2011 (8) TMI 1083 - AT - Income Tax

Depreciation on leasehold land - Depreciable Asset u/s 32 or not? - Assessee said leasehold rights in the land are entitled to depreciation - A.O disagreed on the basis that the Act does not envisage depreciation on land or the leasehold rights over the land thus disallowed the depreciation - HELD THAT - The depreciation even under the amended Sec. 32 is allowable only on the restricted categories of tangible/intangible assets which are specifically enumerated in the Section - Under these circumstances we fully concur with the submission of the assessee that the provisions of the Act cannot be interpreted to mean that leasehold rights granting such type of ownership over land etc. would also qualify as intangible assets for the purpose of depreciation under the Act - Decision against Assessee. Depreciation on Intangible assets u/s 32(1)(ii) - Assessee was allowed to use brandname for a period of 3 years. The A.O. disallowed the depreciation claim u/s 32(1)(ii) because though the agreement mentions about knowhow in the Balance sheet of the transferor company it was not disclosed - HELD THAT - Following the ratio laid down in the case of AMWAY INDIA ENTERPRISES. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE - 1(1) NEW DELHI. 2008 (2) TMI 454 - ITAT DELHI-C we come to the conclusion that in the present case since the assessee had purchased the user of brand name trademark logo for 3 years we hold that the expenditure incurred in this regard as valued by the approved valuer is capital expenditure on which the claimed depreciation was allowable. We accordingly direct the A.O to allow the claimed depreciation on the above assets - Decision in favour of Assessee. Method for determination of ALP in respect of Exports - Assessee adopted comparable Un-controlled price method (CUP) for determining (ALP) in respect of Exports transaction undertaken with the AE. TPO held such method is not applicable for determining ALP thus adopted Cost Plus Method(CPM) - HELD THAT - . In our view the Ld TPO was not justified in comparing the gross margin in export segment vis- -vis gorss margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment no risk of bad debts no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. Thus we are of the view that it is very difficult to make suitable adjustments for these differences hence the CMA Method is not appropriate method. On the basis that the assessee had a Joint Facility Arrangement or a Long Term Buy and Supply Arrangement with its AE we find that there was no sufficient reasons with the Ld TPO to reject CUP method - Decision in favour of Assessee.

Summary

Issues Involved:

1. Assessment of total income.
2. Disallowance of depreciation on leasehold land.
3. Depreciation on acquisition of technical know-how and other business/commercial rights.
4. Additional ground for revenue expenditure on acquisition of know-how and brand name.
5. Addition under Section 92C of the Income Tax Act for determining the Arm's Length Price (ALP) of international transactions.

Detailed Analysis:

1. Assessment of Total Income:
The assessee questioned the action of the Assessing Officer (A.O.)/Dispute Resolution Panel (DRP) in assessing the total income at Rs. 2,40,71,880 as against the returned income of Rs. 15,53,466.

2. Disallowance of Depreciation on Leasehold Land:
The A.O. disallowed the claim of depreciation on leasehold land amounting to Rs. 47,87,204. The assessee argued that leasehold rights should be treated as intangible assets under Section 32(1)(ii) of the Income Tax Act, allowing depreciation at 25%. The A.O. rejected this, stating that the Act does not envisage depreciation on land or leasehold rights over land. The Tribunal upheld the A.O.'s decision, stating that depreciation is allowable only on specific tangible/intangible assets enumerated in Section 32(1)(ii), which does not include leasehold rights over land. The alternative ground for amortization of cost was also rejected as it was not pressed.

3. Depreciation on Acquisition of Technical Know-How and Other Business/Commercial Rights:
The assessee claimed depreciation on amounts paid towards acquiring technical know-how and other business rights, which the A.O. disallowed, treating Rs. 5,08,00,000 as goodwill. The Tribunal found substance in the assessee's contention that the acquisition included intellectual property rights such as designs, drawings, manufacturing processes, and technical know-how. The Tribunal directed the A.O. to allow the claimed depreciation, referencing the valuation report and the agreement's terms, which indicated the acquisition of these rights.

4. Additional Ground for Revenue Expenditure on Acquisition of Know-How and Brand Name:
The assessee sought to raise an additional ground to allow Rs. 5.09 crores paid to Greaves Cotton Ltd. for acquiring know-how, brand name, trademark, and logo as revenue expenditure. The Tribunal allowed the additional ground for consideration, acknowledging its legal nature and relevance to the case. However, given the decision to allow depreciation on these assets, the additional ground became infructuous and was rejected.

5. Addition under Section 92C for Determining ALP of International Transactions:
The assessee challenged the addition of Rs. 58,54,128 under Section 92C, arguing that the Comparable Uncontrolled Price (CUP) or Transactional Net Margin Method (TNMM) was appropriate for determining the ALP of international transactions. The A.O. had adopted the Cost Plus Method (CPM), comparing gross margins in domestic and export segments. The Tribunal found the A.O.'s approach flawed, noting significant differences in functions and risks between domestic and export segments. The Tribunal accepted the assessee's use of TNMM, referencing the acceptance of this method in subsequent years and the need for consistency. The Tribunal directed the A.O. to accept the assessee's claim regarding ALP based on TNMM, setting aside the addition made by the A.O.

Conclusion:
The appeal was allowed, with the Tribunal directing appropriate reliefs on the issues of depreciation on technical know-how and business rights, and the determination of ALP using TNMM. The decision emphasized the need for consistency in applying transfer pricing methods and the proper interpretation of depreciation provisions under the Income Tax Act.