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TMI Blog2013 (6) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... the proposed adjustments made by the TPO u/s 92CA. 2. That on the facts and the circumstances of the case and in law, the learned DRP has erred in ignoring that the advertisement and marketing expenses incurred by the appellant represents only domestic transaction(s) undertaken with third parties, not covered under the purview of section 92B of the Act and is thus in excess of his jurisdiction. 3. That the learned DRP has further failed to comprehend that, the assessee company had not incurred any expenditure to "promote" the brand name of "Sony" and that the entire expenditure as had been incurred by it on advertisement and marketing, only for the purpose of promoting of its business in India, no such expenditure had any impact in respect of any of its international transactions in any manner whatsoever. 4. That the learned DRP has committed a gross error in endorsing the approach followed by the TPO who has incorrectly held both on facts and in law that, the AMP expenses incurred by the appellant to be "excessive" on the basis of a "bright line limit" arrived at by considering inappropriate comparables, not having similar product/ brand profile as the appellant. 5. That the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicable block of assets of the appellant, after reducing the sale proceeds of such assets by holding that depreciation on assets of Daruhera unit sold/ transferred during the financial year 2004-05 is not admissible as the assets were no longer owned and used by the appellant during the relevant previous year 2006-07. 4. That on facts and in law, the AO/ DRP erred in making disallowance of Rs. 11,88,18,028/- (for A.Y. 2007-08) and Rs. 19,04,89,900/- (for A.Y. 2008-09) being 10 percent of advertisement and selling expenses on the ground that the appellant's associated enterprise also benefited from such expenditure. 4.1. That the AO/ DRP erred in making the above disallowance out of advertisement and selling expenses and not following the decision of the ITAT in the appellant's own case for the earlier years deleting such disallowance, merely on the ground that the Revenue had filed an appeal with the High Court against such deletion. 5. That on facts and in law, the AO/ DRP erred in holding that license fees paid for the use of computer software is eligible for depreciation @ 25% under Part B of Appendix-1 without appreciating that computer software license is eligi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in to an arrangement with its AEs for undertaking specified sales promotion activities by using SONY's trademarks in conformity to prescribed standards. As per the agreement, the sales promotion activities as agreed to be undertaken by SID during AY 2008-09 along with their predetermined expenditure was limited to Memory Stick Activities only. Under the agreement, SID was entitled to receive a reimbursement of 50% of expenditure incurred in such promotion of Memory Stick but not exceeding USD 36,000. Relevant extract of a similar inter-company agreement pertaining to AY 2006-07 is reproduced by the Transfer Pricing Officer (TPO) in his order. TPO aggregated all the selling, marketing and advertisement expenses and proposed to hold part of it as benefit enured on AEs for brand building. Assessee opposed the same on various grounds which are mentioned in the written submissions filed before lower authorities as well as ITAT during the course of hearing. TPO however ignoring them made the additions to the international transaction of "receipt of advertising costs incurred on behalf of its AEs- which is challenged by way of grounds of appeals above. Ld counsel Shri Venkatraman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt, therefore, these grounds are pressed by it and assessee's comments on the relevant legal issues as held by the Special Bench in LG Electronics India's case are tabulated as under:- Special Bench decision SID's fact pattern The Special Bench had upheld the recharacterization of AMP expenses as 'services' by the TPO. In SID's case, the TPO didn't recharacterize AMP expenses as services. In SID's case, the international transaction under examination was restricted to specified activities and SID received 50% of the amount spent on such activities. The TPO has merely increased the value of reimbursement received by the assessee for certain specified activities. Based on the facts of LG India's case, the Hon'ble Special Bench concluded that there was no explicit agreement between LG India and its AE. However, since the taxpayer had subscribed to global marketing strategy of the group, it cannot be contended that all decisions regarding the timing, areas and quantum of advertising were taken by the Taxpayer. Hence, based on conduct, it can be concluded that there is a tacit understanding between LG India and its foreign parent with respect to the entire AMP activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e discount, volume rebates etc, and; receipt of subsidy from the parent company in respect of AMP to be excluded from the scope of AMP, thus they have been held by the Hon'ble Special Bench in favour of the tax payers. Category 2 - Criteria/ factors to be considered by the TPO while benchmarking AMP, such as business model, contractual arrangements, product life cycles, choice of comparables, etc. Category 3 - Legal issues