Facts of the Case

Canon India Private Limited, a wholly owned subsidiary of Canon Singapore Pvt. Ltd., was engaged in the purchase and resale of Canon products such as printers, photocopiers, scanners and cameras in India and was also involved in software-related services. During the relevant assessment years, Canon India entered into international transactions with associated enterprises and disclosed such transactions in its returns. The Assessing Officer referred the matter to the Transfer Pricing Officer under Section 92CA for determining Arm's Length Price.

The Transfer Pricing Officer accepted the international transactions as being at arm's length but observed that AMP expenditure incurred by the assessee exceeded that of comparable entities. It was concluded that such excess expenditure benefited the Canon brand and indirectly benefited Canon Singapore Pvt. Ltd., resulting in transfer pricing adjustments.

Apart from the above issue, the Assessing Officer added unutilized subsidy amounts received from Canon Singapore on the ground that the same constituted taxable income of the assessee.

Issues Involved

  1. Whether unutilized subsidy received by Canon India from Canon Singapore for specific advertising and sales promotion activities constituted taxable income.
  2. Whether subsidy received by the assessee was required to be excluded from AMP expenditure at the threshold before carrying out transfer pricing adjustment calculations.
  3. Whether the Tribunal correctly excluded subsidy, trade discounts, cash discounts and commission from AMP expenditure.

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The subsidy amount could not be excluded from AMP expenditure at the threshold stage.
  • Entire AMP expenditure incurred by the assessee was required to be considered while determining Arm's Length Price.
  • Unutilized subsidy became the property of the assessee and therefore constituted taxable income.
  • The character of subsidy should be determined according to the purpose for which the subsidy was granted, and accordingly the subsidy should be treated as revenue receipt 

Respondent’s Arguments (Assessee)

The assessee argued that:

  • Subsidies were received only for specific advertising and promotional activities.
  • The assessee had no authority to utilize the subsidy for any purpose other than the designated purpose.
  • Any unutilized amount remained under an obligation to be held on behalf of Canon Singapore and was reflected as current liability.
  • Since the subsidy was tied to specified expenditure, the unspent amount could not be recognized as income.

Court Findings / Court Order

The Delhi High Court held:

Regarding Unutilized Subsidy

The Court observed that:

  • Subsidies were received for specific purposes and carried an obligation for utilization.
  • The assessee was accountable to Canon Singapore for the use of such funds.
  • The unspent amount was held in trust and reflected as current liability.
  • The assessee could not treat such amount as its income.

The Court held that recognition of subsidy income without corresponding expenditure would violate the matching principle applicable under the mercantile system of accounting.

Accordingly, the Court answered the issue in favour of the assessee and against the Revenue.

Regarding Subsidy Exclusion from AMP Expenditure

The Court observed that this issue was interconnected with determination of Arm's Length Price and methodology adopted for benchmarking. Therefore:

  • The issue was remanded for fresh consideration in light of the principles laid down in Sony Ericsson Mobile Communications India Pvt. Ltd.
  • Both parties were permitted to raise all available contentions before the competent authority.

The appeals were disposed of with these observations.

Important Clarification

The Court clarified an important principle:

Subsidy received for specified purposes cannot be recognized as income merely because the amount has been received. Recognition of such income can arise only when corresponding expenditure is incurred.

Further, whether subsidy should be reduced from AMP expenditure at the initial stage or by later adjustment depends upon:

  • Comparables selected
  • Methodology adopted
  • Arm's Length Price determination exercise

Sections Involved

  • Section 92CA – Reference to Transfer Pricing Officer for determination of Arm's Length Price (ALP)
  • Section 143(3) – Assessment proceedings
  • Section 144C – Dispute Resolution Panel proceedings
  • Transfer Pricing provisions relating to Associated Enterprises under the Income Tax Act, 1961

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Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:6135-DB/VIB03082015ITA1372014.pdf

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