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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 ..... d. (2012 (4) TMI 279 - ITAT CHANDIGARH) and Canon India Ltd. - Consequently, only the figures supplied by assessee excluding the items like trade discounts, cash discounts, subsidy etc. which are to be excluded by Special Bench should be verified by AO because no adverse comments are offered 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 - grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes. V.R.S.- whether for purpose of claiming deduction u/s 35DDA, scheme of voluntary retirement need not comply with conditions laid down in section 10(10C) r.w.r. 2BA and SID is eligible to claim deduction of 1/5th of the expense incurred on VRS under section 35DDA - Held that:- Rule 2BA is in the form of guidelines for the purpose of Section 10(10C), which relates to taxation of income/amount received by an employee under VRS scheme. The said Rule does not deal with the expenditure incurred by the employer when the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain CIT (DR, TP) ORDER Per R. P. Tolani, J.M:- These are two appeals filed by the assessee against the assessment orders framed by the assessing officer, pursuant to DRP directions, u/s 143(3) read with section 144C of the Income-tax for the assessment years 2007-08 and 2008-09, involving issues pertaining to T.P. adjustments as well as corporate tax issues. 2. Various grounds are raised, which, in effect, raise following grounds of appeal, reframed by us, which are required to be adjudicated in these appeals: Grounds of appeal on Transfer pricing issues: 1. That the learned DRP has committed gross errors when it confirmed the adjustments aggregating to ₹ 65,34,38,272/- ( for A.Y. 2007-08); and ₹ 1,12,67,15,023/- (for A.Y.2008- 09) out of 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormity with Rule 2BA. 2. That on facts and in law, the AO/ DRP erred in restricting the depreciation on printers, UPS, switches etc., which are parts of computer eligible to claim depreciation at 60% to 15% of written down value thereby reducing the depreciation allowance. 2.1. That the AO/ DRP erred in making the above disallowance and not following the decision of the ITAT in the appellant's own case for the earlier years deleting such disallowance. 3. That on facts and in law, the AO/ DRP erred in disallowing ₹ 1,61,75,067/- (for A.Y. 2007-08) and ₹ 1,30,43,524/- (for A.Y. 2008-09) by 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 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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transactions undertaken by the assessee, except one, namely, Receipt of advertising cost incurred on behalf of AEs . The TPO has considered this transaction to not be at arm's length. The TPO has undertaken his analysis by bringing the entire AMP expense of SID under the ambit of this transaction and contending that a significant part of this expense was excessive and non-routine and thus incurred by SID for the purpose of providing of brand building services to its SID. The impugned international transaction in this case pertains to receipt of advertising costs incurred on behalf of its AEs under an agreement between SID has entered into an agreement with its Associated Enterprises (AEs), amounting to ₹ 8,989,044. The findings of this arrangement cannot be applied to SID's entire Advertisement, Marketing and Promotional ( AMP ) expenditure. SID has entered 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication and quantification of various expenses i.e. relatable to sale or advertisement and brand promotion etc. 4.3 Apropos legal issues, Special Bench has held that the inclusion of domestic transactions in respect of AMP expenses as amended by Section 92CA(2B) are retrospectively applicable and TP has the power to look into the deemed international transactions and other related issues regarding the reference by assessing officer etc. Thus, these issues have been decided by Special Bench in favour of the revenue and against the assessees. The assessee in question has also raised such legal arguments before DRP as an intervener before Special Bench in the case of LG Electronics India Pvt. Ltd., as also before ITAT in these appeals. Though these issues, following the Special Bench decision, may be decided against the assessee, however, the assessee will be preferring appeals before the Hon'ble Delhi High Court, 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 pat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has held that so long as the advertisements are in an entity s own name, even if the quantum of the AMP expenditure is excessive, a transaction cannot be said to exist. In the case of SID, all its print advertisements contain its own name. Thus the same cannot be said to constitute a transaction of provision of brand building services. Based on the above, it is clear that without prejudice to its contention that the Special Bench Ruling in the case of LG India doesn't apply to the facts of the given case as the functional profile of the assessee differs from that of LG India, it cannot be held that transaction of provision of brand building services is in existence in the assessee's case. 4.4. Ld. Counsel contends that after deciding the legal issues in favour of revenue, the Special Bench vide order dated 23rd January 2013 has laid down broad parameters in relation to the TP adjustment on account of AMP. The main principles emerging in this behalf from the Special Bench order can be classified into three categories as under: Category 1 - Treatment of selling expenses such as trade discount, volume rebates etc, and; receipt of sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses in connection with the sales on the other. Both these expenses are required to be kept in different compartments. While expenses for the promotion of sales directly lead to brand building, the expenses directly in connection with sales are only sales specific. 