2017 (4) TMI 716 - AT - Income Tax

TPA - AMP expenses to be an international transaction - Held that - It is a matter of record that the Hon ble High Court in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT) has held AMP expenses as an international transaction. It can be seen that in some later decisions, view taken is at variance. Equally, the tribunal is also not consistent in its stand. When the TPO in the instant case held AMP expenses to be an international transaction, he did not have any occasion to consider the ratio laid down in several judgments of the Hon ble jurisdictional High Court, which is now available for consideration. Respectfully following the predominant view taken in several Tribunal orders of co-ordinate benches, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon ble High Court, after allowing a reasonable opportunity of being heard to the assessee

Summary

Issues:
- Addition of transfer pricing adjustment of advertisement, marketing, and promotion (AMP) expenses for AY 2007-08 and 2008-09.

Comprehensive Analysis:

*Issue 1: Addition of Transfer Pricing Adjustment of AMP Expenses*

The case involved the addition of significant amounts on account of transfer pricing adjustment of AMP expenses for two assessment years. The Tribunal earlier disposed of the appeals, directing the computation of ALP of AMP expenses to be decided in accordance with the Special Bench decision. The matter was then taken to the High Court, which referred to guidelines laid down in a leading order, restoring the issue to the Tribunal for a fresh decision. The High Court emphasized the need to consider AMP expenses as an international transaction and to determine the ALP accordingly, either in a bundled or segregated manner based on comparability with functions performed by the assessee and probable comparables.

*Issue 2: Determination of ALP of AMP Expenses*

The Special Bench decision established that AMP is an international transaction, empowering the TPO to compute its ALP. The High Court upheld the view that AMP expenses should be bundled with other international transactions, emphasizing comparability with functions performed by the assessee and comparables. The judgment clarified that AMP functions and expenses are distinct, necessitating a detailed examination of functions performed by the parties involved. The Tribunal was directed to assess the nature of expenses, excluding selling expenses directly related to sales from the base amount for computing the ALP of AMP expenses.

*Issue 3: Examination of AMP Functions*

The Tribunal noted the absence of details regarding AMP functions performed by the assessee and comparables, highlighting the necessity for a thorough analysis in determining the ALP of AMP expenses. The High Court's directive to consider the nature of expenses and exclude selling expenses directly linked to sales was reiterated. The case was remanded to the TPO/AO for a fresh determination of the ALP in compliance with the guidelines set by the High Court.

In conclusion, the appeal was partly allowed for statistical purposes, emphasizing the importance of a comprehensive examination of AMP functions and expenses in determining the ALP of international transactions. The judgment highlighted the need for a meticulous approach in assessing and segregating expenses for transfer pricing adjustments, ensuring compliance with legal guidelines and precedents set by higher courts.