Case Law Details
Whirlpool of India Ltd. Vs ACIT (ITAT Delhi)
The Delhi ITAT heard an appeal filed against the final assessment order dated 30.04.2022 passed under Sections 143(3) read with 144C(13) of the Income Tax Act for AY 2017-18. The assessee, a subsidiary of Whirlpool USA engaged in manufacturing, sales and distribution of appliances, had entered into international transactions and adopted the TNMM method to justify arm’s length pricing. However, the TPO and Assessing Officer made transfer pricing adjustments mainly relating to advertisement, marketing and sales promotion (AMP) expenses.
The assessee challenged the addition of ₹57.11 crore on account of AMP expenses, contending that AMP expenditure incurred in India could not be treated as an international transaction in the absence of any agreement or arrangement with the associated enterprise. The assessee also argued that the Bright Line Test (BLT) could not be used to infer an international transaction and that such a method had already been rejected by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd.
The Tribunal noted that in the assessee’s own case for AY 2008-09, the Delhi High Court had held that there was no international transaction in relation to AMP expenses. The Tribunal further recorded that the Supreme Court had dismissed the Revenue’s appeal against that decision. Coordinate Benches had also deleted AMP-related adjustments for AYs 2009-10 to 2016-17. The Tribunal observed that the Departmental Representative could not point out any change in facts or circumstances warranting a different view for the year under consideration. It was also noted that no AMP adjustment had been made in AY 2022-23. Accordingly, the Tribunal decided Grounds 2 and 3 relating to AMP adjustment and protective addition under BLT in favour of the assessee.
The Tribunal then considered disallowance of ₹51.33 lakh towards daughter marriage fund expenditure. It noted that in earlier assessment years, similar issues had been remitted to the Assessing Officer for verification and that consequential orders had granted relief to the assessee. Following earlier orders, the Tribunal restored the matter for verification and statistical purposes.
On the issue of foreign tax credit of ₹78.91 lakh, the Tribunal observed that similar matters in earlier years had been remitted for verification of certificates and that tax credit was subsequently allowed after reconciliation. The issue was therefore remitted again to the Assessing Officer for verification and statistical purposes.
The Tribunal also admitted an additional ground relating to warranty expenditure classified as “unwinding of discounts due to passage of time.” The assessee explained that due to adoption of IND AS 37, warranty provisions were divided into discounted liability and finance cost components, and the latter had mistakenly been added back in the return of income. The Tribunal observed that warranty provision is an allowable liability under Section 37(1), relying on the Supreme Court decision in Rotork Controls India Ltd. Since the issue involved proper computation rather than a fresh claim, the Tribunal restored the matter to the Assessing Officer for fresh examination.
The appeal was accordingly allowed with consequential directions.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is preferred by the assessee against the final assessment order dated 30.04.2022 passed by the Ld. ACIT, Circle-10(1), Delhi, (hereinafter referred as the ‘Assessing Officer’) u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY: 201718.
2. The assessee is a subsidiary of Whirlpool USA and engaged in the business of production, sales and distribution of whirlpool appliances. During the year under consideration assessee had entered into international transactions and adopted TNMM as most appropriate method for justifying the arm’s length price of the international transactions. The TPO/Assessing Officer was not satisfied and had made adjustments which form the substratum to the grounds raised in the appeal before us and the same are reproduced below:
“1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as ‘DRP’) under Section 143(3) read with Section 144C of the Income-tax Act, 1961 (‘Act’), is bad in law, violative of principles of natural justice and void ab-initio.
2. That the assessing officer erred on facts and in law in determining income of the appellant at Rs. 606,72,19,696 against returned total income of Rs. 489,42,06,960 under normal provision of the act.
2.1 That the assessing officer/DRP erred on facts and in law in making addition of
Rs.57,11,67,349 on account of alleged difference in the arm’s length price of international transactions resulting from the advertisement, marketing and sales promotion expenses (hereinafter referred to as the AMP expenses’) incurred by the appellant.
2.2 That the DRP/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B, in the absence of any proved understanding arrangement between the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act.
2.3 That the DRP/TO erred on facts and in law in holding that there exists an international transaction in connection with incurring of AMP expenses without placing on record any tangible material or evidence to substantiate the existence of such transaction.
2.4 That the DRP/TO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm’s length price(ALP) and the contract or declared price, but the said provision could not be invoked to determine the ‘quantum’ / extent of business expenditure.
2.5 That the DRP/TPO erred on facts and in law in not appreciating that since the appellant was performing the key people/critical decision making functions with regard to advertisement and marketing activity, the risk related to such activity ought to have been borne by the applicant.
2.6 That the DRP/TPO erred on facts and in law in not appreciating thatby virtue of long term right to use the ‘Whirlpool brand in India, the appellant has gained economic ownership of the said brand.
2.7 That the DRP/TPO erred on facts and in law in not appreciating that adjustment on account of allegedly excess AMP expenses is not warranted in the case of the appellant, a full risk bearing entrepreneur.
