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2016 (3) TMI 590 - ITAT DELHI

2016 (3) TMI 590 - ITAT DELHI - TMI - Expenses incurred during the year on account of advertisement and publicity - assessee submitted that marketing costs incurred during the product campaign were deferred and amortized over a period of 4 years - Held that:- As decided in assessee's own case the revenue has failed to bring out a case to establish that any capital assets had come into existence. Further, as held by the Hon'ble High Court, there is no concept of deferred revenue expenditure in In .....

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nt, trademark and intellectual property rights paid to Ciel Aircon Ltd - Held that:- once the completion of the agreement is done by payment of the consideration as on the completion date specified in the agreement the assessee would be in possession of the duly executed instruments of transfer, assignment and Conveyances of the assets as specified in the agreement which are basically the intellectual property' rights and the fixed assets. This being so, as also the principles as laid down by th .....

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Revenue : Shri Ramesh Chandra Danday Sr. DR ORDER PER S.V. MEHROTRA, A.M: These are cross appeals, preferred by the assessee as well as the revenue against the order dated 29.3.2011 passed by the ld. CIT(A)-XX, New Delhi in appeal no. 111/2007-08, relating to A.Y. 2003-04. 2. Brief facts of the case are that the assessee, in the relevant assessment year, was engaged in the business of manufacture, export, assembly, supply, distribution and import of all types of refrigeration equipments and acce .....

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eimbursement of Expenses by AE to Daikin for publicity and service warranty - 82,89,550/- 3. The assessee company was selling products like water cooler and airconditioners. Out of the total revenue, sale of air-conditioners was 86.24% and 13.72% from water coolers as per the segmental account prepared by assessee. The assessee company manufactured as well as traded in these products. Ld. TPO has noticed that the imports of material was restricted primarily to air-conditioner segment. He further .....

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March 03 Mar 02 Sales 960586354 838784851 Accretion (Depletion) in inventories 31280270 35170191 Cost of material 674639391 471386713 Total cost 705919661 506556904 Percentage of cost upon sales 73.49 60.39 4. From the above details, the TPO noticed that after taking net effect of accretion of inventories during the year, the cost of material had increased from 60.39% to 73.49% sales of which was unusual in an industry like manufacturing/ trading of air-conditioners, particularly when other exp .....

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ad concluded that comparable companies were charging mark up of 30.48%, whereas the AEs were charging less than this on its cost and, thus, the assessee s transactions of import of raw-material were at arm s length. Ld. TPO did not accept the assessee s approach in considering foreign AE as tested party because assessee failed to demonstrate that foreign AE was less complex and its accounts were available and accessible for verification. 5. As regards the second argument of assessee that resale .....

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in this case for benchmarking international transaction, the functional, asset & Risk analysis submitted as transfer pricing report was perused. The applicability of CUP is ruled out because of the fact that assessee company does not purchase similar goods/ services from unrelated party. The Associated Enterprises also said to be not selling these goods/ services to unrelated parties. Applicability of Resale Price Method and Cost Plus Method has elaborately been discussed above, thus, TNMM i .....

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bles are earning a margin of 4.09% upon their total revenue in the business line of the assessee company. In order to benchmark international transactions entered by the assessee Transactional Net Margin Method was held to be most appropriate method. Applying the margin of comparables on total revenue of the assessee as calculated in para 5.0 above at ₹ 880,885,953 the assessee must earn profit @ 4.09%. Thus in arm s length circumstances the assessee company would have earned a profit f &# .....

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ore ld. CIT(A) the assessee presented an alternative analysis vide submissions dated 11.3.2011 and 24.11.2011 and pointed out that gross level analysis should be carried out to justify the arm s length nature of international transactions. It was further submitted that bench marking analysis should be done based on the segmentation into manufacturing and trading functions and the gross margin of the respective segment be compared with the gross margin earned by the comparables selected by the TP .....

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ved, the assessee in appeal before the Tribunal. Grounds taken by the assessee in its appeal are as under: Disallowance on account of arm's length price - ₹ 141.268,918 In the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - XX (hereinafter referred to as "learned OT (An, has grossly erred in confirming the entire addition of ₹ 141,268,918 as 'arms length price ("ALP") adjustment' made by the learned AO/TPO .....

