2019 (2) TMI 1643 - HC - Income Tax

TP Adjustment - case was referred to TPO u/s 92CA for computation of the Arm s Length - AMP expenses - as alleged revenue was not given sufficient opportunity - Revenue s only argument is that for determining the comparables ITAT relied on the TP analysis conducted by the TPO and that such an exercise was based on application of the bright line test which has since been discarded and ITAT should have remitted the entire matter for fresh consideration by the TPO - HELD THAT - Having gone through the entire record the court is of the opinion that the revenue s arguments are insubstantial and unmerited. There is no per se rule that in every case the ITAT had to necessarily remit each matter. Given that the materials in the form of reports and documents were available with the ITAT that the tribunal itself carried out the analysis based on the record of the facts which were disclosed before the TPO does not result in any credence to the revenue s complaint that it was not given sufficient opportunity. This court notices that the matters were required to be re-examined by the ITAT itself in Sony Ericsson 2015 (9) TMI 483 - ITAT DELHI and in view of the further circumstance that the remit was pending for 3 years the revenue s arguments have no force. AMP exercise as flawed - this court again feels that the analysis carried out by the ITAT having regard to the details pertaining to the comparable entities is fairly exhaustive and reasonable; the findings are in Paras 39-49 of the impugned order. The ITAT s findings consequently that since the brand under which the assessee s products were marketed were relatively unknown in India the advertisement expenditure could not have been said to inure to the benefit of the AE which was otherwise a well known brand overseas - the nature of its marketing and business expenditure was considered. The revenue s grouse that the TPO had treated the AMP expenditure as a bundled one is not also tenable. Sony Ericsson itself indicates that there cannot be a dogmatic approach as to whether bundled transactions of the kind ought to be segregated and that the entire issue is a fact dependent exercise. TPO treated the transactions as a bundled one; this court holds that as such that is not a question of law. Lastly both on the credit notes as well as the fact that in the case of comparables the margins were in fact lower; the ITAT therefore correctly in the opinion of this court recorded its findings that the assessee had been suitably compensated by its AEs. - Decided against revenue

Issues Involved:
1. Transfer Pricing Adjustment
2. Arm's Length Price (ALP) Determination
3. Advertisement, Marketing, and Promotion (AMP) Expenses
4. Application of Bright Line Test (BLT)
5. Compensation for AMP Expenditure
6. Natural Justice and Opportunity of Being Heard
7. Bundled Transaction vs. Separate International Transaction
8. OECD Guidelines on Transfer Pricing
9. Comparability Analysis and Selection of Method

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Revenue challenged the decision of the ITAT, which reversed the Assessing Officer's (AO) confirmation of the Transfer Pricing Officer's (TPO) analysis regarding the respondent-assessee's international transactions. The TPO had proposed ALP adjustments amounting to Rs. 69,94,95,650/-.

2. Arm's Length Price (ALP) Determination:
The TPO determined the ALP by comparing the ratio of AMP/sales using the Bright Line Test (BLT), which was not approved by the court. The ITAT held that the TPO's method of determining ALP was flawed as it did not consider the bundled transaction approach.

3. Advertisement, Marketing, and Promotion (AMP) Expenses:
The ITAT found that the AMP expenses incurred by the assessee were for its business promotion and not exclusively for the AE's brand building. The court noted that the assessee's AMP expenses could not be considered as having added value to the brand name of the AE.

4. Application of Bright Line Test (BLT):
The court disapproved the use of BLT for determining ALP, stating that it lacked statutory mandate. The court emphasized that TP adjustments should ensure tax parity between controlled and uncontrolled taxpayers.

5. Compensation for AMP Expenditure:
The ITAT concluded that the assessee was suitably compensated by its AE through credit notes worth Rs. 73.83 crores, which were adjusted against purchases. The court upheld this finding, stating that the compensation model ensured the assessee earned an arm's length return.

6. Natural Justice and Opportunity of Being Heard:
The Revenue argued that the ITAT erred by not giving the AO/TPO an opportunity to be heard or calling for a remand. However, the court found that the ITAT had sufficient materials and conducted a thorough analysis, thus dismissing the Revenue's argument.

7. Bundled Transaction vs. Separate International Transaction:
The ITAT held that if the AO/TPO accepts the comparables adopted by the assessee as a bundled transaction, it would be illogical to treat AMP expenses as a separate international transaction. The court agreed, noting that the TPO treated the transactions as bundled.

8. OECD Guidelines on Transfer Pricing:
The ITAT referred to the OECD Guidelines, which suggest that a distributor should be compensated with a service fee rather than a return on marketing intangibles. The court found that the assessee's compensation model was aligned with these guidelines.

9. Comparability Analysis and Selection of Method:
The ITAT found no dispute regarding the comparables and the use of the Transactional Net Margin Method (TNMM) as the most appropriate method. The court upheld the ITAT's analysis, noting that the assessee's net margin was higher than the comparables.

Conclusion:
The court dismissed the Revenue's appeal, concluding that there was no substantial question of law. The ITAT's findings were deemed exhaustive and reasonable, and the assessee was found to have been suitably compensated by its AE, negating the need for further adjustments.

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