Thursday, June 20, 2013

ITAT confirms TP adjustment for AMP expenditure; denies de-classification of an exp belonging to AMP category

If assessee had classified certain expenses in his accounts under the head "advertisement" and others under the head "Business Promotion", expenses under the former head would be treated as part of AMP expenses for TP adjustments in accordance with the SB ruling in LG Electronics. Assessee couldn’t claim that certain expenses classified by him as advertisement to be treated as business promotion expenses before the Tribunal

In the instant case, the assessee was importing electronic products from its associate enterprises. Thereafter, it marketed the said products in India through its retail chains and branded shops. Certain AMP expenses were incurred by the assessee. The TPO was of the view that assessee had promoted the aforesaid brand, since the assessee had been using the logo "Panasonic" in all correspondence, letterheads, visiting cards of its personnel, product catalogue, etc. It made TP adjustments in respect of AMP expenses, which was sustained by the DRP.

On appeal, the Tribunal held as under:

1) It had been held by the Special Bench in the case of LG Electronics that the AMP expenditures, incurred more than those in case of comparables, were transactions exigible to proceedings under Chapter X of the Act, being a case of brand building;

2) It further concluded that such expenses, even if paid to Indian entities, were covered by the definition of "transaction" within the meaning of section 92F(v) of the Act. Therefore, assessee's plea that AMP expenditure which had not been paid to overseas AEs won’t come within the purview of international transaction had no merits;

3) There was a force in the assessee's plea that as per Special Bench's decision, the expenses which were directly related to the sales won’t come within the meaning of "brand building";

4) The assessee itself had categorized the expenditure into two sub-heads, i.e., under the advertisement head comprising of expenses which had been incurred for "brand building". The other head was of business promotion expenses. Admittedly, there was no dispute about the category and nature thereof;

5) Hence, following the observations of the Special Bench (supra), the advertisement expenses had been incurred for brand building, whereas the business promotion expenses deserved to be treated as directly connected with the sales undertaken by the assessee;

6) Though the assessee had pleaded that even some of the advertisement expenses were business promotion expenses, yet, in view of the fact that since it itself had included the same under the head "advertisement", there was no reason to change the head of expenses from advertisement to business promotion. Hence, this latter plea of the assessee was to be declined. Thus, assessee’s appeal was to be partly allowed - Panasonic Sales & Services India (P.) Ltd. v. ACIT [2013] 34 276 (Chennai - Trib.)

Right to collect toll is an intangible asset within the purview of sec. 32(1)(ii) and is eligible for depreciation

Where assessee in terms of agreement with Government of Madhya Pradesh was required to develop, construct and maintain a road on Build, operate and transfer (‘BOT’) basis at its own cost for a specified period, it was eligible for depreciation on amount capitalized under head 'License to collect Toll'

In the instant case, the assessee was awarded a project for development, operation and maintenance of a road in the State of Madhya Pradesh on BOT basis. It was required to develop, construct and maintain the road at its own cost for a specified period. On expiry of the specified period, the infrastructural facility was to be transferred to the State Government free of charge. In consideration of such expenditure, the assessee was bestowed with a right to collect toll during the specified period. The costs incurred on development and construction of infrastructural facility was capitalized by assessee under the head 'License to collect Toll' and depreciation thereon was claimed by it. During assessment, the AO disallowed the depreciation claim of assessee. The CIT(A), however, allowed its claim by holding that the right to collect toll was a valuable right, having commercial value and it was an intangible asset covered by section 32(1)(ii).

The Tribunal held in favour of assessee as under:

1) The right to collect toll was a result of the costs incurred by the assessee on development, construction and maintenance of the infrastructure facility. Such a right had been adjudicated by the Tribunal in the various judicial precedents to be in the nature of 'intangible asset' falling within the purview of section 32(1)(ii) and found to be eligible for claim of depreciation.

2) The plea of the revenue, that the impugned right was not of the nature referred to in section 32(1)(ii), for the reason that the agreement with the State Government only allowed the assessee to recover the costs incurred for constructing the road facility, whereas section 32(1)(ii) required that the assets mentioned therein to be acquired by the assessee after spending money, was factually and legally misplaced;

3) It was incorrect to say that impugned right acquired by the assessee was without incurring any cost. In fact, it was quite evident that the assessee had got the right to collect toll for the specified period only after incurring expenditure through its own resources on development, construction and maintenance of the infrastructure facility;

4) Section 32(1)(ii) permits allowance of depreciation on assets specified therein being 'intangible assets' which are wholly or partly owned by the assessee and used for the purposes of its business. The aforesaid condition was fully satisfied by the assessee. Thus, the assessee was eligible for depreciation inasmuch as right to collect toll was an intangible asset falling within the purview of section 32(1)(ii) – ACIT v. Ashoka Infraways (P.) Ltd. [2013] 33 499 (Pune - Trib.)