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O, in particular the inclusion of companies which have substantial difference in the functions, assets and risk analysis as compared to the Appellant; 5 Computing the net margin of the Appellant in determination of the arm's length price after including interest on working capital; 6 Not giving the appellant sufficient opportunity to explain I clarify / further substantiate the losses at net level; 7 Not granting the appellant the option of a price which may vary from the arithmetic mean by .....

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o opportunity was provided to assessee to offer its comments on the selection of comparables by TPO. No objections were invited from assessee and this was specifically challenged before ld. CIT(A) vide ground no. 2.8 reproduced below: Without prejudice to Ground 1.1, on the facts and in the circumstances of the case, and in law, the learned AO (along with the learned TPO- under reference from the learned AO) erred in not giving the appellant sufficient opportunity to explain/ clarify/ further su .....

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In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, the .....

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ate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the l .....

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out that assessee submitted alternative analysis which could not be accepted because the transfer pricing document cannot be substituted at appellate stage. 13. We have considered the rival submissions and have perused the record of the case, Admittedly ld. TPO while selecting new comparables did not provide any opportunity to assessee for filing its objections. He rejected the cost plus method adopted by assessee and considered the TNM method as the most appropriate method, because assessee fai .....

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e power to decide and whose decisions would prejudice a party, entailing civil consequences, would be required to accord oral hearing even where the statute is silent. The provisions of sub-section (3) of section 92CA cast a duty in no uncertain terms on the Transfer Pricing Officer to afford an opportunity of an oral hearing. The reasons for coming to such a conclusion, apart from the clear wording of sub-section (3) of section 92CA, is that, apart from the civil consequences that the determina .....

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the ld. TPO and, therefore, without going into the merits of the case, we restore the matter to the file of ld. TPO to decide the issue de novo after affording reasonable opportunity of being heard to assessee. 15. Assessee s appeal is allowed for statistical purposes. ITA no. 2922/Del/2011 ( revenue s appeal): 16. While completing the assessment, the AO had, inter alia, made following additions/disallowances: - Disallowance of advertisement and publicity expenses; - depreciation on WDV and exc .....

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facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made on a/c of depreciation on Exclusive Business Rights (Goodwill). 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made on a/c of depreciation on patents, trademarks and intellectual property rights acquired by the assessee company from Seil Aircon Ltd. 4. The appellant craves to leave, to add, alter or amend any ground of appeal raised a .....

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the year and closing balance of advertisement and publicity expenditure was explained as under: Opening Balance 46074417 Add: Incurred during the eyar 52151834 Less: Written off during the eyar by debiting P&L A/c. 222280060 Closing balance 75998191 19. It was pointed out that though the expenditure of ₹ 52151834 was incurred during FY 2002-03, but only an amount of ₹ 22228060 was debited to profit & loss account in FY 2002-03. However, in the corporate tax return the entire .....

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124 Taman 413 (Delhi) - CIT v. Berger Paints (India) Ltd. 254 ITR 503 (Cal.) - Campa Beverages (P) Ltd. V. IAC 34 ITD 241 (Delhi Tribunal) 20. The AO concluded that expenditure was basically for launch of a new business product as well as benefit of enduring nature was there. Accordingly, relying o the decision of the Hon ble Supreme Court in CIT Vs. Madras Auto Service (P) Ltd. (1998) 233 ITR 468, he denied the assessee s claim. 21. Before ld. CIT(A), the assessee pointed out that these expens .....

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d holding exhibitions, printing of catalogues, calligraphy charges, hiring media clipping charges, booking of stalls etc. It was pointed out that no benefit of enduring nature had been received by assessee and the expenditure had been incurred for the treatment of the products already being dealt by the assessee. The assessee had relied on various case laws which have been mentioned at page 15 of the CIT(A) s order. Ld. CIT(A) deleted the addition in view of the submissions made by assessee. 22. .....

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4. After considering the pleadings of both sides and case laws relied upon, we are of the view that the revenue has failed to bring out a case to establish that any capital assets had come into existence. Further, as held by the Hon'ble High Court, there is no concept of deferred revenue expenditure in Income-tax laws. The genuineness of the expenditure has not been doubted by the revenue authorities. Keeping all these facts in view and following the decision of Hon'ble jurisdictional Hi .....

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same was not covered under intangible assets under the Income-tax Rules. As regards depreciation on patent and trademarks, the AO denied the assessee s claim, inter alia, observing that patent, trade marks were required to be registered under the Trademarks Registration Act and only the company in whose name the same had been registered, was entitled to use the same. 26. Ld. CIT(A) noted that disallowance of depreciation of ₹ 28,12,500/- was in respect of written down value of the amount p .....

