2016 (11) TMI 1362 - AT - Income Tax

Tribunal Upholds Income Tax Appeals on Depreciation, Expenses, and Transfer Pricing

Deputy Commissioner of Income-tax, Circle-3 (1), New Delhi Versus Bio Rad Laboratories (India) (P.) Ltd.

The tribunal upheld the Commissioner of Income Tax (Appeals) decisions regarding depreciation on computer peripherals and rental assets, marketing and ... Transfer pricing adjustment - mandatory comparability analysis - Held that:- Transfer Pricing Officer has also adopted transactional net margin method (TNMM) as the most appropriate method and selected 7 comparables without carrying out FAR analysis of those comparables with the assessee. Therefore there is basic flaw in the transfer pricing mechanism adopted by the ld. Transfer Pricing Officer. Moreover, he has also not given an opportunity to the assessee to comment on the comparables selected by him. The ld. first appellate authority has relied upon the decision of Philips Software Centre (P.) Ltd. [2008 (9) TMI 466 - ITAT BANGALORE-B ] and has held that since the ld. TPO has not mentioned any of the four conditions prescribed u/s 92C(3) of the Act rendering his order void. During the course of hearing the ld. DR has submitted that Hon'ble Karnataka High Court [2009 (2) TMI 832 - HIGH COURT OF KARNATAKA] has stayed the above judgment and therefore, the decision of the first appellate authority is erroneous as it relied on the stayed judgment. The Hon'ble Karnataka High Court vide its order dated 16.02.2009 has stayed the operation of the judgment on which the first appellate authority has relied upon. Though the Hon'ble High Court admitted the several questions of the law but stayed the whole of the judgment of the coordinate bench. Hence, we reject the contention the ld. AR that the decision of the coordinate bench is stayed to the limited extent. In view of above facts it is apparent that ld. first appellate authority vide his decision dated 25.03.2010 relying on the decision of the coordinate bench which was stayed by Hon'ble Karnataka High Court vide order dated 16.02.2009 deserves to be set aside. Hence, we set aside all the four grounds of the appeal to the file of the ld. TPO to determine ALP of international Transactions after giving assessee a proper opportunity of hearing. Addition on account of depreciation on rental assets - Held that:- infirmity in the order of the ld CIT(A) in allowing the claim of deduction of the depreciation to the assessee as assessee owns the assets and also uses it for the purposes of its business. The revenue's another aspect of this ground is that ld CIT(A) has admitted the affidavit of the assessee before him. We have perused the order of the ld CIT(A) wherein the affidavit only says that the assessee has not received any rent or installment on account of these machines. We reject the argument of the revenue as the information in the form audited financial statement is available on record as assessee has not shown any rental income in its profit and loss account and further in its fixed assets schedule it has shown the rental assets. - Decided against revenue Depreciation claimed on computer peripherals - Held that:- CIT(A) has correctly allowed the claim of the assessee of depreciation @ 60% on such assets following the decision of the Hon'ble Delhi High Court in CIT v. BSES Rajdhani Power Ltd [2010 (8) TMI 58 - DELHI HIGH COURT ] - Decided against revenue Disallowance of seminar expenses - Held that:- CIT(A) has held that these are the expenses for the marketing of new products launched by the assessee in the same line of business. They are routine in nature and further the decision of Hon'ble Supreme Court in case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997 (4) TMI 5 - SUPREME Court ] does not apply to the facts of the case. We do not find any infirmity in the order of the ld. CIT(A) - Decided against revenue Allowance of expenditure on display stand - Held that:- CIT(A) has deleted the disallowance after verification of the invoices which demonstrated that expenses were incurred for display panel, banner stand and other kinds of display literature. He therefore held that looking to the nature of the expenditure and durability and longitivity of these items such expenditure is revenue in nature. We find no infirmity in the order of the ld. CIT(A). - Decided against revenue Issues Involved:1. Transfer Pricing Adjustments2. Depreciation on Computers and Peripherals3. Depreciation on Rental Assets4. Marketing and Seminar Expenses5. Capitalization of Display Stand ExpensesIssue-wise Detailed Analysis:1. Transfer Pricing Adjustments:The primary issue revolves around the transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and the subsequent deletion of these adjustments by the Commissioner of Income Tax (Appeals) [CIT(A)]. The revenue challenged the CIT(A)'s decision on the grounds that the assessee did not perform a mandatory comparability analysis to justify the application of the Profit Split Method (PSM). The TPO had rejected the PSM and applied the Transactional Net Margin Method (TNMM) instead, selecting comparables without conducting a proper FAR (Functions, Assets, and Risks) analysis. The CIT(A) had relied on the decisions in Philips Software and Sony India cases, which the revenue argued were not applicable. The tribunal found that the TPO's rejection of the PSM and the application of TNMM lacked proper justification and FAR analysis. The tribunal directed the TPO to re-examine the transfer pricing adjustments after giving the assessee a proper opportunity to present their case.2. Depreciation on Computers and Peripherals:The assessee claimed depreciation on computer peripherals like printers, scanners, and UPS at the rate of 60%, which the Assessing Officer (AO) allowed only at 25%. The CIT(A) allowed the claim at 60%, following the decision of the Hon'ble Delhi High Court in the case of BSES Rajdhani Power Ltd. The tribunal upheld CIT(A)'s decision, finding no infirmity in allowing depreciation at 60%.3. Depreciation on Rental Assets:The issue pertained to the depreciation claimed by the assessee on certain equipment placed at customers' premises. The AO had disallowed the depreciation on the grounds that the assets were not used by the assessee for business purposes. The CIT(A) allowed the claim, noting that the assets were used for business purposes and the ownership remained with the assessee. The tribunal upheld the CIT(A)'s decision, referencing a coordinate bench's decision in a similar case where depreciation was allowed on machinery installed at another company's premises.4. Marketing and Seminar Expenses:The AO had disallowed a portion of the marketing expenses incurred for launching a new product, treating it as capital expenditure to be amortized over three years. The CIT(A) deleted the disallowance, holding the expenses to be revenue in nature. The tribunal upheld the CIT(A)'s decision, agreeing that the expenses were routine marketing expenses for products in the same line of business and should be treated as revenue expenditure.5. Capitalization of Display Stand Expenses:The AO had treated the expenses incurred for display stands used in seminars as capital expenditure, allowing depreciation at 25%. The CIT(A) held these expenses to be revenue in nature after verifying that they were for items like display panels and banner stands with no long-term durability. The tribunal found no infirmity in the CIT(A)'s decision and dismissed the revenue's appeal on this ground.Conclusion:The tribunal's decisions across the various assessment years consistently upheld the CIT(A)'s rulings on the issues of depreciation on computer peripherals and rental assets, marketing and seminar expenses, and the capitalization of display stand expenses. The tribunal directed the TPO to re-examine the transfer pricing adjustments, ensuring proper FAR analysis and giving the assessee an opportunity to present their case. The appeals were largely decided in favor of the assessee, with specific directions for re-examination of transfer pricing adjustments.