Unutilised subsidy for meeting specific expenditure cannot be treated as Income
1. Assessee is wholly subsidiary of Canon Singapore Pvt. Ltd. (CSPL)
2. Assessing Officer made a reference u/s 92CA to Transfer Pricing Officer (TPO) for determination of arm's Length Price (ALP)
3. TPO found that the Assessee had incurred Advertisement, Marketing and Promotional (AMP) expenditure, which was much in excess of the expenditure incurred by other comparable entities.
4. According to TPO part of the AMP expenditure was incurred by the Assessee on building/promoting the brand ‘Canon’ and the corresponding benefit of such excess expenditure had been passed on to the Assessee’s holding company - CSPL
5. TPO, accordingly, made transfer pricing adjustments and directed the AO to add Rs. 33,25,04,380/- and Rs. 52,19,78,244/- to the taxable income of the Assessee for the AY's 2007-08 and 2008-09 respectively
6. AO issued draft assessment orders which were objected to by the assessee before the DRP
7. Assessee was unsuccessful and the TP adjustments made on account of AMP expenditure were upheld by the DRP
8. AO also added Rs.7,62,58,434/- which was unutilised subsidy, to the total income of the Assessee for the AY 2007-08. Similarly, the AO added a sum of Rs.10,51,00,000/- to the total income of the Assessee for the AY 2008-09 which reflected unutilised subsidy received by the Assessee from its holding company - CSPL on the ground that the same has not been spent for the purpose
9. In the appeal before Tribunal it was held that certain receipt/expenses were to be excluded from AMP
10. Tribunal gave relief to assessee on account of subsidy
11. Revenue and assessee both went to High Court
11. On the issue of Subsidy High Court confirmed the view of ITAT and held that the unspent subsidy can not be treated as Income of the assessee. It is rightly shown under the head Current Liabilities
12. On the issue of AMP - It would be open for the Revenue as well as the Assessee to take all available contentions with respect to this aspect before the concerned authority.
1. Subsidy - It would be impermissible for the Assessee to appropriate and reflect the amount of unutilised subsidy as its income. Therefore, the Assessee has not – in our view rightly so – credited the subsidies received to its Profit & Loss Account, but reflected the same as a current liability. In view of the Assessee’s obligation to utilise the same for the specific purposes, the revenue could be recognised only on the application of the subsidy for the specified purposes. In other words, the Assessee could credit the Profit & Loss Account with the quantum of subsidy only if the corresponding expenditure was also debited to the Profit and Loss Account maintained by the Assessee.
We are, therefore, unable to accept the Revenue’s contention that the unutilised subsidy is required to be recognised as income of the Assessee in the year of its receipt. This would be contrary to the matching concept, which is the substratal principle for computing income during a relevant period. It is necessary that income be recognised along with the corresponding expenditure incurred for earning the income. Thus, where an Assessee follows the Accrual/Mercantile system of Accounting – as in this case – income can be recognised only when the matching expenditure is also accounted for irrespective of the cash outflows/inflows during the year. It would thus, not be correct to recognise the subsidies received for incurring specific expenditure as income without accounting for the corresponding expenditure.
2. AMP - The question whether subsidy has to be reduced from the AMP expenditure incurred by the Assessee at the threshold or by way of a later adjustment would depend on various factors including the comparables selected for the purposes of determining the ALP as also the methodology adopted. Needless to mention, it would be open for the Revenue as well as the Assessee to take all available contentions with respect to this aspect before the concerned authority.
Cases referred to
Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (2015) 374ITR118 (Delhi)
LG Electronics Private Limited 2013 (24) ITR (Trib.) 634 (Del)