2020 (12) TMI 1073 - AT - Income Tax

Tax Tribunal Adjusts Software Depreciation to 60%, Deletes Certain Disallowances, and Remits Transfer Pricing for Review.

The Tribunal partly allowed the taxpayer's appeals for AY 2009-10 and 2010-11, directing the AO/TPO to verify facts and recompute adjustments. ... Disallowance of management fee - HELD THAT:- When the assessee has proved on file that it has availed off the support services from its AE to run its business, it is entitled to claim expenditure. A.O./ CIT(A) was not empowered to decide if there was any necessity for the taxpayer to avail such services. So the ground raised by taxpayer in its appeal for A.Y. 2009-10 and 2010-11 are allowed and disallowance made stands deleted. Disallowance of set off of brought forward losses - HELD THAT:- AO/CIT(A) have disallowed set off losses by ignoring the fact that the matter is pending before the Tribunal for disposal. So, this issue is remitted back to the AO to verify the facts and grant the set off claimed by the assessee if admissible. Disallowance on account of impairment of stock - HELD THAT:- AO has disallowed this claim made by the taxpayer on the ground that the provision for impairment of stock was not ascertained liability - when the AO has not questioned the method of recognizing the value of stock at the close of the year i.e as per AS-2 of Accounting Standard and the stock or net realizable value, whichever is less, the disallowance on the basis of surmises is not permissible. Hence, we find no scope to interfere into the findings returned by Ld. CIT(A) and accordingly, aforesaid grounds in A.Y. 2009-10 and A.Y. 2010-11 raised by the Revenue are dismissed. Addition on account of AMP expenses by treating the same as capital expenses - HELD THAT:- We are of the considered view that Assessing Officer has merely made disallowance by following order passed in A.Y. 2008-09 in which taxpayer has incurred identical AMP expenditure for the purpose of Dealer signage and boards; Printing of Brochures, tyre technical guides, merchandise; Product launches; Print advertisements in newspapers and magazines; Seminars and Exhibitions; Hoardings, etc. which was deleted by the Ld. CIT(A) and order of Ld. CIT(A) was upheld by the tribunal. We find no scope to interfere into the findings returned by Ld. CIT(A). Moreover, it is beyond comprehension as to how the AO quantified 50% of the AMP expenses as capital in nature and remaining 50% as revenue in nature. Depreciation on computer software - @ 25 % as against taxpayer’s claim of 60% in the return of income on the ground that AO/ CIT(A) have erred in considering the license fees paid towards the computer software purchase as an intangible assets i.e. acquisition of right to use the application - HELD THAT:- Because software contained in a disk is tangible property by itself. Since the taxpayer’s ownership of limited right over the computer software purchased from Oracle by making payment of license fee is a tangible assets, it is entitled for depreciation @ 60% as per definition of “Plant” given in new Appendix 1 of Rule 5 effective from A.Y. 2006-07 of the Income Tax Rule, 1962. So, we are of the considered view that AO/CIT(A) have erred in allowing the depreciation on the license fee paid towards computer software @ 25% as against 60% . So, AO is directed to grant depreciation @ 60% on the license fee paid to Oracle by clubbing the said payment with computer and software. Credit for tax deducted at source (TDS) and self-assessment tax deposited while computing the tax demand - HELD THAT:- When taxpayer has brought on record the evidence for deducting the TDS and self tax deposited while computing the tax demand the AO is directed to verify the facts and to provide full credit of TDS and self-assessment tax deposited by the taxpayer in its computation of income. Separate expenses debited to profit and loss account of the taxpayer in order to compute the adjusted profit margin in relation to transaction of import of finished goods for resale - Outward freight for import of material distributed can only be considered for adjustment and not outward freight in India. Ld.TPO is to verify this fact and if the freight is for outward freight in India it need not be considered for adjustment When the taxpayer claimed that the freight need not be considered for adjustment as it is outward freight in India and not freight for import of material distributed, it is not to be considered for adjustment as directed by Ld. CIT(A). AO/ TPO is to verify this fact and provide adjustment of the freight expenses debited in the