2019 (4) TMI 1773 - AT - Income Tax

TP Adjustment - Advertising, Marketing and Promotion ( AMP') - HELD THAT - Following the decision rendered by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2009-10 2018 (9) TMI 1232 - ITAT DELHI and in view of the decision rendered in Sony Ericsson India Pvt. Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT and Maruti Suzuki India Ltd. v. CIT 2010 (7) TMI 84 - DELHI HIGH COURT the Revenue has failed to discharge the onus to prove the international transactions between the taxpayer and its AE and only thereafter ALP of international transactions involving AMP expenses can be computed. In the instant case, there is not an iota of material apart from applying the Bright Line Test and by taking the view that the taxpayer had incurred huge AMP/sales expenses to the tune of 18.14%, no cogent material is there to treat the incurring of AMP expenses as international transaction more particularly when basis for treating the AMP expenses as international transactions i.e. BLT is not sustainable method. So, following the binding judicial precedents, impugned ALP adjustment on account of AMP expenses is ordered to be deleted.

Issues Involved:
1. Adjustment of ?7,12,19,145 for alleged excessive Advertising, Marketing, and Promotion (AMP) expenses.
2. Disregard of premium profits and transfer pricing policy of Moet Group.
3. Misinterpretation of international guidance on marketing intangibles.
4. Incorrect application of "Bright Line Limit" to determine excessive AMP expenses.
5. Unjustified mark-up of 15% on AMP expenses.
6. Application of the LG Electronics decision to a distributor.
7. Inclusion of discounts, rebates, commissions, trade component costs, and trade incentives in AMP spend ratio.

Detailed Analysis:

1. Adjustment of ?7,12,19,145 for Alleged Excessive AMP Expenses:
The taxpayer, Moet Hennessy India Private Ltd., contested the adjustment made by the AO/TPO/DRP for AMP expenses, arguing that these expenses were not excessive and did not warrant a reimbursement from its Associated Enterprises (AEs). The TPO had determined the AMP expenses to be excessive using the "Bright Line Method," comparing the taxpayer's AMP/Sales ratio of 13.34% against an average of 4.678% for selected comparables, resulting in an adjustment of ?7,12,19,145.

2. Disregard of Premium Profits and Transfer Pricing Policy:
The taxpayer argued that the premium profits earned compensated for any allegedly excessive AMP expenses and that the Moet Group's transfer pricing policy, which provided an agreed contribution margin, indicated that the group funded the AMP expenses. The TPO disregarded these arguments, focusing instead on the AMP expenses' impact on brand value and marketing intangibles.

3. Misinterpretation of International Guidance on Marketing Intangibles:
The TPO relied on international guidance from the OECD, US TP Regulations, and the Australian Tax Office, which the taxpayer claimed were misinterpreted or incorrectly applied. The taxpayer contended that these guidelines were not relevant to their case and that the TPO's statements were erroneous and contradictory.

4. Incorrect Application of "Bright Line Limit":
The TPO used the "Bright Line Test" (BLT) to determine the arm's length value of AMP expenses, which was later deemed invalid by the Hon’ble Delhi High Court in Sony Ericsson India Pvt. Ltd. v. CIT and Maruti Suzuki India Ltd. v. CIT. The Tribunal noted that the BLT is not a valid basis for determining the existence of international transactions or computing the ALP of such transactions involving AMP expenses.

5. Unjustified Mark-up of 15% on AMP Expenses:
The TPO applied a 15% mark-up on the AMP expenses without any basis. The Tribunal found this approach unsustainable, particularly since the BLT used to justify the mark-up was invalidated by higher judicial authorities.

6. Application of LG Electronics Decision to a Distributor:
The TPO applied the decision of the Special Bench in LG Electronics India Pvt. Ltd., which was relevant to a licensed manufacturer, to the taxpayer, a distributor. The Tribunal found this application inappropriate, as the taxpayer was not the owner of the brand and was recognized as a distributor exposed to routine business risks.

7. Inclusion of Discounts, Rebates, Commissions, Trade Component Costs, and Trade Incentives in AMP Spend Ratio:
The taxpayer argued that expenses such as discounts, rebates, commissions, trade component costs, and trade incentives should not be included in the AMP spend ratio. The Tribunal agreed, noting that the inclusion of these items inflated the AMP expenses and distorted the analysis.

Conclusion:
The Tribunal concluded that the TPO's adjustment based on the BLT was not sustainable. The Tribunal followed its own decision in the taxpayer’s case for AY 2009-10, where a similar adjustment was deleted. The Tribunal emphasized that there was no material evidence to treat the AMP expenses as an international transaction and that the BLT was not a valid method for such determination. Consequently, the Tribunal ordered the deletion of the impugned ALP adjustment on account of AMP expenses, allowing the taxpayer's appeal.

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