Tribunal directs fresh adjudication on transfer pricing issues related to AMP expenditure & depreciation

The Tribunal allowed both appeals in part, directing fresh adjudication on specific issues related to transfer pricing adjustment concerning AMP expenditure and other depreciation and disallowance matters. The Tribunal emphasized adherence to principles from the Special Bench decision and jurisdictional High Court rulings. The order was issued on 31st July 2013.

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Issues Involved:
1. Transfer pricing adjustment regarding advertisement, marketing, and sales promotion (AMP) expenditure.
2. Depreciation on plant and machinery.
3. Depreciation on computer accessories.
4. Disallowance of loss on sale of fixed assets.
5. Disallowance of devaluation of stock.
6. Disallowance of provision for installation expenses.
7. Credit for TDS for A.Y. 2008-09.

Detailed Analysis:

1. Transfer Pricing Adjustment Regarding AMP Expenditure:
The primary issue was the adjustment made by the Transfer Pricing Officer (TPO) concerning AMP expenditure. The grounds of appeal included multiple points:
- The AO/DRP upheld the adjustments made by the TPO, adding INR 151,632,834 to the appellant's income, arguing that the transactions were not at arm's length price as per section 92F(ii) of the Act.
- The appellant contended that the AMP expenses were incurred to increase its own business/sales in India and not directly for any associated enterprise.
- The TPO's mechanical comparison of AMP expenditure with comparable companies and inclusion of sales commission as part of AMP were challenged.
- The appellant argued that the AMP expenses should not be treated as a separate line of activity and that the TPO erred in determining the mark-up for deemed services arbitrarily.

Both parties agreed that the issue is covered by the Special Bench decision in the case of L.G. Electronics India (P) Ltd. The Tribunal set aside the issue to the AO for fresh adjudication based on the principles laid down by the Special Bench, allowing the assessee to furnish a fresh transfer pricing study report. The AO was directed to verify the claim that sales commission should not be considered part of AMP expenditure.

2. Depreciation on Plant and Machinery:
The assessee claimed that the AO did not follow the DRP's directions regarding depreciation on plant and machinery. The DRP had agreed with the assessee, noting that the assets were used in the business and that individual usage is relevant only in the first year. The AO was directed to follow these directions, and this ground was allowed.

3. Depreciation on Computer Accessories:
The issue of the rate of depreciation on computer peripherals was settled in favor of the assessee by the Delhi High Court in the case of BSES Rajdhani Powers Ltd., which allowed 60% depreciation. The AO was directed to allow this rate, and the ground was allowed.

4. Disallowance of Loss on Sale of Fixed Assets:
The DRP sustained the assessee's objection that the loss on the sale of fixed assets was already adjusted in the Return of Income. The AO was directed to follow the DRP's directions, and this ground was allowed.

5. Disallowance of Devaluation of Stock:
The AO disallowed 20% of the devaluation of stock on an ad hoc basis, which the DRP upheld due to a lack of clarity. However, the Tribunal found that the disallowance could not be sustained on the ground of consistency, as the assessee had been following this method of valuation for many years. The Tribunal also noted that such adjustments are revenue-neutral. This ground was allowed based on the decision of the jurisdictional High Court in the case of CIT Vs. Triveni Engineering and Industries Ltd.

6. Disallowance of Provision for Installation Expenses:
The AO and DRP disallowed this expenditure on the ground that the sale had not crystallized. However, the Tribunal allowed the claim, noting that the income attributable to the installation expenses had been recognized during the year, aligning with the principle of matching income with expenditure.

7. Credit for TDS for A.Y. 2008-09:
The issue of credit for TDS was to be considered in the set-aside amount as part of the fresh adjudication by the AO.

Conclusion:
Both appeals were allowed in part, with directions for fresh adjudication on specific issues and adherence to the principles laid down by the Special Bench and jurisdictional High Court. The order was pronounced in open court on 31st July 2013.

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