Hyundai Motor India Ltd, CHENNAI V. Dy CIT LTU, CHENNAI

ITA 2353/CHNY/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9457 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2008-2009
• Appeal Filed On: 31-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA; ARUN C BHARATH
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Transfer pricing; International transaction; Additional depreciation
• Section: 92C; 143(3); 92B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . . . , . , & BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.2353/MDS/2012 & STAY PETITION NO.360/MDS/2015 (IN ITA NO.2353/MDS/2012) ( / ASSESSMENT YEAR: 2008-09) M/S. HYUNDAI MOTOR INDIA.LTD., PLOT NO.H-1, SIPCOT INDL.PARK, IRUNGATTUKOTTAI, SRIPERUMBUDUR TK. KANCHEEPURAM DIST. VS THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX PAYER UNIT, CHENNAI. PAN: AAACH2364M ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. R.VIJAYARAGHAVAN,ADVOCATE /RESPONDENT BY : MR. ARUN C.BHARATH, CIT & MR.PATHLAVATH PEERYA, CIT /DATE OF HEARING : 3 RD FEBRUARY, 2016 /DATE OF PRONOUNCEMENT : 22 ND APRIL, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY THE ORDER OF THE LEARNED ASSESSING OFFICER DATED 29.1 0.2012 PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT PURSUANT TO THE ORDERS OF THE LEARNED DRP AND LEA RNED TRANSFER PRICING OFFICER DATED 31.08.2012 & 28.1 0.2011 RESPECTIVELY FOR THE ASSESSMENT YEAR 2008-09. MEAN WHILE THE ASSESSEE HAS ALSO FILED A STAY PETITION WHICH H AS ALSO COME UP FOR HEARING ALONG WITH THE APPEAL OF THE AS SESSEE, 2 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 HOWEVER SINCE THE BENCH HAS DECIDED TO DISPOSE OF T HE APPEAL OF THE ASSESSEE, THE STAY PETITION IS DISMIS SED. 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL, HOWEVER, THE LEARNED AUTHORIZED REPRESENTATIVE CON CEDED THAT THE MAIN GROUNDS THAT REQUIRED TO BE ADJUDICAT ED 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 FEES OF RS.2,04,42,31,513/- TOWARDS BRAND / LOGO PROMOTION ACTIVITY UNDERTAKEN BY THE ASSESSEE FROM HMC KOREA IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92B & 92C OF THE ACT. II) 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 RS.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 RS.283.78 CRORES AS AGAINST THE ACTUAL AMOUNT PAID ` 390.46 CRORES WHICH WAS CONFIRMED BY THE LEARNED TPO AND THEREBY ADDITION TO THE EXTENT OF RS.106,67,84,000/- WAS MADE. 3 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 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 RS.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 ASSESSEE FOR THE ASSESSMENT YEAR 2008-09, THOUGH THE SAME HAS NOT ACCRUED TO THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR. VI) THE LEARNED DRP HAS ERRED IN CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER IN DISALLOWING ADDITIONAL DEPRECIATION AMOUNTING TO ` 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 ` 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, S ELLING, TRADING AND SERVICING OF PASSENGER VEHICLES / CKD P ARTS AND SPARE PARTS, FILED ITS E-RETURN ON 31.09.2008 FOR T HE ASSESSMENT YEAR 2008-09 ADMITTING INCOME OF 4 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 RS.423,23,20,855/-. AFTER SCRUTINY, THE LEARNED ASS ESSING OFFICER HAS COMPLETED THE ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT ON 29.10.2012 MAKING VAR IOUS ADDITIONS/DISALLOWANCES. GROUND NO.1 BRAND PROMOTION : 4. THE FINDING OF THE LEARNED TPO IS THAT, THE AS SESSEE COMPANY WAS POPULARIZING THE BRAND AND LOGO OF ITS PARENT COMPANY INCURRING HUGE EXPENDITURE WITHOUT ANY REMUNERATION. FOR THE EARLIER ASSESSMENT YEAR 2007 -08, THE LEARNED TPO HAD OPINED THAT ONE PERCENT OF SALES EX CLUDING THE SALE OF CKD/ SPARES SHOULD BE ATTRIBUTED FOR DE TERMINING THE ARMS LENGTH PRICE IN THIS INTERNATIONAL TAXATIO N ISSUE AND THEREBY MADE AN UPWARD ADJUSTMENT TOWARDS BRAND PROMOTION EXPENDITURE. DURING THE RELEVANT ASSESSM ENT