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d. called Business Purchase Agreement dated 1.5.2000 for purchase of said business and its assets including exclusive business rights. Ld. CIT(A) further noticed that as per clause 4 of the agreement with Usha International Ltd. consideration for exclusive business right payable to Usha International Ltd. was ₹ 1,73,00,000/- and for other business and commercial rights of ₹ 27,00,000/- was capitalized as goodwill in the books of a/c. She noted that in AY 2001-02 the Tribunal had allo .....

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under: 4. In the ground no.2 of revenue's appeal, the issue involved is deleting the addition of ₹ 37,50,000/- made by the Assessing Officer claimed as 'Goodwill' by the assessee on account of depreciation on WDV paid to Usha International Ltd. for acquiring business and commercial rights. 5. Ld. DR relied on the order of the Assessing Officer. On the other hand, the learned AR submitted that the assessee company has purchased marketing , rights along with employees and premis .....

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usive business rights as defined in the agreement were represented as carrying on the business as successor to Usha International Ltd. which include all records of business including records of suppliers and customers; the benefit of the current orders; the benefit of all bids and proposals that have been made by Usha International Ltd. and all rights to Usha International Ltd. distribution network for the business excluding Usha International Ltd.'s company shop. The consideration for exclu .....

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tangible assets. The depreciation in the year 2001-02 was claimed at ₹ 50,00,000/- and in assessment year 2002-03 at ₹ 37,50,000/-. For the assessment year 2001-02, the CIT (A) 'granted the relief. The revenue went in appeal before the IT AT wherein the ITAT had dismissed the revenue's appeal by upholding the order of the CIT (A). The ITAT has held as under :- A perusal of the business purchase agreement also clearly shows that UIL as agreed to sell to the assessee and. the a .....

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red as other assets. This being as the amount of ₹ 27,00,000/- as shown in the purchase price has not been shown to be in relation to either exclusive business rights or for transferable deposits. The same would have to be treated as being towards "goodwill". This being so, we are of the view that the amount ofRs.27,00,0001- as paid by the assessee would have to be treated as goodwill. In regard to the balance of 1.73 Crores, it is for the exclusive business rights." The ITA .....

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ld have to be treated as goodwill and the depreciation on the same cannot be granted. In the circumstances, the findings of the Ld. CIT(A) on this issue is modified to the extent that the AO is directed to grant the depreciation on the consideration of ₹ 173,00,000/- paid to UIL for the purchase of the exclusive business rights which are to be treated as intangible assets. The action of the AO in disallowing the depreciation on the goodwill to the extent of ₹ 27,00,000 is confirmed.& .....

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r in question, have been brought to our notice. Therefore, respectfully following the earlier orders of the Tribunal in assessee s own case, we uphold the order of CIT(A). Ground is dismissed. 29. As regards depreciation on WDV of patent, trademark and intellectual property rights paid to Ciel Aircon Ltd. is concerned, ld. CIT(A) noted that assessee company vide business purchase agreement entered on 8.8.2000 purchased the manufacturing business of Siel Aircon Ltd. and the consideration for the .....

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t registration of trademarks was desirable but not a statutory compulsion. The assessee had relied on various judicial pronouncements wherein it was held that the registration of an asset in the name of purchaser was not necessary for the purpose of claiming depreciation. Following the Tribunal s decision for AY 2001-02 the ld. CIT(A) allowed the assessee s appeal. 30. Having heard both the parties we find that we find that the issue relating to depreciation on patents, trademarks and intellectu .....

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e company also acquired intellectual property rights which include patents, trademarks, etc. etc. and paid ₹ 10,93,00,000/-. The amount was capitalized in books as pat fit and trademark and the same is treated as' intangible assets. These intellectual property rights have not been registered in the name of assessee company. The assessee company claimed depreciation as per section 32 of Income-tax Act read with Schedule for depreciation @ 25%. The Assessing Officer disallowed the same b .....

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e asset as per the provisions of section 32 (1) (ii) of the Act. It is also undisputed that the 'assessee has used the intellectual property rights in its business and there has been no claim against the assessee for the use of the said trademarks. In fact as per the agreement in clause 8.1 (a)(i) it has been specifically agreed that on completion duly executed instruments of transfer, assignment etc. as the assessee may reasonably be required to complete the transfer, assignment and conveya .....

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