Income Tax Appellate Tribunal - Delhi
Sony India (P) Ltd., New Delhi vs Assessee on 23 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "I" NEW DELHI)
BEFORE SHRI R. P. TOLANI : JUDICIAL MEMBER
And
SHRI SHAMIM YAHYA : ACCOUNTANT MEMBER
ITA Nos. 4978/Del/ 2011 & 6389/Del/2012
Asstt. Yrs: 2007-08 & 2008-09
M/s Sony India Pvt. Ltd., Vs. Addl. Commissioner of
A-31, Mohan Cooperative Industrial Income-tax, Range-9,
Estate, New Delhi-110044.
PAN: AABCS 1571 Q
(Appellant ) (Respondent)
Appellant By : Shri N. Venkatraman Sr. Adv.
Shri Manoneet Dalal Adv.
Shri Rahul Yadav Adv.
Shri Rishti Pandit AR
Shri Vimi Gupta CA
Respondent By : Shri Peeyush Jain 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 2 143(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 Rs. 65,34,38,272/- ( for A.Y. 2007-08); and Rs. 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.
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 3 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 learned DRP has committed a gross error in endorsing the approach followed by the TPO who has incorrectly held that the appellant has rendered a service to the AEs by incurring the AMP expense and by holding that a markup of 7% has to be earned by the appellant in respect of the "alleged excessive" AMP expenses. The aforesaid finding and observations resulting in enhancement of income is highly arbitrary and wholly unjustified being without any basis.
6. That the learned DRP have erred in law and in fact by endorsing the learned TPO's approach of re-characterizing the appellant as a limited risk distributor and requiring the appellant to earn its remuneration in accordance with such re-
characterized business model.
7. The learned DRP erred in law in not applying the Proviso to section 92C of the ct and has failed to allow the appellant the 4 benefit of upward variation of 5 percent in determining the Arm's Length Price."
Common Grounds of appeal on corporate tax issues "1. That on facts and in law the AO/ DRP erred in making/sustaining the disallowance of Rs. 6,70,49,994/- being the amortization under section 35DDA of the Act of expenditure incurred by the appellant under a VRS 1.1. That the AO/ DRP erred in making the above disallowance in respect of the expenditure incurred on VRS under section 35DDA and not following the decision of the ITA T in the appellant's own case for the earlier years deleting such disallowance and holding that for claiming deduction under section 35DDA the VRS scheme is not required to be in conformity 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 5 appellant's own case for the earlier years deleting such disallowance.
3. That on facts and in law, the AO/ DRP erred in disallowing Rs. 1,61,75,067/- (for A.Y. 2007-08) and Rs. 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 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 6 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 eligible for depreciation @ 60% under the specific provision in Part-A of Appendix 1 by ignoring the very well settled principle that a specific clause is required to be given preference over general clause, thereby reducing the depreciation allowance 5.1. That the AO/ DRP erred in making the above disallowance by not appreciating and not following the decision of Special Bench of Delhi Tribunal in case of Amway India Enterprises vs. DCIT and SQL Star International Ltd. Vs. ACIT 301 ITR 1, which was binding on it, wherein it was held that w.e.f. 01-04-2003, license fees for the use of computer software is eligible for depreciation at 60%.
3. For A.Y. 2007-08 following ground is also raised:
That on facts and in law, the AO/ DRP erred in holding that miscellaneous income, which is incidental and inextricably 7 linked to the business of the undertaking could not be considered for computing deductions under section 10A and section 10B of the Act and thus reducing such deductions by Rs. 1,12,133/-.
4. Brief facts are:
Sony India Private Limited ("SID") was established in November 1994 and is held entirely by Sony Corporation, Japan ("SC") through its subsidiaries Sony Holding (Asia) B.V., Netherlands and Sony Gulf FZE, Dubai. SID's primary business is to distribute consumer electronics products in India mainly comprising of audio/visual entertainment products in the Indian markets.
In the orders for AY 2007-08 and AY 2008-09, the TPO has accepted arm's length price of all international 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 8 between SID has entered into an agreement with its Associated Enterprises (AEs), amounting to Rs. 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 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.9
Ld counsel Shri Venkatraman Sr. Adv. Contends that now the Special Bench of ITAT in the case of L G Electronics has extensively dwelt on the issue of nature and scope of AMP adjustments in TP workings.
