2015 (8) TMI 1506 - AT - Income Tax

TP Adjustment - Upward adjustment due to brand promotion expense attributable to the assessee s holding company - main grouse of the Revenue is that the appellant company being the user of the Holding Company s brand name and logo indirectly benefits the Holding Company. The appellant company instead of promoting its own brand has been promoting the brand logo of the Holding company - Whether Bright-Line-Test (BLT) is the only method to be adopted to arrive at the value of brand development expense receivable by the assessee company from its Holding Company with respect to the promotion of brand of the assessee s Holding Company? - HELD THAT - As decided in LG. ELECTRONICS INDIA P. LTD. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX 2013 (6) TMI 217 - ITAT DELHI we hereby direct the Ld. Assessing Officer to delete the ad hoc addition of 196 on sales which is treated as brand development fee by following the decision of the Tribunal cited supra. The aforesaid decisions of the Tribunal has also held that Bright Line Test would be the best method for determining developer of the intangible property which the Ld. A.R. claimed that such test was made on the assessee by DRP; however no additions were made because on the computation of the same it was found not warranted. The same was also not controverted by the Ld. D.R. Therefore we hereby restrain ourselves from remitting back the matter for the computation of bright line test. Thus this issue is decided in favour of the assessee. Addition on account of advertisement and sales promotion expenses which ought to have been receivable from the assessee s holding company u/s. 92B - TPO had held that the assessee had incurred advertisement expenses on behalf of the parent company and therefore considered the same as international transaction invoking the section 92B - HELD THAT - We hereby accept the concept of Bright Line Test (BUT) as held by our predecessors with respect to the concept of Bright Line Test for distinguishing between the routine and non-routine expenditure incurred on advertisement and brand promotion wherein advertisement and marketing promotion expenses to the extent incurred by uncontrolled comparable distributors is to be regarded within the Bright Line Limit of the routine expenses and the advertisement and market promotion expenses incurred by the distributors beyond such Bright Line Unit constituted non-routine expenditure resulting in creation of economic ownership in the form of marketing intangibles which belong to the owner of the brand. However in this case even after computing the ALP by following the Bright Line Test the Ld. TPO has deleted the addition - Decided against assessee. Disallowance being royalty paid by the assessee to its Holding Company - appellant company had entered into technical know-how agreement with its Holding Company for all the models of the cars manufactured by it - HELD THAT - TPO has herself accepted the high-tech technology passed on to the assessee company by its Holding Company and also after detailed study of 35 licenses arrived at a conclusion that the royalty payment of 4.7% is prevalent in the automotive sector. Therefore from these circumstances we do not find it appropriate on the part of the Revenue to make addition on account of ALP of royalty payment. Therefore we hereby delete the addition made by the Ld. TPO following the directions of Ld. Members of the DRP. Disallowance of depreciation on capital subsidy - HELD THAT - We are of the opinion that the matter requires a categorical finding as to how the cash received as subsidy from SIPCOT has been utilized by the company in order to address merits of the case. Therefore we hereby remit the issue back to the file of Ld. DRP in order to examine the complete facts. Disallowance u/s. 14A - HELD THAT - Details of investment made were not brought before us. But as pointed out by the assessee Rule 8D was introduced by the Income-tax Fifth Amendment Rules 2008 with effect from 24.03.2008. Therefore it would not be applicable to the case of the assessee for the assessment year 2007-08. Moreover under such circumstances various judicial authorities have held that 296 to 5% of the dividend earned may be disallowed in order to justify the provisions of Section 14A of the Act. However in the present case before us the Ld. A.R. has claimed that the assessee had not received any dividend during the year which has not been rebutted by the Ld. D.R. Therefore we hereby hold that disallowance of Section 14A is not warranted. Disallowance of expenditure towards 100 cars given to Police Department - Whether assessee had justified the action as fulfilment of obligation towards Corporate Social Responsibility ? - difference of opinion between the Hon ble the Accountant Member and the Judicial Member - HELD THAT - The Hon ble Vice President sitting as the Third Member has agreed with the Hon ble Judicial Member and has held that the expenditure incurred by the assessee was not incidental to carrying on the business and there is no commercial expediency in incurring this expenditure and therefore the view of the learned Judicial Member is upheld. Therefore by the majority view this ground raised by the assessee is dismissed. Addition on account of export incentives accrued to the assessee on target plus scheme and focus market scheme - HELD THAT - The export incentive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India s export competitiveness in these countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by the relevant Govt. authorities and issuance of the license by such Government authorities - As relying on EXCEL INDUSTRIES LTD. AND MAFATLAL INDUSTRIES P. LTD. 2013 (10) TMI 324 - SUPREME COURT notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant to assessment year however the same shall be taxed in the previous year in which the assessee has received the licenses and derived such income. Thus this issue is also decided in favour of the assessee. Disallowance of additional depreciation in respect of assets used in regional offices - as argued stating that as per provisions of Section 32(1)(iia) of the Act the assessee will be entitled to the claim of additional depreciation since the assessee is engaged in the business of manufacture of production of any article or thing - HELD THAT - The assessee is entitled to additional depreciation if it has satisfied the condition that it is engaged in the business of manufacture or production of any article or thing. There is no condition stipulated in the Act that additional depreciation shall be allowed only if the asset is deployed in the factory of the assessee and not the office of the assessee. Therefore we accept the argument of the Ld. A.R. and reject the observations of the Revenue on this regard and accordingly direct the Ld. Assessing Officer to allow the claim of additional depreciation if the other conditions of the Act remains satisfied. Non granting the credit for the tax deducted at source - HELD THAT - In the interest of justice we remit this matter back to the file of the Ld. Assessing Officer for examining the relevant documents furnished by the assessee and pass appropriate speaking order as per merits and law after giving opportunity to the assessee of being heard. We further make it clear that the assessee is at liberty to produce before the Revenue any relevant documents supporting its claim.