2.8 That the DRP/TO erred on facts and in law in holding that benefit derived by the associated enterprise as a result of AMP expenses incurred by the appellant is reflected in the improvement in overall global brand ranking not appreciating that such improvement in ranking was a result of the strategic marketing efforts and expenses incurred by the associated enterprises.
2.9 That the TPO erred on facts and in law in holding that the associated enterprise is benefiting from the AMP expenses on account of development of brand without appreciating that the associated enterprise is not selling any goods directly in the Indian market.
2.10 That the TPO erred on facts and in law in holding that, “there is an international transaction between the assessee and the foreign AE under which the assessee incurred AMP expenses towards promotion of brand which is legally owned by the foreign AE”.
2.11 That the TO erred on facts and in law in making protective adjustment of Rs.58,67,18,782 applying Bright Line test (“BLT’) not appreciating that use of BLT to infer the existence of an international transaction is not mandated under the Act without appreciating that in absence of specific provision in the Transfer Pricing statutory provisions in India, adjustment on account of the arm’s length price of the advertisement and brand promotion expenses could not be made.
2.12 That the TPO erred on facts and in law in not appreciating that the use of BLT has been negated by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile communications 374 ITR 118.
2.13 Without prejudice that the DRP/TO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm’s length applying TMM.
2.14 Without prejudice that the DRP/TPO erred on facts and in law in considering following inappropriate comparable companies, being contact manufacturers, for the purpose of applying the bright line test not appreciating that such companies are not required to incur any significant AMP expenses:
a. CompuageInfocom Limited
b. Penguin Electronics Ltd.
c. Ion Exchange (India) Limited
d. Salora International Ltd.
2.15 Without prejudice that the DRP/TPO erred on facts and in law in considering following inappropriate comparable companies for the purpose of computing the mark up charged on AMP expenses:
a. Pressman Advertising Ltd.
b. Just Dial Ltd
c. EDCIL Ltd
d. Majestic Research Services and Solutions Ltd
e. Holtec Consulting Pvt. Ltd.
f. ICRA Ltd
3. That the assessing officer erred on facts and in law in making disallowance of Rs.58,67,18,782 under section 37(1) of the Act on account of advertisement and marketing expenses incurred by the appellant holding that the expenditure was incurred by the appellantfor developing the brand in favour of the parent company, being the legal owner of the brand.
3.1 That the assessing officer erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for the purpose of its business and were deductible as business expenditure.
3.2 That the assessing officer erred on facts and in law in not appreciating that the appellant has a long term right to exploit the trademark ‘Whirlpool’ and benefits arising from the advertisement and marketing expenditure inures solely to the appellant.
3.3 That the assessing officer erred on facts and in law in not appreciating that the right allowed by the associated enterprise to the appellant to use the trademark ‘Whirlpool’ is a privilege and not a service rendered to the associated enterprise so as to warrant compensation.
3.4 That the assessing officer erred on facts and in law in not appreciating that benefit arising to the parent company, if any, is merely incidental, not warranting disallowance of advertisement and marketing expenses incurred by the appellant.
4. That the assessing officer erred on facts and in law in disallowing Rs. 51,33,504 being expenditure on account of daughter marriage fund, allegedly holding that the said expenditure is beyond the scope of admissible business expenditure u/s 37(1) of the Act.
5. That the assessing officer erred on facts in not allowing foreign tax credit amounting to Rs.78,91,061 to the appellant.
The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal.”
3. It comes up that assessee has further raised an additional claim in the form of additional ground which is also reproduced below:
“That on the facts and circumstances of the case and in law, the assessing officer ought to have allowed deduction in respect of part of the warranty expenditure amounting to Rs.4,63,14,580 accounted for in the financial statements of the relevant previous year, under the head finance cost’ under the sub-heading ‘Unwinding of Discount’ but erroneously offered tax in the computation of income by the appellant.”
4. On hearing both sides we find that that as with regard to the ground on merits ld. Counsel has drawn our attention to the fact that issue involved are primarily covered in favour of the assessee by decisions of the Tribunal and Hon’ble Delhi High Court too.
5. Ground No. 1 is general in nature and ground No. 2-2.15 are in regard to addition made by the TPO on account of alleged creation of marketing intangible by assessee in favour of his associates enterprise on account of AMP expenses. Ground No. 3 with sub-ground is also with regard to TP adjustment of AMP made on protective basis by applying bright line test.
6. It comes up that in assessee’s own case for AY: 2008-09 Hon’ble Delhi High Court has held that as such there is no international transaction on account of AMP expenses. This has been sustained by the Hon’ble Supreme Court where the appeal of revenue has been dismissed. Coordinate Bench have followed the decision for Hon’ble Delhi High Court and deleted the adjustments on account of AMP expenses for AY: 2009-10 to 2016-17.
7. Though ld. DR has relied the orders of ld. tax authorities below we find that he was unable to controvert with any submissions of facts or law, as to if, there is any change of facts and circumstances for a different treatment this year. In fact, ld. counsel has drawn our attention to the fact that subsequently in AY: 2022-23 no adjustment on account of AMP expenditure have been made.