before the Special Bench, such as validity of TPO jurisdiction, qualification as transaction/ international transaction, use of bright line approach, etc. 4.5. Ld. Counsel then adverted to the relevant paras from pages 103 to 107 of the Special Bench order, relevant extract is as under:- Scope of AMP Expenses: 18.1. The ld. counsel for the assessee and some of the interveners contended that the TPO has included selling expenses in the total AMP expenses for the purposes of determining the ALP. It was submitted that selling expenses cannot constitute part of AMP expenses. Our attention was drawn towards the erstwhile sections 37(3A) and 37(3B), in which disallowance u/s 37(3A) was prescribed in respect of expenses referred to in sub-sec. (3A), which, inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les agent do not attract disallowance under sub-sections (3A) & (3B) of .sec, 37. The Hon'ble M.P. High Court in the ease of CIT Vs. Mohd. Ishaque Gulam [(1998) 232ITR 869 (MP)] has held that the dealer's commission and sales agent commission etc. cannot be* brought within the purview of advertisement, publicity rod sales promotion expenses, as referred to in sec. 37. 18.5. We do not find any force in the contention of the learned DR made in this regard. The logic in the exercise of finding out the AMP expenses towards creation of marketing intangibles for the. foreign AE starts with the expenses which are otherwise in the nature of advertisement, marketing and promotion. If an expenditure itself is not in the nature of advertising, marketing or promotion, that ought to be excluded at the very outset. We, therefore, reject this contention raised by the learned DR. 18.6. As 'we are presently considering the term 'advertisement marketing and promotion . expenses, which is analogous to, if not lesser in scope than the term 'advertisement, publicity and sales promotion' as employed in the erstwhile sub-sec. (3B) of sec. 37, all the judgments rendered in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts inasmuch as while benchmarking the AMP related international transactions, TPO has included the amounts relating to Trade discount, commission, volume rebates as part of AMP expenses. Such aggregate of AMP expenses i.e. the significant part of which comprised of trade discounts, volume rebates etc. was then compared with the AMP spent of the comparables. By this grossly faulty manner the determination of the arm's length price of the AMP has eventually lead to distorted, excessive and arbitrary TP adjustments in the name of AMP. 4.8. The Special Bench has categorically laid down a divider to distinguish expenses incurred with respect to promotion of sales and expenses incurred in connection with the sales. It has been held by the Special Bench that the expenses in connection with sales are incurred post occurrence of sales and such expenses reduces the cost of goods sold and are directly linked to sales. Therefore, such expenses cannot be held as sales promotion expenses and by no parameter it can be held that such expenditure helps in building/ promoting Canon brand. 4.9. The over emphasis of the TPO has been that the appellant by incurring excessive expenditure in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record which are referred by ld. counsel before us for respective years during his arguments. It is emphasized that principles laid down by Special Bench decision in the case of LG India, hold that expenses having direct correlation with sales cannot be brought within the ambit of AMP for determining the cost/ value of the international transaction. 4.15. The Special Bench (Para 17.4 at pg 100) has categorically suggested factors for determination of cost/ value of international transaction. On these parameters assessee stands miles apart from L.G's case and facts are clearly distinguishable. 4.16. Apart from the items like trade, volume, cash and rebates etc., Special Bench has held that other items like the subsidy received from principal towards AMP expenses, are to be excluded. Therefore, it is prayed that appropriate orders/ directions may be given to the AO/ TPO for following Special Bench judgment and to exclude the expenditure relating to dealer discount, volume rebates and commission, which do not form AMP expenses and are tabulated above as they are not disputed by AO /TPO /DRP that they shall be excluded while aggregating of AMP expenses. 5. In reply, ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt, volume rebate, etc. was due to the character of such expenses as the same do not lead to brand building. The Special Bench has succinctly explained at para 18 that selling expenses stand on a different footing than AMP expenses. Selling expenses, having regard to their nature, cannot be treated akin to the expenditure for brand building and accordingly, ought to be taken out of the ambit of AMP expenditure for the purpose of benchmarking. v. It was never the case of the AO/ TPO that reduction of subsidy and trade discounts/ dealer commission etc from the amount of AMP before benchmarking would lead to double deduction. 