2015 (10) TMI 2675 - AT - Income Tax

Adjustment for AMP expenses - AR has submitted that gross profit margin earned by the assessee being higher than gross profit margin by internal as well as external comparables, no adjustment for AMP expenses was required in the case of the assessee - whether we can compute the arms length price of the international transaction of AMP expenses in the given circumstances or we need to remit the matter back to the AO as submitted by the learned SR DR - Held that - Authorised Representative has submitted that gross profits margin earned by the assessee being higher than gross profit margins earned by comparables companies, no adjustment is required for the purpose of computing arms length price of international transaction of AMP expenses. If the argument of the learned AR is accepted, it will lead us to a result where the AMP transaction will be rendered as non international transaction, as against the findings of the Hon ble High Court in the case of Sony Erricsson (supra). The Hon ble High Court has directed to find out AMP functions of comparables and compare the same with the AMP functions performed by the assessee and then after making adjustments if any compute the arms length price of the international transaction in bundled manner for distribution as well as AMP expenses and if not possible to compute in bundled manner, then only in separate manner. But in the case in hand the AMP functions performed by the external comparable are neither submitted by assessee before the AO/TPO nor examined by the TPO. The learned Authorised Representative has also failed to exhibit us the AMP functions carried out by the assessee and compare those functions with the AMP functions of the comparables and without that analysis the arms length price of the AMP functions cannot be determined at our level. We are also in agreement with the submission of the learned Senior Departmental Representative that the figures given in the tables by the learned Authorised Representative are not verifiable from the orders of the AO/TPO. In view of the above facts and circumstances, we are unable to determine the ALP of AMP expenses at our own either in the bundled or a separate approach. We remit the matter back to the file of AO/TPO for determination of ALP on international transaction on AMP expenses, in accordance with the direction laid down by the Hon ble High Court in the case of the assessee led by Sony Ericson Mobile Communication P Ltd (2015 (3) TMI 580 - DELHI HIGH COURT ). Needless to say that the assessee shall be afforded a reasonable opportunity of being heard.

Summary

Issues Involved:
1. Determination of Arms Length Price (ALP) of international transactions of Advertising, Marketing, and Promotion (AMP) expenses.
2. Jurisdiction and validity of adjustments suggested by the Transfer Pricing Officer (TPO) regarding AMP expenses.
3. Categorization of AMP expenses as an international transaction under Section 92B of the Income Tax Act, 1961.
4. Applicability of Cost Plus Method for transfer pricing adjustments of AMP expenses.
5. Benchmarking and comparability analysis for AMP expenses.
6. Inclusion of selling expenses in AMP expenses.

Issue-wise Detailed Analysis:

1. Determination of Arms Length Price (ALP) of International Transactions of AMP Expenses:
The primary issue was whether the AMP expenses incurred by the assessee could be considered as an international transaction and how to determine the ALP for such expenses. The TPO applied the 'bright line test' to segregate routine and non-routine AMP expenses, proposing an adjustment of Rs. 57,24,40,796 as the ALP of the international transaction of AMP expenses. The ITAT initially upheld the TPO's approach but excluded selling expenses like rebates and discounts from the AMP expenses.

2. Jurisdiction and Validity of Adjustments Suggested by the TPO Regarding AMP Expenses:
The assessee challenged the TPO's jurisdiction to make adjustments on AMP expenses, arguing that no specific reference was made by the Assessing Officer (AO). The High Court, however, upheld the TPO's jurisdiction, stating that the adjustments were valid in light of the retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012.

3. Categorization of AMP Expenses as an International Transaction under Section 92B of the Income Tax Act, 1961:
The High Court ruled that AMP expenses incurred by the assessee in India could be treated as an international transaction under Section 92B. This was based on the premise that these expenses were incurred for the benefit of the associated enterprise (AE) and thus fell within the ambit of international transactions.

4. Applicability of Cost Plus Method for Transfer Pricing Adjustments of AMP Expenses:
The ITAT initially directed that the ALP of AMP expenses should be computed using the Cost Plus Method. However, the High Court found this approach erroneous and remanded the matter back to the ITAT for fresh consideration. The High Court emphasized that the method selected should be appropriate and reliable, including the AMP functions and costs.

5. Benchmarking and Comparability Analysis for AMP Expenses:
The High Court highlighted the need for a detailed functional analysis and comparability analysis, including AMP functions. It directed that the ALP of AMP expenses should be computed preferably along with the ALP of the international transaction of distribution in a bundled manner. If bundling was not feasible, then a separate approach should be adopted. The High Court also rejected the 'bright line test' as having no statutory mandate.

6. Inclusion of Selling Expenses in AMP Expenses:
The ITAT had initially excluded selling expenses like rebates and discounts from the ambit of AMP expenses for determining the international transaction. The High Court upheld this exclusion, stating that selling expenses should not be included in AMP expenses.

Conclusion:
The ITAT remitted the matter back to the AO/TPO for the determination of the ALP of the international transaction of AMP expenses in accordance with the High Court's directions. The High Court's judgment emphasized a comprehensive functional and comparability analysis, rejecting the 'bright line test' and stressing the need for a practical approach to ensure fair and just conclusions on the ALP. The appeals were allowed for statistical purposes, with the matter being restored to the AO/TPO for fresh determination.