TMI Blog2016 (5) TMI 1249X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of royalty on sales prevalent during the relevant assessment year amongst the comparable companies is only 2.54%. Therefore, this ground raised by the assessee is decided against it. Disallowance of depreciation by reducing the cost of asset in lieu of the subsidy received from SIPCOT - Held that:- Authorized Representative submitted that the Tribunal on the earlier occasion on this identical matter has remitted the case back to the file of the learned DRP with certain directions. He therefore pleaded that for the relevant assessment year also the matter may be remitted back with similar directions. The learned Departmental Representative could not controvert to the submissions of the learned Authorized Representative. Addition on account of export incentives towards target plus scheme and focus market scheme - Held that:- Notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant assessment year; however the same shall be taxed in the relevant assessment year in which the assessee receives the license and derives such income. It is ordered accordingly. Additional depreciation on the assets deployed in the corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Assessing Officer /DRP has erred in confirming the order of the learned TPO who has held that the expenditure incurred towards advertisement was in excess to the extent of ₹ 64,15,77,200/- when compared with other comparable companies in international transactions and thereby added the excess expenditure to the income of the assessee under the provisions of section 92B 92C of the Act. iii) The learned Assessing Officer / DRP has erred in determining the ALP of royalty payable by the assessee to its AE at ₹ 283.78 crores as against the actual amount paid Rs. 390.46 crores which was confirmed by the learned TPO and thereby addition to the extent of ₹ 106,67,84,000/- was made. Corporate Tax Issues:- iv) The learned DRP has erred in confirming the order of the learned Assessing Officer who has reduced the capital subsidy granted by SIPCOT from the cost of the asset and consequently disallowed depreciation amounting to ₹ 3,55,957/-. v) The learned DRP has erred in confirming the order of the Assessing Officer in treating the export incentives on account of target plus scheme and focus market scheme as the income of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue was decided by the Tribunal on the earlier occasion for the assessment year 2007-08 in ITA No.2157/Mds/2011 dated 28th August, 2015, wherein it was held that the Bright line test would be the best method for determining the development of an intangible property. The relevant portion of the order is reproduced herein below for reference:- 4.4. We have heard the rival submissions and carefully perused the materials available on record. The main grouse of the Revenue is that the appellant company being the user of the Holding Company s brand name and logo indirectly benefits the Holding Company. The appellant company instead of promoting its own brand has been promoting the brand logo of the Holding company. Thereby the Holding Company is benefited because of the increase in sales of the appellant company. It was only due to the efforts put in by the assessee company and the relevant expenditure incurred for promoting its products the brand value of the Holding Company has proportionately increased. Therefore, the Revenue opined that one percent (1%) of sales excluding the sale of CKD/spare should be attributed for determining the Arm s Length Price (ALP) in this internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to advertisement, marketing and sales promotion expenses incurred by the assessee? Whether the assessee ought to have been compensated by the AE in respect of such AMP expenses alleged to have been incurred for and on behalf of the AE? Observations Ruling The Tribunal has held as follows: Confirmed validity of jurisdiction of the TPO by observing that the assessee s case is covered u/s. 92CA(2B) of the Income Tax Act, 1961 ( the Act ) which deals with international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee. The incurring of AMP expenses leads to promotion of LG brand in India, which is legally owned by the foreign AE and hence is a transaction. The said transaction can be characterised as an international transaction within the ambit of Section 92B(1) of the Act, since (i) there is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its AE; (ii) the AE is non-resident; and (iii) such transaction is in the nature of provision of service. Accepted Bright Line Test to determine the cost/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es brought by the tax department to justify two additions in relation to brand building, and deleted the brand development fees computed at 1% of sales. 4.7 Considering the facts of the case which is identical to the case decided by the Special Bench of the Tribunal and the Chennai Bench of the Tribunal cited supra, we hereby direct the Ld. Assessing Officer to delete the adhoc addition of 1% on sales which is treated as brand development fee by following the decision of the Tribunal cited supra. The aforesaid decisions of the Tribunal has also held that Bright Line Test would be the best method for determining developer of the intangible property, which the Ld. A.R. claimed that such test was made on the assessee by the Ld.DRP; however no additions were made because on the computation of the same it was found not warranted. The same was also not controverted by the Ld. D.R. Therefore, we hereby restrain ourselves from remitting back the matter for the computation of bright line test. Thus, this issue is decided in favour of the assessee. 5. In the relevant assessment year also, following the decision of the Chennai Bench of the Tribunal and the Special Bench cited supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses to the extent incurred by uncontrolled comparable distributors is to be regarded within the Bright Line Limit of the routine expenses and the advertisement and market promotion expenses incurred by the distributors beyond such Bright Line Unit constituted non-routine expenditure resulting in creation of economic ownership in the form of marketing intangibles which belong to the owner of the brand. However, in this case even after computing the ALP by following the Bright Line Test the Ld.TPO has deleted the addition Rs. 76.63 crores. Accordingly, this ground raised by the assessee is dismissed. 