Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 30.08.2024 passed by the Income Tax Appellate Tribunal for Assessment Year 2010-11. The Tribunal had partially allowed the assessee’s appeal and dismissed the Revenue’s appeal.

The issues before the Tribunal related to disallowance of depreciation on assets of the Dharuhera unit which were discarded during the year, and transfer pricing adjustments relating to Advertisement, Marketing and Promotion (AMP) expenses, including application of the Bright Line Test.

Issues Involved

Whether depreciation can be disallowed on assets discarded during the year when the block of assets continues to exist, whether separate AMP adjustment is warranted when the distribution activity is already benchmarked, and whether BLT can be applied for AMP adjustment.

Appellant’s Arguments

The Revenue proposed three substantial questions of law contending that the ITAT erred in deleting depreciation on discarded assets which were allegedly no longer owned by the assessee, erred in holding that no separate AMP adjustment was required, and erred in directing partial benchmarking of AMP reimbursement when the Transfer Pricing Officer had applied the Bright Line Test and the AMP issue was pending before the Supreme Court.

Respondent’s Arguments

Though unrepresented at the hearing, the assessee relied on binding precedents of the Delhi High Court in its own cases. It was contended that depreciation is allowable as long as the block of assets continues to exist and that AMP adjustments based on BLT are legally unsustainable. Reliance was placed on earlier Sony India judgments and the ruling in Sony Ericsson Mobile Communications India Pvt. Ltd.

Court Order / Findings

The Delhi High Court recorded the submission of the Revenue that substantial questions of law relating to AMP adjustments stood covered against the Revenue by the earlier Division Bench judgment of the Court in Pr. Commissioner of Income Tax-8 vs. Sony India Pvt. Ltd. The Court held that no substantial question of law arose on issues relating to AMP adjustment and BLT, and accordingly rejected questions B and C.

As regards depreciation on the Dharuhera unit, the Court noted that the ITAT had relied on the judgment of the Delhi High Court in Sony India (P) Ltd. vs. Commissioner of Income Tax, which in turn followed the law laid down in CIT vs. Ansal Properties & Infrastructure Ltd. and Oswal Agro Mills Ltd. The Court reiterated that depreciation is allowable on block of assets and cannot be denied merely because certain individual assets were discarded, so long as the block of assets does not cease to exist.

The Court observed that the Revenue did not dispute that the issue stood covered by binding precedent and held that no substantial question of law arose even on the depreciation issue.

Important Clarification

The Court clarified that under the block of assets regime, individual use or discard of specific assets is irrelevant for depreciation, provided the block continues to exist. It also reaffirmed that AMP adjustments based on the Bright Line Test are legally impermissible and unsustainable.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal allowing depreciation on assets forming part of the block of assets and deleting AMP adjustments, holding that no substantial question of law arose for consideration, thereby deciding the matter in favour of Sony India Private Limited and against the Revenue.

Link to download order- https://www.mytaxexpert.co.in/uploads/1769681824_PR.COMMISSIONEROFINCOMETAX7DELHIVsSONYINDIAPRIVATELIMITED.pdf

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