8. As with regard to application of bright line test for making adjustment on protective basis the law is now settled that bright line test application has been rejected by Hon’ble Delhi High Court in the case of Soni Ericsson Mobile Communication India Pvt. Ltd. Vs. CIT, 374 ITR 118. In fact, in assessee’s own case for AY: 2008-09 Hon’ble Delhi High Court has once held that there is no international transaction with regard to AMP expenditure the protective addition obviously falls. In the light of aforesaid discussion the ground No. 2 & 3 with their sub-ground are decided in favour of the assessee.
9. Ground No. 4: The issue arises out of ex-gratia payment made by the assessee to its employee at the time of marriage of their daughter. The assessee has been making provisions in the books which are offered for taxation in the return and actually the amount paid during the year is claimed as expenditure. During the year under consideration expenditure of Rs.51,33,584/- on account of daughter marriage fund was made which has been disallowed by the ld. tax authorities below and ld. DR following its order for AY: 2015-16 & 2016-17 confirmed the disallowance made by the assessing officer.
10. Although, ld. DR has relied the orders of ld. tax authorities below we find that in assessee’s own case for AY: 2015-16 in ITA No. 9191/Del/2019 and AY: 2016-17 vide ITA No. 476/Del/2017 the Coordinate Bench has remitted the matter to the assessing officer for allowing the deduction after verification of details. The ld. AR has also drawn our attention to the factthat in effect giving order passed by ld. Assessing Officer giving relief to the assesse no addition is made.
11. In the light of aforesaid discussion the ground No. 4 is sustained in favour of the assesse with directions to follow directions of this Tribunal in AY 2015-16 and AY: 2016-17 (supra). The ground is sustained for statistical purposes.
12. Ground No. 5: The ground pertains to claim of foreign tax credit of Rs.78,91,061/- which assessing officer did not allow. The ld. Counsel has drawn our attention to the decision in case of assessee for AY: 2015-16 and 2016-17 (supra) wherein matter has been remitted to the assessing officer for verification of certificates. Again the effect giving order shows that assessee had submitted statement of reconciliation of the amount along with copy of certificate and assessing officer has allowed the credit of tax relief. In the light of aforesaid circumstances this ground is sustained in favour of the assessee for statistical purposes and the issues are remitted the assessing officer for verification of certificates.
13. As with regard to additional ground raised ld. DR has opposed the admission of same at this stage submitting that the same is not a legal ground and requires factual verification.
14. In context to the additional ground of appeal we find that assessee is in manufacture and sale of consumer durables home appliances which definitely carry some sort of warrantee for a period of one year and as long as 10 years.It is submitted that in view of the IND AS 37 coming into effect from FY 2016-17, the appellant started making provision for warranty on the basis of Actuarial Valuation Certificate computed on discounted value of the liability as at the end of previous year. It is submitted that as per the accounting practice followed by the appellant company, the value of the product warranty as per the Actuarial valuation Certificate under discounted value basis is grouped into two parts. The first part consists of the discounted value of the carrying amount of the warranty liability and the second part consist of the value of the interest cost on the discounted value warranty liability grouped as ‘unwinding of discounts due to passage of time. Effective from FY 2016-17, the same is accounted for by the appellant in its books of accounts and presented in the Annual Financial Statements under two separate accounting subheads. It is submitted that the undiscounted portion of the provision for warranty is accounted under the head “customer service expenses” and the finance/interest cost attributable to passage of time on such undiscounted provision is accounted under the head “unwinding of discounts due to passage of time”. It is submitted that while the appellant has been claiming deduction in the ROI for the expenditure recorded under the head “customer service expenses” as deduction and has mistakenly been adding back the amount recorded under the head “unwinding of discounts due to passage of time” in the return of income. Upon review of financial and tax returns, it was noted that amount recorded under the head “unwinding of discount due to passage of time” has incorrectly been disallowed by the appellant.
15. The appellant has been consistently following mercantile/accrual system of accounting year after year, which is also consistently followed to compute taxable business income.We are of the considered view that there is no dispute to the fact that provision for warrantee is deductible as ascertained liability u/s 37(1) of the Act and reliance for this can be apply decision of Hon’ble Supreme Court in Rotork Controls India Ltd. Vs. CIT, 314 ITR 62. Now, if there is any mismatch in reporting the provision for warrantee in the books and in the return of income filed then assessee is entitled to explain the same during the assessment proceedings. Assessee may have failed to bring this on record before ld. tax authorities, however, as the tax liability should be determined as per the provisions of the Act and the claim of the assessee is not completely new or fresh but actually only involves enhancement, the same requires top be considered.
16. In the light of aforesaid we are of the considered view that the additional ground deserves to be admitted and same are restored to the files of ld. AO to raise necessary queries from the assessee and determine the computation of the claim afresh.In aforesaid terms the ground is sustained for statistical purposes.
17. As a consequence of aforesaid discussion the appeal of assessee is allowed with a consequence to follow as aforesaid.
Order pronounced in the open court on 30.03.2026
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