YEAR, THE LEARNED TPO PLACED RELIANCE IN THE CREDIT GIVEN BY AN ORGANIZATION NAMED INTER-BRAND. THE ORGANIZAT ION INTER- BRAND HAD RANKED THE ASSESSEE HYUNDAI AS 76 AND DECLARED THAT THE ASSESSEE HYUNDAI HAS BRAND VALUE OF US$ 4.8 BILLION DURING THE RELEVANT ASSESSMENT YEAR. IN THE YEAR 2006, THE VALUE WAS MARKED AS US$4.078 BILLION AND IN THE 5 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 YEAR 2007 IT WAS MARKED AS US$ 4.5 BILLION. CONSIDE RING THE ACCREDITATION VALUED BY THE ORGANIZATION INTER-BRA ND THE LEARNED TPO ARRIVED AT A CONCLUSION THAT BRAND VALU E OF THE ASSESSEES PARENT COMPANY HAS INCREASED YEAR AFTER YEAR. THEREAFTER THE LEARNED TPO ARRIVED AT A CONCLUSION THAT RS.204,42,31,513/- HAS TO BE ATTRIBUTED TO THE ASSE SSEE COMPANY AS THE COMPENSATION FOR BUILDING THE BRAND OF THE HOLDING COMPANY. HOWEVER, AS POINTED OUT BY THE LE ARNED 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 28 TH AUGUST, 2015, WHEREIN IT WAS HELD THAT THE BRIGHT LINE TEST WOU LD BE THE BEST METHOD FOR DETERMINING THE DEVELOPMENT OF AN I NTANGIBLE PROPERTY. THE RELEVANT PORTION OF THE ORDER IS REP RODUCED HEREIN BELOW FOR REFERENCE:- 4.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREF ULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. THE MAI N GROUSE OF THE REVENUE IS THAT THE APPELLANT COMPANY BEING THE USER OF THE HOLDING COMPANYS BRAND NAME AND LOGO INDIRECTLY BE NEFITS THE HOLDING COMPANY. THE APPELLANT COMPANY INSTEAD OF P ROMOTING ITS OWN BRAND HAS BEEN PROMOTING THE BRAND LOGO OF THE HOLDING COMPANY. THEREBY THE HOLDING COMPANY IS BENEFITED B ECAUSE OF THE INCREASE IN SALES OF THE APPELLANT COMPANY. IT WAS ONLY DUE TO THE EFFORTS PUT IN BY THE ASSESSEE COMPANY AND T HE RELEVANT EXPENDITURE INCURRED FOR PROMOTING ITS PRODUCTS THE BRAND VALUE OF THE HOLDING COMPANY HAS PROPORTIONATELY INCREASE D. THEREFORE, THE REVENUE OPINED THAT ONE PERCENT (1%) OF SALES 6 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 EXCLUDING THE SALE OF CKD/SPARE SHOULD BE ATTRIBUTE D FOR DETERMINING THE ARMS LENGTH PRICE (ALP) IN THIS IN TERNATIONAL TAXATION ISSUE AND THEREBY MADE AN UPWARD ADJUSTMEN T TOWARDS BRAND PROMOTION EXPENSE FOR ` 82,12,54,41,380/-. AT THIS JUNCTURE WE MUST SAY THAT AS POINTED OUT BY THE LD. A.R, THE LD.TPO AND THE LD. MEMBERS OF THE DRP HAS NOT ADOPTED ANY OF T HE FIVE METHODS PRESCRIBED U/S.92C OF THE INCOME TAX ACT IN ORDER TO DETERMINE THE ALP FOR BRAND FEES WHICH OUGHT TO HAV E BEEN RECEIVED BY THE ASSESSEE COMPANY FOR THE USAGE OF T HE HOLDING COMPANYS BRAND HYUNDAI. THE 1% ON SALES ADOPTED BY THE REVENUE IN DETERMINING THE ALP IS PURELY ADHOC AND WITHOUT ANY BASIS. IT IS PERTINENT TO MENTION HERE AS POINTED OUT BY THE LD. A.R. THAT THE DELHI SPECIAL BENCH OF THE TRIBUNAL I N THE CASE OF LG ELECTRONICS INDIA PVT LTD., MENTIONED SUPRA HAS HELD THAT BRIGHT-LINE- TEST (BLT) IS THE ONLY METHOD TO BE AD OPTED TO ARRIVE AT THE VALUE OF BRAND DEVELOPMENT EXPENSE RECEIVABL E BY THE ASSESSEE COMPANY FROM ITS HOLDING COMPANY WITH RESP ECT TO THE PROMOTION OF BRAND OF THE ASSESSEES HOLDING COMPAN Y. 4.5. THE BRIEF GIST OF THE CASE IS SUMMARIZED HERE IN BELOW FOR REFERENCE. FACTS : L.G. ELECTRONICS INDIA PRIVATE LIMITED (THE ASSESSEE) IS A SUBSIDIARY OF L.G. ELECTRONICS INC., KOREA (THE AE ). PURSUANT TO TECHNICAL ASSISTANCE AND ROYALTY AGREEM ENT, THE ASSESSEE OBTAINED A RIGHT FROM THE AE TO USE TE CHNICAL INFORMATION, DESIGNS, DRAWINGS AND INDUSTRIAL PROPE RTY RIGHTS FOR THE MANUFACTURE, MARKETING, SALE AND SERVICES O F AGREED PRODUCTS, FOR WHICH IT AGREED TO PAY ROYALTY @ 1 PE R CENT. THE AE ALLOWED THE ASSESSEE TO USE ITS BRAND NAME AND TRADEMARKS TO PRODUCTS MANUFACTURED IN INDIA WITHO UT ANY RESTRICTION. THE TRANSFER PRICING OFFICER (TPO) CONCLUDED TH AT THE ASSESSEE WAS PROMOTING LG BRAND AS IT HAD INCURRED EXPENSES ON AMP TO THE TUNE OF 3.85% OF SALES VIS- - VIS 1.39% INCURRED BY A COMPARABLE. ACCORDINGLY, TP O 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 TOWAR DS BRAND PROMOTION OF THE AE AND PROPOSED A TRANSFER PRICING ADJUSTMENT. 