6.1. It is submitted that the Ld. DR did not object to the various findings of Special Bench, the fact remains that figures and nature of expenses and subsidy supplied by the assessee have not been disputed by TPO/DRP. In view of these facts, circumstances and availability of record, the Bench may be pleased to issue suitable directions for exclusion of such amounts from AMP related TP adjustments. The parameters laid by the Special Bench of the Tribunal for exclusion of AMP subsidy and other above mentioned non brand building expenses, while bench marking and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rency of the brand is not recognized and AS26 is a guiding tool on this aspect * The existing jurisprudence overwhelmingly suggests that advertising and sales promotion expenditure is not capital in nature. Once case in point is the decision of the Mumbai ITAT in the case of Fine Jewellery India Ltd. Vs ACIT (19 ITR (Trib) 746. "Even if it is presumed that the building of brand image of "Nirvana" is giving advantage of enduring benefit to the assessee, still it would be on revenue account as there is no creation of a tangible or intangible asset of enduring nature to the assessee. The hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT reported in [1980] 124 ITR ,1 (SC), has held that no tests for distinguishing between capital and revenue expenditure is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem, whether, it is a capital expenditure, or revenue expenditure. Their Lordships have held that even tests of enduring benefit at times gets failed as not each and every advantage of enduring nature can be of capital field. The most celebrated observations of their Lordships on this account are reproduced he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses. The TPO has computed the "excess" AMP expenditure incurred by SID and has made and has made a transfer pricing adjustment. 1.2. At the same time, the AO has disallowed 10 percent of the total advertisement expenses under section 37(1) of the Act on the ground that the same resulted in enduring benefits to SID and therefore were capital in nature. 1.3. Thus, while for the amount has been disallowed by the AO for the purpose of claiming tax deduction on the other hand the TPO has considered in its cost base and made an enhance of income on the basis of the same amount. As a result, SID is expected to pay double tax on the same amount. A simplified representation is presented below:- Particulars AO's addition TPO's addition Disallowance by AO 100 Cost base used for AMP expenditure 100 TP adjustment after considering markup of 12.5% 112.5 Additional tax (assuming corp tax rate of 30%) 30 33.75 Total additional tax 63.75 Effective tax rate 63.75% 1.4. As is evident from the above, an amount of INR 100, the taxpayer would end up paying a tax of INR 63.75 on an expense allowance of INR 100, i.e. more than double ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is conveniently reproduced for the sake of brevity. The issue of retrospective application, jurisdiction, AO/TPO's powers etc. etc. have been decided in favour of revenue and against the assessee in L.G. Electronics India Pvt. Ltd. by following observations: "7.19. Here it is relevant to note that the Finance Act, 2012 introduced sub-sec. (2C) along with sub-sec. (2B) of section 92CA. Whereas sub-section (2B) has been made retrospectively applicable from 1.6.2002, sub-section (2C) has been given effect from 1-7- 2012. The reason is obvious when we see the contents of both the provisions. Under sub-section (2C), the power of the AO to make assessment or reassessment U/S 147 or pass order U/S 154 to enhance the assessment completed before 1-7-2012, has been curtailed to the extent the subject matter is covered by sub-section (2B). It shows that abundant caution has been taken by the legislature in not disturbing the finality of the assessment due to retrospective operation of sub- section (2B) in cases set out in sub-section (2C). The acceptance of the contention of the ld. AR to consider sub-section (2B) as prospective, would not only make sub- section (2B) but sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motu exercise of power by the TPO on other international transactions is concerned, the requirement of seeking approval from the CIT will be lacking, rendering the assumption of jurisdiction by the TPO over such other international transactions as invalid. Here again we find ourselves in respectful disagreement with the submission. What sub-sec. (1) requires is that the AO should seek previous approval of the Commissioner in respect of the transactions. for which he is making reference to the TPO. There is no requirement of previous approval of the Commissioner in respect of the international transactions which come to the notice of the TPO during the course of proceedings before him. The prerequisite of seeking approval of the Commissioner is incorporated in sub-sec. (1) alone and the same cannot be read into sub-sees. (2A) and (2B) by the doctrine of incorporation. Our view is fortified by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Pawan Kumar Laddha [(2010) 324ITR 324 (SC)) . 7.22. Now we take up the contention raised by the Id. counsel for some of the interveners on harmoniously interpreting sub- section (2B) by limiting its scope only to such transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ec. (2B) covers all types of international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee's version. The contention of the ld. counsel in this regard is thus sans merits and is hereby rejected. We want to clarify that the above discussion has been made only to deal with the contention raised on behalf of some of the interveners. But for that, it is only academic in so far as we are concerned. with the present appeal involving the A.Y. 2007-08, which is a period anterior to A.Y~ 2012-13. The extant case is fully and directly. covered under sub- section (2B) of section 92CA. In that view of the matter, it becomes evident that no fault can be found with the jurisdiction of the TPO to process the transaction under reference." .......... 