However assesses major challenge to this decision remains on various issues including the legal issues which are contained in the written submissions. They shall be dealt hereinafter. Adverting the L G Electronics case and assesses own case ld counsel contends that:
4.1. The facts pertaining to LG appeals(supra) as considered and debated by the Special Bench are: "LG India" is a wholly owned subsidiary of LG Electronics Inc, a Korean based company. LG India is a manufacturer and engaged in the business of manufacture, sale and distribution of electronic products and electrical appliances. Under a contractual arrangement with its parent company LG India was permitted to use the brand name and trade name owned by its parent company, accordingly AMP adjustments were carried out in L.G. India case. However, it is emphasized by ld. Counsel that there is lot of difference in facts involved in classification and quantification of AMP expenses in the case of Sony India i.e. assessee and LG case.
4.2. Ld. Counsel for the assessee contends that the Special Bench order can be divided into two parts -
(i) legal issues about retrospective application of Sec. 92CA(2B), by which the TPO's powers were enhanced along with the scope of international transactions; and 10
(ii) The scope, classification 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:11
Special Bench decision SID's fact pattern The Special Bench had upheld the re- In SID's case, the TPO didn't re-
characterization of AMP expenses as characterize AMP expenses as 'services' by the TPO. 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, TPO has not brought on record any the Hon'ble Special Bench concluded evidence to prove that SID's AEs that there was no explicit agreement exercise control over its AMP over between LG India and its AE. and above that amount stated in the However, since the taxpayer had agreement pertaining to advertising subscribed to global marketing cost reimbursement.
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 12 tacit understanding between LG India and its foreign parent with respect to the entire AMP activities undertaken by LG India.
Special Bench ruling states that The TPO's analysis in SID's case is before contending that a transaction not consistent with the principles exists, the TPO needs to prove that a laid down by the Special Bench. taxpayer incurs non-routine or Hence, following the principle laid excessive AMP expenditure. To down by the Special Bench, the TPO prove that a taxpayer incurs non- has failed to prove the existence of routine or excessive AMP non-routine or excessive expenditure expenditure, the TPO first needs to and hence, a transaction. find appropriate comparables, based on the guidelines provided by the Special Bench. Only after finding a set of appropriate comparables, can the TPO determine the quantum of what would constitute as routine expenditure based on which the TPO can identify the non-routine expenditure and hence prove the existence of a transaction. Further, the Special Bench has also held that expenses incurred in relation to selling cannot be considered to be part of AMP expenses for the purpose 13 of brand building.
The Special Bench in LG's order has In the case of SID, all its print held that so long as the advertisements contain its own advertisements are in an entity's own name. Thus the same cannot be said name, even if the quantum of the to constitute a transaction of AMP expenditure is excessive, a provision of brand building services. transaction cannot be said to exist.
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 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 14 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, inter alia, included "advertisement, publicity and sales' promotion". It was submitted that various courts have held that the selling expenses cannot be included within the scope of sec. 37(3B).
18.2. The learned Departmental Representative opposed this contention by stating that there is no logic in the contention of the learned AR-that the expenses causing sales should be taken 15 out of the total AMP expenses for consideration. All the AMP expenses including the expenses in connection with the sales should be considered as one basket of expenses, out of which the AMP expenses for the creation or promotion of marketing intangibles on behalf of the-foreign enterprise are to be segregated. It was contended that since by their very nature most of the AMP expenses are common having been incurred for own business and brand- building for the foreign AE, the reduction of expenses in connection with sales would prejudice the computation of the AMP expenses for the brand building, 18.3. Having heard the rival submissions on this issue, we find that the AMP expenses refer only to advertisement, marketing and publicity expenses. A divider needs to be placed between the expenses for the promotion of sales on one hand and 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 16 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 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 17 sec. 37, all the judgments rendered in the context of sub-sec. (3A) & (3B) of sec. 37 will squarely apply to the interpretation of the scope of AMP expenses. We, therefore, hold that the expenses in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of "advertisement, marketing and promotion expenses" for determining the cost/value of the international transaction.
