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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 ..... ppellant : Shri Tarandeep Singh, Adv. For the Respondent : Shri Surenderpal, CIT(DR) ORDER PER O.P. KANT, AM: This appeal by the assessee is directed against final assessment order dated 29/01/2015 passed by the Deputy Commissioner of Income-tax, Circle-27(2), New Delhi [in short the Assessing Officer ] pursuant to the direction dated 18/12/2014 of the learned Dispute Resolution Panel (DRP). The grounds raised by the assessee are reproduced as under: 1. That on facts and in law the orders passed by the Assessing Officer [hereinafter referred as the AO ] / Dispute Resolution Panel [hereinafter referred as the DRP ] / Transfer Pricing Officer [hereinafter referred as the TPO ] are bad in law and void abinitio. 2. That on facts and in the law the AO/TPO/DRP erred in making/proposing/upholding an addition to total income of ₹ 15,42,32,773/- under Chapter X of the Income Tax Act, 1961 [hereinafter 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 sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO erredin not granting credits for: (a) Advance Fringe Benefit Tax of ₹ 20,00,000/- (b) TDS Certificates of ₹ 56,49,994/- 9. That on facts and in law, the assumption of jurisdiction by the AO/TPO to determine Arm s Length Price is bad in law and void ab-initio. That the appellant prays for leave to add, alter, amend and/or vary the ground(s) of appeal at or before the time of hearing. 2. Briefly stated facts of the case are that the assessee company is one of the company of Xerox Group . The company operates in document management industry, providing a range of office equipment, software solutions and document management services. The assessee filed return of income on 30/09/2010 declaring total income of ₹ 24,89,29,283/-, which was subsequently revised on 31/03/2012 for claiming more credit of tax deducted at source (TDS). The case was selected for scrutiny and in view of the International transactions reported by the assessee, the matter for determination of their arm s-length was referred to the learned Transfer Pricing Officer (TPO). The learned Transfer Pricing Officer (TPO) proposed adjustment of ₹ 11,44,61,024/- to the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price to AMP transaction and addition of ₹ 33,34,814/- for depreciation disallowed on de-capitalized assets. Aggrieved with the above additions, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. This appeal of the assessee has been heard through videoconferencing facility after due consent of the parties. The learned DR also consented to argue the appeal through videoconferencing. 4. Before us, the learned counsel of the assessee filed a paperbook and other documents electronically. The learned counsel submitted that identical issue of AMP adjustment the case of the assessee has been deleted by the Tribunal in assessment year 2008-09. He referred to Para- 22 to 34 of the order of the Tribunal, wherein the BLT approach for computing adjustment to AMP expenses has been rejected. The learned counsel submitted that in the decisions cited before the Tribunal in assessment year 2008-09, the existence of international transaction of the AMP has been rejected both on the ground of the excessive spending and use of the logo. The learned Counsel, however, submitted that para 35 of the order of the Tribunal may not be followed as the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brand ambassador, product, market and other similar details in the advertisement is confined to India only. So, it cannot be said to promote the Xerox brand world-wide. Moreover, when it is undisputed fact that the taxpayer has not paid any royalty for use of Xerox brand name, incidental benefits, if any, to overseas entity does not call for any compensation for the taxpayer. 23. In case of Valvoline Cummins (P.) Ltd. vs. DCIT (2017) 84 taxmann.com 191 (Delhi), Hon ble Delhi High Court held that mere use of brand name or logo owned by the AEs by the taxpayer will not automatically lead to influence that any expenses that the taxpayer incurred towards AMP was only to enhance the brand by returning following findings :- 17. Once the BLT has been declared by this Court in Sony Ericsson India Pvt. Ltd.(supra) to no longer be a valid basis for determining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name Valvoline will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e third company, M/s. Rathi Graphics Ltd., the TPO has observed in the order that it was carrying out AMP activities on behalf of its subsidiaries also. The assessee has not given any arguments to rebut the contention of the AO. Therefore, the assessee's objection regarding rejection of all the three comparables is turned down by the Panel. The assessee has 229 17 ITA No.5528/Del./2012 also given a list of its own comparables for determining the brightline . However, all the comparables proposed by the assessee are distributors of branded goods and, therefore, for the reasons mentioned above, such comparables cannot be accepted. However, the Panel, on its own, has carefully examined the functional profile as well as the financials of all the comparables used by the TPO. It has been noted that more than 50% of turnover of M/s Dhoot Industrial Finance Ltd. is from sale of shares. The Panel is, therefore, of the view that it should have not been considered as a comparable. 25. By now, it is settled principle of law that BLT is not a valid method for determining the existence of international transaction or for determination of ALP of such transactions. 22. Hon ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an international transaction and thereafter its ALP. 26. Hon ble Delhi High Court in case of Maruti Suzuki India Ltd. vs. CIT (2015) 64 taxmann.com 150 (Delhi) also decided as to how the international transaction qua AMP expenditure is to be determined and as to how the price of international transaction qua AMP expenditure is to be determined by returning following findings :- 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions . Since the reference is to price and to uncontrolled conditions it implicitly brings into play the BLT. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial which might show the existence of any arrangement or 'understanding' or any conduct of either party to show that they were acting in concert as far as the Assessee having to promote the brand of the foreign AE is concerned. 28. In case of LE Passage to India Tour Travels (P.) Ltd. (2017) 391 ITR 207 (Delhi), Hon ble Delhi High Court again held 232 20 ITA No.5528/Del./2012 that all transactions reporting AMP cannot be treated as international transaction and the fact of each case would have to be examined independently by returning following findings :- 4. This Court is of the view that whilst L.G. Electronics India Pvt. Ltd.(supra) indicated that AMPs were or did constitute the basis for an inquiry into the international transaction and indicated a bright line test for it, Sony Ericsson Mobile Communications India Pvt. Ltd.