14.21. Thus it is palpable that all the three necessary ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE is non- resident; such transaction is in the nature of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regation and details of sales related expenses i.e. trade discount, volume rebate, cash discount, commission etc. So also, no adverse comments were offered in respect of subsidy received from Singapore to meet the AMP expenses. This bench on earlier occasion in the case of Canon India Ltd. vide consolidated order dated 3.5.2013 in ITA Nos.4602/Del/2010 & Others for AY 2006-07, 2007-08 & 2008-09 relied on ITAT Chandigarh Bench decision in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. for A.Y. 2007-08, which came across nearly similar type of situation, where such type of selling expense were excluded from the AMP expenses at the ITAT level itself. The relevant extract is as under: "27. The plea of the assessee before us was that expenses aggregating Rs. 5500.86 lacs are expense incurred in connection with sale and do not lead to brand promotion as held by the Special Bench. After excluding the aforesaid selling expenses aggregating to Rs. 5500.86 lacs, the remaining expense of Rs. 8679.75 lacs (consisting of 6.87% of the total sales) only is required to be considered for the purpose of benchmarking analysis as undertaken by the TPO. The learned DR for the Revenue placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffered by lower authorities on these details. Thus only such details of expenses are set aside back to the file of AO/TPO to decide the issue of AMP expenses by applying the proper comparables after hearing the assessee and keeping in view the Special Bench directions in this behalf. Thus, the grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes. CORPORATE ADDITIONS. Ld counsel adverts the corporate issues as raised above in following seriatum: 1 V.R.S.Issue :- It is submitted that for the purpose of claiming deduction under section 35DDA, scheme of voluntary retirement need not comply with conditions laid down in section 10(10C) of the Income Tax Act, 1961 (Act) read with Rule 2BA of the Income-tax Rules, 1962 and SID is eligible to claim deduction of 1/5th of the expense incurred on Voluntary Retirement Scheme (VRS) under section 35DDA. It is pleaded that Income Tax Appellant Tribunal (ITAT), Delhi in SID's own case [ITA No 4008 (Del)/ 2010 and ITA No 4994 (Del)/ 2010 for the AY 2005-06 & 2006-07 respectively] has held this issue in favour of SID. The relevant part of paragraph no. 6.3 and 6.8 of the Hon'ble ITAT order h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 for the AY 2005-06 & 2006-07 respectively] has allowed depreciation on printer, UPS and switches at the rate of 60%. The relevant part of paragraph no. 8 of the ITAT order has been reproduced below: "8. .............................As the coordinate bench has already taken a decision in the matter, relying on the same, the matter is decided in favour of the assessee and against the revenue. The AO is directed to allow depreciation on these items at the rate of sixty per cent." Further, the appeal filed by the Revenue before Hon'ble Delhi High Court has been dismissed and issue has been decided in favor of SID [ITA no.s 1178/2011 & 1182/2011 for the AY 2005-06 & 2006-07 respectively]. The relevant part of paragraph no 7 of the Hon'ble High Court order has been reproduced below: "7. The finding recorded by the tribunal that UPS, Printer and switches were used with the computer system, is not disputed and denied. In these circumstances, decision of Delhi High Court in ITA 1267/2010 titled CIT v. BSES Yamuna Power Ltd. decided on 31st August, 2010 is applicable. In the said case it was held that computer accessories and peripherals form an integral part of a computer syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational Limited (2009) 308 ITR 199 (Del). (see also CIT vs. Monto Motors Ltd. ITA No. 978/2011 (12.12.2011). No substantial question of law is accordingly framed." 8. In view of the foregoing it is pleaded that this issue is also covered in favour of the assessee and may be allowed. 9. Ld CIT(DR) is heard on the issues who relied on the orders of the DRP and AO. 10. We have heard the rival contentions and perused the material available on the record. Respectfully following the decisions of coordinate bench which is approved by Hon'ble Delhi high court we allow the above three common grounds of the assesses appeals. 11. Apropos the ground Depreciation on Daruhera Factory Assets, it is pleaded that AO/DRP erred in denying depreciation on the balance written down value of assets pertaining to the factory at Daruhera, Haryana (which was closed down during the financial year 2004-05) and which was included in the total written down value of the applicable block of assets of the appellant, after reducing the sale proceeds of such assets. 12. Ld counsel contends that this ground has been decided by ITAT against assessee in its orders for AY 05-06 and 06-07, however it is mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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