2013 (10) TMI 543 - AT - Income Tax

Adjustment of arm s length price - Expenses on advertisement/business promotion - Conceptual framework of international transaction - Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee - Held that - expenses which are directly related to the sales do not come within the meaning of brand building - AMP expenses refer only to advertisement, marketing and publicity expenses. A divider needs to be placed between the expenses for the promotion of sales on one hand and expenses in connection with the sales on the other. Both these expenses are required to be kept in different compartments. While expenses for the promotion of sales directly lead to brand building, the expenses directly in connection with sales are only sales specific - assessee itself has categorized the expenditure into two sub-heads hereinabove, i.e. the advertisement head comprises of expenses which have been incurred for brand building . The other head is of business promotion expenses - advertisement expenses have been incurred for brand building; whereas, the business promotion expenses deserve to be treated as directly connected with the sales undertaken by the assessee. Though the assessee has pleaded that even some of the advertisement expenses are business promotion expenses, i.e. dealer meet expenses, training/seminar/classes, product demonstrators, product finance scheme, consumer gift (supra) etc, however, in view of the fact that since it itself has included the same under the head advertisement - There is no reason to change the head of expenses from advertisement expenditure to business promotion expenditure - only advertisement expenses out of the total amount are liable to be considered for the purpose of advertisement, marketing and promotion leading to brand building of the Panasonic logo - Decided in favour of assessee.

Issues Involved:
1. Addition on account of arm's length price under Section 92CA(3) of the Income-tax Act.
2. Determination of whether local transactions involving marketing expenses with unrelated parties are international transactions under Section 92B.
3. Methodology used by the TPO for determining the ALP of the transaction.
4. Application of transfer pricing provisions over domestic transactions.
5. Charging of interest under Section 234B.

Detailed Analysis:

1. Addition on Account of Arm's Length Price under Section 92CA(3):
The primary issue revolves around the addition of Rs. 3,80,86,435/- made by the A.O. under Section 92CA(3) of the Income-tax Act. The assessee contended that the A.O.'s order, based on the findings of the TPO and the directions of the DRP, was erroneous. The TPO had determined that the assessee was engaged in brand building activities on behalf of its AE and had incorrectly applied transfer pricing provisions to local transactions involving marketing expenses with unrelated parties.

2. Determination of Whether Local Transactions Involving Marketing Expenses with Unrelated Parties are International Transactions:
The TPO and DRP held that the local transactions involving marketing expenses were international transactions under Section 92B. The TPO noted that the assessee's advertising and business promotion expenses were significantly higher than those of comparables, indicating brand building for the AE. The TPO's reliance on the Maruti Suzuki India Ltd. case was pivotal in this determination.

3. Methodology Used by the TPO for Determining the ALP of the Transaction:
The TPO used a methodology not prescribed by the Income-tax Act, which the assessee argued was erroneous. The TPO compared the advertising expenses of the assessee (17% of total sales) with those of comparables (3.31% of total sales) and concluded that the excess expenses were for brand building. The DRP upheld this methodology, rejecting the assessee's contention that the expenses were necessary for selling its products.

4. Application of Transfer Pricing Provisions Over Domestic Transactions:
The TPO and DRP applied transfer pricing provisions to domestic transactions, which the assessee argued was incorrect. The DRP noted that the benefit accruing to the AE from the assessee's marketing activities justified the application of transfer pricing provisions. The Special Bench decision in L.G. Electronics India (P.) Ltd. was cited, supporting the view that AMP expenses exceeding those of comparables are subject to transfer pricing adjustments.

5. Charging of Interest Under Section 234B:
The assessee also contested the charging of interest under Section 234B amounting to Rs. 34,93,757/-, arguing that it was based on erroneous grounds. However, the judgment does not provide a detailed analysis of this issue, focusing primarily on the transfer pricing adjustments.

Conclusion:
The Tribunal partly allowed the appeal, concluding that only the advertisement expenses of Rs. 89,949,473/- out of the total Rs. 16,16,17,537/- should be considered for AMP leading to brand building. The TPO was directed to pass a consequential order after verifying the facts and providing the assessee an opportunity to be heard. The appeal was allowed for statistical purposes, and the order was pronounced on June 3, 2013, in Chennai.

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