2022 (8) TMI 1621

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....eturned income of INR 6,17,87,33,470) are based on erroneous facts, surmises and conjectures, hence bad in law and are liable to be quashed. 2. That Impugned final assessment order is invalid and bad in law for having been passed without following the procedure laid down in law. 3. That the Ld. AO and Hon'ble DRP have erred in facts and in law in treating 50% of the expenditure incurred on advertisement, publicity and sales promotion as capital expenditure disregarding the fact that the expenditure incurred is revenue in nature. 3.1 That on the facts and in the circumstances of the case and in law, the Ld. AO and Hon'ble DRP has grossly erred in disallowing 50% of the expenditure on notional/ ad-hoc basis without any cogent evidence and reasoning. 3.2 That on the facts and in the circumstances of the case and in law, the Ld. AO and Hon'ble DRP has grossly erred in not appreciating the principles laid down by Jurisdictional High Court judgments cited during the course of the assessment proceedings that the advertisement, publicity and sales promotion expenditure is revenue in nature. 3.3 Without prejudice to our contention tha....

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....ances of the case and in law, the Ld. AO erred in initiating the penalty proceedings under section 271(1)(c) of the Act." 3. The assessee has filed appeal against the addition made by the Assessing officer on Transfer Pricing issues as well as Corporate Tax issues. 4. (As per DRP) Briefly stated, based on the Inter-Company Commission Agreement with Microsoft Operations Pte. Ltd., Singapore ("MO") and License Agreement with Microsoft India Corporation, USA, the AO held that the advertisement, publicity and sales promotion expense also include expense incurred for efforts to make Microsoft USA's trademarks, service marks and trade names well know in India. The AO observed that the assessee was a wholly owned subsidiary of Microsoft Corporation (USA) and was also advertising, publicizing and marketing Microsoft products and services in India. By undertaking such activities, the assessee apart from promoting Microsoft products is also building/promoting the brand of 'Microsoft'. The AO accordingly disallowed 50% of such expenditure as being capital in nature resulting in an addition of Rs. 188,08,60,000/-. The assessee contended that it had executed a marke....

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....he same, the assessee had no right to enter into any agreements with the customers regarding any Microsoft products and services. The customers are not that of the assessee, but that of MO. Further, the License Agreement, which was effective from April 1, 2013 between Microsoft India Corporation, a Nevada Corporation (Ml Corp) and the assessee provided the assessee a non-exclusive right to use the trademarks and services marks 'MICROSOFT" and "WINDOWS" etc. The services with which such trademarks and service marks were associated were subject to the control of Ml CORP and Microsoft Corporation, USA (MSFT). Under Para 4.1.2 of the said Agreement, the assessee was required to use its best efforts to make MSFT's trademarks, service marks and trade names well known in the Territory which has been defined therein as including India, Bhutan, Maldives, Nepal and British Indian Ocean Territory. As pointed out by the AO in para 4.8 of the assessment order that vide Para 4.1.3 of the Agreement, the assessee agreed to take such steps as Ml CORP or MFST requests to establish or confirm MSFT's ownership. Para 4.11 of the AO's order also draws attention to the 2014 10K for Microsoft Corporat....

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....t is also seen from the public domain that an SLP was filed by Revenue against the order of the Hon'ble Delhi High Court in the Seagram Manufacturing Pvt. Ltd. case [245 Taxman 389 (2017] before the Hon'ble Supreme Court and that the SLP was dismissed on the ground of delay, that of the overseas group companies. Besides, the case was decided in the context of sec. 92 as it existed before its substitution by sec. 92 to 92F by the Finance Act, 2001, which is not applicable in the present case. It is also relevant that such AMP expenses being of the nature of international transactions with the AE resulting in creation of marketing intangibles and requiring separate benchmarking under transfer pricing for arm's length remuneration only supports the position that such expenses have been incurred for brand building. From the above, the Panel is in agreement with the AO's conclusion that the Advertisement, Publicity and Sales Expenses included expenses incurred for brand building / promotion of the Microsoft brand owned by MFST. The disallowance to the extent of 50% of such expenses as being of capital nature in terms of section 37(1) of the Act is upheld. Depreciation under sec....