7 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 THE DISPUTE RESOLUTION PANEL (DRP) NOT ONLY CON FIRMED THE APPROACH OF THE TPO, BUT ALSO DIRECTED TO CHARG E A MARK- UP OF 13 % ON SUCH AMP EXPENSES TOWARDS OPPORTUNITY COST AND ENTREPRENEURIAL EFFORTS. ISSUES : WHETHER TRANSFER PRICING ADJUSTMENT CAN BE MADE I N RELATION TO ADVERTISEMENT, MARKETING AND SALES PROMOTION EXP ENSES INCURRED BY THE ASSESSEE? WHETHER THE ASSESSEE OUGHT TO HAVE BEEN COMPENSAT ED 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 ASSESSEES CASE IS COVERED U/S. 92CA(2B) OF THE INCOME TAX ACT, 1961 (THE ACT) WHICH DEALS WITH INTERNAT IONAL TRANSACTIONS IN RESPECT OF WHICH THE ASSESSEE HAS N OT FURNISHED REPORT, WHETHER OR NOT THESE ARE INTERNATIONAL TRAN SACTIONS 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 CHARACTERI SED AS AN INTERNATIONAL TRANSACTION WITHIN THE AMBIT OF SECTI ON 92B(1) OF THE ACT, SINCE (I) THERE IS A TRANSACTION OF CREATING A ND IMPROVING MARKETING INTANGIBLES BY THE ASSESSEE FOR AND ON BE HALF OF ITS AE; (II) THE AE IS NON-RESIDENT; AND (III) SUCH TRA NSACTION IS IN THE NATURE OF PROVISION OF SERVICE. ACCEPTED BRIGHT LINE TEST TO DETERMINE THE COST/ VALUE OF THE INTERNATIONAL 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--VIS THAT INCURRED ON BEHALF OF THE AE. THE TRANSFER PRICING PROVISIONS BEING SPECIAL PRO VISIONS, OVERRIDE THE GENERAL PROVISIONS SUCH AS SECTION 37( 1) / 40A(2) OF THE ACT. FOR DETERMINING THE COST/VALUE OF INTERNATIONAL T RANSACTION, SELECTION OF DOMESTIC COMPARABLE COMPANIES NOT USIN G ANY FOREIGN BRAND WAS RELEVANT IN ADDITION TO OTHER FAC TORS. 8 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 THE SUPREME COURT OF INDIA IN MARUTI SUZUKIS CAS E EXAMINED THE ISSUE OF AMP EXPENSES WHERE IT DIRECTED THE TPO FOR A DE NOVO DETERMINATION OF ALP OF THE TRANSACTION. THE D IRECTION BY THE SUPREME COURT RECOGNISES THE FACT OF BRAND BUIL DING FOR THE FOREIGN AE, WHICH IS AN INTERNATIONAL TRANSACTION A ND THE TPO HAS THE JURISDICTION TO DETERMINE THE ALP OF THE TRANSA CTION. THE EXPENSES INCURRED IN CONNECTION WITH SALES ARE ONLY SALES SPECIFIC. HOWEVER, THE EXPENSES FOR PROMOTION OF S ALES LEADS TO BRAND BUILDING OF THE FOREIGN AE, FOR WHICH THE IND IAN ENTITY NEEDS TO BE COMPENSATED ON AN ARMS LENGTH BASIS BY APPLY ING THE BRIGHT LINE TEST. WITH REGARD TO THE DRPS APPROACH, OF APPLYING A MARK-UP ON COST FOR DETERMINING THE ALP OF THE INTERNATIONAL T RANSACTION, ON THE GROUND THAT THE SAME HAS SANCTION OF LAW UNDER RULE 10B(1)(C)(VI) OF THE INCOME TAX RULES, 1962 WAS ACC EPTED. THE CASE WAS SET ASIDE AND THE MATTER WAS RESTORE D TO THE FILE OF THE TPO FOR SELECTION OF APPROPRIATE COMPARABLE COMPANIES, EXAMINING EFFECT OF VARIOUS RELEVANT FACTORS LAID D OWN IN THE DECISION AND FOR THE DETERMINATION OF THE CORRECT M ARK-UP. 4.6 FURTHER, IN THE CASE FORD INDIA PVT. LTD (20 13-TII-118-ITAT- MAD-TP) CITED BY THE LD. A.R. SUPRA, THE CHENNAI B ENCH OF THE TRIBUNAL FOLLOWED THE SPECIAL BENCH RULING IN THE C ASE OF LG ELECTRONICS INDIA PVT. LTD(SUPRA) IN APPLYING BRIGH T LINE TEST (BLT) TO ARRIVE AT THE ADJUSTMENT TOWARDS EXCESS AMP EXPENDI TURE. THE TRIBUNAL ALSO RULED THAT THE EXPENDITURE DIRECTLY I N CONNECTION WITH SALES HAD TO BE EXCLUDED IN COMPUTING THE AMP ADJUS TMENT. THEREAFTER, THE TRIBUNAL DELETED THE HYPOTHETICAL B RAND DEVELOPMENT FEE ADJUSTMENT COMPUTED AT 1% OF SALE MADE BY THE T PO. THE TRIBUNAL HAS DISREGARDED THE CONCEPT OF ADD ON BRAN D VALUE ON NORMAL SALES AND ADD ON BRAND VALUE ON ADDITIONAL S ALES BROUGHT BY THE TAX DEPARTMENT TO JUSTIFY TWO ADDITIONS IN RE LATION TO BRAND BUILDING, AND DELETED THE BRAND DEVELOPMENT FEES CO MPUTED AT 1% OF SALES. 4.7 CONSIDERING THE FACTS OF THE CASE WHICH IS IDE NTICAL TO THE CASE DECIDED BY THE SPECIAL BENCH OF THE TRIBUNAL AND TH E CHENNAI BENCH OF THE TRIBUNAL CITED SUPRA, WE HEREBY DIRECT THE L D. 