2021 (2) TMI 857 - AT - Income Tax

Disallowance of depreciation on intangible assets - Depreciation on Goodwill - depreciation on Customer Relationship (CR) Vendor Relationship (VR) considering them to fall under Any other business or commercial rights of similar nature - treatment as asset under Explanation 3(b) to Section 32(1) - HELD THAT - We notice that an identical issue has been considered in the assessee's own case by the coordinate bench in AY 2011-12 2019 (7) TMI 25 - ITAT BANGALORE a reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) - Decided against revenue. TPA - question of bench marking the AMP expenses - Whether Residual profit split method is not appropriate method to bench mark AMP transactions? - HELD THAT - The question of bench marking the AMP expenses has been examined and decided by Hon Tale Delhi High Court in the case of Sony Ericsson 2015 (3) TMI 580 - DELHI HIGH COURT and Maruti Suzuki Ltd. 2015 (12) TMI 634 - DELHI HIGH COURT . The bright line test adopted by the TPO has been specifically rejected in the case of Sony Ericsson (supra). The Hon'ble Delhi High Court has held in the case of Maruti Suzuki Ltd. (supra) that the revenue needs to establish the existence of international transaction before undertaking benchmarking of AMP expenses. Hence, the approach of the TPO cannot be upheld. Since the TPO has combined Royalty payments also along with AMP expenses while making Transfer pricing adjustments by adopting Residual Profit Split Method, since the existence of international transactions in AMP expenses is required to be shown separately, we are of the view that this issue requires fresh examination at the end of AO/TPO. Accordingly, we set aside the order passed by the AO on AMP expenses and restore the same to the file of AO/TPO for examining it afresh. After affording adequate opportunity of being heard, the AO/TPO may take appropriate decision in accordance with law. Appeal of the assessee is treated as allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment made in respect of AMP expenditure.
2. Rejection of depreciation claimed on intangible assets.

Detailed Analysis:

Issue 1: Transfer Pricing Adjustment Made in Respect of AMP Expenditure

The assessee challenged the assessment order dated 30.10.2019 for the assessment year 2015-16, which was passed under Section 143(3) read with Sections 92CA and 144C of the Income Tax Act, 1961. The grounds of appeal included the incorrect facts and wrong interpretation of law by the AO, resulting in an assessed total income of INR 113,66,49,356 against the returned income of INR 88,13,25,460.

The primary contention revolved around the application of the Bright Line Test (BLT) by the TPO to determine non-routine AMP expenditure and label it as an international transaction. The TPO's approach included splitting AMP expenses into routine and non-routine expenses and adopting the Residual Profit Split Method to benchmark both royalty and AMP expenses. The TPO reworked the profit margin of the assessee to 21.58% by considering only routine AMP expenses, while the profit margin of comparable companies was 7.76%. The difference of 13.82% was considered non-routine profit, which was shared between the assessee and its AE, resulting in a transfer pricing adjustment of INR 21.94 crores.

The Tribunal noted the assessee's reliance on the Delhi High Court's decision in Sony Ericsson (374 ITR 118), which rejected the Bright Line Test and the Residual Profit Split Method for benchmarking AMP transactions. The Delhi High Court emphasized the need to establish the existence of an international transaction before benchmarking AMP expenses. Consequently, the Tribunal set aside the AO's order on AMP expenses and remanded the matter for fresh examination by the AO/TPO, instructing them to provide an adequate opportunity for the assessee to be heard and to take an appropriate decision in accordance with the law.

Issue 2: Rejection of Depreciation Claimed on Intangible Assets

The assessee claimed depreciation of INR 2,41,80,072 on intangible assets, including Design & Technical Know-how, Vendor Network Relationship, and Customer Network Relationship. The AO disallowed the claim, following the decision rendered for the assessment year 2012-13, and the DRP confirmed the disallowance.

The assessee cited previous Tribunal decisions in its favor for the assessment years 2008-09 and 2011-12, where similar disallowances were deleted. The Tribunal referred to the coordinate bench's decision in AY 2011-12, which followed the decision in AY 2008-09, and noted that the consistent view was to allow depreciation on intangible assets. The Tribunal highlighted that the expenses incurred by the assessee for business purposes could not be disallowed based on technicalities. It also referenced the Supreme Court's decision in Smifs Securities Ltd. (348 ITR 302), which recognized goodwill as an intangible asset eligible for depreciation under Section 32(1) of the Act.

The Tribunal observed that the AO had allowed depreciation on the same intangible assets in the previous year, and the written down value brought forward could not be disputed. The Tribunal concluded that the assessee was eligible for depreciation on intangible assets and directed the AO to delete the disallowance.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside the AO's order on AMP expenses for fresh examination and directing the deletion of the disallowance of depreciation on intangible assets. The decision emphasized the need for a proper establishment of international transactions and consistent application of legal principles regarding depreciation claims.