2020 (8) TMI 927 - AT - Income Tax

TP Adjustment - benchmark the reimbursement of AMP expenditure by the AE - TPO on the basis of its TP study computed the average ratio of AMP/sales expenditure at 2.29% of comparables vis- -vis 6.23% of the comparables and proceeded to compute the AMP expenditure - HELD THAT - Tribunal in taxpayer s own case in AY 2010-11 2018 (12) TMI 111 - ITAT DELHI which is exactly on the identical issue and adjustment on account of AMP expenditure made by the TPO has been found to be not sustainable on the ground that no international transactions held to be involved and that economic/legal ownership of the brand seeking compensation for AMP expenditure is inconsistent with the characterization and business model of the taxpayer and that adjustment on account of AMP expenses is not permissible within the scheme of Chapter X . Even otherwise adjustment on account of AMP expenses is not permissible within the scheme of Chapter - X of the Act as has been held by the Hon ble Delhi High Court in case of Maruti Suzuki India Ltd. vs. CIT 2015 (12) TMI 634 - DELHI HIGH COURT We are of the considered view that addition made by AO/DRP/TPO on account of AMP expenses is not sustainable and as such question framed is answered in the negative. We set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. Adjustment made by the TPO/DRP/AO by applying the BLT on account of AMP expenses in the absence of international transactions between the taxpayer and AE is not sustainable in the eyes of law hence ordered to be deleted. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of assessment under section 144C read with section 143(3) of the Income-tax Act, 1961.
2. Transfer pricing adjustment related to Advertisement, Marketing, and Sales Promotion (AMP) expenses.
3. Characterization of AMP expenses as an international transaction.
4. Existence of tangible material or evidence to substantiate the international transaction.
5. Creation of valuable marketing intangible in favor of associated enterprises (AE).
6. Reimbursement of AMP expenses as an international transaction.
7. Control over marketing intangibles by the associated enterprise.
8. Independent control of AMP expenditure by the appellant.
9. Interpretation of the memorandum between the appellant and the AE.
10. Reimbursement of 100% of expenses for advertising the 'Suzuki' brand.
11. Permissibility of Transfer Pricing adjustments under Chapter X of the Act.
12. Economic ownership of the 'Suzuki' brand by the appellant.
13. Adjustment for excess AMP expenses for a full risk-bearing entrepreneur.
14. Benefit to AE from AMP expenses and separate benchmarking.
15. Benefit to AE from AMP expenses in the absence of direct sales in India.
16. Quantitative adjustment for AMP expenditure.
17. Exclusive business purpose of AMP expenses.
18. Application of the Bright Line Test (BLT).
19. Arm's length nature of AMP expenses using Transactional Net Margin Method (TNMM).
20. Inclusion of rebates and discounts in AMP expenditure.
21. Comparability analysis for benchmarking AMP expenditure.
22. Application of a markup on excess AMP expenditure.

Detailed Analysis:

1. Validity of Assessment:
The appellant challenged the assessment completed under section 144C read with section 143(3) of the Income-tax Act, 1961, arguing that the assessing officer erred in finalizing the assessment at a loss of Rs. 20,56,26,035 against the returned loss of Rs. 37,85,45,196.

2. Transfer Pricing Adjustment:
The primary issue was the transfer pricing adjustment of Rs. 17,29,19,161 related to AMP expenses incurred by the appellant. The Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) held that these expenses constituted an international transaction requiring adjustment.

3. Characterization of AMP Expenses:
The appellant argued that the AMP expenses incurred unilaterally in India could not be characterized as an international transaction in the absence of any proved understanding or arrangement with the AE, as per section 92B of the Act.

4. Tangible Material or Evidence:
The DRP/TPO failed to place on record any tangible material or evidence to substantiate the existence of an international transaction related to AMP expenses.

5. Creation of Marketing Intangible:
The DRP/TPO held that the appellant created valuable marketing intangibles in India in favor of the AE, which required compensation.

6. Reimbursement of AMP Expenses:
The TPO/DRP considered the reimbursement of AMP expenses by the AE as an international transaction, despite the appellant's claim that such reimbursements were gratuitous and not pursuant to any understanding or arrangement.

