2017 (3) TMI 1725 - AT - Income Tax

TPA - disallowing Advertising, Marketing and Promotion (AMP) expenses - adjustment by applying the Bright Line Test on account of AMP expenses - Held that - We have noticed that the TPO proposed the adjustment by applying the Bright Line Test on account of AMP expenses incurred by assessee. The Bright Line Test has been overruled by the decision of Sony Ericsson Mobile Communication 2015 (3) TMI 580 - DELHI HIGH COURT . TPO and the DRP was not having the benefit of the decision as the same was delivered on 16.03.2015. We therefore, considering the fact and totality, the ratio laid down by Hon ble Delhi High Court and the submission made before us by ld. representative of the parties, we deem it appropriate to set-aside the issue relating to the adjustment on account of AMP to the file of TPO/AO to decide the issue afresh relating to the adjustment on account of TPO to decide the issue afresh in accordance with law. - Decided in favour of assessee for statistical purpose.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Treatment of Advertising, Marketing, and Promotion (AMP) expenses as an international transaction.
3. Alleged arrangement between CD India and CD France regarding AMP expenses.
4. Classification of expenses incurred for opening a new store as extraordinary items.
5. Application of the Bright Line Test for determining compensation for AMP expenses.
6. Selection of comparables for calculating AMP to sales ratio.
7. Charging of interest under sections 234B, 234C, and 234D of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment orders for AY 2009-10 and 2010-11, stating that they were bad in law, unjust, and unfair. The assessment for AY 2009-10 was based on the order dated 19.12.2013, and the assessment for AY 2010-11 was based on the order dated 19.01.2015. Both orders were passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, pursuant to the directions of the Dispute Resolution Panel (DRP).

2. Treatment of AMP Expenses as an International Transaction:
The assessee contended that AMP expenses incurred in India should not be treated as an international transaction. The TPO observed that the AMP expenditure was 39.57% of sales and suggested an adjustment of ?2,40,48,821/-. The DRP included Timex Group India Ltd. as a comparable, which was challenged by the Revenue. The Tribunal noted that the "Bright Line Test" applied by the TPO had been overruled by the Delhi High Court in Sony Ericsson Mobile Communication (374 ITR 118). Therefore, the issue was set aside to the TPO/AO for fresh consideration in light of the Delhi High Court's decision.

3. Alleged Arrangement Between CD India and CD France:
The assessee argued that there was no arrangement between CD India and CD France requiring CD France to compensate CD India for AMP expenses. The TPO and AO's conclusions were based on the assumption of such an arrangement. The Tribunal directed the TPO/AO to reconsider this issue afresh.

4. Classification of Expenses for Opening a New Store:
The assessee claimed that the expenses incurred for opening a new store in DLF Emporio, Delhi, amounting to ?1,25,60,261/-, should be classified as extraordinary items and not as AMP expenses. The Tribunal agreed that these one-time expenses should not be included as AMP expenses and directed the TPO/AO to reconsider this classification.

5. Application of the Bright Line Test:
The TPO applied the Bright Line Test to determine the compensation for AMP expenses incurred by CD India. The Tribunal noted that the Bright Line Test had been overruled by the Delhi High Court in Sony Ericsson Mobile Communication and directed the TPO/AO to reconsider the issue without applying the Bright Line Test.

6. Selection of Comparables for Calculating AMP to Sales Ratio:
The assessee challenged the comparables selected by the TPO, arguing that they were not functionally similar. The Tribunal directed the TPO/AO to reconsider the selection of comparables, including those proposed by the assessee, such as Mahindra Retail Private Limited, Saga Department Store Ltd, and Spectrum Jewellery Ltd. The Tribunal also noted that the comparables selected by the TPO, such as Cravatex Ltd and Central Cottage Industries Corporation of India Ltd, were not appropriate and required reconsideration.

7. Charging of Interest Under Sections 234B, 234C, and 234D:
The assessee contested the charging of interest under sections 234B, 234C, and 234D of the Income Tax Act. The Tribunal did not specifically address this issue, as it was consequential to the primary issues being reconsidered by the TPO/AO.

Conclusion:
The Tribunal set aside the issues related to AMP expenses, selection of comparables, and classification of extraordinary expenses to the TPO/AO for fresh consideration in light of the Delhi High Court's decision in Sony Ericsson Mobile Communication. The appeals filed by the assessee and the Revenue were allowed for statistical purposes, and the AO was directed to provide sufficient opportunity to the assessee before passing a fresh order.