2019 (7) TMI 1765 - AT - Income Tax

TP Adjustment - selection of MAM - most appropriate method for benchmarking import of Crystal goods and Crystal components - In respect of the Assessment Years 2007-08 to 2009-10, Ld. CIT(A) held that RPM is the most appropriate method for benchmarking the activities of the assessee in the import of Crystal and Crystal components - Bright Line Test (BLT) is sought to be applied - HELD THAT - This Tribunal in assessee s own case for the Assessment Year 2004-05 2017 (2) TMI 691 - ITAT DELHI direct the AO/TPO to determine the ALP of the transaction of Import of Crystal goods and Crystal components, firstly, by applying the RPM. It is hereby clarified that the manner of application of RPM is open at large before the TPO who will decide it in the way he thinks expedient. Contention of the ld. AR that the comparables should be restricted to the ten companies which it cited before the ld. CIT(A) or twenty companies which the ld. CIT(A) suomotu chose for making TP adjustment on account of AMP expenses, cannot be accepted. We do not intend to eclipse the power of the TPO by restricting the exercise, which he has yet to undertake for the first time. It is further clarified that if due to one reason or the other as discussed above, such a method cannot be applied, then, resort should be made to the TNMM in the way enshrined in rule 10B(1)(e) of IT Rules, 1962, taking care of the infirmities discussed above in the earlier calculation made by the TPO Addition made on account of Software and Electronic Data Processing ( EDP ) charges - assessee incurred expenses towards IT support services which were categorised under Software and Electronic Data Processing ( EDP ) charges - HELD THAT - We find that the expenditure being incurred in nature year after year, and cannot be placed in the category of capital expenditure - services are basic business operations of the company through the organised and maintained IT support systems. Further the sample copies of the invoices show that these services are charged on the basis of uses at a predefined hourly usage rates and these expenses are incurred for the services in the nature of operational IT services such as browsing charges, usage of Swarovski distribution system software for facilitating the activities such as customer invoicing, inventory management etc services of laptops and PCs etc which are helpful to the assessee to perform the basic business operations. It is not the case of the Revenue that these expenses were made for purchase of any software for the purpose of making enhancement to any profit-making operations of the company constituting the capital asset. It could further be found from the record that no fixed amount expenses are incurred. As relying on M/S ASAHI INDIA SAFETY GLASS LTD. 2011 (11) TMI 2 - DELHI HIGH COURT Software and Electronic Data Processing ( EDP ) charges incurred by the assessee are Revenue in nature and the assessee is entitled to claim the same as allowable deduction. We, therefore, delete the addition made on this account. Nature of expenditure - Expenditure on media advertisements, PR agency fees, communication material and others - HELD THAT - This Tribunal in assessee s own case for the Assessment Year 2004-05 2017 (2) TMI 691 - ITAT DELHI held that the entire expenditure on publicity and advertisement is allowable fully in the year in which it is incurred and a similar view is adopted for the Assessment Year 2002-03, 2004-05 2017 (2) TMI 1388 - ITAT DELHI - Thus assessee had rightly claimed deduction of advertisement and publicity expenditure as Revenue expenditure.

Summary

List of Issues:
1. Determination of the most appropriate method (MAM) for benchmarking international transactions.
2. Application of the Bright Line Test (BLT) for AMP expenses.
3. Nature of Software and Electronic Data Processing (EDP) charges.
4. Classification of advertisement and publicity expenses as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Determination of the Most Appropriate Method (MAM) for Benchmarking International Transactions:
The assessee used the Comparable Uncontrolled Price (CUP) method for the Assessment Years (AY) 2007-08 to 2009-10. The Transfer Pricing Officer (TPO) rejected the CUP method, stating it was not conclusive and did not capture the AMP expenses, and instead applied the Transactional Net Margin Method (TNMM). The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee and held that the Resale Price Method (RPM) was the most appropriate method for benchmarking the trading activity of international transactions for the import of Crystal and Crystal components. This decision was consistent with the Tribunal's earlier ruling for AY 2004-05 and 2005-06, where it was held that RPM is applicable when the property purchased is resold as such without any value addition.

2. Application of the Bright Line Test (BLT) for AMP Expenses:
The TPO made adjustments to the AMP expenses using the BLT, which was challenged by the assessee. The CIT(A) followed the BLT for AY 2011-12 without referring to the Delhi High Court's directions in the case of Sony Ericsson Mobile Communications (India) Private Ltd vs. CIT. The Tribunal noted that the BLT was rejected by the jurisdictional High Court in Sony Ericsson's case and the intensity test was also rejected by the Chandigarh Bench in the case of Widex India Private Limited vs. ACIT. The Tribunal remanded the matter back to the TPO for compliance with the High Court's directions, emphasizing that external comparables performing similar AMP functions should be used for accurate results.

3. Nature of Software and Electronic Data Processing (EDP) Charges:
The assessee incurred expenses towards IT support services categorized under Software and EDP charges. The Assessing Officer (AO) treated these expenses as capital expenditure. The CIT(A) and the Dispute Resolution Panel (DRP) upheld this view. However, the Tribunal, following its earlier decisions in the assessee’s own case for AY 2006-07 and 2010-11, held that these charges are business expenses and should be treated as revenue in nature. The Tribunal noted that the services provided under the "Inter Company IT-Services Agreement" were essential for basic business operations and did not result in the acquisition of capital assets.

4. Classification of Advertisement and Publicity Expenses as Capital or Revenue Expenditure:
For AY 2011-12, the AO classified advertisement and publicity expenses as capital expenditure, allowing depreciation at 25%. The DRP confirmed this view. The Tribunal, however, noted that in the assessee's own case for earlier years, advertisement and publicity expenses were consistently treated as revenue expenditure. The Tribunal cited the Delhi High Court's decision in CIT vs. Citi Financial Consumer Fin Ltd, which allowed full deduction of such expenses in the year incurred. Following this consistent stand, the Tribunal held that the advertisement and publicity expenses incurred by the assessee are revenue in nature.

Conclusion:
The Tribunal allowed all the appeals of the assessee and the Revenue for statistical purposes, remanding specific issues back to the TPO for compliance with the directions indicated in the Tribunal's earlier decisions and the High Court's rulings. The Tribunal's order emphasized consistency with previous rulings and the need for detailed verification and accurate application of transfer pricing methods and expense classifications.