2014 (8) TMI 961 - AT - Income Tax

Inclusion of certain expenses in the overall base of advertising marketing and promotion (AMP) expenses for the purposes of making Transfer Pricing adjustment - Held that - The scope of AMP expenses came up consideration before the Special Bench in the case of LG Electronics India Pvt. Ltd. (2013 (6) TMI 217 - ITAT DELHI). The Bench after considering the arguments from both the sides held in para 18.3 to 18.6 of the order that AMP expenses are only such expenses which are incurred for the promotion of sales which in turn lead to brand building. The Bench noticed that the expenses which are directly in connection with sales are only sales specific and hence cannot be brought within the domain of AMP expenses. It was further observed that the expenses which are not in the nature of advertisement marketing or promotion cannot help in creating any marketing intangibles or brand promotion for the foreign A.E. The Bench further examined the erstwhile provisions of sec. 37(3A) and (3B) and held them to be relevant in the correct interpretation of the scope of AMP expenses. It was eventually held that the expenses in connection with the sales which do not lead to brand promotion should not be brought within the purview of AMP expenses for determining the cost/value of the international transaction. - The action of the AO was prompted because he did not have the benefit of special bench decision at that time. As this exercise can be carried out only after examining the correct nature of each and every item of expense we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO/TPO. - Decided in favour of assessee.

Summary

Issues:
- Inclusion of certain expenses in the overall base of advertising, marketing, and promotion (AMP) expenses for Transfer Pricing adjustment for the assessment years 2008-09 and 2009-10.

Analysis:
Assessment Year 2008-09:
1. The assessee challenged the inclusion of specific expenses in the AMP expenses for Transfer Pricing adjustment. The Assessing Officer included selling expenses within AMP expenses using the bright line test, except for 'Liquidated damages claimed by customers.' The ld. CIT(A) directed the exclusion of Installation commission and Employees sales incentive from the overall base of AMP expenses based on a Special Bench order. The Special Bench clarified that AMP expenses are only those promoting sales leading to brand building, excluding expenses directly connected with sales. The ld. CIT(A) erred in focusing on 'marketing intangibles' instead of 'brand promotion,' contrary to the Special Bench's mandate.

2. The TPO applied the bright line test incorrectly, including both sales-specific expenses and promotion-related expenses in the base of AMP expenses. The AO's action was due to the absence of the Special Bench decision's guidance. The Tribunal set aside the impugned order, directing the AO/TPO to reevaluate the issue, excluding expenses directly linked to sales and only considering promotion-related expenses for determining transfer pricing adjustments. The assessee will have a hearing in the fresh proceedings.

Assessment Year 2009-10:
1. The facts for the assessment year 2009-10 mirrored those of 2008-09. The Tribunal, following the decision for 2008-09, remitted the matter to the AO/TPO for a fresh determination in line with the directions provided for the previous assessment year.

2. Both appeals were allowed for statistical purposes, and the order was pronounced on 28/8/2014.