2016 (8) TMI 608 - AT - Income Tax

Tribunal allows appeal on depreciation, rejects AMP expenses disallowance. Transfer pricing adjustments limited to associated enterprises.

The Tribunal partially allowed the assessee's appeal by directing verification of assets for depreciation disallowance and rejecting the disallowance of ... TP adjustment - AMP expenditure - Held that:- We are of the opinion that after the judgments of Maruti Suzuki [2015 (12) TMI 634 - DELHI HIGH COURT] and Bausch & Lomb (2015 (12) TMI 1332 - DELHI HIGH COURT) there is no scope of any other interpretation about the AMP expenditure. In the case under consideration, the AO/TPO has not brought anything on record that there existed and agreement, formal or informal, between the assessee and the AE to share/reimburse the AMP expenses incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction-in-question an IT remains unfulfilled. Conducting FAR analysis or adopting an appropriate method is the second stage of TP adjustments. The first thing is to find out whether the disputed transaction in is IT or not. Without crossing the first threshold second cannot be approached, as stated earlier. In the case under consideration, we are of the opinion that AMP expenditure is not an IT and therefore we are not inclined to restore back the issue to the file of the AO. Considering the facts and circumstances of the case under consideration, we are of the opinion that the FAA was not justified in upholding the order of the TPO. Therefore, reversing his order, we decide second ground in favour of the assessee. TP adjustment made in relation to purchase of Raw material from its AE.s - Held that:- Provision of section 92 are applicable to the IT only. Transactions entered in to by an assessee with the Non-AE.s are not governed by the provisions of Chapter X of the Act. So, there was no justification for applying the TP provisions to entire purchases. Thus we direct the AO/TPO to restrict the adjustment to the transactions entered into between the assessee and its AE.s only. ALP expenses computation - deducting the license income received from the third party manufacturers - Held that:- While the assessee had earned sub-license-fees from thirdparty manufacturers it had not paid any royalty/fee to its AE.s, that it resulted in additional operating revenue, that the assessee had not paid any royalty was a relevant factor to determine the ALP of the transaction, that the sub license fee earned by the assessee was from the same brands that were being promoted through the AMP expenses under consideration, that the sub license fee received by it were the net receipts in its hands, that it was in the nature of cost saving from the gross ALP expenses incurred by it. Therefore, in our opinion the FAA had rightly excluded the said amount for calculating the ALP expenses. We are not inclined to interfere with his order. Issues Involved:1. Disallowance of depreciation on plant and machinery.2. Advertising, marketing, and promotional (AMP) expenditure.3. Transfer pricing adjustment related to the purchase of raw materials from associated enterprises (AEs).4. Sub-license fee received from third-party manufacturers.Issue-wise Detailed Analysis:1. Disallowance of Depreciation on Plant and Machinery:The assessee's claim for depreciation on plant and machinery amounting to Rs. 2.23 lakhs was disallowed by the AO due to no production activities at the Nagpur plant. The First Appellate Authority (FAA) upheld the disallowance. The Tribunal referred to a similar issue in AY 2001-02, where it was directed to determine if any assets were used for purposes other than manufacturing. The Tribunal restored the matter to the AO for verification and allowed the appeal partly.2. Advertising, Marketing, and Promotional (AMP) Expenditure:The TPO categorized Rs. 5.35 crores as AMP expenditure out of the total advertising and selling expenses of Rs. 8.43 crores, using the 'bright line test' (BLT) and made an adjustment of Rs. 4.36 crores. The FAA accepted the assessee's plea to deduct sub-license fees from AMP expenses but used a lower figure for the deduction. The Tribunal, referencing various case laws, held that AMP expenses incurred independently by the assessee could not be considered as an international transaction (IT) under transfer pricing (TP) provisions. It emphasized that the expenditure was for the assessee's own business needs and not for the AE's benefit. The Tribunal concluded that AMP expenditure did not qualify as an IT and reversed the FAA's order, deciding in favor of the assessee.3. Transfer Pricing Adjustment Related to Purchase of Raw Materials from AEs:The TPO rejected the Cost Plus Method (CPM) used by the assessee and applied the Transactional Net Margin Method (TNMM), resulting in an adjustment of Rs. 57.63 lakhs. The FAA upheld the TPO's application of TNMM. The Tribunal noted that TP provisions apply only to ITs with AEs and not to transactions with non-AEs. Citing the Bombay High Court's decision in Tara Jewels Export Pvt. Ltd., the Tribunal directed the AO/TPO to restrict the adjustment to transactions with AEs only, allowing the ground in part.4. Sub-license Fee Received from Third-party Manufacturers:The AO contested the FAA's deduction of sub-license fees from AMP expenses. The Tribunal found that the sub-license fees were relevant for determining the ALP of the transaction as they represented additional operating revenue and cost savings. The Tribunal upheld the FAA's decision to exclude the sub-license fees from AMP expenses, dismissing the AO's ground.Additional Appeals and Cross Objections:For AY 2009-10, the AO's appeal regarding the license fee was decided against the AO, following the earlier year's decision. The assessee's cross objections included a general ground, disallowance of depreciation on plant and machinery, and AMP expenditure adjustment. The Tribunal restored the depreciation issue to the AO and decided the AMP expenditure issue in favor of the assessee, consistent with the earlier year's ruling.Conclusion:The Tribunal's order resulted in partial relief for the assessee regarding depreciation and TP adjustments, while dismissing the AO's appeals related to AMP expenditure and sub-license fees. The decisions emphasized the proper application of TP provisions and the necessity of evidence for considering AMP expenses as ITs.