2018 (9) TMI 1750 - AT - Income Tax

AMP expenditure incurred as treated and categorized as an international transactions u/s 92B - Held that - The judicial discipline also demands that, in case there is no change in the facts and circumstances of the case, the issue decided by the coordinate bench in assessee s own case for earlier years on identical facts and circumstances, should be followed by the coordinate bench while deciding the similar issue for later years. Therefore, respectfully following the decision of the coordinate bench in assessee s own case, we also hold that the transfer pricing adjustment made by the ld TPO on account of arm s length price of alleged international transaction of AMP expenditure is unsustainable. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the order passed by the Assessing Officer (AO) under section 143(3) read with section 144C of the Income Tax Act.
2. Confirmation of additions by the Dispute Resolution Panel (DRP).
3. Characterization of Wrigley India and its marketing functions.
4. Jurisdictional error regarding AMP expenditure.
5. Benchmarking of AMP expenses.
6. Compensation for AMP expenses benefiting the Associated Enterprise (AE).
7. Misinterpretation of international guidelines on marketing intangibles.
8. Nature of AMP expenses as domestic transactions.
9. Classification of AMP expenses as a function rather than a transaction.
10. Methodology for determining the arm's length price of AMP expenses.
11. Quantification and comparability issues related to AMP expenses.
12. Levy of interest under sections 234A, 234B, 234C, and 234D.
13. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Legality of the AO's Order:
The appellant challenged the legality of the AO's order, asserting it was "bad in law." However, this general ground did not require adjudication and was dismissed.

2. Confirmation of Additions by DRP:
The appellant contested the DRP's confirmation of the AO's additions, which enhanced the appellant's income by ?73,23,49,876. The Tribunal noted that similar additions in prior assessment years (2007-08, 2008-09, 2009-10) were deleted by the Tribunal, holding that AMP expenditure incurred by the appellant could not be treated as an international transaction under section 92B of the Act.

3. Characterization of Wrigley India and Marketing Functions:
The appellant argued that key marketing decisions were made by it and that the AMP expenses should not be reimbursed by the AE. The Tribunal found that the appellant's characterization was consistent with prior judgments, which supported that AMP expenses were for the appellant's business and not for creating marketing intangibles for the AE.

4. Jurisdictional Error Regarding AMP Expenditure:
The appellant contended that the AO/TPO erred in assuming jurisdiction over AMP expenditure as it did not qualify as an international transaction under section 92B read with section 92F(v). The Tribunal agreed, referencing the Delhi High Court's decision in Maruti Suzuki, which ruled that AMP expenses incurred by a licensed manufacturer are not international transactions.

5. Benchmarking of AMP Expenses:
The appellant argued that once the TPO accepted all international transactions at arm's length, there was no need to separately benchmark AMP expenses. The Tribunal upheld this view, noting that AMP expenses were part of the appellant's business expenditure and not separate international transactions.

6. Compensation for AMP Expenses Benefiting AE:
The appellant contended that the AO/TPO erred in concluding that the AE should compensate the appellant for AMP expenses, as any benefit to the AE was incidental. The Tribunal agreed, stating that the AMP expenses were for the appellant's own business and any incidental benefit to the AE did not warrant income adjustment.

7. Misinterpretation of International Guidelines:
The appellant argued that the AO/TPO misinterpreted international guidelines on marketing intangibles, particularly the OECD guidelines, in applying the bright line limit (BLT). The Tribunal referenced multiple judgments, including Sony Ericsson and Honda Siel, which held that BLT has no statutory mandate and is not a valid method for determining the existence or ALP of international transactions involving AMP expenses.

8. Nature of AMP Expenses as Domestic Transactions:
The appellant asserted that AMP expenses were domestic transactions with third parties and outside the purview of section 92BA. The Tribunal supported this view, noting that AMP expenses were business expenditures under section 37(1) and not international transactions.

9. Classification of AMP Expenses as a Function:
The appellant argued that AMP expenses should be seen as a function performed by it, not a transaction. The Tribunal agreed, emphasizing that these expenses were for the appellant's business activities.

10. Methodology for Determining Arm's Length Price:
The appellant contended that the AO/TPO did not apply any method to determine the arm's length price of AMP expenses. The Tribunal noted that the AO/TPO's approach was flawed, as AMP expenses were not international transactions requiring such determination.

11. Quantification and Comparability Issues:
The appellant challenged the quantification of AMP expenses and the comparables used by the TPO. The Tribunal found that the TPO's method and selection of comparables were inappropriate, referencing prior judgments that rejected the use of BLT and emphasized proper comparability analysis.

12. Levy of Interest:
The appellant questioned the levy of interest under sections 234A to 234D. The Tribunal noted that these issues were consequential and dismissed this ground.

13. Initiation of Penalty Proceedings:
The appellant contested the initiation of penalty proceedings under section 271(1)(c). The Tribunal deemed this ground premature and dismissed it.

Conclusion:
The Tribunal allowed the appeal partly, holding that the transfer pricing adjustment for AMP expenditure was unsustainable, and dismissed the grounds related to interest and penalty proceedings. The decision was pronounced on 25/09/2018.