Summary

Issues Involved:
1. Transfer Pricing Issues: Brand promotion, advertisement expenses, royalty payable.
2. Corporate Tax Issues: Capital subsidy, disallowance under section 14A, expenditure on providing cars to the police, export incentives, additional depreciation, tax credit, and interest levied under sections 234B & 234D.

Detailed Analysis:

Transfer Pricing Issues:

1. Brand Promotion Expense Adjustment:
- The assessee contested the addition of Rs. 82,12,54,41,380/- for brand promotion activities attributed to its holding company.
- The TPO determined that the assessee's efforts in promoting the Hyundai brand in India should be compensated by the parent company at 1% of sales, excluding CKD/spare parts.
- The Tribunal found this 1% ad hoc determination by the TPO as not based on any of the five prescribed methods under Section 92C of the Act.
- The Tribunal directed the deletion of this addition, citing the Special Bench ruling in the case of LG Electronics India (P.) Ltd., which mandates the use of the Bright Line Test (BLT) for such determinations.

2. Advertisement and Sales Promotion Expenses:
- The TPO added Rs. 76.63 crores, comparing the assessee's advertisement expenses to those of other companies.
- The DRP directed the exclusion of volume and trade discounts from advertisement expenses.
- Post-DRP adjustments, the TPO found no excess advertisement expenses, leading to the deletion of the Rs. 76.63 crores addition.
- The Tribunal upheld the deletion, accepting the BLT as the appropriate method for distinguishing routine and non-routine advertisement expenses.

3. Royalty Payment Adjustment:
- The TPO reduced the allowable royalty from Rs. 369.77 crores to Rs. 265.50 crores, leading to an addition of Rs. 104,27,36,417/-.
- The DRP confirmed the need for separate benchmarking but adjusted the comparables.
- The Tribunal noted the TPO's own findings that the average royalty rate in the automotive sector is 4.7%, higher than the assessee's 4.22%.
- The Tribunal deleted the addition, finding the TPO's adjustment unjustified.

Corporate Tax Issues:

1. Capital Subsidy and Depreciation:
- The AO reduced the capital subsidy from SIPCOT from the cost of assets, disallowing Rs. 7,91,060/- in depreciation.
- The Tribunal remitted the issue back to the DRP to examine the utilization of the subsidy in light of relevant Supreme Court decisions.

2. Disallowance under Section 14A:
- The AO disallowed Rs. 5,29,910/- applying Rule 8D.
- The Tribunal held Rule 8D inapplicable for AY 2007-08 and noted no dividend was earned, directing the deletion of the disallowance.

3. Expenditure on Providing Cars to Police:
- The AO disallowed Rs. 5,20,97,000/- for 100 cars given to the Tamil Nadu Police, viewing it as a goodwill gesture rather than a business expense.
- The Tribunal initially allowed the expense, citing commercial expediency and corporate social responsibility.
- However, on difference of opinion, the Third Member upheld the disallowance, finding no commercial expediency or business nexus.

4. Export Incentives:
- The AO added Rs. 5,52,26,335/- and Rs. 3 crores for target plus and focus market schemes, treating them as accrued income.
- The Tribunal, following the Supreme Court's decision in Excel Industries Ltd., held that such incentives should be taxed in the year the license is received, not when the export is made.

5. Additional Depreciation:
- The AO disallowed Rs. 8,52,500/- for assets used in regional offices.
- The Tribunal allowed the claim, noting no stipulation that additional depreciation is limited to factory assets.

6. Tax Credit:
- The AO did not grant credit for TDS amounting to Rs. 39,90,609/-.
- The Tribunal remitted the issue back to the AO for verification and appropriate action.

7. Interest under Sections 234B & 234D:
- The Tribunal noted that the charging of interest is consequential and dismissed this ground.

Conclusion:
The appeal is partly allowed for statistical purposes, with several issues remitted back for re-examination or deletion of additions as directed by the Tribunal.