19. In the facts and circumstances of the present case, it is found that the TPO restricted the comparable cases to only two without discussing as to how other cases cited by the assessee were not comparable. Further it can be seen that the TPO has not considered the effect of any of the relevant factors as discussed above. A bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors as discussed above, cannot produce correct result. It can be illustrated by a simple example. If there is no subsidy in a comparable case but the assessee has received some amount of subsidy from its foreign AE on imports or in any other manner, which fact otherwise needs to be specifically established by the assessee, then the initial amount so . computed would require reduction to the extent of 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.
18opinion 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 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 19 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 form of AMP has led to brand building for its foreign AE in India. Thus in effect it has never been the case of the lower authorities to disallow expenditure which had direct nexus with sales as against brand building.
4.10. It is submitted that following the past accounting practice, some of the sale related expenses, which do not fall in the scope of AMP expenses, were inadvertently debited in some AMP type accounts. However, during the course of assessment proceedings, the assessee segregated the sale related expenses and furnished separate details thereof along with AMP related expenses. Thus, on record there existed a complete break up of sale related expenses which cannot be considered as AMP expenses.
4.11. All the relevant details about the correct nature of such expenses have been filed before TPO, ASSESSING OFFICER and DRP. No doubts what so ever, have been raised by any of the lower authorities on the real nature of expenses.
4.12. The entries in the books of accounts are not determinative of deductibility of an item of expenditure for the purposes of computation of 20 taxable income under the provisions of the Act. Reliance, in this regard, is placed on Kedarnath Jute Mfg. .Co. Ltd. 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 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.
214.15. 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 (DR) contends that though as per the Special Bench order it has been held that volume and cash rebates are not covered in the scope of AMP expenses and also subsidy recovered to meet AMP expenditure, however, Ld CIT (DR) pleads that:
(i) Issues about such rebates may be set aside and restored back to AO/ TPO to verify the nature of such rebates.
(ii) By reducing subsidy from the amount of AMP the appellant may get double deduction as some part of the subsidy may have been received in respect of trade discounts and incentives provided to dealers, which has to be reduced from AMP expenditure.
6. Ld. counsel in rejoinder submitted that the contentions raised by the Ld DR for set aside are contrary to the facts of the instant case and are untenable as-
22i) It is submitted that the spirit and intention of the directions issued by the Special Bench of the Tribunal is to reduce subsidy and trade discounts / dealer commission as they operate in all together different fields.
ii) The Special Bench of the Tribunal was constituted to decide the complex question of excessive AMP expenditure which leads to brand building. In light of various observations, the Special Bench 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.
23iii) 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 sales, such as trade discount, 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 aggregating the AMP 24 expenses and T.P. adjustments thereon are fully applicable to assessee's case.
6.2. It is further pleaded by Mr. Venkatraman Sr. Advocate that while the assessee does not agree with the decision/ conclusion rendered by the Special Bench on legal issues pertaining to Sec. 92 and reserves it's right to challenge such issues before Hon'ble High Court in exercise of its right of appeal under section 260A of the Act. Comparative gist of legal arguments is already submitted. Such issues may accordingly be decided.
2. Without prejudice to all other contentions, it is pleaded that it is not appropriate to expect AE to pay a mark-up on the "excessive" AMP expenses incurred by SID as :-
In this order for AY 2007-08 the TPO has proposed a mark-up of 7.0% on "excessive" AMP expenditure. In AY 2008-09 the mark-up was inexplicably increased to 15.0%, reduced to 12.5% by the DRP.25
• Without prejudice to our other contentions, it is submitted that based on above submission, it is clearly evident that the benefits of AMP expenses accrued to SID and not its AE.
• If an AE is receiving any benefit from any unilateral 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 26 • 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 built or gets enhanced.
• This presumption during the existence and currency 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 herein below (head note):-
"There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be 27 on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the asses-see's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit, is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances 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 28 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 of the subject assessment years, SID incurred certain AMP expenditure including advertisement expenses. 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:
29 Particulars AO's TPO's
addition addition
Disallowance by AO 100
Cost base used for AMP expenditure 100
TP adjustment after considering mark- 112.5
up of 12.5%
Additional tax (assuming corp tax rate 30 33.75
of 30%)
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 the (assumed) corporate tax rate simply because neither the AO nor the TPO has given effect to each other's adjustments while computing the consolidated adjustment.