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 TRIBUN AL 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 9 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 SUCH TEST WAS MADE ON THE ASSESSEE BY THE LD.DRP; H OWEVER NO ADDITIONS WERE MADE BECAUSE ON THE COMPUTATION OF T HE SAME IT WAS FOUND NOT WARRANTED. THE SAME WAS ALSO NOT CONTROV ERTED 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 T HE SPECIAL BENCH CITED SUPRA, WE HEREBY HOLD THAT BRI GHT LINE TEST WOULD BE THE BEST METHOD FOR DETERMINING THE VALUE OF DEVELOPING THE INTANGIBLE PROPERTY. FOR SUCH DETER MINATION, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF THE LEARNED TPO. GROUND NO.2 - ADVERTISEMENT EXPENSES AS AN INTERNATIONAL TRANSACTION: 6. THE LEARNED TPO WAS OF THE VIEW THAT THE ASSESSE E HAD INCURRED HUGE EXPENDITURE TOWARDS ADVERTISEMENT ON BEHALF OF ITS HOLDING COMPANY FOR THE PURPOSE OF PR OMOTING 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 RS.64,15,77,200/- AND 10 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 ACCORDINGLY MADE ADDITION ON ACCOUNT OF TRANSFER PR ICING 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 THE HOLDING COMPANY AND FACTORS RELEVANT FOR ESTABLISHING THE CO-RELATIONSHIP BETWEEN THE BRAND PROMOTIONS AS DISCUSSED IN THE PRECEDING PARAGRAPHS IT WOULD BE WRONG TO HOLD THAT ADVERTISEMENT EXPENSES WERE NOT IN THE NATURE OF INTERNATIONAL TRANSACTION. AS SUCH THERE IS NO SCOPE FOR ANY INTERFERENCE IN THE POSITION TAKEN BY THE TRANSFER PRICING OFFICER ON THIS COUNT. 7. BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE SUBMITTED THAT THIS ISSUE IS COVERED BY THE DECISIO N OF THE CHENNAI BENCH OF THE TRIBUNAL IN ASSESSEES OWN CAS E FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.2157/MDS/2011 DATED 28 TH AUGUST, 2015. THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT CONTROVERT TO THE SUBMISSI ONS OF THE LEARNED AUTHORIZED REPRESENTATIVE. 8. ON PERUSING THE ORDER OF THE TRIBUNAL CITED BY T HE LEARNED AUTHORIZED REPRESENTATIVE, WE FIND THAT THI S ISSUE IS 11 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 ALREADY DEALT WITH ON THE EARLIER OCCASION AS POINT ED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENC E: 5.5 AFTER HEARING BOTH SIDES AND PERUSING THE ORD ERS OF THE TRIBUNAL CITED BY THE LD. A.R SUPRA, WE HERE BY ACCEPT THE CONCEPT OF BRIGHT LINE TEST (BLT) AS HEL D BY OUR PREDECESSORS WITH RESPECT TO THE CONCEPT OF BR IGHT LINE TEST FOR DISTINGUISHING BETWEEN THE ROUTINE AN D NON- ROUTINE EXPENDITURE INCURRED ON ADVERTISEMENT AND B RAND PROMOTION WHEREIN ADVERTISEMENT AND MARKETING PROMOTION EXPENSES TO THE EXTENT INCURRED BY UNCONTROLLED COMPARABLE DISTRIBUTORS IS TO BE REGAR DED WITHIN THE BRIGHT LINE LIMIT OF THE ROUTINE EXPEN SES AND THE ADVERTISEMENT AND MARKET PROMOTION EXPENSES INCURRED BY THE DISTRIBUTORS BEYOND SUCH BRIGHT LI NE UNIT CONSTITUTED NON-ROUTINE EXPENDITURE RESULTING IN CREATION OF ECONOMIC OWNERSHIP IN THE FORM OF MARKE TING 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 DELET ED THE ADDITION ` 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 T HE 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. 12 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 GROUND NO.3 : DISALLOWANCE OF ROYALTY : 10. THE LEARNED TPO WAS OF THE VIEW THAT THE ASSES SEE HAS PAID EXCESS ROYALTY TO ITS AE AND THEREBY DETE RMINED THE ARMS LENGTH PRICE AT RS.106,67,84,000/- AND MADE AD DITION THEREON. ON APPEAL, THE LEARNED DRP CONFIRMED THE O RDER OF THE LEARNED TPO BY HOLDING THAT THE COMPARABILITY A NALYSIS HAS BEEN DONE ON THE VALUES PROVIDED IN PROWESS DAT ABASE AND THEREFORE THERE IS NO SCOPE FOR INTERFERING WIT H THE ORDER OF THE LEARNED TPO. 11. AT THE OUTSET, THE LEARNED AUTHORIZED REPRESENT ATIVE SUBMITTED THAT THE ISSUE IS COVERED BY THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN ASSESSEES OWN CAS E FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.2157/MDS/2011 DATED 28 TH AUGUST, 2015. THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT CONTROVERT TO THE SUBMISSI ONS OF THE LEARNED AUTHORIZED REPRESENTATIVE. 