2014 (11) TMI 266 - AT - Income Tax

Inclusion of selling expenses in the AMP basket of expenses Held that - The assessee declared a loss by way of filing its return on 29.09.2008 which was selected for scrutiny through CASS after issuance of notice u/s 143(2) of the Income Tax Act. The AO made a reference to the TPO - the TPO after considering the Transfer Pricing study of the assessee, wherein the assessee described its activities as that of a distributor; and considering the Importation Agreement entered into by the assessee with the parent company, i.e. BMW w.e.f 01.01.2006 which assigned the duties of the assessee with regard to marketing and promotion of the products of the parent company - it was submitted that the AMP expenses include expenses of certain items like after sales support costs incurred for company dealers and salesman bonus and it was urged that these should not form part of AMP expenses. The assessee has performed advertisement, marketing and sale promotion activities (marketing or AMP expenditure) which exceed the activities performed by comparable independent enterprises as selected by the assessee - the assessee has not been reimbursed for such non routine AMP activities and no return was provided to the assessee for carrying out these additional significant marketing functions for its AE The assessee through its non routine marketing (AMP) activities has not only enhanced the brand value of the AE in India but has also developed marketing intangible for the BMW products of its AE which resulted in enhanced sale and profit to the AEs - Since legal ownership of brand is with the AE the assessee would not be entitled to share in any return attributable to the increase in the value of the brand - the assessee have assumed significantly greater risk than the arm s length price - the assessee is not only entitled for reimbursement of non-routine AMP expenditure but also a normal return on such AMP activities provided for the benefited of the AEs. The assessee has objected to use of PLR for computing the minimum return expected to be earned on amount of AMP expenses - If the assessee would have invested the money spent on AMP expenses over and above the bright line limit (non- routine AMP), assessee would have earned a return which is at least equivalent to PLR - assessee should earn some markup on the value of services rendered, time and effort spent on incurring non-routine AMP expenditure to build the brand of the AE - assessee should have been reimbursed for the non-routine AMP expenses with a markup of PLR 2.5% i.e. 15.27% - The assessee has also stated that since PLR is being used the monthly expenditure should have been taken for the purpose of this markup - it is appropriate to accept the departmental stand and direct the assessee to demonstrate its claim before the TPO. Selection of comparables Held that - The contention of the assessee is accepted about the necessity of choosing properly comparable cases in the first instance before starting the exercise of making comparison of the AMP expenses incurred by them for finding out the amount spent by the assessee for its own business purpose - choosing cases using the foreign brand ex facie cannot be accepted - the AMP expenses of such cases will also include contribution towards brand building of their respective foreign AEs - the comparison would become meaningless as their total AMP expenses will stand on the same footing as that of the assessee before the exclusion of expenses in relation to brand building for the foreign AE thus, the matter is remitted back to the TPO for fresh selection of comparables. Determination of the ALP - Intra Group Service Charges as NIL by using CUP method Held that - The assessee has not identified the services actually availed of and has only given a general response - The contemporaneous evidence to show that the services have actually been received it was held was not made available and the assessee had merely submitted sub-inter company invoices, description of the service which was ostensibly to be rendered by the AE - they did not prove the fact that it was actually made available and received - the payments were also on cost to cost basis without any profit margin/mark-up built in and there was no basis of actual cost allocation - there was no evidence to show that there was any designated person rendering the services as same persons were found to be on the payroll of AE and major portion of work it was presumed would have been carried out by them for the AE and only ancillary services if any would be provided to the assessee company - the documentary evidence in support of the claim was missing - the assessee had made payments to its AE for intra-group services which are not found to exist - The arm s length price of these services is held to be nil on application of CUP method as no uncontrolled enterprise would have paid any amount for services which do not tantamount to intra group services with demonstrable benefits - on similar facts no adjustment was made by the TPO in the immediately preceding assessment year appears to be a plausible belief that contemporaneous documentation may not be required to be demonstrated thus, the matter is to be remitted back to the TPO for adjudication Decided in favour of assessee.

Issues Involved:
1. Transfer Pricing Adjustment on AMP Expenses
2. Transfer Pricing Adjustment on IT Support Services
3. Reclassification of Assets for Depreciation
4. Disallowance of Depreciation Allowance
5. Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment on AMP Expenses:
The primary issue was the enhancement of income by Rs. 78.62 crores due to "alleged excessive" Advertising, Marketing, and Promotion (AMP) expenses. The Tribunal noted that the assessee's case for AY 2008-09 was in favor of the assessee, and the facts remained unchanged for AY 2009-10. The Tribunal highlighted the importance of judicial discipline in following its own precedents unless there is a significant reason to deviate.

The Tribunal discussed the bright line test and the selection of comparables, emphasizing the need for a meaningful comparison by choosing domestic cases not using any foreign brand. The Tribunal restored the issue to the TPO for fresh selection of comparables and directed the exclusion of certain expenses like after-sales support costs from the AMP expenses.

2. Transfer Pricing Adjustment on IT Support Services:
The Tribunal addressed the enhancement of income by Rs. 3.12 crores due to the transaction of receipt of IT support services being held non-arm's length by the TPO. The TPO had applied the Comparable Uncontrolled Price (CUP) method and determined the arm's length value as NIL, citing the lack of contemporaneous documentation and tangible benefits derived by the assessee.

The Tribunal restored the issue to the TPO, directing the assessee to provide necessary evidence to substantiate its claim and demonstrate the benefits derived from the IT support services.

3. Reclassification of Assets for Depreciation:
The Tribunal addressed the reclassification of certain assets from the "Computers" block (eligible for 60% depreciation) to the "Plant and Machinery" block (eligible for 15% depreciation). The Tribunal noted the inconsistency in the AO's treatment of similar assets and directed the AO to verify and allow higher depreciation for Cisco Switches on the same reasoning as allowed for other similar assets.

4. Disallowance of Depreciation Allowance:
The Tribunal considered the disallowance of Rs. 0.48 crores towards depreciation allowance on reclassified assets. The Tribunal partially allowed the claim, directing the AO to verify the allowability of higher depreciation for specific assets like Cisco Switches, while upholding the disallowance for other communication devices based on existing judicial precedents.

5. Penalty Proceedings under Section 271(1)(c):
The Tribunal found that the issue of penalty proceedings under Section 271(1)(c) was premature and required no adjudication at this stage.

Conclusion:
The Tribunal provided a detailed analysis and directions for each issue, emphasizing the need for consistency with previous judgments, proper selection of comparables, and substantiation of claims with evidence. The appeal was partly allowed for statistical purposes, with specific directions for the TPO and AO to re-examine and verify the claims.

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