2013 (9) TMI 264 - AT - Income Tax

Transfer pricing - ALP - Advertisement, marketing and business promotion adjustment for Transfer pricing adjustment - AMP expenditure incurred in excess of the mean expenditure incurred on AMP upon sales of comparable companies - The TPO determined the Bright Light AMP expense at 84% on the basis of comparables selected for the purpose of bench marking the AMP expenditure incurred by the assessee viz-a-viz 12.55% AMP expenses of the assessee Held that - Reliance has been placed upon the judgment in the case of L.G. Electronics India (P.) Ltd. 2013 (5) TMI 633 - ITAT DELHI , wherein it has been held that TPO restricted the comparable cases to only two without discussing as to how other cases cited by the assessee were not comparable. A bald comparison with the ratio of AMP expenses to sales of the comparables cases without giving effect to the relevant factors as discussed above, cannot produce correct result. As the TPO has neither properly considered the request of the assessee for inclusion of some other comparable cases nor examined the effect of the above discussed relevant factors on the question of determination of the cost/value of international transaction, the ends of justice will meet adequately if the order of the TPO and that of the AO giving effect to such order is set aside and the matter is restored to the file of the TPO for determining the cost/value of the international transaction and the consequent ALP afresh as per law In the present case also, matter is restored to the file of the TPO for determining the cost/value of the international transaction and the consequent Arm's Length Price afresh as per law Rate of depreciation to be applicable on UPS and Printer - Depreciation on UPS and printer from 60 percent to 15 percent, by treating the same as Plant and Machinery without appreciating that UPS and printer is integral part of the computer system Held that - Reliance has been placed upon the judgment in the case of Orient Ceramics and Inds. Ltd 2011 (1) TMI 26 - DELHI HIGH COURT , wherein it has been held that depreciation @ 60% on such items shall be allowed In the instant case also, depreciation allowed @ 60% - Decided in favor of Assessee.

Issues Involved:

1. Violation of principles of natural justice and arbitrary assessment.
2. Computation of income and high-pitched assessment.
3. Transfer Pricing (TP) adjustments relating to Advertisement, Marketing, and Business Promotion (AMP) expenses.
4. Reduction of depreciation rate on UPS and printer.
5. Levy of consequential interest u/s 234B of the Income Tax Act.
6. Initiation of penalty proceedings u/s 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Violation of Principles of Natural Justice and Arbitrary Assessment:
The assessee argued that the assessment order was vitiated, arbitrary, and violated principles of natural justice. However, these grounds were deemed general and did not require specific adjudication.

2. Computation of Income and High-Pitched Assessment:
The assessee contested the addition of Rs. 80,082,338 to the returned total income, arguing it was highly unjustified and constituted a high-pitched assessment. This issue was intertwined with the TP adjustments and was considered under the broader discussion of AMP expenses.

3. Transfer Pricing Adjustments Relating to AMP Expenses:
The primary contention revolved around the TP adjustments for AMP expenses. The assessee argued that the expenses were incurred for selling its products in India and did not promote the brands owned by Luxottica Group. The TPO had used a "bright line" approach to determine excessive AMP expenses, which the assessee contested on several grounds, including the selection of inappropriate comparables and the application of a markup.

The tribunal referred to the Special Bench decision in the case of L.G. Electronics India (P.) Ltd., which provided detailed guidelines for benchmarking AMP expenses. The tribunal noted that the TPO had not properly considered the assessee's request for including other comparable cases or examined relevant factors affecting the determination of the cost/value of the international transaction. Consequently, the matter was restored to the TPO for fresh determination, following the guidelines laid down by the Special Bench.

4. Reduction of Depreciation Rate on UPS and Printer:
The AO had reduced the depreciation rate on UPS and printer from 60% to 15%, treating them as Plant and Machinery. The assessee argued that these items were integral parts of the computer system and should be depreciated at 60%. The tribunal referred to the Hon'ble Delhi High Court's decision in the case of Orient Ceramics and Inds. Ltd., which supported the assessee's claim. Therefore, this ground was allowed, and the higher depreciation rate was restored.

5. Levy of Consequential Interest u/s 234B:
This ground was deemed consequential to the main issues and did not require separate adjudication.

6. Initiation of Penalty Proceedings u/s 271(1)(c):
This ground was considered misconceived and did not warrant detailed discussion.

Conclusion:
The appeal was partly allowed for statistical purposes, with the TP adjustments relating to AMP expenses being restored to the TPO for fresh determination. The assessee's claim for higher depreciation on UPS and printer was upheld based on the Hon'ble Delhi High Court's decision. The stay petition filed by the assessee was dismissed as it became infructuous following the decision on the appeal.

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