claimed deduction under section 80IC for its units based on the allocation of common expenses. The AO re-allocated expenses based on turnover, reducing the deduction claimed. The Tribunal noted that while most overhead expenses were allocated based on turnover, design and development costs were allocated based on the number of watches produced. The Tribunal agreed with the AO's approach, stating that the expenditure was not directly proportional to the number of watches produced, and turnover-based allocation was more appropriate. Thus, the ground was dismissed, and the appeal was partly allowed.

In conclusion, the Tribunal partly allowed the assessee's appeal, addressing the issues related to advertisement expenses, interest on advances to AEs, and apportionment of common expenses for deduction under section 80IC. The order was pronounced on 17th August 2022.

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