profit and loss account of the taxpayer to compute the adjusted gross margin only if it relates to import of finished goods for resale. Gross profit margin computation - HELD THAT:- Following the decision rendered by Hon’ble Delhi High Court in case of Soni Ericssion Mobile Pvt. Ltd. [2015 (3) TMI 580 - DELHI HIGH COURT]wherein it is held that gross profit margin should be computed after including AMP expenditure and RPM is considered as the most appropriate method for import segment for resale. So far as question of rejecting Brightline test (BLT) by the Ld. CIT(A) in A.Y. 2010-11 is concerned it has been rejected in a number of judgments by the Hon’ble High Courts on the ground that “brightline test” has no statutory mandate for benchmarking AMP expenses. Issues Involved:1. Disallowance of Management Fee2. Set-off of Brought Forward Losses3. Disallowance of Advertisement and Publicity Expenses4. Disallowance of Impairment of Stock5. Depreciation Rate on Computer Software6. Adjustment of Freight Expenses7. Transfer Pricing AdjustmentsDetailed Analysis:1. Disallowance of Management Fee:The taxpayer challenged the disallowance of management fees for AY 2009-10 and 2010-11. The Tribunal referenced its decision in the taxpayer's case for AY 2008-09, where it was established that the taxpayer had availed support services from its AE and was entitled to claim the expenditure. The Tribunal held that the AO/CIT(A) was not empowered to question the necessity of these services. Consequently, the grounds raised by the taxpayer for AY 2009-10 and 2010-11 were allowed, and the disallowance was deleted.2. Set-off of Brought Forward Losses:The AO/CIT(A) disallowed the set-off of brought forward losses for AY 2005-06 and 2006-07, ignoring that the matter was pending before the Tribunal. The Tribunal remitted the issue back to the AO to verify the facts and grant the set-off if admissible.3. Disallowance of Advertisement and Publicity Expenses:The Tribunal referenced its decision in the taxpayer's case for AY 2008-09, where it was held that AMP expenses were revenue in nature and necessary for the taxpayer's business. The AO's disallowance of 50% of the AMP expenses as capital expenditure was deemed arbitrary and beyond comprehension. The Tribunal upheld the CIT(A)'s deletion of the disallowance for AY 2009-10 and 2010-11.4. Disallowance of Impairment of Stock:The AO disallowed the provision for impairment of stock, considering it an unascertained liability. The Tribunal referenced its decision in the taxpayer's case for AY 2008-09, which upheld the CIT(A)'s deletion of a similar disallowance. The Tribunal found no merit in the AO's disallowance, as the taxpayer followed AS-2 for valuing stock. The disallowance for AY 2009-10 and 2010-11 was dismissed.5. Depreciation Rate on Computer Software:The taxpayer challenged the depreciation rate of 25% on computer software, claiming it should be 60%. The Tribunal agreed, stating that the license fee for Oracle software should be clubbed with computer and software, and depreciation should be allowed at 60%. The AO was directed to grant the appropriate depreciation.6. Adjustment of Freight Expenses:The taxpayer claimed that outward freight in India should not be considered for adjustment. The Tribunal directed the AO/TPO to verify if the freight expenses were related to the import of finished goods for resale. If the expenses were for outward freight in India, they should not be considered for adjustment.7. Transfer Pricing Adjustments:The Tribunal allowed the taxpayer's applications to admit additional evidence and raise an additional ground for AY 2009-10. The RPM analysis was necessary for adjudicating the issue. The Tribunal remitted the matter back to the TPO to decide afresh, following the order passed by the CIT(A) for AY 2010-11 and the decision of the Delhi High Court in the case of Sony Ericsson Mobile Pvt. Ltd.For AY 2010-11, the Tribunal upheld the CIT(A)'s application of RPM as the most appropriate method for computing the arm's length price of AMP expenditure. The Tribunal rejected the revenue's challenge to the rejection of the Brightline Test (BLT), citing multiple judgments that BLT has no statutory mandate for benchmarking AMP expenses.Conclusion:The Tribunal partly allowed the taxpayer's appeals for AY 2009-10 and 2010-11 for statistical purposes and dismissed the revenue's appeals for both years. The Tribunal directed the AO/TPO to verify specific facts and recompute adjustments as necessary. The Tribunal's decisions were based on consistency with previous rulings and adherence to judicial precedents.