1.5. It is a well established principle that an expense cannot be disallowed twice. Even the Explanation to Section 92(1) states that "the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price". In other words, ALP of all allowed expenses should be determined for the purpose of section 92C. However, if an expense 30 has already been disallowed by the AO completely, the ALP for the same would not be determined. But if an expense is allowed partly, only the ALP of only the allowed portion should be considered for the purpose of ALP.
1.6. Accordingly, 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 31 broader parts for the sake of convenience, which will be dealt with one by one.
I. JURISDICTION OF TPO
II. RULE 29
III. TRANSACTION
IV. INTERNATIONAL TRANSACTION
V. COST/ VALUE OF TRANSACTION
VI. METHODS FOR DETERMINATION OF ALO OF
INTERNATIONAL TRANSACTION
VII. MARUTI SUZUKI'S CASE"
7.2. In the wake of these criterias the Special Bench proceeded to decide various issues by a very lengthy order, which 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 32 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 (2C) also as dormant and non- existent. Obviously an interpretation which makes a valid piece of legislation as redundant, does not merit acceptance. The purpose intended to be achieved in validating the jurisdiction of the TPO on the earlier transactions not referred to him by the AO on one hand and also not disturbing the finality of assessments already. completed on the other, has been properly achieved by the respective dates from which sub- sections (2A), (2B) and (2C) have been given effect to.
7.20. The Id. counsel for the appellant also contended that if sub- section (2B) is considered as retrospective in operation, then all other sub-sections of sec. ·92CA will loose the worth of their existence. This argument was developed to contend that if the 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 33 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 international transactions requiring determination of ALP. Thus, reference by the ·AO to the TPO for at least one international transaction. is a necessary stipulation to assume power for determining ALP in respect of other transactions.
7.21. Another point urged by the ld. counsel for the appellant was that sub-sec. (I) requires making a reference by the AO with the previous approval of the Commissioner. It was contended that insofar as suo 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 34 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 transactions which the assessee perceives as international transactions but fails to report. We are not convinced with such interpretation. A line of distinction sought to be drawn by. the ld. counsel between two types of international transactions for which the assessee has not furnished audit report, viz., which is an international transaction as. per assessee's version and which is not so, has no statutory sanction. There is no such cue, even remotely, in the language of sub-sec. (2B). The reference to international transaction in sub-sec. (2B), for which the assessee has not furnished report u/s 92E~ is unqualified. If we interpret sub-sec. (2B) in the way suggested by the Id. AR, it 35 would amount to doing violence to the unambiguous language of the 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, whereas sub-sec. (2B) is a special provision .limited in its scope only to such international transactions - in respect of which the assessee did not furnish report u/s 92E. We have thoroughly discussed elsewhere in this order that when there is special provision governing a particular types of cases, then such cases 36 stand excluded from the general provision governing all the cases. As such we are of the considered opinion that the scope of sub-sec. (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 provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building an 37 international transaction in the facts and circumstances of the present case."
7.3. Since it is a very lengthy order, it will not be desirable to reproduce extensively as the order can be referred to independently. The glimpses of the observations and conclusion of Special Bench may be found at various other places also, but we have tried to summarize the gist of the conclusion as best possible as above.
7.4. After hearing both the parties on the legal issues, respectfully following the Special Bench judgment in the case of L.G. Electronics India (supra), we decide these legal grounds against 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 38 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) contends that the entire issue of expenditure shall be set aside, restored back to the file of assessing officer. The assessee counters the CIT(DR)'s contention that all the details are on record and were produced before every lower authorities. In the absence of any objection or adverse comment it will amount to harassment of the assessee to face second round of proceedings for no fault of it. Ld. CIT(DR) also could not offer any adverse comment on the segregation 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 39 benchmarking analysis as undertaken by the TPO. The learned DR for the Revenue placed reliance on the orders of the authorities below.
28. We have heard the rival contentions and perused the records. The claim of the assessee is that the total AMP expenditure considered by the TPO while determining the ALP included certain expense which are in relation to the sales made by the assessee and are not related to the brand promotion.. the claim of the assessee is with regard to the expenses totaling Rs. 5500.86 lacs as tabulated below:
S. No. Name of expenses Amount
(Rs. Lacs)
1. Discount-sales 60.52
2. Market Research 664.24
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 40 view thereof, we direct the Assessing officer to exclude the expenses incurred by the assessee in connection with the sales totaling Rs. 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 Rs.
