2015 (9) TMI 483 - AT - Income Tax

Transfer pricing adjustment - whether there is no agreement for the use of brand name between the overseas AE and the assessee and the assessee has not made any payment to its AE for using the brand name? - application of Bright-line test - Held that - The grounds qua the application of Bright-line test is decided against the assessee thereafter holding that the assessee has rendered higher intensity functions qua the comparables by which the AE of the assessee has been benefited by brand building exercise on the part of the assessee affecting the profit of the assessee thereby eroding the tax base by the said international transaction. On consideration of facts the issue for calculating the correct AMP expense is resorted to the TPO/AO who is further directed to consider on facts whether compensation was still due on account of the pricing adjustment considering TP study report available on record and the credit notes of Rs. 78 crore odd received by the assessee . Thus L.G. Electronic case 2013 (6) TMI 217 - ITAT DELHI keeping in mind our finding that the assessee is a distributor whose remuneration model is not only supported by International Tax Jurisprudence as available in the OECD Guidelines and Australian Tax Guidelines but is also found supported by Questions 1, 9 10 of the L.G. Electronics case as considered by the Special Bench. The assessee has made a reference to its Global Pricing Policy on which the TP study is based the same may be produce before the TPO/AO. As such the arguments of the assessee to the above extent are upheld. On the issue of mark-up if still so warranted on facts the arguments of the Ld. AR have been that the same is excessive. It is seen that there is no discussion in the TPO s order as to why a mark-up of 15% is adequate. Similarly DRP also does not give any justification for reducing the same to 12.5%. We refrain from substituting the arbitrary mark-up by our own arbitrary estimate in the absence of any facts or material on record. Even estimates have to have some rationale and reasoning which is completely absence in the orders and arguments advanced before us. Accordingly we deem it appropriate to set aside the orders and restore the issue back to the TPO/AO with the direction to give a rationale basis for applying a mark-up after hearing the assessee if so warranted on facts. In principle the departmental stand that over and above compensation of costs incurred mark-up factoring in the profits for application of its funds resources and efforts in terms of time and energy needs be considered also. Whether on facts the adjustment in arm s length price is still warranted or not shall be decided on the facts of the case considering the guidelines of the Special Bench which need to be considered for calculating the correct AMP and the Question Nos.-1 9 10 12 in para 17.4 of the Special Bench. Decided in favour of the Revenue. Depreciation on computer peripherals - @ the rate of 60% or 15% - Held that - AO is directed to grant necessary relief in accordance with law following the judgement and decision of the Jurisdictional High Court in CIT vs. BSES Yamuna Power 2010 (8) TMI 58 - DELHI HIGH COURT wherein held 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%. - Decided in favour of assessee. Disallowance of 10% of the expenditure of advertisement and selling expenses on the ground of enduring benefit - Held that - It is seen that the reliance placed upon Sony India Pvt. Ltd. Vs DCIT (2008 (9) TMI 420 - ITAT DELHI-H) by the assessee was not considered by the DRP on the ground that the matter has not attained finality. The said approach is neither correct nor can it be upheld. The assessee has also argued that it results in double disallowance. On consideration of facts on record we hold the DRP s order a non-speaking order. The reasoning adopted for rejecting the claim of the assessee and refusing to apply its mind to the facts and law cannot be given judicial sanctity. The issue is restored to the AO with the direction to decide the same in accordance with law by way of a speaking order after giving the assessee a reasonable opportunity of being heard. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Validity of assessment order/directions by AO/TPO/DRP.
2. Jurisdiction of TPO over AMP expenditure as an international transaction.
3. Transfer Pricing adjustment concerning AMP expenses.
4. Application of 'Bright Line Method' for determining AMP expenditure.
5. Depreciation on UPS.
6. Disallowance of advertisement and selling expenses.
7. Penalty for concealment of income.

Detailed Analysis:

1. Validity of Assessment Order/Directions by AO/TPO/DRP:
The assessee contended that the assessment order and directions passed by the AO/TPO/DRP were bad in law and void ab initio for not following judicial precedents set by the ITAT and Delhi High Court on similar issues. However, the Tribunal did not find merit in this argument, as the assessment was conducted in line with the statutory provisions and guidelines.

2. Jurisdiction of TPO Over AMP Expenditure:
The TPO assumed jurisdiction over AMP expenditure, considering it an international transaction under section 92B of the Income Tax Act. The assessee argued that AMP expenses did not qualify as an international transaction. The Tribunal upheld the TPO's jurisdiction, referencing the Special Bench decision in the L.G. Electronics case, which established that AMP expenses benefiting the AE could be considered an international transaction.

3. Transfer Pricing Adjustment Concerning AMP Expenses:
The TPO made a transfer pricing adjustment of INR 69,94,95,650/- by applying the 'Bright Line Method'. The DRP granted partial relief, reducing the adjustment to INR 69,71,93,835/-. The Tribunal upheld the application of the 'Bright Line Test' but remanded the matter to the TPO for recalculating the AMP expenses, excluding sales and dealer bonuses, as per the guidelines of the Special Bench in the L.G. Electronics case.

4. Application of 'Bright Line Method':
The TPO's use of the 'Bright Line Method' was contested by the assessee, arguing it was not a prescribed method under section 92C. The Tribunal upheld the method, referencing the Special Bench decision in the L.G. Electronics case, which validated the use of the 'Bright Line Test' for determining excessive AMP expenses.

5. Depreciation on UPS:
The AO restricted depreciation on UPS to 15% instead of 60%. The Tribunal directed the AO to grant depreciation at 60%, following the jurisdictional High Court's decision in CIT vs. BSES Yamuna Power.

6. Disallowance of Advertisement and Selling Expenses:
The AO/DRP disallowed 10% of advertisement and selling expenses, treating them as capital in nature. The Tribunal found the DRP's order non-speaking and remanded the issue to the AO for a fresh decision, directing them to follow the ITAT's decision in Sony India Pvt. Ltd. and ensure no double disallowance occurs.

7. Penalty for Concealment of Income:
The AO/DRP initiated penalty proceedings under section 271 for furnishing inaccurate particulars of income. The Tribunal did not make a specific ruling on this issue, implying it would be contingent on the final outcome of the reassessment.

Conclusion:
The Tribunal upheld the application of the 'Bright Line Method' for determining AMP expenses and remanded the matter for recalculating AMP expenses and considering the credit notes received by the assessee. The Tribunal also directed the AO to follow the jurisdictional High Court's decision on depreciation for UPS and reconsider the disallowance of advertisement and selling expenses. The appeal was partly allowed for statistical purposes.