12. ON PERUSING THE ORDER OF THE TRIBUNAL CITED BY THE LEARNED AUTHORIZED REPRESENTATIVE, WE FIND THAT THI S ISSUE IS DEALT WITH ON THE EARLIER OCCASION AS POINTED OUT B Y THE 13 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 LEARNED AUTHORIZED REPRESENTATIVE. THE RELEVANT POR TION 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 DECIS IONS CITED BY THE ASSESSEE VIZ. I) ITA NOS.1040 & 1159/HYD./2011 AND 1408/HYD./2010 (PAPER BOOK PG. 3 70 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. ADDITIO NAL CIT, IN ITA NO.6460/MUM/2012 (PAPER BOOK PAGE 433). FURTHER THE ASSESSEE HAS RELIED ON THE RULE 10B(2)( D) OF THE INCOME TAX RULES, 1962 WHICH STIPULATES AS UNDE R:- RULE 10B(2) FOR THE PURPOSES OF SUB-RULE(1), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH THE UNCONTROLL ED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NA MELY:- (A) - - - - - (B) - - - - - (C) - - - - (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 6.5 FURTHER PERUSING THE ORDER OF THE LD. TPO IN P AGE 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 APPELLANTS AVERAGE RATE OF ROYALTY PAYMENT OF 4.22 %. FURTHER THE LD. TPO HAS OBSERVED THAT THE ASSESSEE COMPANY HAS BEEN BESTOWED WITH THE LATEST TECHNOLO GY BY ITS HOLDING COMPANY AND IT CANNOT BE SAID THAT OLD TECHNOLOGY HAS BEEN DUMPED IN THE INDIAN MARKET (PA RA 27 OF THE TPOS ORDER). THE RELEVANT PORTION OF THE LD. TPOS ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE :- 26 IN THE TABLE GIVEN ABOVE IT IS SEEN THAT IN AUT OMOTIVE SECTOR ON STUDY OF 35 LICENSES IN RESPECT TO ROYALTY PAYME NT MINIMUM ROYALTY PAYMENT WAS 1% MAXIMUM WAS 15% ROYALTY PAYM ENT. AVERAGE COMES TO 4.7% AND THE MEDIAN ROYALTY RATE W AS 4.0%. 27. IN THE CASE OF THE ASSESSEE WHAT WILL BE THE RIGHT PERCENTAGE OF ROYALTY THAT WOULD COMPENSATE THE ASS ESSEE 14 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 SUITABLY. IN THIS CONNECTION IT IS RELEVANT TO DISC USS CERTAIN RELEVANT FACTS. AS DISCUSSED EARLIER, INDIA IS A VA ST MARKET FOR AUTO MAKERS. INDIA HAS A HUGE PERCENTAGE OF MIDDLE AND UPPER MIDDLE, CLASS POPULATION THAT HAS ENOUGH SURPLUS IN COME TO BUY SUCH MOVABLE AND IMMOVABLE ASSETS SUCH AS HOUSE, CA RS ETC. FURTHER BANKS HAVE LIBERALLY SANCTIONED AUTO LOANS ON EQUATED MONTHLY INSTALLMENT BASIS TO THE BUYERS. IT IS ALS O RELEVANT TO NOTE THAT INDIA HAS GOT A BIG PERCENTAGE OF POPULAT ION WHICH IS NOT ONLY YOUNG BUT ALSO EARNS HANDSOME MONEY ESPECI ALLY SOFT WARE BOOM IN INDIA. THIS SECTION OF THE SOCIETY IS INFLUENCED BY THE BRAND NAME. IN INDIA IS EXPANDING AUTO MARKET THE SHARE OF HYUNDAI IS INCREASING YEAR AFTER YEAR. THIS HAS BE EN DISCUSSED IN COMPANY PROFILE AND INDUSTRIAL OVER VIEW GIVEN A BOVE. IN THIS MARKET, HYUNDAI BRAND AND LOGO HAS BECOME QUIT E POPULAR. IT IS DUE TO BRAND VALUE DEVELOPMENT ON A CCOUNT OF EFFORTS MADE BY THE ASSESSEE COMPANY. SO FAR AS TH E HYUNDAI TECHNOLOGY IS CONCERNED IT IS THE LATEST TECHNOLOGY AND IT CANNOT BE SAID THAT OLD TECHNOLOGY HAS BEEN DUMPED IN INDI AN 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 FUTURE AND HENCE THE SALES WILL DECREASE AND THEREFORE BRAND DEVELOPMENT WILL NOT BE ADVANTAGEOUS TO THE H OLDING COMPANY. IT WOULD LIKE TO STAY AHEAD OF ITS COMPETI TORS IN THE INDIAN MARKET BY ENSURING THE QUALITY OF PRODUCT AS WELL AS BY SPREADING THE BRAND AWARENESS. THE HOLDING COMPANY HAS GIVEN TO THE ASSESSEE THE EXCLUSIVE RIGHTS OF PRODU CING THE CARS IN THIS TERRITORY. EACH CAR PRODUCED BY THE ASSESS EE BECOMES THE CARRIER OF HOLDING COMPANYS BRAND NAME AND LOG O ------------ --------------------------------------------------- ---------------------------------- --------------------------------------------------- ---------------------------------- --------------------------------------------------- -------------- FACTS