2017 (7) TMI 1004 - AT - Income Tax

AMP expenditure treated as international transaction Coming to the case at hand - Held that - We are of the considered view that when the TPO has determined the AMP expenses to be international transaction, he had no occasion to follow the ratio of the judgments in Rayban Sun Optics India Ltd. vs. CIT 2016 (9) TMI 1293 - DELHI HIGH COURT , Pr. CIT vs. Toshiba India Pvt. Ltd. 2016 (8) TMI 1175 - DELHI HIGH COURT and Pr. CIT vs. Bose Corporation (India) Pvt. Ltd. (2016 (8) TMI 1177 - DELHI HIGH COURT) rendered by Hon ble jurisdictional High Court discussed in the preceding paras since those judgments were not available to him. Aforesaid decisions have consistently been followed by coordinate Benches of the Tribunal. In these circumstances, we are of the considered view that it would be in the interest of justice if the impugned order is set aside and the matter is restored to the file of TPO/AO for fresh determination of the question to determine, as to whether AMP expenditure is international transaction , in the light of the judgments rendered by Hon ble Delhi High Court discussed in preceding paras. In case the existence of such an international transaction is not proved, there shall not be any transfer pricing addition, by the ld. AR for the assessee. However, in case the international transaction is proved to be existed, then the TPO will determine such international transaction in the light of the judgment rendered by Hon ble jurisdictional High Court after providing an opportunity of being heard to the assessee. TPO/AO is also required to benchmark the distribution and marketing functions both being interconnected and intertwined on an aggregate basis in accordance with the decision rendered by coordinate Bench in assessee s own case for AY 2011-12. However, so far as first part of the directions issued by the DRP qua legal issues are concerned, the assessee sought to reserve its right to argue the same before the competent forum. However, we are of the considered view that this remedy is otherwise always available to the assessee to argue on legal issues before the competent authority

Issues Involved:
1. Assessment of total income.
2. Adjustment to the arm's length price of AMP expenditure.
3. Existence of an international transaction between associated enterprises.
4. Categorization of unilateral AMP expenditure as an international transaction.
5. Jurisdiction of TPO in benchmarking AMP expenditure.
6. Demonstration of business purpose/benefit from AMP expenditure.
7. Re-characterization of the appellant as a service provider.
8. Non-compliance with jurisdictional High Court decisions.
9. Department's inability to appeal against DRP directions.
10. Benchmarking of distribution and marketing functions.
11. Use of Transaction Net Margin Method (TNMM) and Resale Price Method (RPM).
12. Application of cost plus method for benchmarking AMP expenses.
13. Value addition and brand building services.
14. Application of mark-up.
15. Inclusion of sales-related expenditure in AMP benchmarking.
16. Quantitative/economic adjustments in AMP expenditure.
17. Use of Bright Line Test (BLT).
18. Opportunity of being heard before issuing prejudicial directions.
19. Benefit of +/- 5% range under section 92C(2).
20. Charging of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Assessment of Total Income:
The AO assessed the total income of the appellant at INR 57,32,67,720 against the returned income of INR 5,42,98,030. The DRP upheld this assessment.

2. Adjustment to the Arm's Length Price of AMP Expenditure:
The AO/DRP/TPO made an adjustment of INR 51,89,69,687 to the arm's length price of the alleged international transaction of AMP expenditure.

3. Existence of an International Transaction Between Associated Enterprises:
The orders passed by the AO/TPO were contested as the pre-requisite for applying Chapter-X, i.e., the existence of an international transaction between two associated enterprises under section 92B of the Act, was not satisfied or existed. There was no agreement or arrangement for such expenditure.

4. Categorization of Unilateral AMP Expenditure as an International Transaction:
The unilateral AMP expenditure incurred by the appellant was categorized as an international transaction under Chapter X of the Act, contrary to law, without proper opportunity of being heard or satisfaction recorded by the AO.

5. Jurisdiction of TPO in Benchmarking AMP Expenditure:
The TPO re-characterized the unilateral AMP expenditure as an international transaction under Chapter X of the Act, despite the jurisdiction of the TPO being limited to computing the arm's length price of the international transaction.

6. Demonstration of Business Purpose/Benefit from AMP Expenditure:
The AO/DRP held that the appellant failed to demonstrate the business purpose/benefit from incurrence of alleged excessive AMP expenditure, ignoring the accelerated growth of the appellant's turnover.

7. Re-characterization of the Appellant as a Service Provider:
The AO/DRP/TPO re-characterized the appellant as a service provider rendering brand-building services to its AE, without appreciating that it is a full risk-bearing distributor incurring AMP expenditure to promote its sales in India.

8. Non-compliance with Jurisdictional High Court Decisions:
The AO/DRP/TPO did not follow various decisions of the jurisdictional High Court, sustaining the order on the premise that the Special Leave Petition against such decisions had been admitted by the Hon'ble Supreme Court.

9. Department's Inability to Appeal Against DRP Directions:
The DRP's order was contested on the grounds that the Department cannot file an appeal against the directions of the DRP.

10. Benchmarking of Distribution and Marketing Functions:
The AO/DRP/TPO erred in not appreciating that distribution and marketing are inter-connected and should be benchmarked on an aggregate basis, leading to over-taxation.

11. Use of TNMM and RPM:
The AO/DRP erred in holding that the appellant benchmarked the international transaction of purchase of finished goods using TNMM, without appreciating that it was primarily benchmarked using RPM.

12. Application of Cost Plus Method for Benchmarking AMP Expenses:
The AO/DRP/TPO applied the cost plus method to benchmark the AMP expenses, contrary to Indian Transfer Pricing Regulations.

13. Value Addition and Brand Building Services:
The AO/DRP/TPO failed to appreciate that the appellant had not provided any value-added or brand-building services to its AE by incurring AMP expenditure, and therefore, no mark-up could have been charged.

14. Application of Mark-up:
Even if the mark-up is to be applied, it should only be on the value-added expenses incurred by the appellant for brand promotion services, not on the entire amount incurred/paid to third-party vendors.

15. Inclusion of Sales-related Expenditure in AMP Benchmarking:
The DRP directed the AO/TPO to include sales-related expenditure while benchmarking the AMP expenditure, disregarding the jurisdictional High Court decision.

16. Quantitative/Economic Adjustments in AMP Expenditure:
The AO/DRP/TPO erred in not granting quantitative/economic adjustments while quantifying adjustments relating to alleged excessive AMP expenditure.

17. Use of Bright Line Test (BLT):
The AO/DRP/TPO erred in determining adjustments on a protective basis by applying the BLT method, which has been rejected by the jurisdictional High Court.

18. Opportunity of Being Heard Before Issuing Prejudicial Directions:
The DRP erred in not affording the opportunity of being heard to the appellant before issuing any direction prejudicial to the interest of the assessee.

19. Benefit of +/- 5% Range Under Section 92C(2):
The AO/DRP/TPO did not provide the appellant the benefit of the +/- 5% range as provided by the proviso to section 92C(2) of the Act.

20. Charging of Interest Under Sections 234B and 234C:
The AO erred in charging interest under sections 234B and 234C of the Act and in the incorrect calculation of such interest.

Conclusion:
The Tribunal set aside the impugned order and restored the matter to the TPO/AO for fresh determination of whether AMP expenditure is an international transaction, in light of the judgments rendered by the Hon'ble Delhi High Court. The AO is required to follow the DRP's directions regarding AMP intensity adjustment and benchmark distribution and marketing functions on an aggregate basis. The appeal was allowed for statistical purposes, and the matter was remanded for a fresh decision after providing an opportunity of being heard to the assessee.

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