Transfer pricing remand and depreciation on intangible business rights upheld while product promotion was allowed as revenue.

Transfer pricing benchmarking based on selected comparables could not be finally sustained where the assessee was not given an effective opportunity to object and its alternative analysis was not examined; the matter was remanded for fresh adjudication after reasonable hearing. Advertisement and publicity expenditure on product promotion, including hoardings, banners, media publicity and catalogues, was treated as revenue in nature because no enduring capital asset was shown, so the disallowance failed. Intangible rights acquired under business purchase arrangements, including goodwill, exclusive business rights, patents, trademarks and intellectual property rights, were held eligible for depreciation when used in the business.

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Issues: (i) whether the transfer pricing adjustment based on the selected comparables and the transactional net margin method could be sustained when the assessee was not given an opportunity to object and its alternative analysis was not examined by the Transfer Pricing Officer; (ii) whether advertisement and publicity expenditure incurred for product promotion was allowable as revenue expenditure; and (iii) whether depreciation was allowable on goodwill, exclusive business rights, patents, trademarks and intellectual property rights acquired under business purchase arrangements.

Issue (i): whether the transfer pricing adjustment based on the selected comparables and the transactional net margin method could be sustained when the assessee was not given an opportunity to object and its alternative analysis was not examined by the Transfer Pricing Officer.

Analysis: The selection of comparables was made without affording the assessee an effective opportunity to raise objections. The assessee's alternative benchmarking exercise was required to be examined and, in the circumstances, referred back for consideration. At the same time, the rejection of the assessee's original cost plus approach was not found infirm merely because the assessee had adopted a different method in its transfer pricing study. The matter required de novo consideration after reasonable hearing.

Conclusion: The transfer pricing issue was restored to the Transfer Pricing Officer for fresh adjudication after affording reasonable opportunity to the assessee.

Issue (ii): whether advertisement and publicity expenditure incurred for product promotion was allowable as revenue expenditure.

Analysis: The expenditure was incurred on hoardings, posters, banners, media publicity, exhibitions, catalogue printing and allied promotional activities for existing products. No capital asset or enduring advantage was shown to have come into existence. The issue stood covered by the Tribunal's earlier order in the assessee's own case, and the factual matrix did not justify a different view.

Conclusion: The disallowance of advertisement and publicity expenditure was not sustained.

Issue (iii): whether depreciation was allowable on goodwill, exclusive business rights, patents, trademarks and intellectual property rights acquired under business purchase arrangements.

Analysis: The rights acquired under the business purchase agreements constituted intangible assets eligible for depreciation. The earlier orders in the assessee's own case had already held that exclusive business rights and goodwill arising from such acquisition were depreciable, and the same reasoning applied to the patents, trademarks and intellectual property rights acquired for business use.

Conclusion: The assessee was entitled to depreciation on the disputed goodwill, business rights, patents, trademarks and intellectual property rights.

Final Conclusion: The assessee obtained a remand on the transfer pricing adjustment, while the revenue's challenges to the allowability of advertisement and publicity expenditure and depreciation on intangible assets failed.

Ratio Decidendi: Where transfer pricing benchmarking is undertaken without affording an effective opportunity to object and the assessee's alternative analysis remains unexamined, the adjustment cannot be finally affirmed and must be reconsidered after hearing the assessee; and intangible business rights acquired under a business purchase agreement may qualify as depreciable assets when used in the business.

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