BEING SO, IT IS APPARENT THAT THE LD. TPO HAS HERSELF ACCEPTED THE HIGH-TECH TECHNOLOGY PASSED ON TO THE ASSESSEE COMPANY BY ITS HOLDING COMPANY AND ALSO AF TER DETAILS STUDY OF 35 LICENSES ARRIVED AT A CONCLUSIO N THAT THE ROYALTY PAYMENT OF 4.7% IS PREVALENT IN THE AUTOMOT IVE SECTOR. THEREFORE FROM THESE CIRCUMSTANCES, WE DO N OT FIND IT APPROPRIATE ON THE PART OF THE REVENUE TO M AKE ADDITION ON ACCOUNT OF ALP OF ROYALTY PAYMENT. THE REFORE, WE HEREBY DELETE THE ADDITION OF ` 104,27,36,417/- MADE BY THE LD. TPO FOLLOWING THE DIRECTIONS OF LD. MEMBERS OF THE DRP. 15 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 13. HOWEVER, IN THE RELEVANT ASSESSMENT YEAR, WE FI ND THAT THE LEARNED TPO HAS MADE CATEGORICAL FINDING THAT T HE AVERAGE PERCENTAGE OF ROYALTY PAID BY OTHER COMPARA BLE COMPANIES IS 2.54% WHILE AS THE ASSESSEE HAS PAID R OYALTY @ 3.47% ON SALES. THUS, THERE IS A DIFFERENCE OF 0. 93% WHICH WORKS OUT TO RS.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 ROYA LTY TO SALES RATIO AS UNDER:- COMPANY NAME ROYALTY EXPENS ES NET SALES ROYALTY AS A % OF SALES GENERAL MOTORS INDIA PVT.LTD. 47.21 3095.29 1.53% 16 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 FINALLY, THE LEARNED TPO ARRIVED AT THE FOLLOWING C ONCLUSION:- THE ARGUMENTS OF THE ASSESSEE COMPANY FOR THE ISSU E RAISED BY THE TPO ON ROYALTY FEE FOR AVAILING TECH NICAL KNOWHOW HAVE BEEN DULY CONSIDERED. THE ARITHMETIC ERRORS HAVE BEEN RECTIFIED. IN THE ABSENCE OF EVID ENCES, THE VALUES REFERRED BY THE ASSESSEE COMPANY CANNOT BE ACCEPTED. THE COMPARABILITY ANALYSIS HAS BEEN DONE BASED ON THE VALUES PROVIDED IN PROWESS DATABASE. T HE EXCESS AMOUNT OVER AND ABOVE THE ARMS LENGTH MARGIN SPENT AS ROYALTY FEE PAID HAS TO BE DISALLOWED AND ATTRIBUTED TO THE HOLDING COMPANY. THUS AN AMOUNT O F RS.106,67,84,000/- HAS BEEN PROPOSED TO BE DISALLOW ED AS EXCESS EXPENDITURE ON FEE FOR ROYALTY FOR THE ASSESSMENT YEAR 2008-09. ON APPEAL, THE LEARNED DRP ALSO CONFIRMED THE ORDER OF THE LEARNED TPO. 14. BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIV E ARGUED ON THIS ISSUE DRAWING STRENGTH FROM THE EARL IER DECISION OF THE BENCH OF THE TRIBUNAL FOR THE PRECE DING ASSESSMENT YEAR WHEREIN THERE WAS A CATEGORICAL FIN DING BY THE LEARNED TPO THAT THE AVERAGE RATE OF ROYALTY PA YMENT IN THE INDUSTRY WAS 4.7%. HOWEVER, IN THE PRESENT CASE BEFORE FORD INDIA PVT.LTD. 46.94 2450.83 1.92% HONDA SIEL CARS INDIA LTD. 181.80 4313.04 4.22% MARUTI SUZUKI INDIA LTD. 495.20 19799.00 2.50% AVERAGE 2.54% HMIL AS PER FORM 3CEB 390.46 11255.74 3.47% DIFFERENCE 0.93% DIFFERENCE BETWEEN THE ARMS LENGTH PRICE MARGIN O F CONTROLLED TRANSACTION 106.68 CR 17 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 US NO ARGUMENTS WAS ADVANCED FOR JUSTIFYING THE STA ND OF THE ASSESSEE THAT DURING THE RELEVANT ASSESSMENT YEAR A LSO THE AVERAGE RATE OF ROYALTY ON SALES IN THE INDUSTRY IS MORE THAN 3.47%. IN THIS SITUATION, WE DO NOT FIND IT NECESS ARY TO INTERFERE WITH THE ORDERS OF THE REVENUE WHO HAD MA DE ELABORATE FINDING IN THEIR RESPECTIVE ORDERS THAT T HE AVERAGE RATE OF ROYALTY ON SALES PREVALENT DURING THE RELEV ANT ASSESSMENT YEAR AMONGST THE COMPARABLE COMPANIES IS ONLY 2.54%. THEREFORE, THIS GROUND RAISED BY THE ASSESS EE 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 C APITAL SUBSIDY RECEIVED FROM SIPCOT FROM THE VALUE OF THE ASSET ACQUIRED AND THEREBY DISALLOWED THE DEPRECIATION CL AIMED BY THE ASSESSEE TOWARDS THE SAME AMOUNTING TO RS.3,55, 957/- FOR THE RELEVANT ASSESSMENT YEAR. THE LEARNED DRP CONFIRMED THE ORDER OF THE LEARNED TPO BY OBSERVING AS UNDER:- 18 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 THIS ISSUE DOES NOT REQUIRE MUCH DELIBERATION BECA USE FOR ASSESSMENT YEAR 2003-04 THE SAME ISSUE WAS ADJUDICATED BY THE FIRST APPELLATE AUTHORITY WHO HA D DIRECTED THE ASSESSING AUTHORITY TO VERIFY AND ALLO W THE CLAIM OF THE ELIGIBLE ASSESSEE ON MERIT. THE ELIGIB LE ASSESSEE