(supra) overruled that decision. This per se does not mean that every endeavour will be to conclude that all transactions reporting AMPs are to be treated as international transactions, the facts of each case would have to be examined for some deliberations. Whilst the TPO and the DRP undoubtedly held that the international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate yardstick for determining the existence of an international transaction or for that matter for calculating the ALP of such transaction. The decision of the Full Bench of the ITAT in L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1which sought to make BLT the basis was set aside by this Court. 30. In the instant case, there is not an iota of material on the file apart from relying upon the fact that by incurring huge AMP expenses to the tune of 6.93%, taxpayer has enhanced brand value and created intangibles in favour of its AE, no cogent material is there to treat the incurring of AMP expenses as international transactions. TPO has also not returned the finding that how the benefit of AMP expenditure incurred by the taxpayer have benefited AE, no calculation has come on record, so in these 234 22 ITA No.5528/Del./2012 circumstances when we discarded the BLT the entire case of ld. TPO/DRP fell flat. 31. In view of what has been discussed above and following the decisions rendered by Hon ble High Court discussed in the preceding paras, we are of the considered view that firstly, there is not an iota of material with ld. TPO to prove the existence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute is covered in the favour of the assessee by the order of the Tribunal for assessment year 2007-08. The learned DR, however, relied on the order of the lower authorities. 8.1 We have heard rival submission of the parties on the issue in dispute. Before the Assessing Officer, the assessee submitted that certain items of the tradable inventory were converted to capital goods for self use and depreciation was claimed on the same. This conversion of the inventory to fixed asset was referred as capitalization. After having capitalized inventory as capital goods/fixed assets, sometimes the assessee transferred these assets back to inventory, which was termed as de-capitalization. The main reason for such conversion include assets gone out of order or damaged, asserts no longer required. The finding of the Assessing Officer on dealing of recapitalized asset by the assessee is reproduced as under: After de-capitalization, assets which are converted in inventory are dealt with as under:- (i) where the asset is in working condition:- sold with or without carrying our serfice( or small repair work) of the asset so as to make it fit for selling ; re-converted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proposed disallowance is therefore maintained. 8.3 The Tribunal in the assessment year 2007-08 has considered objection of the Revenue in details and decided the issue as under: 5. In the ground no.2, the issue involved is confirming the disallowance by DRP of depreciation of ₹ 28,21,208/- on decapitalised assets. 6. While pleading on behalf of the assessee, ld. AR submitted that certain fixed assets were not capable of use for captive consumption and were discarded from block of assets and converted into stockin-trade. This conversion was done at a nominal value which was deducted from the opening WDV from the block on which the depreciation was claimed. He further submitted that the assets converted into stock-in-trade are generally used assets and incapable of any further use, therefore, the saleable or market value of these is negligible. Since these assets are being technology products. Therefore, these assets tend to become obsolete in a very short span of period as new and more advanced technology comes into operation. He further submitted that most of the assets which are converted into stock-in-trade had either been outlived their useful functiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submitted that where the assets have been transferred to inventory and duly accounted for and whenever they are sold, the profit on their sale shall be accounted for in the profit and loss account. Therefore, there shall be no loss to the revenue by this transaction which is completely according to the provisions of Income-tax Act, 1961. He further submitted that in earlier provisions of the Act, there was a clause for terminal depreciation which was allowable in the year of sale of the asset. Under the concept of block of assets, the terminal depreciation concept has been done away with and now the loss on sale of assets is not booked in the year in which asset is sold. The depreciation on such assets constituted in the block is continued to be allowed till the block remains in the books of account. He submitted that such proposition of law has been accepted by the ITAT in the assessee s own case in ITA No.680/Del/2006 for assessment year 2002-03. In that year, certain fixed assets could not be located on physical verification and assessee wrote off the same in the books of account. Finally, the ITAT held that even though these fixed assets were written off, the depreciation sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also submitted that certain assets have been leased out again and these have been recapitalised in the block of assets at the value at which such assets were de-capitalised. Thus, the actual value was not reflected on transfer. He also submitted that depreciation cannot be allowed on the assets which are forming part of the stock-in-trade. He finally relied on the orders of the authorities below. 8. We have heard both the sides on the issue. The assessee is engaged in the business of trading of Xerographic Equipments, Printers, Scanners, Faxes, Multi Functional Devices and consumables parts thereof. The assessee leased out the equipments to the customers on an operating lease basis and these equipments are capitalized and depreciation is claimed for tax purposes in accordance with the provisions of the Act. These operating leased assets were returned to the assessee either on the termination of the lease or otherwise after a period of six months, then the assessee is following a practice to convert these assets into stock-in-trade at a nominal value of ₹ 1/- as these used assets are not having any readymade market for further leasing. This nominal value is reduced from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to write off the book value of the fixed assets in its profit and loss account Since there was no scrap value for such assets no adjustment was made to the written down value of the respective block of assets for computing depredation under the provisions of the Act The assessee further submitted that out of these assets around 92% (in terms of cost) were purchased prior to year 2000 and another 7% were purchased before 2005 but after 2000. These assets which were written off were tangible movable assets which over a period of time would have broken or lost. The assessee also clarified that same issue has already been: decided in favour of the assessee in the asstt. year 2002-03 by Hon'ble ITAT (Delhi bench). It was also made clear that the appeal of the Revenue before jurisdictional Delhi High Court against stands decided in favour of the assessee. It was further submitted that in the asstt. year 2004-05 identical disallowance has been deleted by the Commissioner of Income tax (Appeals). 3.2 We have considered the material on record. The Hon'ble Delhi High Court vide its order dated 27.07.2011 has held that tax authorities were not justified in working out the depr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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