18.4. Sub-Section (3A) of sec. 37, before its omission, provided that where the. expenses incurred by the assessee on anyone or more of the items specified in sec. 37(3B) exceed one lac of rupees, then twenty percent of such excess shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business or profession'. Clause (i) of sub-sec. (3B) referred to advertisement, publicity and sales promotion . The Hon'ble jurisdictional High Court in the case of CIT Vs. Khetu Ram Bishambar Dass [(20 08) 166 Taxman 273 (Del.)], has held that bonus paid to dealers is not in the nature of sales promotion expenses and hence the provisions of sec. 37(3A) cannot be applied to it. The Hon'ble Calcutta High Court in CIT Vs. The Statesman Ltd. [(1992) 198 ITR 582 (Cal.)] has enunciated that the expenses incurred by way of commission paid to sales agent do not attract dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such subsidy or vice versa As the TPO has neither properly considered the request of the assessee for inclusion of some other comparable cases nor examined the effect of the above discussed relevant factors on the question of determination of the cost/value of international transaction, . in our considered. opinion the ends of justice will meet adequately if the order of the TPO and that of the AO giving effect to such order is set aside arid the matter is restored to the file of the TPO for determining the cost/value of the international transaction and the consequent ALP afresh as per law after allowing a reasonable opportunity of being heard to the assessee. 4.6. Ld. Counsel Shri Venkatram Sr. Advocate contends that the issue about various expenditures like trade discount; volume rebates; and receipt of subsidy from the parent in respect of AMP expenses etc. stand settled by Special Bench. Assessee has raised appropriate grounds before DRP and have also been raised by proper grounds before ITAT in this behalf in these appeals. 4.7. It is emphasized that the order of TPO in the assessee's case runs contrary to Special Bench directions in many respects inasmuch as whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs CIT 82 ITR 363 (SC). It is reiterated that such expenses incurred by appellant go to reduce the cost of goods sold, as they have a live nexus to the only sales made during the years and has no nexus with brand building. The Special Bench after considering these issues has rightly held that such expenditure should be excluded from the AMP before benchmarking. No dispute about such details has been raised by AO/ TPO or DRP. 4.13. AMP expenses quantified by the TPO in these assessments include the amounts clearly attributable to trade discount, volume rebate etc. According to assessee, these figures are as under and are placed on paper book. 4.14. The nature and amount of these expenses have never been objected or disputed by lower authorities on the quantum or quantification of expenditure incurred in relation to trade discount sales commission etc. The TPO in his order has acknowledged and recorded the amount of such expenditure pertaining to Trade discount, commission, volume rebates, etc. They have been included because TPO and DRP were of the ad hoc view that all such expenses fall within the scope of AMP expenses. This is evident from the relevant details placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of the Tribunal held that subsidy is to be reduced for two reasons before benchmarking such transaction (a) the same goes to reduce the total AMP expenditure that needs to be benchmarked, such that the Indian AE to the extent reimbursed has not incurred such expenditure and (b) for an objective or like comparison of AMP spend between the appellant and the comparables chosen the subsidy (reimbursement) received should be reduced. In other words, it would then only be an apple to apple comparison to benchmark such expenditure and not otherwise. The manner in which such benefit is to be given to the assessees has been explained by the Special Bench in para 19, wherein it is clearly stated that where the Indian AE receives subsidy, while its comparables do not receive any subsidy, the amount of subsidy received must be reduced from the initial amount of AMP, before any exercise of comparison with the comparables can be commenced. iii) Even as per the facts of the instant case the subsidy and trade discount/ dealer commission etc operate in separate fields. iv. It is submitted that the directions of the Special Bench of the Tribunal to exclude the expenditure in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act by SID, such incidental benefit could not be termed as provision of services by SID to its AEs. In this regard, Para 7.13 of the Organisation for Economic Co- operation and Development ( OECD ) Guidelines, 2010 also state that an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed.... Thus, if no service has been rendered then there should not be any question of mark up on the same. Further, the above discussion also substantiates that AMP expenses have been benchmarked in the TNMM analysis undertaken for the trading segment. Thus, if the transaction is already at arm's length then an additional mark up should not be charged on the same. 1. Without prejudice to all other contentions, it is submitted that the incurring of advertising expenditure by SID has not lead to the creation of any asset A combination of various commercial factors results in enhanced sale leading to enhanced income and profits. It is therefore perceived that the brand of the legal owner gets b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a given case. Further such a payment has also to be seen from the context of business necessity or expediency also. If the outgoing expenditure is so intricately related to carrying on or the conduct of the business that it may be regarded as integral part of the profit-earning process and not for an acquisition of an asset or a right of the permanent character, the possession of which is condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. From the above it is clear that if any expenditure, like advertising and sales promotion expenditure in the case of SID, is a business necessity and integral to the profit earning process, the same cannot be considered to have been incurred for the process of creation of an asset. To the extent of expenditure incurred on advertising and sales promotion, there has been double disallowance/addition as this expenditure has been treated as 'capital' by the learned AO, and hence entirely disallowed under section 37(1) in computing the taxable income whereas the said amount has been included by the TPO while computing the alleged excessive AMP expenditure. 1.1. During each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, since 10% of expenditure has been disallowed under section 37(1) of the Act already, your honours would appreciate that for the purpose of the TP adjustment only the balance amount of the expenditure should be compared with the ALP determined by the TPO. 7. We have heard rival contentions made on behalf of the parties and gone through the relevant material available on record. 7.1. First of all we will take up the legal issues as raised in the grounds of appeal regarding the retrospective applicability of sec. 92CA(2B) to the years in question in the case of the assessee as also the powers of assessing officer to make such reference and the powers of TPO to furnish report in this behalf and all other related issues. The Special Bench in the case of LG Electronics India (supra) adjudicated such issues as is evident in para 6 of the order: 6. Though both the questions referred to this special bench are inter-linked, still we are taking up question no. 1 first. The ld. Counsel for the assessee ahs assailed the impugned order on various legal and factual issues. In so far as the first question is concerned, we have divided such submissions into seven broader parts fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO is to be permitted to determine ALP in respect of any transaction, then sub- sec. (1) requiring reference to him by the AO, will be rendered useless. In our considered opinion, this contention misses the wood from the tree. The jurisdiction of the TPO is activate only when the AO makes reference to him under sub-section (1) for determining ALP in respect of certain transactions. Sub-sees, (2A) and (2B) come into play only when sub-sec. (1) has already been set into motion. Thus, it is only when the AO makes a reference to the TPO in terms of sub-sec. (1) for determination of ALP in respect of the referred international .transactions, that the TPO gets power under sub- sections (2A) and (2B) to determine ALP in respect of non- referred international transactions as well. In the absence of any such reference under sub-section (1), the TPO cannot suo motu undertake the determination of ALP in respect of other international transactions not referred to him. It is a different matter that the reference by the AO may be for one international transaction and the TPO while determining . ALP in respect of that one international transaction, also comes across certain. other internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision by importing certain words in it, which is obviously impermissible; The primary rule is that of strict or literal interpretation, as per which a provision should be read as it is unless manifestly absurd results follow from such interpretation. 7.23. We are equally conscious of the rule of harmonious construction as reiterated in Sultana Begum (supra). Principle 3 in para 15 of the judgment is that it is to be borne in mind by all the courts all the times that when there are two conflicting provisions in an Act which cannot be reconciled with each other, it should be interpreted as if possible, effect should be given to both . In our considered opinion, the rule of harmonious construction can be applied instantly by excluding the cases in which the assessee has not furnished report in respect of international transactions, whether or not it is- an international transaction as per the assessee's view point, from the ambit of sub-sec. (2A) and including them in sub- section (2B) of section 92CA. It is relevant to note that sub-see. (2A) is a general provision on the issue of the TPO suo motu taking up an . international transaction not referred by the AO, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as a consequence thereof, the relevant grounds raised in the memo of appeal, touching these legal aspects stand dismissed. 