POINTS OUT THAT EFFECT TO THE ORDER OF FIR ST APPELLATE AUTHORITY HAVE NOT BEEN SO FAR. THIS HAS LED TO DISALLOWANCE THIS YEAR AS WELL. THE ASSESSING AUTHORITY SHALL GIVE EFFECT TO THE OR DER OF THE FIRST APPELLATE AUTHORITY FORTHWITH AND SHALL A PPLY THE SAME POSITION TAKEN BY THE REVENUE ON THE ISSUE INVOLVED FOR THIS YEAR AS WELL. 16. AT THE OUTSET, THE LEARNED AUTHORIZED REPRESENT ATIVE 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 P LEADED THAT FOR THE RELEVANT ASSESSMENT YEAR ALSO THE MATT ER MAY BE REMITTED BACK WITH SIMILAR DIRECTIONS. THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT CONTROVERT TO THE SUBMISSIONS OF THE LEARNED AUTHORIZED REPRESENTATIV E. 17. ON PERUSING THE ORDER OF THE TRIBUNAL, WE FIND MERIT IN THE CONTENTION OF THE LEARNED AUTHORIZED REPRESENTA TIVE. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL IS RE PRODUCED HEREIN BELOW FOR REFERENCE. 19 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 7.2 BEFORE US, THE LD. A.R. SUBMITTED THAT FOR THE ASSESSMENT YEAR 2003-04 THE LD. CIT (A) HAS DIRECTE D THE LD. ASSESSING OFFICER TO RE-EXAMINE THE ISSUE IN TH E LIGHT OF SUPREME COURT DECISION SAHNEY STEEL AND PRES S WORKS LTD. AND OTHERS VS. LD. CIT IN 228 ITR 253 AND CIT VS. P.J. CHEMICALS LTD IN 210 ITR 830. LD. A.R . FURTHER SUBMITTED THAT AS ON DATE THE LD. ASSESSING OFFICER IS YET TO GIVE EFFECT TO THE ORDER OF THE LD. CIT ( A). THEREFORE LD. A.R PLEADED THAT FOR THE RELEVANT ASSESSMENT YEAR ALSO THE MATTER MAY BE REMITTED BAC K TO THE FILE OF LD. DRP WITH SIMILAR DIRECTION. LD. D. R STRONGLY OPPOSED TO THE SUBMISSIONS OF THE LD. A.R. AND RELI ED ON THE ORDERS OF THE LD. MEMBERS OF THE LD. DRP AND TH E LD. ASSESSING OFFICER. 7.3. AFTER HEARING BOTH SIDES, WE ARE OF THE OPI NION THAT THE MATTER REQUIRES A CATEGORICAL FINDING AS T O HOW THE CASH RECEIVED AS SUBSIDY FROM SIPCOT HAS BEEN UTILI ZED BY THE COMPANY IN ORDER TO ADDRESS MERITS OF THE CA SE. THEREFORE, WE HEREBY REMIT THE ISSUE BACK TO THE FI LE OF LD.DRP IN ORDER TO EXAMINE THE COMPLETE FACTS OF TH E ISSUE IN THE LIGHT OF THE VARIOUS DECISIONS CITED B Y THE LD. A.R AND PASS APPROPRIATE ORDER AS PER MERITS AND LA W. 18. CONSIDERING THE ABOVE ORDER OF THE CHENNAI BENC H OF THE TRIBUNAL AND AS REQUESTED BY THE LEARNED AUTHOR IZED REPRESENTATIVE WE REMIT BACK THE MATTER TO THE FILE OF THE LEARNED DRP WITH SIMILAR DIRECTIONS. GROUND NO.5 : ADDITION ON ACCOUNT OF EXPORT INCENTIVES TOWARDS TARGET PLUS SCHEME AND FOCUS MARKET SCHEME: 20 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 19. AT THE OUTSET, WE FIND THAT THIS ISSUE HAS ALRE ADY BEEN DEALT WITH BY THE TRIBUNAL BY THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR TH E ASSESSMENT YEAR 2007-08 IN ITA NO.2157/MDS/2011 DAT ED 28 TH 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 INCE NTIVE TOWARDS TARGET PLUS SCHEME IS BESTOWED AS A REWARD IN ORDER TO ENCOURAGE THE ACCELERATING GROWTH IN EXPOR TS. 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 GENER AL ANNUAL EXPORT TARGET THAT IS FIXED. THE INCENTIVE O N FOCUS MARKET SCHEME IS TO OFFSET HIGH FREIGHT COST AND OT HER EXTERNALITIES TO SELECT INTERNATIONAL MARKET WITH A VIEW TO ENHANCE INDIAS EXPORT COMPETIVENESS IN THESE COUNT RIES. IT IS PERTINENT TO NOTE THAT THE ASSESSEE WILL BE E NTITLED TO SUCH BENEFIT ONLY AFTER VERIFICATION OF THE CLAIM O F THE ASSESSEE BY THE RELEVANT GOVT. AUTHORITIES AND ISSU ANCE OF THE LICENSE BY SUCH GOVERNMENT AUTHORITIES. THEREFO RE, THE FACTS OF THE ASSESSEES CASE ARE SIMILAR TO THE FACTS OF THE CASE DECIDED BY THE HONBLE APEX COURT CITED SU PRA. THEREFORE, RESPECTIVELY FOLLOWING THE DECISION OF T HE HONBLE APEX COURT WE HEREBY HOLD THAT THE NOTIONAL INCOME COMPUTED BY THE ASSESSEE CANNOT BE TREATED A S TAXABLE INCOME OF THE ASSESSEE DURING THE RELEVANT TO ASSESSMENT YEAR, HOWEVER THE SAME SHALL BE TAXED IN THE PREVIOUS YEAR IN WHICH THE ASSESSEE HAS RECEIVED TH E LICENSES AND DERIVED SUCH INCOME. THUS, THIS ISSUE IS ALSO DECIDED IN FAVOUR OF THE ASSESSEE. 20. FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL, WE H EREBY HOLD FOR THE RELEVANT ASSESSMENT YEAR ALSO THAT NOT IONAL INCOME COMPUTED BY THE ASSESSEE CANNOT BE TREATED A S 21 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 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 RECE IVES THE LICENSE AND DERIVES SUCH INCOME. IT IS ORDERED ACCO RDINGLY. 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 ASSESSE E SHALL NOT BE ELIGIBLE TO CLAIM ADDITIONAL DEPRECIATION ON THE ASSETS DEPLOYED IN THE CORPORATE OFFICE FOR OFFICE USE ACC ORDINGLY, HE MADE A DISALLOWANCE OF ` 5,93,605/-. 22. AS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE THIS ISSUE IS COVERED BY THE EARLIER ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESS MENT YEAR 2007-08 IN ITA NO.2157/MDS/2011 DATED 28 TH AUGUST, 2015. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL I S REPRODUCED HEREIN BELOW FOR REFERENCE:- FROM THE ABOVE IT IS EVIDENT THAT THE ASSESSEE IS E NTITLED TO ADDITIONAL DEPRECIATION IF IT HAS SATISFIED THE CONDITION 22 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 THAT IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE O R PRODUCTION OF ANY ARTICLE OR THING. THERE IS NO CON DITION STIPULATED IN THE ACT THAT ADDITIONAL DEPRECIATION SHALL BE ALLOWED ONLY IF THE ASSET IS DEPLOYED IN THE FACTOR Y OF THE ASSESSEE AND NOT THE OFFICE OF THE ASSESSEE. THEREF ORE, WE ACCEPT THE ARGUMENT OF THE LD. A.R. AND REJECT T HE OBSERVATIONS OF THE REVENUE ON THIS REGARD AND ACCORDINGLY DIRECT THE LD. ASSESSING OFFICER TO ALL OW THE CLAIM OF ADDITIONAL DEPRECIATION OF ` 8,52,500/- IF THE OTHER CONDITIONS OF THE ACT REMAINS SATISFIED. 23. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, W E HEREBY DIRECT THE LEARNED ASSESSING OFFICER TO ALLOW THE C LAIM OF ADDITIONAL DEPRECIATION OF ` 5,93,605/-. GROUND NO.7 : DISALLOWANCE OF EXCESS DEPRECIATION ON UPS :- 24. THE ASSESSEE HAD CLAIMED DEPRECIATION ON THE VA LUE OF ITS UPS SYSTEMS @ 60%. THE LEARNED ASSESSING OFFICE R OPINED THAT THE DEPRECIATION ON THE UPS CANNOT BE A LLOWED @ 60% SINCE IT HAS TO BE CLASSIFIED UNDER PLANT & M ACHINERY 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 TH E INCOME TAX RULES, INSTEAD THE ASSESSEE HAD ONLY CLAIMED 23 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 DEPRECIATION @ 60% TREATING IT TO BE PART OF DATA P ROCESSING 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 M ADE ADDITION OF RS. 18,12,748/-. THE LEARNED DRP CONFI RMED 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 I T WAS HELD THAT THE UPS IS NEITHER A PART OF THE COMPUTER OR E NERGY 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 SEV ERAL DECISIONS TO JUSTIFY ITS STAND THAT THE UPS FORMS P ART OF DATA PROCESSING EQUIPMENTS AND ACCORDINGLY THE ASSESSEE WOULD BE ENTITLED FOR THE CLAIM OF DEPRECIATION @ 60%. WE FIND MERIT IN THE CONTENTION OF THE LEARNED AUTHORIZED REPRESE NTATIVE. THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF SU NDARAM ASSET MGT. COMPANY VS,. DCIT IN ITA NO.1774 /MDS/20 12 24 ITA NO.2353 /MDS/2012 & S.P.NO.360/MDS/2015 VIDE ORDER DATED 19.07.2013 HAS HELD THAT THE ASSES SEE WOULD BE ELIGIBLE TO CLAIM DEPRECIATION @ 60% IN RE GARD TO THE UPS FORMING PART OF COMPUTERS. THEREFORE, FOLLO WING THE ABOVE SAID DECISION WE HEREBY DIRECT THE LEARNED AS SESSING OFFICER TO VERIFY WHETHER THE UPS OWNED BY THE ASSE SSEE ARE FORMING PART OF THE COMPUTER AS ITS ACCESSORIES AND IF SO, ALLOW DEPRECIATION @ 60%. 26. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES AND THE STAY PETIT ION FILED BY THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. ORDER PRONOUNCED IN THE OPEN COURT ON THE 22 ND APRIL, 2016 SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) ( A.M OHAN ALANKAMONY ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 22 ND APRIL, 2016 SOMU *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /G