2014 (3) TMI 803 - AT - Income Tax

Addition made on account of Transfer pricing adjustment towards AMP expenses Held that - A sum of ₹ 54.75 crore was incurred on Incentive which was passed on to the subscriber who actually got made bookings for their customers through the network of Amadeus group - But for the payment of incentive, the subscribers had no interest in dealing with the assessee - As the revenue generated from bookings done by the subscribers is the major source of the assessee s income from its A.E, such Incentive to the subscribers cannot be viewed as anything other than Selling expense which is liable to excluded from the total AMP expenses Relying upon LG Electronics India Pvt. Ltd. Vs ACIT 2013 (6) TMI 217 - ITAT DELHI - the discount and incentive passed by the assessee to its dealers and distributors on effecting the sales was required to be excluded from the total AMP expenses for the purposes of determination of ALP in respect of AMP expenses thus, the incentive amounting to ₹ 54.75 crore should be deducted from total AMP expenses of ₹ 58.66 crores and the remaining amount of ₹ 3.91 crores should be considered by the Assessing Officer for a fresh determination of its ALP Decided partly in favour of Assessee.

Summary

Issues:
Transfer pricing adjustment towards AMP expenses

Analysis:
The appeal pertains to the addition of Rs. 33,52,43,720/- by the Assessing Officer on account of transfer pricing adjustment towards Advertising, Marketing, and Promotion (AMP) expenses for the assessment year 2007-08. The assessee, engaged in data processing services, reported international transactions related to services provided to Associated Enterprises (AEs). The primary contention was against the transfer pricing adjustment made by the AO. The Special Bench in LG Electronics India Pvt. Ltd. case held that there exists a 'Transaction' between the assessee and its foreign AE regarding AMP expenses, falling under 'International transaction.' The Bright Line Test was deemed appropriate for determining the Arm's Length Price (ALP) of AMP expenses. The AO/TPO was directed to consider specific factors before deciding on the transfer pricing adjustment related to AMP expenses.

The contention that there was no 'transaction' concerning AMP expenses and that it was not an 'international transaction' was rejected in light of the Special Bench order. The application of the Bright Line Test for determining ALP was upheld, and the matter was remitted to the AO/TPO for a fresh determination of the TP adjustment. The argument to exclude the 'Incentive' amount from total AMP expenses was raised. The 'Incentive' was explained as commission passed on to subscribers who generated business for the assessee. The Tribunal differentiated between expenses for brand promotion and sale-specific expenses, directing the exclusion of the latter from AMP expenses.

The Tribunal found that the 'Incentive' amount of Rs. 54.75 crore was paid to subscribers for generating revenue, qualifying as a 'Selling expense' to be excluded from total AMP expenses. Citing the Whirlpool India Pvt. Ltd. case, discounts and incentives to dealers and distributors were to be excluded from total AMP expenses. Consequently, the 'Incentive' amount was deducted from total AMP expenses for fresh determination of ALP. The appeal was partly allowed based on these findings.