2016 (5) TMI 1249 - AT - Income Tax

Transfer pricing adjustment - best method for determining the value of developing the intangible property - Held that - Bright line test would be the best method for determining the development of an intangible property. Advertisement expenses as an international transaction - Held that - The concept of bright line test has to be applied in the case of the assessee for determining the ALP on advertisement expenses and accordingly remit back the matter to the file of the learned TPO for computing the ALP with respect to the advertisement expenses incurred by the assessee company on behalf of its holding company. Disallowance of royalty - Held that - In the present case before us no arguments was advanced for justifying the stand of the assessee that during the relevant assessment year also the average rate of royalty on sales in the industry is more than 3.47%. In this situation, we do not find it necessary to interfere with the orders of the Revenue who had made elaborate finding in their respective orders that the average rate of royalty on sales prevalent during the relevant assessment year amongst the comparable companies is only 2.54%. Therefore, this ground raised by the assessee is decided against it. Disallowance of depreciation by reducing the cost of asset in lieu of the subsidy received from SIPCOT - Held that - Authorized Representative submitted that the Tribunal on the earlier occasion on this identical matter has remitted the case back to the file of the learned DRP with certain directions. He therefore pleaded that for the relevant assessment year also the matter may be remitted back with similar directions. The learned Departmental Representative could not controvert to the submissions of the learned Authorized Representative. Addition on account of export incentives towards target plus scheme and focus market scheme - Held that - Notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant assessment year; however the same shall be taxed in the relevant assessment year in which the assessee receives the license and derives such income. It is ordered accordingly. Additional depreciation on the assets deployed in the corporate office for office use - Held that - Issue is covered by the earlier order of this Tribunal in assessee s own case for the assessment year 2007-08 wherein 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 Disallowance of excess depreciation on UPS - Held that - UPS forms part of data processing equipments and accordingly the assessee would be entitled for the claim of depreciation @ 60%

Issues Involved:
1. Transfer Pricing Issues: Brand/logo promotion, Advertisement expenses, Royalty.
2. Corporate Tax Issues: Capital subsidy depreciation, Export incentives, Additional depreciation, Depreciation on UPS.

Issue-wise Detailed Analysis:

Transfer Pricing Issues:

1. Brand/Logo Promotion:
The Tribunal addressed the issue of whether the assessee should have received fees for brand/logo promotion activities from its parent company, HMC Korea. The TPO had determined an upward adjustment based on the "Inter-brand" valuation, attributing ?204,42,31,513/- to the assessee company. The Tribunal referred to its previous decision for the assessment year 2007-08, where it had held that the "Bright line test" was the best method for determining the development of an intangible property. Consequently, the Tribunal remitted the matter back to the TPO for re-evaluation using the Bright Line Test.

2. Advertisement Expenses:
The TPO had added ?64,15,77,200/- to the income of the assessee, considering the advertisement expenses as an international transaction benefiting the holding company. The Tribunal referred to its earlier decision where it had accepted the Bright Line Test to distinguish between routine and non-routine expenses. The Tribunal remitted the matter back to the TPO to apply the Bright Line Test for determining the ALP of advertisement expenses.

3. Royalty:
The TPO determined that the royalty paid by the assessee to its AE was excessive, resulting in an addition of ?106,67,84,000/-. The Tribunal noted that in the previous year, the TPO had found the average royalty rate in the industry to be 4.7%. However, for the current year, the TPO found the average to be 2.54%, while the assessee paid 3.47%. The Tribunal upheld the TPO’s finding and decided against the assessee, confirming the addition.

Corporate Tax Issues:

4. Capital Subsidy Depreciation:
The AO reduced the capital subsidy received from SIPCOT from the cost of the asset, disallowing depreciation of ?3,55,957/-. The Tribunal noted that a similar issue had been remitted back in a previous year for re-examination. Following the same approach, the Tribunal remitted the matter back to the DRP for re-examination in light of previous decisions.

5. Export Incentives:
The AO treated export incentives under the target plus scheme and focus market scheme as income for the assessment year 2008-09. The Tribunal referred to its previous decision, where it was held that such notional income cannot be treated as taxable income until the assessee receives the licenses. Thus, the Tribunal held that the notional income should not be taxed in the relevant assessment year.

6. Additional Depreciation:
The AO disallowed additional depreciation of ?5,93,605/- on assets used in the corporate office. The Tribunal referred to its earlier decision, which stated that additional depreciation is allowable if the assessee is engaged in manufacturing, regardless of where the asset is used. Following this, the Tribunal directed the AO to allow the additional depreciation.

7. Depreciation on UPS:
The AO allowed depreciation on UPS at 15%, treating it as plant & machinery instead of data processing equipment eligible for 60% depreciation. The Tribunal cited several decisions, including one from the Chennai Bench, which held that UPS forming part of computers is eligible for 60% depreciation. The Tribunal directed the AO to verify and allow depreciation at 60% if the UPS is part of the computer system.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes and dismissed the stay petition as infructuous. The matters regarding brand/logo promotion, advertisement expenses, capital subsidy depreciation, and UPS depreciation were remitted back for re-evaluation, while the issues of royalty, export incentives, and additional depreciation were decided based on previous rulings and existing records.

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