567.49 lacs. In view of our decisions in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus allowed."
7.7. In these facts, circumstances and arguments, we find merit in the argument of ld. counsel for the assessee. There being no objection or adverse comment in respect thereof coming from any of the lower authorities i.e. AO/ TPO, DRP and also ld. CIT(DR), there is no justification in setting aside these expenses for verification again to AO/TPO. Our view is supported by the Chandigarh Bench judgment in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. (supra) and the case of 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 assessing officer. This is so 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. Thus, the grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes.
41CORPORATE 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 has been reproduced below:
"6.3 ............ For sustaining the arguments of the ld. DR, the provision contained in section 35DDA will have to be modified by incorporating a part of section 10(10C) in it. In our view, such an incorporation does not find support from any rule of construction stated before us. Thus, there is no compelling reason to read section 35DDA as suggested by the ld. DR.42
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 scheme formulated by them. The treatment of expenditure or outgoing of the employer has to be dealt with under Section 35DDA and the prescribed rules, if applicable. Rule 2BA, which is applicable to the recipient i.e. the employee, cannot be applied. On this aspect, therefore, we do not think that any substantial question of law arises for consideration."
2 Depreciation on printers, scanners, UPS and switches etc. 43 1 It is pleaded that printers, UPS, switches etc, which are parts of 'computer' are eligible to higher claim of depreciation at 60% as against 15% of written down value. This issue has been decided by the ITAT and Hon'ble Delhi High Court in the appellant's own case for the earlier years deleting such disallowance. Relevant portions are referred as under:
- The ITAT in appellant's own case [ITA No 4008 (Del)/ 2010 and ITA No 4994 (Del)/ 2010 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 44 August, 2010 is applicable. In the said case it was held that computer accessories and peripherals form an integral part of a computer system and therefore, depreciation has to be allowed at the rate of 60%. We may notice that the higher depreciation was not only allowed in respect of UPS but also in respect of printers, switches etc."
(B) Disallowance of part of advertisement and selling expense Advertisement and selling expenses 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."45
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 relevant part of paragraph no. 12.4 of the ITAT order has been reproduced below:
"12.4 In this case, there is no allegation that any part of the expenditure relates to products in which the assessee is not dealing in the normal course of its business. The expenses by way of advertisement and sales promotion are revenue in nature. Further, if incurring of the expenditure leads to a benefit incidentally to any other person, that does not constitute sufficient ground for making part- disallowance. Further, no part of the expenditure can be said to be capital in nature. ...."
The Hon'ble Delhi High Court also ruled in favor of the appellant in ITA no. 1283/2009 for the AY 2001-02. The relevant part of the High Court order has been reproduced below:
" This issue has been decided against the Revenue and in favour of the respondent-assessee in view of the decision of this court in CIT vs. Salora International 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.
4610. 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 mentioned that assessee appeals on this issue have been admitted by the Hon'ble Delhi High Court.
13. After hearing both the parties this ground of the assessee is dismissed.
14. Apropos ground about disallowance of depreciation on software license fees at 60% out of 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.
4721.1 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 assessee before Hon'ble Delhi High court which has ruled that assessee shall await for the outcome of MA. The same is to be decided by the ITAT .
16. We have heard the rival contentions. In view of the above facts we have to decide the issue against assessee with a liberty to fil;e MA in consequence of favorable order in earlier MA.
17. Apropos the last ground in AY 2007-08, about deduction under section 10A and 10B on miscellaneous income which is incidental and inextricably linked to the business of the undertaking should be considered for computing deductions under section 10A and section 10B of the Act. It is pleaded.48
18. We have heard the rival contentions. Since the complete details of ancillary income have not been referred to, we see no reasons to interfere with the findings of DRP and AO. This ground of the assessee is dismissed.
19. In the result assessee's appeals are partly allowed for statistical purposes Decision pronounced in the open Court on 7th June, 2013.
Sd/- Sd/-
(SHAMIM YAHYA) (R.P.TOLANI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 07 .06.2013
MP
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar