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TMI Blog2020 (8) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... referred as "the Act"] on account of Advertisement, Marketing and Sales Promotion {hereinafter referred as "AMP"} expenses. 2.1 That on facts and in law the TPO/DRP erred in not appreciating that in absence of a "transaction" as envisaged under section 92F of the Act between the appellant and its AE for brand promotion or for establishing marketing intangibles the TPO had no jurisdiction to propose an adjustment on account AMP expenses. 2.2 That on facts and in law the TPO erred in holding and the DRP inter alia erred in upholding/observing that the: (i) Appellant had incurred AMP expenditure of Rs. 13,70,95,799/- on promotion of proprietary marks and for development of marketing intangible for the benefit of AE. (ii) AMP expenditure of Rs. 13,70,95,799/- incurred by the appellant is an "International Transaction" u/s 92B of the Act. (iii) Selling Expenses (for eg. Discounts, Commission) incurred by the appellant are in the nature of AMP expenses. (iv) AE is directly benefited by any expenditure incurred by assesse on AMP. 2.3 That on facts and in law the AO/TPO/DRP erred in not appreciating that benchmarking on the basis of expenses incurred by an assessee is not rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's-length was referred to the learned Transfer Pricing Officer (TPO). The learned Transfer Pricing Officer (TPO) proposed adjustment of Rs. 11,44,61,024/- to the International transaction of 'procedure of finished goods for resale'. While proposing the adjustment, the learned TPO held that most appropriate method for determination of arm's-length price (ALP) of purchase of the finished goods should be "Resale Price Method" (RPM) instead of "Transactional Net Margin Method" (TNMM) applied by the assessee. The learned TPO also observed that the assessee had incurred a huge amount (Rs. 16,79,22,000/-) on Advertisement and Market Promotion (AMP) expenses which has created market intangibles including brand value in favour of Associated Enterprises and thus being an international transaction, same need to be benchmarked. He applied Bright Line Test (BLT) for computing the AMP adjustment. The learned TPO allowed the AMP expenses of Rs. 3,08,26,201/- and balance AMP expenses of Rs. 13,70,95,799/- was considered as incurred for creating marketing intangibles in favour of the AE. He applied a markup of 12.5% on the said amount and proposed total AMP adjustment of Rs. 15,42,32,773/-. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the logo. The learned Counsel, however, submitted that para 35 of the order of the Tribunal may not be followed as the appeals involving AMP issues have not been heard by the Hon'ble Supreme Court and thus restoring the issue to the TPO for following the decision of the Hon'ble Supreme Court, which yet has not been pronounced, is not justified. 5. The Learned DR, on the other hand, relied on the order of the learned TPO and learned DRP and submitted that facts of the year under consideration are different from the assessment year 2008-09. He submitted that in the year under consideration learned TPO has analyzed creation of the marketing intangibles in view of the evidences brought on record as against the earlier year, where the Tribunal rejected the contention of the revenue mainly on the ground that no evidences were brought on record to support creation of market intangibles. According to him, the decision of the Tribunal is distinguishable on facts. Then, he submitted that impact of explanation to section 92B which has been inserted by the Finance Act, 2012, has also not been considered by the Tribunal in the said decision. 6. In the rejoinder, the learned Counsel of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand 'Valvoline'. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose." 24. When all these objections were raised by the taxpayer before the ld. DRP, same has been dismissed by using same ratio applied by the TPO firstly to declare the AMP expenditure as an international transaction and then to treat the AMP expenditure incurred by the taxpayer in excess of routine expenditure to promote the brand and creating intangibles for its AE by using the BLT, as is evident form para 5.3 of the ld. DRP order. In para 5.8, ld. DRP again applied the BLT to benchmark the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction or for determination of ALP of such transactions. 22. Hon'ble Delhi High Court in case of CIT vs. Whirlpool of India Ltd. (2016) 381 ITR 154 (Delhi) decided the identical issue by returning following findings :- "34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concern". ..... 37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in 231 19 ITA No.5528/Del./2012 uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negative by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........ 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly held that the international transactions existed - that understanding apparently was passed upon the pre-existing regime, propounded in L.G. Electronics India Pvt. Ltd.(supra) with greater clarity on account of this Court's decision in Sony Ericsson Mobile Communications India Pvt. Ltd.(supra). The I.T.A.T. in our opinion, should have first decided whether in the circumstances of this case, the nature of the AMP reported, could lead to the conclusion that there was an international transaction. When doing so, it should have remitted the matter back for examination to the A.O. in this case. Accordingly, following the decision of Sony Ericsson Mobile Communications India Pvt. Ltd.(supra) and a subsequent decision in Daikin Airconditioning India Pvt. Limited v. Assistant Commissioner of Income Tax in ITA 269/2016, decided on 27.07.2016, this Court hereby remits the matter for a comprehensive decision by the I.T.A.T. In other words, the I.T.A.T. will decide whether the reporting of the AMP in regard to the outbound business constitutes an international transaction for which ALP determination was necessary and if so, the effect thereof. The parties are directed to appear before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve the existence of an international transactions involving AMP expenses by the taxpayer. TPO rather proceeded on the premise that the AMP expenditure incurred by the taxpayer were far excess of AMP expenses incurred by the comparables. 32. TPO has also applied the BLT which has been discarded by the Hon'ble High Court in a number of judgments. Even otherwise, in the absence of any agreement, arrangement or understanding between the taxpayer and its AE, expressed or implied, that AMP spent of the taxpayer would also be beneficial to the AE or it would enhance the brand value of the AE in any manner, no international transaction can be inferred. 33. Moreover, on the other hand, the taxpayer has come up with specific pleading that it has analysed a principal to principal relationship with its AE and at no point, it has acted as agent of the AE. If this is so, AMP expenses which the taxpayer has incurred to boost up its sales cannot be treated to enhance the brand value and to create 235 23 ITA No.5528/Del./2012 intangibles in favour of the AE. All these facts stand proved from the growing sale pattern of the taxpayer which shows that benefit of AMP activities accrued in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e.capitalised) for (a) self use in same or different location; (b) any other revenue generating priniting contract; Such selling or re-conversion of the asset can take place in the same or in the subsequent financial years. (ii) Where asset is not in working condition and same is reparable, it is repaired and thereafter it can be (a) sold or (b) used for self use or for revenue generating contracts; (iii) Where it is not in working condition and same is irreparable; such assets are cannibalised (i.e.dismantled). After cannibalisation working parts are taken out for selling or for carrying out repair work. Non-working or damaged parts are written off and thereafter scarapped and sold to scrap dealers." 8.2 The Assessing Officer held that the depreciation cannot be allowed to the assessee even after sale of the goods. The learned DRP distinguished the decision of the Tribunal (for AY 2002-03) relied upon by the assessee observing as under: "14.3. It is observed that there is a decision of Hon'ble High Court of Delhi in the case of assessee for AY 2002-03 wherein the appeal of the revenue against the decision of the ITAT in the assessee's own case was dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive due to which they had to be de-capitalised. In these circumstances, the assessee was justified in reducing the nominal value from running WDV of the block of the assets under which such assets fell. He further submitted that for the tax treatment, the depreciation under the amended provisions of section 32 of the Act is calculated by applying the specified rate to the WDV of block of assets. He further submitted that after introduction of depreciation on block of assets concept w.e.f. 01.04.1988, depreciation is available on the relevant block of assets and not on individual assets as the individual item or asset loses its identity when it is mixed with the block of assets. The depreciation is allowable on the WDV at the end of the relevant previous year for a block of assets which was computed by adding to the opening WDV of the said block of assets, actual cost of the assets acquired during the year and deducting therefrom moneys payable including scrap value, if any, in respect of assets sold or discarded during the year. It is submitted that the phrase "moneys payable" refers to the cash received on account of sale or scrapping of the asset. Ld. AR draw our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se assets from the block of assets, if any. The assessee's case of de-capitalisation / discarding of assets from the block of assets is also covered by the decision of ITAT in assessee's own case, hence, depreciation cannot be disallowed on the assets so discarded during the year under consideration. He finally submitted that the legal position on allowability of depreciation on the assets forming a part of the block of assets which have been sold or written off or not found, discarded or destroyed or demolished that once an asset is a part of the block of assets and it is put to use, the depreciation will be allowed till the block of assets continued to exist even if the relevant assets are sold, discarded, destroyed or demolished. Such a proposition has been upheld by Hon'ble Delhi High Court in assessee's own case where an asset forming part of the block of assets is not found or is not traceable or is lost, then also depreciation continued to be allowed on such assets as long as the block of assets do exist. In this case, the assessee has discarded the assets from the block of assets at a value of Rs. 1/- and has taken to inventory as stock-in-trade at Rs. 1/-. Therefore, depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets at the nominal value at which these were decapitalised. However, certain used assets remained in stock-in-trade and whenever these are sold, the profit is offered for taxation. This method of accounting is being followed consistently by the assessee. When the assets are recapitalized at the nominal value at which it is decapitalised then there is no effect on the taxability of the assessee. Similarly, whenever these used assets are converted into stock-in-trade and sold subsequently and the surplus on the sale is offered for taxation then there is no harm to the revenue. Considering all these facts, we allow this ground of assessee's appeal. 9. In the ground no.3, the issue involved is disallowance of depreciation of Rs. 6,03,122/- on the fixed assets which has been written off in the books of account and where the assets ceased to exist. The Assessing Officer made an addition of Rs. 20,99,837/- in respect of fixed assets written off during the year. The DRP in its direction dated 24.08.2011 has reduced the amount to Rs. 6,03,122/-. The DRP sustained this amount on the basis that this disallowance has past history and the matter has travelled up to High Court and the departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remit the matter back to the A.O. to recompute the depreciation only after ascertaining the scrap value of assets which have been discarded or written off in the books during the year under consideration was endorsed by Delhi High Court assessee submitted that the assets written off do not have an scrap value and section 43(6)(c) which defines WDV of a block assets states that the WDV of the assets has to be reduced by the money payable in respect of any asset falling within that block which is sold or discarded or demolished or destroyed during the previous year together with the amount of scrap value, if any. The assessee submitted that there is no value of these assets and hence no reduction needs to be made. Similar issue had come up in the asstt. Year 2007-08 and DRP-II vide its direction dated 24.08.2011 decided not to interfere with the draft asstt. order as the order of the High Court was awaited. But now the order of Delhi High Court has been received and the Assessing Officer vide her letter dated 06.08.2012 has submitted that proposal for filing SLP against the order dated 27.07.2011 of Delhi High Court was sent to the Directorate of Legal & Research, New Delhi but the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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