2015 (10) TMI 1008 - AT - Income Tax

Transfer pricing adjustment - TPO treating the AMP spend as a separate international transaction, he applied the Cost plus method and proposed the extant adjustment and segregated routine AMP expenses incurred by the assessee for his business from the non-routine AMP expenses by treating such non-routine AMP expenses leading to the creation of marketing intangible for its AE - Held that - AMP spend is an international transaction, which is required to be processed under Chapter X of the Act by taking into account the AMP functions performed by the assessee and then comparing such functions with those performed by comparable entities, though, firstly in a combined manner with the distribution functions. We find no reference in the order of the TPO of making any comparison of the assessee s AMP functions with those of the comparables. Going by the ratio in the case of Sony Ericsson Mobile Communications India (P.) Ltd.(2015 (3) TMI 580 - DELHI HIGH COURT), it is mandatory to make a comparison of the AMP functions performed by the assessee and comparables and then making an adjustment, if any, due to differences between the two, so that the AMP functions performed by the assessee and comparable are brought to a similar platform No detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO because of his applying the bright line test for determining the value of the international transaction of AMP expense and then applying the cost plus method for determining its ALP. The ld. AR also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. Under such circumstances, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon ble High Court in Sony Ericsson Mobile Communications India (P.)Ltd. (2015 (3) TMI 580 - DELHI HIGH COURT). Ex consequenti, the ground raised about the TPO having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile Communications India (P.)Ltd. (supra). - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Benchmarking of Advertisement, Marketing, and Promotion (AMP) expenses.
3. Jurisdiction of Transfer Pricing Officer (TPO) in determining ALP for AMP expenses.
4. Application of Bright Line Test.
5. Use of Transactional Net Margin Method (TNMM) and Resale Price Method (RPM).
6. Selection of comparables for benchmarking.
7. Inclusion of selling expenses in AMP expenses.
8. Jurisdictional error in reference to TPO without AO's reasons.
9. Imposition of interest and penalty.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The assessee, a subsidiary of Nikon Corporation, Japan, engaged in distribution and marketing services, reported several international transactions using TNMM, CUP, and RPM methods. The TPO accepted the reported ALP for most transactions but raised issues regarding AMP expenses, suggesting they were excessive and required compensation from the AE (Nikon Japan).

2. Benchmarking of Advertisement, Marketing, and Promotion (AMP) Expenses:
The TPO observed that the assessee incurred AMP expenses of Rs. 37,62,75,469, which were not benchmarked separately in the TP report. The TPO benchmarked these expenses using comparable companies and concluded that the AMP expenses were excessive, leading to the development of marketing intangibles for the AE.

3. Jurisdiction of Transfer Pricing Officer (TPO) in Determining ALP for AMP Expenses:
The TPO's jurisdiction to determine the ALP of AMP expenses was upheld, referencing the Special Bench decision in LG Electronics India (P.) Ltd., which treated AMP as an international transaction. The Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. upheld this view, confirming that AMP expenses should be bundled with distribution activities for ALP determination.

4. Application of Bright Line Test:
The TPO applied the Bright Line Test to segregate routine and non-routine AMP expenses, which was later deemed inappropriate by the Hon'ble Delhi High Court. The court held that AMP expenses should be determined in a bundled manner with distribution activities, and the Bright Line Test was not applicable for benchmarking.

5. Use of Transactional Net Margin Method (TNMM) and Resale Price Method (RPM):
The assessee used TNMM for several transactions, which the TPO accepted. However, for AMP expenses, the TPO applied the Cost Plus Method, which was found incorrect by the court. The court emphasized the need to compare AMP functions performed by the assessee and comparables.

6. Selection of Comparables for Benchmarking:
The TPO selected comparables for benchmarking AMP expenses but did not analyze the AMP functions performed by these comparables. The court mandated a detailed comparison of AMP functions between the assessee and comparables, and adjustments should be made for any differences.

7. Inclusion of Selling Expenses in AMP Expenses:
The court held that selling expenses directly incurred in connection with sales should not be included in AMP expenses. The TPO's inclusion of these expenses was incorrect, and the matter was remanded for fresh determination excluding selling expenses.

8. Jurisdictional Error in Reference to TPO without AO's Reasons:
The assessee contended that the reference to the TPO was jurisdictionally flawed as the AO did not record reasons for the reference. However, this issue was not specifically addressed in the judgment.

9. Imposition of Interest and Penalty:
The imposition of interest under sections 234A, 234B, 234C, and 234D, and the initiation of penalty proceedings under section 271(1)(c) were upheld as within the AO's prerogative, and objections were rejected as premature.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remanded to the TPO/AO for fresh determination of the ALP of AMP expenses in accordance with the guidelines laid down by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd., emphasizing the need for a detailed comparison of AMP functions and exclusion of selling expenses.