2017 (5) TMI 1352 - AT - Income Tax

Transfer pricing adjustment in regard to AMP expenses - Held that - As decided in the assessee s own case for assessment year 2011-12 2017 (5) TMI 1351 - ITAT DELHI it would be in the fitness of things if the impugned order is set aside and the matter is restored to file of TPO/AO for 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 would 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 in Sony Ericsson Mobile Communications (India) Pvt. Ltd. Vs. CIT 2015 (3) TMI 580 - DELHI HIGH COURT after allowing a reasonable opportunity of being heard to the assessee. As relates to benefit of deduction under Section 80IC the same was claimed only for the unit situated in Rudrapur (Uttrakhand). There is net loss in the units of Manessar (Haryana) & Chennai (Tamilnadu) and there is a net profit in Rudrapur Unit. The TPO has only disallowed this claim as the assessee was not involved in manufacture of any item covered by Schedule XIV where as the assessee has referred Schedule XIII and submitted that it is not considered by the TPO. After verifying Schedule XIII & XIV it is pertinent to note that the assessee s location at Rudrapur is coming under the scope of 80IC but the address was not properly verified by the TPO. Therefore this needs to be verified. We therefore remit this issue back to the file of the TPO to examine the same as relates to the applicability of the Schedule XIII.

Summary

Issues:
1. Assessment of income by the AO and TPO
2. Adjustment in relation to Advertising, Marketing & Promotion Expenses (AMP) using Bright Line Test
3. Application of Bright Line Test for computing AMP adjustment
4. Failure to apply Special Bench decision in entirety
5. Treatment of AMP expenses as an 'international transaction'
6. Failure to establish existence of understanding or arrangement for AMP spend
7. Failure to consider TNMM for AMP expenditure adjustment
8. Incorrect inclusion of issues from separate proceedings
9. Initiation of penalty proceedings under section 271

Analysis:

1. The appeal was against the final assessment order passed by the AO u/s 143(3) read with section 144C for the assessment year 2009-10. The assessee, a private limited company engaged in manufacturing confectionary products, filed objections against the proposed transfer pricing adjustment. The Tribunal had previously set aside the matter to the file of the Assessing Officer/TPO to decide the arm's length price of AMP expenses in line with the LG Electronics case. The TPO recomputed the transfer pricing adjustment, leading to the final assessment order by the AO determining the total income at a higher amount.

2. The grounds of appeal raised by the assessee included challenges to the assessment of income by the AO and TPO, particularly regarding the adjustment made on account of AMP expenses using the Bright Line Test. The appellant argued that the adjustment was contrary to legal decisions and bad in law. The application of the Bright Line Test for computing the AMP adjustment was also contested, citing decisions of the Delhi High Court that deemed it invalid.

3. The failure to apply the Special Bench decision in its entirety was highlighted by the appellant, pointing out that certain factors were not considered, direct selling expenses were not excluded, and the gross profit margin was used incorrectly for computing the adjustment. The appellant argued that the authorities erred in not following the directions of the Tribunal while remanding the matter for a fresh determination.

4. The treatment of AMP expenses as an 'international transaction' was disputed by the appellant, citing guidelines from various court cases that dealt with similar facts in the context of manufacturers. The appellant contended that there was a lack of evidence to establish an understanding or arrangement between the appellant and its associated enterprises regarding AMP spend in India.

5. The failure to consider the Transactional Net Margin Method (TNMM) for AMP expenditure adjustment was raised as an issue by the appellant. It was argued that once the arm's length basis was satisfied using TNMM, no further adjustment for AMP expenditure was warranted in law. The appellant claimed that the authorities misinterpreted the decisions of the courts and tribunals in this regard.

6. The appellant also challenged the inclusion of issues from separate proceedings under section 263, arguing that it resulted in duplicative and unlawful demands. Additionally, the initiation of penalty proceedings under section 271 was contested by the appellant on the grounds of factual and legal inaccuracies.

7. The Tribunal, following its decision in the assessee's own case for a different assessment year, allowed the appeal for statistical purposes based on the directions given in that case. The appeal was allowed, and the assessment order was set aside, remanding the matter back to the TPO/AO for fresh determination in accordance with the Tribunal's observations and directions.