7.5. Now we proceed to decide the issue about nature and scope of AMP expenses as elucidated by the Special Bench. The quantification thereof and the bench marking of the AMP expenses which is to be subjected to TP adjustments applying the ALP methodology by the TPO and DRP. 7.6. We have heard rival contentions. It has not been disputed that assessee submitted all relevant details about the aggregate expenditure relatable to trade discount, volume rebates, cash discount, commission and the amount of subsidy. No dispute or adverse comments have been offered by any of the lower authorities i.e. AO/ TPO DRP. The details thereof are given in para 4.23 hereinabove already filed and not controverted. The assessee's contention is to the effect that the uncontroverted figures may not be reconsidered and those liable for AMP as submitted by assessee only be reconsidered by assessing officer for the purpose of ALP by applying suitable comparables afresh to decide the TP adjustments in this behalf in accordance with law. Per contra ld. CIT(DR) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Sales Promotion 3939.90 4. Selling and distribution 826.17 5. Service charges paid to selling agent 10.03 Total 5500.86 29. We find that the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. Vs. ACIT (supra) held that the expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing officer to exclude the expenses incurred by the assessee in connection with the sales totaling ₹ 5500.86 lacs as the same do not fall within the ambit of AMP expenses and hence not to be considered for computing the cost/ value of international transaction. The assessee vide ground no. 4 had raised the issue against disallowance of consumer market research expenses of ₹ 567.49 lacs. In view of our decisions in allowing the claim of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng reason to read section 35DDA as suggested by the ld. DR. Therefore, the scheme of the assessee is held to be a VRS, to which the aforesaid provision is applicable. 6.8 However, as mentioned earlier, the assessee is entitled to deduction of one-fifth of the expenditure u/s 35DDA as claimed. Therefore, these grounds are allowed. Revenue filed appeal before Hon'ble Delhi High Court which has been dismissed and issue has been decided in favor of the SID [ITA nos. 1178/2011 1182/2011 for the AY 2005-06 2006-07 respectively]. The relevant part of paragraph no 4 and 6 of the Hon'ble High Court's order has been reproduced below:- 5. Regarding applicability of Rule 2BA of the Income Tax Rules, 1961 to expenditure incurred and subject matter of Section 35DDA of the Income Tax Act, 196, we are entirely in agreement with the findings recorded by the tribunal in paragraph 6.3. Rule 2BA is in the form of guidelines for the purpose of Section 10(10C), which relates to taxation of income/amount received by an employee under VRS scheme. The said Rule does not deal with the expenditure incurred by the employer when the assessee makes payment under the VRS schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by SID does not result in any enduring benefit and therefore, is not a capital expenditure. Ld counsel contends that this issue also is covered in favour of the assessee by ITAT judgment in SID's own case [ITA No. 1731(Del.)/2009 for AY 2004-05] ruled in favour of the SID with respect to the disallowance of AMP expenses on account of capital in nature. The Hon'ble ITAT held as under:- even if it is assumed for the sake of argument that there was such advantage of enduring nature that had accrued to the taxpayer company as a result of incurring of the said expenditure, the same, having regard to the nature of such expenditure, was in the revenue field and not certainly in the capital field so as to treat the same as of capital nature. The said expenditure thus was rightly claimed by the taxpayer as of revenue nature and, in our opinion, there was no infirmity in the impugned order of the learned CIT(A) deleting the disallowance of 10% made by the AO by treating the same as of capital nature. The Delhi ITAT 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 ruled in its favour. The relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Software license fee paid by the appellant for use of computer software is eligible for depreciation at 60% under the specific provision in Part-A of Appendix-1- 'Computer including computer software'. It is pleaded that ITAT in AY 2006-07 has decided this issue against assessee in peculiar circumstances by following observations. 21.1 In this connection, it is mentioned in the order of the learned DRP that the assessee claimed deduction of depreciation @ sixty per cent. License is an intangible asset as per Part-B of Appendix-I, in which the rate of depreciation on all intangible assets has been prescribed @ 25 per cent. Therefore, excess claim of 35 per cent was disallowed. No particular argument has been made by the learned counsel. Part-B of Appendix-I in respect of intangible assets provides depreciation at uniform rate of 25 per cent and licenses have been included therein. Accordingly, we do not find any error in the order of the learned DRP. Therefore, this ground is dismissed. 15. Thus the issues was decided as it was alleged that no arguments were made by the assessee. This is agitated by an MA as arguments were made and appealed against by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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