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2015 (6) TMI 130 - AT - Income TaxTransfer pricing adjustment - Advertising, Marketing and Promotion (AMP) expenses - selection of comparable - Held that - TPO/AO have followed the Special bench decision in LG Electronics (2013 (6) TMI 217 - ITAT DELHI) for determining the ALP of AMP expenses. There is no discussion about the AMP functions carried out by the assessee or comparables. Now since the Special bench order has been partly modified by the Hon ble Delhi High Court, including the non-applicability of the bright line test, and no material has been placed on record by the ld. AR to, firstly, demonstrate the AMP functions carried out by the assessee and then, to compare such functions with those done by comparables, this issue cannot be decided at our end. Under such circumstances, we set aside the impugned order and remit the matter to the file of the AO/TPO for deciding it afresh as per law. In this fresh exercise, the TPO will follow the parts of the judgment in Sony Ericson (2015 (3) TMI 580 - DELHI HIGH COURT) as are common to both Manufacturers and Distributors; apply the parts of the judgment as are applicable to a Manufacturer ; and ignore the parts of the judgment which pertain exclusively to a Distributor . Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Addition of Rs. 180,63,50,055/- on account of transfer pricing adjustment towards Advertising, Marketing, and Promotion (AMP) expenses. Detailed Analysis: Issue 1: Addition of Rs. 180,63,50,055/- on account of transfer pricing adjustment towards AMP expenses The appeal by the assessee challenges the final order passed by the Assessing Officer (AO) on 5.1.2015 u/s 143(3) read with section 144C of the Income-tax Act, 1961, for the assessment year 2010-11. The only issue raised is the addition of Rs. 180,63,50,055/- made by the AO on account of transfer pricing adjustment towards AMP expenses. The assessee, an Indian company and a subsidiary of PVM, engaged in manufacturing confectionary products, reported 14 international transactions. The Transfer Pricing Officer (TPO) accepted all reported international transactions at arm's length price (ALP) but noticed significant AMP expenses amounting to Rs. 183,73,82,000/-. Using the bright line test, the TPO determined non-routine AMP expenses in excess of the bright line at Rs. 152.61 crore, adding a mark-up of 18.36%, resulting in a transfer pricing adjustment of Rs. 180,63,50,055/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP), and the AO made an addition of Rs. 180.63 crore in the final order. The assessee appealed against this addition. Upon hearing the submissions, it was noted that the assessee is a `Manufacturer` and not a `Distributor`. The Special Bench of the Tribunal in LG Electronics India Pvt. Ltd. Vs. ACIT (2013) held that AMP is an international transaction within the meaning of section 92B of the Act and that the TPO has jurisdiction to compute the ALP of this transaction. The Special Bench approved the bright line test for non-routine AMP expenses and suggested the Cost plus method for determining ALP. Following the Special Bench order, various benches of the Tribunal restored matters to the AO/TPO for fresh decisions in line with the LG Electronics case. The Hon'ble Delhi High Court in Sony Ericson Mobile Communications India Pvt. Ltd. Vs. CIT upheld the majority view of the Special Bench treating AMP as an international transaction and conferred jurisdiction on the TPO to determine the ALP. The High Court suggested bundling AMP expenses with other international transactions for distributors and provided guidelines for determining ALP. The High Court disapproved the bright line test, emphasizing the need to compare AMP functions performed by the assessee and comparables. It highlighted that AMP functions are separate but related to distribution activities and should be examined in a bundled manner. If no suitable comparables are available, AMP expenses should be determined separately. The court also stated that selling expenses should not be considered as part of AMP expenses. In this case, the TPO/AO followed the Special Bench decision in LG Electronics, but there was no discussion on AMP functions carried out by the assessee or comparables. Given the modifications by the Hon'ble Delhi High Court, the issue cannot be decided without examining AMP functions. Therefore, the matter is remitted to the AO/TPO for fresh consideration, following the guidelines in the Sony Ericson case applicable to manufacturers and ignoring parts specific to distributors. The appeal is allowed for statistical purposes, and the order was pronounced in the open court on 02.06.2015.
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