2015 (10) TMI 2621 - AT - Income Tax

Determining the arm s length price of the international transaction of advertising marketing and promotion (AMP) spent and royalty payment - Held that - So far as determination of arm s length price of AMP expenses is concerned the Hon ble Court in Sony Ericsson Mobile Communications India Pvt. Ltd. (Now known as Sony India Limited) & others 2015 (3) TMI 580 - DELHI HIGH COURT has held that if suitable comparable engaged in both distribution and advertising marketing and promotion (AMP) functions are found than arm s length price of the transaction should be determined on aggregate basis. If however there is some difference in the function of distribution or advertising marketing and promotion performed by the assessee as compared to the comparables then attempt should be made to bridge the difference by making a suitable adjustment to the profit margin of the comparables. The Hon ble Court has gone on to hold that if such adjustment is not possible then the chosen comparable should be eliminated and if in the process of comparing no comparables are left who are engaged in performing such distribution and advertising marketing and promotion functions then the International transaction of AMP should be segregated and its arm s length price should be determined applying a suitable method however in determining so a proper set off if any available from the distribution activity should be allowed. We find that in the present case details of the advertising marketing and promotion function performed by the assessee are not available on record. Further advertising marketing and promotion functions of the comparables have also not analyzed by the TPO as he applied the bright line test for determining the value of International transaction of advertising marketing and promotion expenses which approach has not been approved of by the Hon ble High Court. Thus since the Ld. A.R fairly stated that facts need to be addressed afresh as at this stage without a detailed discussion on facts agreements conduct etc. of the assessee it was not possible to address the advertising marketing and promotion function of the assessee as well as comparables thus request for remitting the matter back to the AO on facts and circumstances of the case is found to be justified. As far as determination of arm s length of royalty payment is concerned it is seen that the Hon ble High Court has held that payment of royalty is a relevant consideration while determining the arm s length price of international transaction of distribution and marketing however the tax treatment of royalty being different the Royalty transaction may be bench marked separately. Since the determination of arm s length price of royalty payment is inter connected with advertising marketing and promotion expenses as held by the Hon ble High Court we are of the view that determination of arm s length price of royalty also cannot be done at this stage and needs to be remitted back.- Decided in favour of assessee for statistical purpose.

Issues Involved:
1. Jurisdiction of the Transfer Pricing Officer (TPO) regarding AMP expenses.
2. Classification of AMP expenses as an international transaction under Section 92B of the Income Tax Act.
3. Transfer pricing adjustments for AMP expenses under Chapter X of the Income Tax Act.
4. Application of Cost Plus Method for AMP expenses.
5. Fresh benchmarking/comparability analysis for AMP expenses.
6. Exclusion of selling expenses from AMP expenses.
7. Deletion of transfer pricing adjustment for royalty payments.

Detailed Analysis:

1. Jurisdiction of the TPO regarding AMP expenses:
The Tribunal affirmed that the TPO had the jurisdiction to make additions on account of AMP expenses. The Hon'ble High Court of Delhi in its judgment dated 16th March 2015, in the case of Sony Ericsson Mobile Communication India Pvt. Ltd., held that such additions were within the TPO's jurisdiction, especially in light of the retrospective amendment to Section 92CA of the Income Tax Act by the Finance Act, 2012.

2. Classification of AMP expenses as an international transaction:
The Tribunal, guided by the High Court, ruled that AMP expenses incurred by the assessee in India could be treated and categorized as an international transaction under Section 92B of the Income Tax Act. This was based on the detailed discussion under the heading C, paragraphs 51 to 57 of the High Court's judgment.

3. Transfer pricing adjustments for AMP expenses:
The Tribunal noted that transfer pricing adjustments could be made by the TPO/Assessing Officer in respect of AMP expenses under Chapter X of the Income Tax Act. The High Court provided a detailed framework for such adjustments, emphasizing the need for a detailed functional analysis and comparability analysis. The Tribunal was directed to re-examine the facts and apply the legal standards set forth by the High Court.

4. Application of Cost Plus Method for AMP expenses:
The Tribunal was instructed to re-evaluate the use of the Cost Plus Method (CPM) for computing transfer pricing adjustments for AMP expenses. The High Court criticized the Tribunal's reliance on the majority decision in L.G. Electronics India Pvt. Ltd., stating that the legal ratio accepted and applied was erroneous. The Tribunal was ordered to conduct a fresh analysis using the appropriate method as per the High Court's guidelines.

5. Fresh benchmarking/comparability analysis for AMP expenses:
The Tribunal was directed to undertake a fresh benchmarking/comparability analysis for AMP expenses. The High Court emphasized that if suitable comparables engaged in both distribution and AMP functions were found, the arm's length price should be determined on an aggregate basis. If adjustments were not possible, the AMP expenses should be segregated and determined separately, allowing for any available set-off from distribution activities.

6. Exclusion of selling expenses from AMP expenses:
The Tribunal upheld the High Court's decision that selling expenses such as trade/volume discounts, rebates, and commissions paid to retailers/dealers should not be included in AMP expenses. This substantial question of law was answered against the Revenue and in favor of the assessee.

7. Deletion of transfer pricing adjustment for royalty payments:
The Tribunal was instructed to re-examine the transfer pricing adjustment made on account of royalty payments. The High Court ruled that the payment of royalty was a relevant consideration while determining the arm's length price for distribution and marketing transactions. However, the tax treatment of royalty being different, the royalty transaction should be benchmarked separately. The Tribunal was directed to re-assess the arm's length price of royalty payments in light of the High Court's judgment.

Conclusion:
The Tribunal remanded the matters of AMP expenses and royalty payments back to the Assessing Officer/TPO for de novo consideration, applying the legal standards and ratios laid down by the Hon'ble High Court of Delhi in the consolidated judgment dated 16th March 2015. The appeal of the assessee was allowed for statistical purposes, and the decision was pronounced in the open court on 9th October 2015.

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