2013 (8) TMI 367 - AT - Income Tax

Adjustment in arm s length price - Adjustment in regard to advertisement, marketing and sales proportion expenditure - A.O. made addition in reference to difference of arm s length price - Held that - a fresh exercise has to be undertaken, both by the assessee, as well as by the TPO, to arrive at the arm s length price, based on the principle and propositions of law - assessee should be granted liberty to furnish fresh transfer pricing study report, with comparables obtain by undertaking of fresh search. The TPO should also be at liberty to conduct a fresh search and arrive at appropriate comparable/conclusions - Following decision of Asstt. Commissioner of Income Versus M/s LG Electronics India Pvt. Ltd. 2013 (5) TMI 633 - ITAT DELHI - Decided in favour of assessee. Depreciation on Plant and Machinery - Held that - assessee has not claimed depreciation on goods which have been sold / scraped in the earlier years. Moreover, it is a fact that the assessee was engaged in the business of selling air- conditioners. This by itself is sufficient to prove that during the year under consideration relevant block assets is used by the assessee in its business - individual usage of the asset is only relevant in the first year when the asset was put to use and not subsequent years after it has formed part of the block of assets - Decided in favour of assessee. Depreciation on computer peripherals - A.O. disallowed depreciation - Held that - computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60% - Following decision of COMMISSIONER OF INCOME TAX Versus BSES YAMUNA POWERS LLD. / BSES RAJDHANI POWERS LTD. 2010 (8) TMI 58 - DELHI HIGH COURT - Decided in favour of assessee. Devaluation of stock - A.O. disallowed 20% of the amount of devaluation of stock - Held that - The assessee has been following his method of valuation of stock during all the previous year as well as the subsequent years - When the revenue has been accepting this method of valuation for many years, there is no reason as to how the same can be disturbed during the year, the disallowance in question is made on ad hoc basis - opening stock of succeeding year is increased by the said adjustment to the value of stock and consequently the profits of the subsequent year get effected to that extent. If the closing stock is valued by applying a particular yardstick or method, then, the opening stock of the year would also be required to be adjusted - Following decision of CIT Vs. Triveni Engineering and Industries Ltd. 2010 (11) TMI 90 - DELHI HIGH COURT - Decided in favour of assessee. Disallowance of installation expenses - A.O. disallowed expenditure on the ground that the sale has not crystallized - Held that - income attributable to the installation expenses has been recognized during the year and on the principle of matching income with expenditure, this claim has to be allowed - Decided in favour of assessee.

Issues Involved:
1. Transfer pricing adjustment regarding advertisement, marketing, and sales promotion (AMP) expenditure.
2. Depreciation on plant and machinery.
3. Depreciation on computer accessories.
4. Disallowance of loss on sale of fixed assets.
5. Disallowance of devaluation of stock.
6. Disallowance of provision for installation expenses.
7. Credit for TDS for A.Y. 2008-09.

Detailed Analysis:

1. Transfer Pricing Adjustment Regarding AMP Expenditure:
The primary issue was the adjustment made by the Transfer Pricing Officer (TPO) concerning AMP expenditure. The grounds of appeal included multiple points:
- The AO/DRP upheld the adjustments made by the TPO, adding INR 151,632,834 to the appellant's income, arguing that the transactions were not at arm's length price as per section 92F(ii) of the Act.
- The appellant contended that the AMP expenses were incurred to increase its own business/sales in India and not directly for any associated enterprise.
- The TPO's mechanical comparison of AMP expenditure with comparable companies and inclusion of sales commission as part of AMP were challenged.
- The appellant argued that the AMP expenses should not be treated as a separate line of activity and that the TPO erred in determining the mark-up for deemed services arbitrarily.

Both parties agreed that the issue is covered by the Special Bench decision in the case of L.G. Electronics India (P) Ltd. The Tribunal set aside the issue to the AO for fresh adjudication based on the principles laid down by the Special Bench, allowing the assessee to furnish a fresh transfer pricing study report. The AO was directed to verify the claim that sales commission should not be considered part of AMP expenditure.

2. Depreciation on Plant and Machinery:
The assessee claimed that the AO did not follow the DRP's directions regarding depreciation on plant and machinery. The DRP had agreed with the assessee, noting that the assets were used in the business and that individual usage is relevant only in the first year. The AO was directed to follow these directions, and this ground was allowed.

3. Depreciation on Computer Accessories:
The issue of the rate of depreciation on computer peripherals was settled in favor of the assessee by the Delhi High Court in the case of BSES Rajdhani Powers Ltd., which allowed 60% depreciation. The AO was directed to allow this rate, and the ground was allowed.

4. Disallowance of Loss on Sale of Fixed Assets:
The DRP sustained the assessee's objection that the loss on the sale of fixed assets was already adjusted in the Return of Income. The AO was directed to follow the DRP's directions, and this ground was allowed.

5. Disallowance of Devaluation of Stock:
The AO disallowed 20% of the devaluation of stock on an ad hoc basis, which the DRP upheld due to a lack of clarity. However, the Tribunal found that the disallowance could not be sustained on the ground of consistency, as the assessee had been following this method of valuation for many years. The Tribunal also noted that such adjustments are revenue-neutral. This ground was allowed based on the decision of the jurisdictional High Court in the case of CIT Vs. Triveni Engineering and Industries Ltd.

6. Disallowance of Provision for Installation Expenses:
The AO and DRP disallowed this expenditure on the ground that the sale had not crystallized. However, the Tribunal allowed the claim, noting that the income attributable to the installation expenses had been recognized during the year, aligning with the principle of matching income with expenditure.

7. Credit for TDS for A.Y. 2008-09:
The issue of credit for TDS was to be considered in the set-aside amount as part of the fresh adjudication by the AO.

Conclusion:
Both appeals were allowed in part, with directions for fresh adjudication on specific issues and adherence to the principles laid down by the Special Bench and jurisdictional High Court. The order was pronounced in open court on 31st July 2013.

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