2017 (8) TMI 360 - AT - Income Tax

Addition of excess AMP expenditure - TPA - international transaction with its AE or not - advertisement marketing and promotion of the products manufactured by assessee for his business in India - Held that - On perusal of the order passed by Ld. TPO, it is observed that he did not have benefit of judicial precedents now available, while dealing with the issue of AMP expenses. In some of these decisions AMP expenses has been held to be an international transaction and in some others as not, while in some others the matter has been restored for fresh consideration to be decided in the light of the decision of Sony Ericson (2016 (1) TMI 1234 - DELHI HIGH COURT) where there is an acceptance on behalf of the assessee regarding the AMP expenses being an international transaction. Under such circumstances it would be in the interest of natural justice just and proper, if the impugned issue is set aside to Ld.TPO, for fresh consideration of the question, as to whether there exists an international transaction of AMP expenses. - Grounds raised by the assessee stands allowed for statistical purposes. Determination of ALP of interest paid to AE - LIBOR rate - high degree of compatibility for benchmarking the loan rates on the basis of internal CUP - Held that - Assessee has adopted rupee as currency in which interest is repaid. As Hon ble court has already held that prime lending rate as applicable in India needs to be applied as the currency in which the loan has to be repaid is Indian currency. We agree with the submission advanced by Ld. Counsel for assessee that assessee is within the range of the prime lending rate considered by ld.TPO in the show cause notice. Respectfully following the decision in the case of Cotton Naturals India Pvt. Ltd (2015 (3) TMI 1031 - DELHI HIGH COURT), we do not find any need of adjustment in respect of the interest paid on FCD s. Accordingly this ground raised by the assessee stands allowed.

Issues Involved:
1. Application of Section 92 of the Act to Advertising, Marketing, and Promotion (AMP) expenses.
2. Functional and risk profile of the appellant as a full-fledged risk-bearing manufacturer.
3. Classification of the appellant as a 'Distributor' vs. a full-risk bearing licensed manufacturer.
4. Computation of arm's length price (ALP) of AMP expenses.
5. Exclusion of non-brand related expenses for computing AMP expenses.
6. Relief as per directions issued by the Dispute Resolution Panel (DRP).
7. Interpretation of international guidance and judicial pronouncements.
8. Non-payment of royalty to the associated enterprise (AE) for the use of the brand.
9. Brand building services provided to the AE.
10. Rejection of economic analysis for benchmarking the international transaction involving 'payment of interest' on fully convertible debentures (FCD).
11. Initiation of penalty proceedings under section 271(l)(c) of the Act.

Issue-wise Detailed Analysis:

1. Application of Section 92 of the Act to AMP Expenses:
The appellant contested that the AMP expenses incurred in India should not be considered an international transaction under Section 92 of the Act, as no real income arose for the AEs from such expenses. The Tribunal noted that the authorities assumed these expenses were for brand building benefiting the AE without establishing an agreement or arrangement proving this. The Tribunal remanded the issue back to the Transfer Pricing Officer (TPO) to determine if an international transaction existed, in light of judicial precedents.

2. Functional and Risk Profile of the Appellant:
The appellant argued that it is a full-fledged risk-bearing manufacturer responsible for key business decisions, and any benefit to the AE from AMP expenses was incidental. The Tribunal emphasized that the authorities need to substantiate the existence of an agreement indicating that the AMP expenses were incurred for the AE’s benefit. The Tribunal remanded this issue to the TPO for fresh consideration.

3. Classification of the Appellant as a 'Distributor':
The appellant contended that it is a licensed manufacturer, not a distributor. The Tribunal noted the appellant's significant manufacturing activities and remanded the issue to the TPO to reassess the appellant’s functional profile accurately.

4. Computation of ALP of AMP Expenses:
The appellant challenged the methodology adopted by the DRP and TPO for computing the ALP of AMP expenses. The Tribunal directed the TPO to re-evaluate the ALP without applying the Bright Line Test (BLT), which has been rejected by the Delhi High Court.

5. Exclusion of Non-Brand Related Expenses:
The appellant argued that non-brand related expenses should be excluded from AMP expenses computation. The Tribunal instructed the TPO to correctly classify and exclude selling expenses directly incurred in connection with sales from the AMP expenses.

6. Relief as per DRP Directions:
The appellant claimed that the TPO did not provide appropriate relief as per DRP directions. The Tribunal remanded the issue to ensure compliance with DRP directions and proper determination of taxable income.

7. Interpretation of International Guidance and Judicial Pronouncements:
The appellant argued that the authorities misinterpreted international guidance and judicial pronouncements. The Tribunal noted the need for the TPO to consider relevant judicial decisions and remanded the issue for re-evaluation.

8. Non-Payment of Royalty to AE:
The appellant highlighted that no royalty was paid to the AE for using the brand during the year. The Tribunal directed the TPO to consider this aspect while re-evaluating the AMP expenses.

9. Brand Building Services Provided to AE:
The appellant contested the conclusion that it provided brand building services to the AE. The Tribunal instructed the TPO to reassess if the AMP expenses constituted brand building services for the AE.

10. Rejection of Economic Analysis for Benchmarking Interest on FCD:
The appellant argued against the TPO's application of LIBOR-based interest rates for benchmarking interest on FCDs issued in Indian currency. The Tribunal, following the Delhi High Court’s decision in Cotton Naturals India Pvt. Ltd., held that the interest rate should be based on the currency in which the loan is repaid (Indian Rupees) and found the appellant’s interest rate within the acceptable range. Thus, no adjustment was needed.

11. Initiation of Penalty Proceedings:
The Tribunal found the issue of penalty proceedings premature and dismissed it without adjudication.

Conclusion:
The Tribunal remanded several issues back to the TPO for fresh consideration, emphasizing the need to follow judicial precedents and accurately classify expenses. The appeal was disposed of with directions for reassessment and appropriate relief based on the Tribunal's observations.

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