9. Following the above decision of the Tribunal, we hereby hold that the concept of bright line test has to be applied in the case of the assessee for determining the ALP on advertisement expenses and accordingly remit back the matter to the file of the learned TPO for computing the ALP with respect to the advertisement expenses incurred by the assessee company on behalf of its holding company. Ground No.3 : Disallowance of royalty : 10. The learned TPO was of the view that the assessee has paid excess royalty to its AE and thereby determined the arms length price a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f royalty payment of 4.22%. Further the Ld. TPO has observed that the assessee company has been bestowed with the latest technology by its Holding Company and it cannot be said that old technology has been dumped in the Indian market (para 27 of the TPO s order). The relevant portion of the Ld. TPO s order is extracted herein below for reference:- 26 In the table given above it is seen that in automotive sector on study of 35 licenses in respect to royalty payment minimum royalty payment was 1% maximum was 15% royalty payment. Average comes to 4.7% and the median royalty rate was 4.0%. 27. In the case of the assessee what will be the right percentage of royalty that would compensate the assessee suitably. In this connection it is relevant to discuss certain relevant facts. As discussed earlier, India is a vast market for auto makers. India has a huge percentage of middle and upper middle, class population that has enough surplus income to buy such movable and immovable assets such as House, cars etc. Further banks have liberally sanctioned auto loans on equated monthly installment basis to the buyers. It is also relevant to note that India has got a big percentage of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d royalty @ 3.47% on sales. Thus, there is a difference of 0.93% which works out to ₹ 106,67,84,000/-. The finding of the learned TPO is extracted herein below for reference:- The learned TPO has rejected the arguments of the assessee and its representative by summarizing as follows:- a) The assessee has not given any convincing reason as to why any of its Indian competitor or counterpart is not found fit to be comparable company. b) The assessee has not given any reason as to why foreign companies, operating in a totally different economic environment should be considered as a comparable. c) The comparables chosen by the assessee fail the basic test of comparability of product. d) The comparison adopted by the assessee is untenable, from economic, geographic factors too. Thereafter the learned Assessing Officer corrected the arithmetical errors made in the computation of royalty to sales ratio as under:- Company Name Royalty Expenses Net Sales Royalty as a % of sales General Motors India Pvt.Ltd. 47.21 3095.29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies is only 2.54%. Therefore, this ground raised by the assessee is decided against it. Ground No.4 : Disallowance of depreciation by reducing the cost of asset in lieu of the subsidy received from SIPCOT: 15. The learned Assessing Officer had reduced the capital subsidy received from SIPCOT from the value of the asset acquired and thereby disallowed the depreciation claimed by the assessee towards the same amounting to ₹ 3,55,957/- for the relevant assessment year. The learned DRP confirmed the order of the learned TPO by observing as under:- This issue does not require much deliberation because for assessment year 2003-04 the same issue was adjudicated by the first appellate authority who had directed the assessing authority to verify and allow the claim of the eligible assessee on merit. The eligible assessee points out that effect to the order of first appellate authority have not been so far. This has led to disallowance this year as well. The assessing authority shall give effect to the order of the first appellate authority forthwith and shall apply the same position taken by the Revenue on the issue involved for this year as well. 16. At th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/2011 dated 28th August, 2015. The relevant portion of the order of the Tribunal is reproduced herein below for reference:- 10.4. In the case of the assessee, the export incentive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India s export competiveness in these countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by the relevant Govt. authorities and issuance of the license by such Government authorities. Therefore, the facts of the assessee s case are similar to the facts of the case decided by the Hon ble apex Court cited supra. Therefore, respectively following the decision of the Hon ble apex Court we hereby hold that the notional income computed by the assessee cannot be treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the UPS cannot be allowed @ 60% since it has to be classified under plant machinery and accordingly allowable depreciation would be 15% on the cost of machinery. However, the assessee contended that the UPS owned by the assessee has to be classified under the block energy saving equipments and therefore it will be eligible for depreciation @ 80% as prescribed by the Income Tax Rules, instead the assessee had only claimed depreciation @ 60% treating it to be part of data processing equipments. Rejecting the argument of the assessee, the learned Assessing Officer allowed depreciation @ 15% on the cost of UPS owned by the assessee and thereby made addition of ₹ 18,12,748/-. The learned DRP confirmed the order of the learned Assessing Officer by following the decision of the Delhi Bench of the Tribunal in the case of Nestle India Ltd. reported in 111 TTJ 498 wherein it was held that the UPS is neither a part of the computer or energy saving device and therefore it has to be treated as general plant machinery and accordingly depreciation @ 15% can only be allowed. 25. The learned Authorized Representative cited several decisions to justify its stand that the UPS forms par ..... X X X X Extracts X X X X X X X X Extracts X X X X
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