2011 (7) TMI 963 - HC - Income Tax

Transfer Pricing - determination of ALP - Tribunal directed AO to re-compute ALP at 21.97%, however TPO arrived at 35.26% - adjustment for the depreciation on administrative assets - Held that - As Tribunal found the four comparable companies for adopting the Arm s Length Price no perversity could be pointed out by appellant that may warrant interference in the finding recorded by the Tribunal In respect of adjustment on account of depreciation, Tribunal observed that TPO after accepting the working of Depreciation/Total cost ratio, failed to make adjustment for extraordinary items of depreciation in the order. Therefore, no perversity is found in said order. Advertisement expenses - Capital or revenue expenditure - Held that - Cost of a signboard cannot be contemplated as a capital expenditure because the benefit accruing to the assessee cannot be said to be in the capital field. It merely facilitates the assessee s trading operations. Thus rightly held as revenue expenditure See Empire Jute Co. Ltd. vs. CIT 1980 (5) TMI 1 - SUPREME Court - Decided in favor of the assessee

Summary

Issues Involved:
1. Re-computation of Arm's Length Price (ALP) by the Assessing Officer (AO).
2. Adjustment for depreciation on administrative assets.
3. Deletion of addition on account of disallowance of advertisement expenses.

Issue-wise Detailed Analysis:

1. Re-computation of Arm's Length Price (ALP):
The Tribunal directed the AO to re-compute the ALP at 21.97%, contrary to the Transfer Pricing Officer (TPO) who had determined it at 35.26%. The revenue relied on data from three companies, suggesting an average OP/TC ratio of 35.26%. Conversely, the assessee presented data from different companies, arguing for an average of 16.83%. The Tribunal, after evaluating the material, concluded that 21.97% was appropriate, considering data from four comparable companies: Tulsyan Technologies Ltd. (Cosmic Global), Ace Software Exports Ltd., Goldstone Teleservices, and Asian Cerc Information Technology Ltd. (Seg). The Tribunal found these companies comparable based on their level of operation and turnover, dismissing the inclusion of other companies suggested by the TPO due to lack of strict comparability.

2. Adjustment for Depreciation on Administrative Assets:
The Tribunal upheld the assessee's claim for depreciation adjustment on administrative assets amounting to Rs. 31,82,586/-. The TPO had accepted the Depreciation/Total cost ratio at 12% after adjusting for this extraordinary depreciation expense but failed to apply this adjustment while determining the ALP. The Tribunal noted this oversight and emphasized that the TPO had, in principle, accepted the adjustment. The Tribunal found merit in the assessee's plea, concluding that the adjustment was necessary for a fair comparison of profits, thereby directing the AO to adopt the total cost at Rs. 1,70,84,964/- instead of Rs. 2,02,67,550/-.

3. Deletion of Addition on Account of Disallowance of Advertisement Expenses:
The Tribunal deleted the addition of Rs. 1,00,000/- on account of disallowance of advertisement expenses, which the revenue argued was capital in nature. The Tribunal held that the cost of a signboard is not capital expenditure as the benefit, although enduring, is in the revenue field. It facilitates the assessee's trading operations, enabling more profitable conduct of business. The Tribunal referenced the Supreme Court decision in Empire Jute Co. Ltd. vs. CIT, concluding that the expenditure was revenue in nature.

Conclusion:
The Tribunal's findings on all issues were upheld. The Tribunal's determination of a 21.97% ALP, acceptance of depreciation adjustment, and classification of advertisement expenses as revenue expenditure were all based on thorough evaluation of the material on record. The appeal was dismissed, with no substantial question of law warranting interference by the High Court.