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2018 (9) TMI 1302 - AT - Income TaxTPA - AMP expenses - Held that - TPO has resorted to segregation of AMP expenses as a separate international transaction requiring independent bench marking by considering the same set of comparables as adopted by the assessee. As in the case of Soni Ericsson Mobile Communication India P Ltd Vs. CIT 2015 (3) TMI 580 - DELHI HIGH COURT has held that once the Assessing Officer/TPO accepted and adopted TNMM but chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was the cost or expenses and was not diverse. Even if the AMP expenses incurred by the appellant company are bench marked on a separate basis, no adjustment on account of AMP expenses would survive. No plausible reason for TP adjustment on account of AMP expenses. We, accordingly, direct the Assessing Officer to delete the impugned adjustments. - Decided in favour of assessee.
Issues Involved:
1. Addition to total income using Bright Line Test on protective basis. 2. Addition using cost plus method on substantive basis due to alleged difference in Arm's Length Price (ALP) of international transaction of Advertisement, Marketing, and Promotion (AMP) expenses. Detailed Analysis: Issue 1: Addition to Total Income Using Bright Line Test on Protective Basis The assessee challenged the correctness of the order dated 29.11.2011 framed under section 143(3) read with section 144C of the Income-tax Act, 1961. The assessee was aggrieved by the addition of ?4,08,18,553/- using the Bright Line Test on a protective basis. The TPO had determined an AMP adjustment of ?4,33,12,598/- which was included in the draft assessment order. The DRP directed the application of the Bright Line Method for computing the ALP of AMP expenses. The AMP/sales ratio of the assessee was 6.09%, while the comparables had an average ratio of 0.22%. The excess expenditure over the bright line limit was ?3,62,02,708/-, and a markup of 12.75% was applied, resulting in a total adjustment of ?4,08,18,553/- on a protective basis. The Hon'ble High Court of Delhi in the case of Sony Mobile Communication (India) Pvt Ltd rejected the Bright Line Test, stating it had no statutory mandate and should not be applied broadly. The court emphasized the need for a detailed functional analysis and comparability analysis, rejecting the segmentation of AMP expenses as a separate international transaction without proper justification. Issue 2: Addition Using Cost Plus Method on Substantive Basis The assessee was also aggrieved by the addition of ?5,95,56,701/- using the cost plus method on a substantive basis. The TPO, following the DRP's directions, recomputed the adjustment using the cost plus method. The AMP expenses after excluding selling expenses were ?3,75,58,618/-, and the gross profit margin was 58.57%. The ALP of AMP expenses was calculated to be ?5,95,56,701/-, leading to an adjustment of the same amount on a substantive basis. The Hon'ble High Court of Delhi in the case of Soni Ericsson Mobile Communication India Pvt Ltd held that if the TNMM is accepted as the most appropriate method, segregating AMP expenses as a separate transaction without bifurcation would lead to incongruous results. The court stated that the AMP expenses should be included in the overall comparability analysis under the selected method, and any adjustment should be based on a comprehensive view of the functions performed, assets used, and risks assumed by the entities involved. Findings and Conclusion: The tribunal found that the assessee's AMP expenses were incurred to increase its own sales and not to benefit the associated enterprises (AEs). The tribunal rejected the TPO's adoption of the Bright Line Test and the cost plus method with a 58.57% markup, as these approaches were not aligned with the High Court's directives. The tribunal emphasized that the TPO was aware of the High Court's decision rejecting the Bright Line Test and should have followed the correct legal principles. The tribunal concluded that the AMP expenses did not warrant a separate adjustment and directed the Assessing Officer to delete the impugned adjustments. The appeal filed by the assessee was allowed. Final Judgment: The appeal filed by the assessee in ITA No. 7574/DEL/2017 was allowed, and the order was pronounced in the open court on 19.09.2018.
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