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2016 (5) TMI 1249 - ITAT CHENNAI

2016 (5) TMI 1249 - ITAT CHENNAI - TMI - Transfer pricing adjustment - best method for determining the value of developing the intangible property - Held that:- “Bright line test” would be the best method for determining the development of an intangible property.

Advertisement expenses as an international transaction - Held 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 t .....

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th the orders of the Revenue who had made elaborate finding in their respective orders that the average 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 .....

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sessee 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 corporate office for office use - Held that:- Issue is covered by the earlier order of this Tribunal in assessee’s own case for the assessment year 2007-08 wherein held that the as .....

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sing Officer to allow the claim of additional depreciation

Disallowance of excess depreciation on UPS - Held that:- UPS forms part of data processing equipments and accordingly the assessee would be entitled for the claim of depreciation @ 60% - I .T.A.No.2353/Mds/2012, Stay Petition No.360/Mds/2015 - Dated:- 22-4-2016 - SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER For The Appellant by : Mr. R.Vijayaraghavan,Advocate For The Respondent : Mr. Arun .....

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with the appeal of the assessee, however since the Bench has decided to dispose of the appeal of the assessee, the stay petition is dismissed. 2. The assessee has raised several grounds in its appeal, however, the learned Authorized Representative conceded that the main grounds that required to be adjudicated are as follows:- Transfer Pricing Issues: i) The learned Assessing Officer / DRP has erred in confirming the order of the learned TPO who had held that the appellant ought to have received .....

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s 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 .....

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earned DRP has erred in confirming the order of the learned Assessing Officer in disallowing additional depreciation amounting to Rs. 5,93,605/- in respect of the assets used in its Regional Offices. vii) The learned DRP has erred in confirming the order of the learned Assessing Officer in disallowing the excess depreciation amounting to Rs. 18,12,748/- in respect of UPS. 3. Brief facts of the case are that the assessee is a company engaged in the business of manufacturing, selling, trading and .....

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incurring huge expenditure without any remuneration. For the earlier assessment year 2007-08, the learned TPO had opined that one percent of sales excluding the sale of CKD/ spares should be attributed for determining the arms length price in this international taxation issue and thereby made an upward adjustment towards brand promotion expenditure. During the relevant assessment year, the learned TPO placed reliance in the credit given by an organization named Inter-brand . The organization In .....

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a conclusion that ₹ 204,42,31,513/- has to be attributed to the assessee company as the compensation for building the brand of the holding company. However, as pointed out by the learned Authorized Representative this issue 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 rel .....

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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 international taxation issue and thereby made an upward adjustment towards brand promotion .....

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mention here as pointed out by the Ld. A.R. that the Delhi Special Bench of the Tribunal in the case of LG Electronics India Pvt Ltd., mentioned supra has held that Bright-Line- Test (BLT) is the only method to be adopted to arrive at the value of brand development expense receivable by the assessee company from its Holding Company with respect to the promotion of brand of the assessee s Holding Company. 4.5. The brief gist of the case is summarized herein below for reference. Facts: • L.G .....

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n India without any restriction . • The Transfer Pricing Officer ( TPO ) concluded that the assessee was promoting LG brand as it had incurred expenses on AMP to the tune of 3.85% of sales vis-àvis 1.39% incurred by a comparable. Accordingly, TPO held that the assessee should have been compensated for the difference. • Applying the Bright Line Test, the TPO held that the expenses in excess of 1.39 % of the sales are towards brand promotion of the AE and proposed a transfer prici .....

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en 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 .....

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ational transaction, in view of the fact that the assessee failed to discharge the onus by not segregating the AMP expense incurred on its own behalf vis-à-vis that incurred on behalf of the AE. • The transfer pricing provisions being special provisions, override the general provisions such as section 37(1) / 40A(2) of the Act. • For determining the cost/value of international transaction, selection of domestic comparable companies not using any foreign brand was relevant in add .....

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ses for promotion of sales leads to brand building of the foreign AE, for which the Indian entity needs to be compensated on an arm s length basis by applying the Bright Line Test. • With regard to the DRP s approach, of applying a mark-up on cost for determining the ALP of the international transaction, on the ground that the same has sanction of law under Rule 10B(1)(c)(vi) of the Income Tax Rules, 1962 was accepted. • The case was set aside and the matter was restored to the file of .....

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Tribunal also ruled that the expenditure directly in connection with sales had to be excluded in computing the AMP adjustment. Thereafter, the Tribunal deleted the hypothetical brand development fee adjustment computed at 1% of sale made by the TPO. The Tribunal has disregarded the concept of add on brand value on normal sales and add on brand value on additional sales brought by the tax department to justify two additions in relation to brand building, and deleted the brand development fees co .....

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f 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 Chen .....

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of promoting the business of its holding company. Therefore the learned TPO computed the amount receivable from the holding company towards the advertisement expense incurred on behalf of the holding company as ₹ 64,15,77,200/- and accordingly made addition on account of transfer pricing adjustments by determining the ALP. The learned DRP also confirmed the order of the learned TPO by observing as under:- Also considering the nexus of the advertisement expenses with the ensuing benefit to .....

