2015 (11) TMI 15 - AT - Income Tax

Transfer pricing adjustment - determine the ALP of AMP expenses - Held that - 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. Jurisdiction of the TPO to determine AMP expenses as international transactions.
2. Application of the Bright Line Test for AMP expenses.
3. Determination of ALP for AMP expenses.
4. Inclusion of selling expenses in AMP expenses.
5. Use of appropriate comparables for benchmarking AMP expenses.
6. Method of benchmarking AMP expenses.
7. Adjustment for AMP expenses.
8. Procedural and jurisdictional errors in the assessment process.

Detailed Analysis:

1. Jurisdiction of the TPO to Determine AMP Expenses as International Transactions:

The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses. The Special Bench of the Tribunal in the case of LG Electronics India (P.) Ltd. held that AMP is an international transaction within the meaning of section 92B of the Act and that the TPO can compute the ALP of this international transaction even if not specifically referred by the AO. This was upheld by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT.

2. Application of the Bright Line Test for AMP Expenses:

The TPO applied the Bright Line Test to segregate routine and non-routine AMP expenses. However, the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. held that the Bright Line Test cannot be applied to work out non-routine AMP expenses for benchmarking. The ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity.

3. Determination of ALP for AMP Expenses:

The TPO used the Cost Plus Method for benchmarking AMP expenses, which was contested by the assessee. The Hon'ble Delhi High Court emphasized that AMP expenses should be bundled with other international transactions of distribution activities when TNMM is applied and suitable comparables should be chosen. If no comparables perform similar functions, then the AMP transaction should be separately processed for determining its ALP.

4. Inclusion of Selling Expenses in AMP Expenses:

The Hon'ble Delhi High Court held that selling expenses directly incurred in connection with sales should not be considered as part of AMP expenses. This was a significant point raised by the assessee, arguing that selling expenses should be excluded from AMP expenses while benchmarking.

5. Use of Appropriate Comparables for Benchmarking AMP Expenses:

The TPO selected comparables for benchmarking AMP expenses but did not examine the AMP functions performed by the assessee and comparables. The Hon'ble Delhi High Court stated that comparables should perform similar AMP functions, and if adjustments for differences are not possible, then such comparables should be discarded.

6. Method of Benchmarking AMP Expenses:

The TPO applied the Cost Plus Method, but the Hon'ble Delhi High Court suggested that if no suitable comparables are available for a combined approach, the AMP transaction should be separately processed using any suitable method, including the Cost Plus Method.

7. Adjustment for AMP Expenses:

The TPO computed an adjustment for AMP expenses based on the Bright Line Test, which was found incorrect by the Hon'ble Delhi High Court. The Court emphasized proper set-off or purchase price adjustment should be allowed from the distribution activity when determining the ALP of AMP expenses.

8. Procedural and Jurisdictional Errors in the Assessment Process:

The assessee raised procedural and jurisdictional errors, including the TPO's suo moto adjustments and the AO's failure to record reasons for referring the matter to the TPO. The Hon'ble Delhi High Court upheld the TPO's jurisdiction and the procedural aspects as per the statutory requirements.

Conclusion:

The Tribunal set aside the impugned order and remitted the matter back to the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the guidelines laid down by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. The Tribunal emphasized the need for a detailed functional analysis of AMP expenses and comparables, excluding selling expenses directly incurred in connection with sales.