2013 (9) TMI 124 - AT - Income Tax

Transfer pricing adjustments - receipt of reimbursement of Advertising and Marketing Promotion ( AMP ) expenses from the Associated Enterprises ( AEs ) - Intervention - Intervention in L.G Electronics case 2013 (6) TMI 217 - ITAT DELHI - Held that - assessee was not an intervener in the proceedings before the Special Bench in the case of L.G. Electronics as its name does not find a mention in the list of interveners and the affidavit dated 14.02.2013 of the Ld. AR Sh. Rahul Mitra addresses the background as to how after seeking permission to be impleaded as an intervener, the permission to withdraw was moved - it does not necessarily follow that the ruling of the Special Bench would not apply to the assessee wherever facts and law so demand. As such, the departmental stand that the said ruling is binding has to be upheld with the caveat to the extent facts and law support it Adjustment of transfer pricing - Reimbursement of Advertising and Marketing Promotion expenses - Comparison to other comparable companies - Service rendered to AE - Held that - on a consideration of the market conditions and the terms of the contract entered into in the Importation Agreement by the assessee with the AE, it necessarily leads us to the conclusion that the assessee has performed the function of sales promotion and advertisement in order to make a dent in the market while performing the functions of a distributor with greater intensity as opposed to a routine distributor - assessee has performed greater intensity of service than a normal distributor and has incurred expenditure for advertising marketing and promoting the brand of its AE. Whether on account of rendering of non-routine service was the assessee entitled to receive compensation with a mark-up from its AE - Held that - in the facts of the present case there was no occasion for the AE to further compensate the assessee for the services rendered towards building the brand of the AE as the same already stood factored in the pricing adjustment of the contract goods. As such the occasion to consider the applicability of mark-up does not arise. - Decided partly in favour of assessee.

Issues Involved:
1. Transfer Pricing Adjustment for Advertising and Marketing Promotion (AMP) Expenses
2. Mark-up on Alleged Excessive AMP Expenses
3. Misinterpretation of International Guidance on Marketing Intangibles and Bright Line Test
4. AMP Expenses Incurred for Assessee's Own Business Requirements
5. Arm's Length Nature of International Transactions Using Resale Price Method (RPM) and Transactional Net Margin Method (TNMM)
6. Selection of Comparable Set for AMP Spend Computation

Detailed Analysis:

1. Transfer Pricing Adjustment for Advertising and Marketing Promotion (AMP) Expenses
The assessee was subjected to a transfer pricing adjustment of Rs. 48,65,29,622 for AMP expenses incurred, which the TPO and DRP held should have been reimbursed by the Associated Enterprises (AEs). The TPO applied the bright line test, determining that AMP expenses exceeding 1.99% of sales were non-routine and required compensation from the AE, leading to the adjustment.

2. Mark-up on Alleged Excessive AMP Expenses
The TPO and DRP applied a 15% mark-up on the alleged excessive AMP expenses, asserting that the assessee rendered services to the AEs by incurring these expenses. The assessee argued that its high gross and net profit margins already compensated for any additional functions performed.

3. Misinterpretation of International Guidance on Marketing Intangibles and Bright Line Test
The assessee contended that the TPO and DRP misinterpreted international guidelines, including those from the OECD, US TP Regulations, and the Australian Tax Office (ATO), regarding marketing intangibles and the bright line test. The Tribunal upheld the use of the bright line test as an accepted method for calculating non-routine AMP expenses but emphasized that the assessee's pricing adjustments already factored in compensation for these expenses.

4. AMP Expenses Incurred for Assessee's Own Business Requirements
The assessee argued that the AMP expenses were incurred for its own business purposes, resulting in increased sales and market share, with any benefit to the AEs being incidental. The Tribunal acknowledged that the assessee performed non-routine functions but concluded that the compensation for these functions was embedded in the pricing arrangement with the AE.

5. Arm's Length Nature of International Transactions Using Resale Price Method (RPM) and Transactional Net Margin Method (TNMM)
The assessee demonstrated that its international transactions were at arm's length using RPM and TNMM, showing higher gross and net profit margins compared to comparable companies. The Tribunal agreed that the assessee's high margins indicated that it had already been compensated for any additional functions performed.

6. Selection of Comparable Set for AMP Spend Computation
The TPO and DRP selected a set of comparables for computing the alleged excessive AMP spend. The Tribunal noted that the comparables accepted by the TPO had similar intensity functions and upheld the bright line test application. However, it directed the TPO to exclude certain expenses, such as after-sales support costs and salesman bonuses, from the AMP calculation as per the DRP's directions.

Conclusion:
The Tribunal partially allowed the assessee's appeal, holding that the compensation for the non-routine AMP expenses was already factored into the pricing arrangement with the AE, and no further compensation was required. The TPO was directed to verify the calculations and give effect to the order, excluding specific expenses from the AMP calculation as directed by the DRP.

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