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the Tribunal in assessee s own case for the assessment year 2007-08 in ITA No.2157/Mds/2011 dated 28th August, 2015. The learned Departmental Representative could not controvert to the submissions of the learned Authorized Representative. 8. On perusing the order of the Tribunal cited by the learned Authorized Representative, we find that this issue is already dealt with on the earlier occasion as pointed out by the learned Authorized Representative. The relevant portion of the order is extracte .....

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arded 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 .....

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that the assessee has paid excess royalty to its AE and thereby determined the arms length price at ₹ 106,67,84,000/- and made addition thereon. On appeal, the learned DRP confirmed the order of the learned TPO by holding that the comparability analysis has been done on the values provided in prowess database and therefore there is no scope for interfering with the order of the learned TPO. 11. At the outset, the learned Authorized Representative submitted that the issue is covered by the .....

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n of the order is herein below for reference: 6.4. We have heard both the parties and carefully perused the materials available on record and decisions cited by the assessee viz. i) ITA Nos.1040 & 1159/Hyd./2011 and 1408/Hyd./2010 (Paper book pg. 370 to 371), ii) Lumax Industrues Ltd. Vs.ACIT in ITA No.4456/Del./2012 (paper book page No.394) and iii) Thyssen Krupp Industries India Pvt Ltd. Vs. Additional CIT, in ITA No.6460/Mum/2012 (paper Book page 433). Further the assessee has relied on t .....

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and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 6.5 Further perusing the order of the Ld. TPO in page 40 in para Nos.25 & 26 the Ld. TPO herself observed that in respect of royalty payment in automotive sector from the study of 35 licenses, the average works out to 4.7% and the median works out to 4% which is higher than the appellant s average rate of royalty payment of 4.22%. Further the Ld. TPO has observe .....

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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 aut .....

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ecome quite popular. It is due to brand value development on account of efforts made by the assessee company. So far as the Hyundai technology is concerned it is the latest technology and it cannot be said that old technology has been dumped in Indian market. It has promising future that will earn the holding company in coming years huge income by way of royalty on know how supplied by it to the assessee company. It is not an old technology about which it may be said that it does not have bright .....

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parent that the Ld. TPO has herself accepted the high-tech technology passed on to the assessee company by its Holding Company and also after details study of 35 licenses arrived at a conclusion that the royalty payment of 4.7% is prevalent in the automotive sector. Therefore from these circumstances, we do not find it appropriate on the part of the Revenue to make addition on account of ALP of royalty payment. Therefore, we hereby delete the addition of Rs. 104,27,36,417/- made by the Ld. TPO f .....

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ssessee 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 assess .....

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Difference 0.93% Difference between the Arms length price - margin of controlled transaction 106.68 Cr Finally, the learned TPO arrived at the following conclusion:- The arguments of the assessee company for the issue raised by the TPO on royalty fee for availing technical knowhow have been duly considered. The arithmetic errors have been rectified. In the absence of evidences, the values referred by the assessee company cannot be accepted. The comparability analysis has been done based on the .....

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e earlier decision of the Bench of the Tribunal for the preceding assessment year wherein there was a categorical finding by the learned TPO that the average rate of royalty payment in the industry was 4.7%. However, in the present case before us no arguments was advanced for justifying the stand of the assessee that during the relevant assessment year also the average rate of royalty on sales in the industry is more than 3.47%. In this situation, we do not find it necessary to interfere with th .....

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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 .....

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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. 17. On perusing the order of the Tribunal, we find merit in the contention of the learned Authorized Representative. The relevant portion of the order of the Tribunal is reproduc .....

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r the relevant assessment year also the matter may be remitted back to the file of Ld. DRP with similar direction. Ld. D.R strongly opposed to the submissions of the Ld. A.R. and relied on the orders of the Ld. Members of the Ld. DRP and the Ld. Assessing Officer. 7.3. After hearing both sides, we are of the opinion that the matter requires a categorical finding as to how the cash received as subsidy from SIPCOT has been utilized by the company in order to address merits of the case. Therefore, .....

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eme and focus market scheme: 19. At the outset, we find that this issue has already been dealt with by the Tribunal by the decision of the Chennai Bench of the Tribunal in assessee s own case for the assessment year 2007-08 in ITA No.2157/Mds/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 a .....

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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 treated as taxable income of the assessee during the relevant to ass .....

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n which the assessee receives the license and derives such income. It is ordered accordingly. Ground No.6 : Disallowance of additional depreciation: 21. As per the provisions of section 32(1)(iia) of the Act , the learned Assessing Officer held that the assessee shall not be eligible to claim additional depreciation on the assets deployed in the corporate office for office use accordingly, he made a disallowance of ₹ 5,93,605/-. 22. As pointed out by the learned Authorized Representative t .....

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the Act that additional depreciation shall be allowed only if the asset is deployed in the factory of the assessee and not the office of the assessee. Therefore, we accept the argument of the Ld. A.R. and reject the observations of the Revenue on this regard and accordingly direct the Ld. Assessing Officer to allow the claim of additional depreciation of Rs. 8,52,500/- if the other conditions of the Act remains satisfied. 23. Following the above decision of the Tribunal, we hereby direct the le .....

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