TaxTMI 
TaxTMI 
2020 (8) TMI 130
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....nder Chapter X of the Income Tax Act, 1961 [hereinafter referred as "the Act"] on account of Advertisement, Marketing and Sales Promotion {hereinafter referred as "AMP"} expenses. 2.1 That on facts and in law the TPO/DRP erred in not appreciating that in absence of a "transaction" as envisaged under section 92F of the Act between the appellant and its AE for brand promotion or for establishing marketing intangibles the TPO had no jurisdiction to propose an adjustment on account AMP expenses. 2.2 That on facts and in law the TPO erred in holding and the DRP inter alia erred in upholding/observing that the: (i) Appellant had incurred AMP expenditure of Rs. 13,70,95,799/- on promotion of proprietary marks and for development of marketing intangible for the benefit of AE. (ii) AMP expenditure of Rs. 13,70,95,799/- incurred by the appellant is an "International Transaction" u/s 92B of the Act. (iii) Selling Expenses (for eg. Discounts, Commission) incurred by the appellant are in the nature of AMP expenses. (iv) AE is directly benefited by any expenditure incurred by assesse on AMP. 2.3 That on facts and in law the AO/TPO/DR....
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....redit of tax deducted at source (TDS). The case was selected for scrutiny and in view of the International transactions reported by the assessee, the matter for determination of their arm's-length was referred to the learned Transfer Pricing Officer (TPO). The learned Transfer Pricing Officer (TPO) proposed adjustment of Rs. 11,44,61,024/- to the International transaction of 'procedure of finished goods for resale'. While proposing the adjustment, the learned TPO held that most appropriate method for determination of arm's-length price (ALP) of purchase of the finished goods should be "Resale Price Method" (RPM) instead of "Transactional Net Margin Method" (TNMM) applied by the assessee. The learned TPO also observed that the assessee had incurred a huge amount (Rs. 16,79,22,000/-) on Advertisement and Market Promotion (AMP) expenses which has created market intangibles including brand value in favour of Associated Enterprises and thus being an international transaction, same need to be benchmarked. He applied Bright Line Test (BLT) for computing the AMP adjustment. The learned TPO allowed the AMP expenses of Rs. 3,08,26,201/- and balance AMP expenses of Rs. 13,70,95,799/- was c....
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....the decisions cited before the Tribunal in assessment year 2008-09, the existence of international transaction of the AMP has been rejected both on the ground of the excessive spending and use of the logo. The learned Counsel, however, submitted that para 35 of the order of the Tribunal may not be followed as the appeals involving AMP issues have not been heard by the Hon'ble Supreme Court and thus restoring the issue to the TPO for following the decision of the Hon'ble Supreme Court, which yet has not been pronounced, is not justified. 5. The Learned DR, on the other hand, relied on the order of the learned TPO and learned DRP and submitted that facts of the year under consideration are different from the assessment year 2008-09. He submitted that in the year under consideration learned TPO has analyzed creation of the marketing intangibles in view of the evidences brought on record as against the earlier year, where the Tribunal rejected the contention of the revenue mainly on the ground that no evidences were brought on record to support creation of market intangibles. According to him, the decision of the Tribunal is distinguishable on facts. Then, he submitted that impact o....
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....mining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name 'Valvoline' will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand 'Valvoline'. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose." 24. When all these objections were raised by the taxpayer before the ld. DRP, same has been dismissed by using same ratio applied by the TPO firstly to declare the AMP expenditure as an international transaction and then to treat the AMP exp....
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....strial Finance Ltd. is from sale of shares. The Panel is, therefore, of the view that it should have not been considered as a comparable." 25. By now, it is settled principle of law that BLT is not a valid method for determining the existence of international transaction or for determination of ALP of such transactions. 22. Hon'ble Delhi High Court in case of CIT vs. Whirlpool of India Ltd. (2016) 381 ITR 154 (Delhi) decided the identical issue by returning following findings :- "34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F(v), an international transaction could include an arr....
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....ning the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in 231 19 ITA No.5528/Del./2012 uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negative by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........ 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be ma....
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....saction and indicated a "bright line" test for it, Sony Ericsson Mobile Communications India Pvt. Ltd.(supra) overruled that decision. This per se does not mean that every endeavour will be to conclude that all transactions reporting AMPs are to be treated as international transactions, the facts of each case would have to be examined for some deliberations. Whilst the TPO and the DRP undoubtedly held that the international transactions existed - that understanding apparently was passed upon the pre-existing regime, propounded in L.G. Electronics India Pvt. Ltd.(supra) with greater clarity on account of this Court's decision in Sony Ericsson Mobile Communications India Pvt. Ltd.(supra). The I.T.A.T. in our opinion, should have first decided whether in the circumstances of this case, the nature of the AMP reported, could lead to the conclusion that there was an international transaction. When doing so, it should have remitted the matter back for examination to the A.O. in this case. Accordingly, following the decision of Sony Ericsson Mobile Communications India Pvt. Ltd.(supra) and a subsequent decision in Daikin Airconditioning India Pvt. Limited v. Assistant Commissioner....