7. Control Over Marketing Intangibles:
The DRP/TPO asserted that the AE controlled the development and growth of marketing intangibles, while the appellant contended that it independently controlled the AMP expenditure.

8. Independent Control of AMP Expenditure:
The appellant argued that it performed critical decision-making functions regarding advertisement and marketing activities, thereby independently controlling the AMP expenditure.

9. Interpretation of Memorandum:
The DRP/TPO relied on a memorandum stating that the AE commissioned the appellant to advertise and promote its products in India. The appellant argued that this memorandum was for the promotion of its own products.

10. Reimbursement of Advertising Expenses:
The memorandum indicated that the AE reimbursed 100% of expenses for advertising the 'Suzuki' brand, while the remaining AMP expenses were incurred solely for promoting the appellant's products in India.

11. Permissibility of Transfer Pricing Adjustments:
The appellant contended that Chapter X of the Act only permitted adjustments for differences between the arm's length price and the declared price, not for determining the quantum of business expenditure.

12. Economic Ownership of the Brand:
The appellant claimed economic ownership of the 'Suzuki' brand in India due to long-term usage rights, challenging the need for adjustments for AMP expenses.

13. Adjustment for Excess AMP Expenses:
The appellant, as a full risk-bearing entrepreneur, argued that adjustments for excess AMP expenses were unwarranted.

14. Benefit to AE from AMP Expenses:
The TPO held that the AE benefited from AMP expenses through royalties and sales, which were separately benchmarked and accepted as arm's length.

15. Benefit to AE Without Direct Sales:
The TPO's assertion that the AE benefited from AMP expenses for brand development was challenged by the appellant, noting that the AE did not sell goods directly in India.

16. Quantitative Adjustment:
The appellant argued that the TPO's quantitative adjustment for AMP expenditure was not authorized by Chapter X of the Act.

17. Business Purpose of AMP Expenses:
The appellant maintained that AMP expenses were incurred exclusively for its business purposes, with any benefit to the AE being incidental.

18. Application of Bright Line Test:
The TPO applied the Bright Line Test (BLT) to benchmark AMP expenses, which the appellant argued was invalidated by the Delhi High Court in the case of Sony Ericsson Mobile Communications Pvt Ltd.

19. Arm's Length Nature Using TNMM:
The appellant contended that AMP expenses were at arm's length when applying the Transactional Net Margin Method (TNMM).

20. Inclusion of Rebates and Discounts:
The appellant disputed the inclusion of rebates and discounts in the calculation of AMP expenditure.

21. Comparability Analysis:
The appellant argued against using companies with different product profiles for benchmarking AMP expenditure.

22. Markup on Excess AMP Expenditure:
The TPO applied an 8.50% markup on excess AMP expenditure, which the appellant challenged.

Tribunal's Findings:

Onus of Proving International Transactions:
The Tribunal held that the Revenue failed to discharge its onus of proving the existence of international transactions between the taxpayer and the AE. The existence of such transactions could not be inferred merely based on the BLT.

Application of BLT:
The Tribunal noted that the BLT method had no statutory mandate and was not a legally sustainable method for determining the existence or arm's length price of international transactions involving AMP expenses.

Economic/Legal Ownership:
The Tribunal found that the taxpayer had economic and legal ownership of the brand, and the AMP expenses were incurred to enhance its sales, not for the benefit of the AE.

Delhi High Court Precedents:
The Tribunal relied on several Delhi High Court decisions, including Maruti Suzuki India Ltd. and Bausch & Lomb Eyecare (India) Pvt. Ltd., which held that the Revenue must provide tangible material to prove international transactions and that BLT was not a valid method.

Adjustment Not Sustainable:
The Tribunal concluded that the adjustment made by the TPO/DRP/AO on account of AMP expenses was not sustainable in the absence of international transactions and tangible evidence.

Remand for Fresh Order:
The Tribunal set aside the orders of the authorities below and restored the matter to the file of the Assessing Officer. The AO was directed to pass a fresh order considering the Tribunal's findings and any future decision by the Hon'ble Apex Court.

Appeal Allowed:
The appeal filed by the taxpayer was allowed, with the adjustment on account of AMP expenses ordered to be deleted.

Order Pronounced:
The order was pronounced in open court on August 31, 2020.