2018 (7) TMI 2297 - AT - Income Tax

TP Adjustment - Incurring of AMP expenditure - whether the TPO was justified in making ALP adjustment in respect of alleged expenditure incurred on AMP functions? - HELD THAT - The important fact to be taken into consideration is that the assessee was assured of minimum return on distribution business. These facts no doubt trigger an enquiry into the real nature of relationship between assessee and its AE i.e. whether it is distributor or a trader. The real economic substance of transaction is required to be found out having regard to the actual conduct of the parties. Having regard to the actual conduct of the parties and the real economic substance of the transaction it requires to be established whether there is any international transaction of AMP expenditure. Needless to mention the Hon ble Delhi High Court in a series of judgments subsequent to decision of the Sony Ericsson Mobile Communications India P Ltd. vs. CIT 2015 (3) TMI 580 - DELHI HIGH COURT AND Yum Restaurants (India) Pvt. Ltd. vs. ITO 2016 (1) TMI 582 - DELHI HIGH COURT held that AMP expenditure is international transaction but determination of ALP was restored to the file of the AO for the purpose of detailed examination of the agreement between the assessee and its AE to ascertain whether any part of AMP expenditure is for the purpose of creating marketing intangibles for AE of the assessee therein. If it is shown that AMP expenditure is an international transaction then further question of determination of ALP of such international transaction would arise. In the present case also TPO had not brought anything on record to show existence of international transaction whereby the assessee was obliged to incur AMP expenditure for the purpose of promoting brand intangible of its AE. Similarly the assessee-company also has not furnished FAR analysis of AMP functions in its TP study. Thus the matter requires remission to the TPO for undertaking fresh analysis to establish existence of international transaction in respect of AMP expenditure and true nature of transaction between the appellant and its AE. After due analysis of FAR of the AMP functions carried out by the appellant and having regard to the actual conduct of the appellant vis- vis its AE and economic substance of the transactions between the appellant and its AE if the TPO is of opinion that there existed an international transaction in the form of AMP functions then to undertake the exercise of determination of ALP by adopting a suitable method of compensation to the appellant for performing the AMP functions of its AE. Appeal filed by the assessee allowed for statistical purposes.

Summary

Issues involved:
1. Transfer pricing adjustment on Advertisement, Marketing, and Sales Promotion (AMP) expenditure.
2. Determination of existence of international transaction in respect of AMP expenditure.
3. Application of Arms Length Price (ALP) adjustment on AMP functions.
4. Consideration of Functional Analysis and economic substance of the transactions between the appellant and its Associated Enterprise (AE).

Detailed Analysis:
1. The appeals were filed against final assessment orders for assessment years 2012-13 and 2013-14 regarding Transfer Pricing adjustments on AMP expenditure. The Transfer Pricing Officer (TPO) alleged that the assessee incurred AMP expenditure for promoting brand intangibles of its AE, resulting in TP adjustments. The Dispute Resolution Panel (DRP) upheld the TPO's action but directed adjustments in the calculation of AMP expenditure and the exclusion of certain comparables. The Appellate Tribunal found that the TPO did not establish the existence of an international transaction obliging the assessee to incur AMP expenditure for the AE's benefit. The Tribunal remanded the issue to the TPO for a fresh analysis to determine the existence of an international transaction and the true nature of the transaction between the appellant and its AE.

2. The key issue was whether the TPO was justified in making ALP adjustments on alleged AMP functions expenditure. The Tribunal noted that the assessee, as an exclusive distributor of its AE, earned income through commissions and had a minimum return assurance on distribution business. Citing precedents, the Tribunal emphasized the need to establish the existence of an international transaction regarding AMP expenditure. It highlighted the importance of a detailed examination of the agreement between the assessee and its AE to ascertain if any part of the AMP expenditure aimed at creating marketing intangibles for the AE. As the TPO failed to demonstrate the existence of such a transaction, the Tribunal remanded the matter for a fresh analysis to determine the existence of an international transaction and the appropriate ALP if required.

3. The Tribunal directed a reassessment by the TPO to establish the existence of an international transaction in the form of AMP functions and determine the ALP by adopting a suitable compensation method for the appellant's performance of AMP functions for its AE. The Tribunal stressed the significance of conducting a detailed analysis of the Functional Analysis and the economic substance of the transactions between the appellant and its AE to reach a fair and accurate determination.

4. In conclusion, the appeals for both assessment years were allowed for statistical purposes, emphasizing the need for a thorough reassessment by the TPO to determine the existence of an international transaction regarding AMP expenditure and to ascertain the appropriate ALP adjustments based on a detailed analysis of the transaction's nature and the appellant's functions in relation to its AE.