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....red by the taxpayer have benefited AE, no calculation has come on record, so in these 234 22 ITA No.5528/Del./2012 circumstances when we discarded the BLT the entire case of ld. TPO/DRP fell flat. 31. In view of what has been discussed above and following the decisions rendered by Hon'ble High Court discussed in the preceding paras, we are of the considered view that firstly, there is not an iota of material with ld. TPO to prove the existence of an international transactions involving AMP expenses by the taxpayer. TPO rather proceeded on the premise that the AMP expenditure incurred by the taxpayer were far excess of AMP expenses incurred by the comparables. 32. TPO has also applied the BLT which has been discarded by the Hon'ble High Court in a number of judgments. Even otherwise, in the absence of any agreement, arrangement or understanding between the taxpayer and its AE, expressed or implied, that AMP spent of the taxpayer would also be beneficial to the AE or it would enhance the brand value of the AE in any manner, no international transaction can be inferred. 33. Moreover, on the other hand, the taxpayer has come up with specific pleading....
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....ude assets gone out of order or damaged, asserts no longer required. The finding of the Assessing Officer on dealing of recapitalized asset by the assessee is reproduced as under: "After de-capitalization, assets which are converted in inventory are dealt with as under:- (i) where the asset is in working condition:- • sold with or without carrying our serfice( or small repair work) of the asset so as to make it fit for selling ; • re-converted in Capital Goods( i.e.capitalised) for (a) self use in same or different location; (b) any other revenue generating priniting contract; Such selling or re-conversion of the asset can take place in the same or in the subsequent financial years. (ii) Where asset is not in working condition and same is reparable, it is repaired and thereafter it can be (a) sold or (b) used for self use or for revenue generating contracts; (iii) Where it is not in working condition and same is irreparable; such assets are cannibalised (i.e.dismantled). After cannibalisation working parts are taken out for selling or for carrying out repair work. Non-working or damaged p....
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....iation was claimed. He further submitted that the assets converted into stock-in-trade are generally used assets and incapable of any further use, therefore, the saleable or market value of these is negligible. Since these assets are being technology products. Therefore, these assets tend to become obsolete in a very short span of period as new and more advanced technology comes into operation. He further submitted that most of the assets which are converted into stock-in-trade had either been outlived their useful functional life or were not cost effective. Further, certain assets became defective due to which they had to be de-capitalised. In these circumstances, the assessee was justified in reducing the nominal value from running WDV of the block of the assets under which such assets fell. He further submitted that for the tax treatment, the depreciation under the amended provisions of section 32 of the Act is calculated by applying the specified rate to the WDV of block of assets. He further submitted that after introduction of depreciation on block of assets concept w.e.f. 01.04.1988, depreciation is available on the relevant block of assets and not on individual ass....
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....et is sold. The depreciation on such assets constituted in the block is continued to be allowed till the block remains in the books of account. He submitted that such proposition of law has been accepted by the ITAT in the assessee's own case in ITA No.680/Del/2006 for assessment year 2002-03. In that year, certain fixed assets could not be located on physical verification and assessee wrote off the same in the books of account. Finally, the ITAT held that even though these fixed assets were written off, the depreciation shall be continued to be allowed on the block of assets after deducting the scrap value of these assets from the block of assets, if any. The assessee's case of de-capitalisation / discarding of assets from the block of assets is also covered by the decision of ITAT in assessee's own case, hence, depreciation cannot be disallowed on the assets so discarded during the year under consideration. He finally submitted that the legal position on allowability of depreciation on the assets forming a part of the block of assets which have been sold or written off or not found, discarded or destroyed or demolished that once an asset is a part of the block of assets and it is....
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.... an operating lease basis and these equipments are capitalized and depreciation is claimed for tax purposes in accordance with the provisions of the Act. These operating leased assets were returned to the assessee either on the termination of the lease or otherwise after a period of six months, then the assessee is following a practice to convert these assets into stock-in-trade at a nominal value of Rs. 1/- as these used assets are not having any readymade market for further leasing. This nominal value is reduced from the block of assets. In some of the cases, these assets are again leased out then they are recapitalized in the block of assets at the nominal value at which these were decapitalised. However, certain used assets remained in stock-in-trade and whenever these are sold, the profit is offered for taxation. This method of accounting is being followed consistently by the assessee. When the assets are recapitalized at the nominal value at which it is decapitalised then there is no effect on the taxability of the assessee. Similarly, whenever these used assets are converted into stock-in-trade and sold subsequently and the surplus on the sale is offered for taxation then th....
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....year 2002-03 by Hon'ble ITAT (Delhi bench). It was also made clear that the appeal of the Revenue before jurisdictional Delhi High Court against stands decided in favour of the assessee. It was further submitted that in the asstt. year 2004-05 identical disallowance has been deleted by the Commissioner of Income tax (Appeals). 3.2 We have considered the material on record. The Hon'ble Delhi High Court vide its order dated 27.07.2011 has held that tax authorities were not justified in working out the depreciation on block of assets by reducing the value of assets which have either to be discarded or destroyed or sold or written off. The ITAT's decision to remit the matter back to the A.O. to recompute the depreciation only after ascertaining the scrap value of assets which have been discarded or written off in the books during the year under consideration was endorsed by Delhi High Court assessee submitted that the assets written off do not have an scrap value and section 43(6)(c) which defines WDV of a block assets states that the WDV of the assets has to be reduced by the money payable in respect of any asset falling within that block which is sold or discarde....