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2018 (11) TMI 1052 - AT - Income TaxTPA - computation of ALP of the international transactions by applying BLT - AMP expenses - Held that - Merely by applying the BLT the existence of international transactions cannot be proved and as such the adjustment made by the TPO/DRP/AO on this account is not sustainable in the eyes of law. We are further of the considered view that ALP expenses incurred by the taxpayer were not for the benefit of AE but only to enhance sales of the taxpayer. Identical issue has already been decided by the coordinate Bench of the Tribunal in favour of the taxpayer in taxpayer s own case for AY 2013-14 having identical facts and same business model as in the year under consideration wherein the TPO had also computed the ALP of the international transactions by applying BLT. We are of the considered opinion that the ALP of an international transaction involving AMP expenses the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time we cannot ignore the submission of the learned DR that the matter is pending before Hon ble Apex Court and the decision of Hon ble Apex Court would be binding upon all the authorities. In view of the above we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However if the above decisions of Hon ble Jurisdictional High Court which is under consideration before the Hon ble Apex Court is modified or reversed by the Hon ble Apex Court then the Assessing Officer would pass the order afresh considering the decision of Hon ble Apex Court. In those circumstances he will also allow opportunity of being heard to the assessee.
Issues Involved:
1. Legality of the assessment order. 2. Transfer Pricing Adjustment for Advertisement, Marketing, and Sales Promotion (AMP) expenses. 3. Application of Bright Line Test (BLT) for determining the existence of international transactions and computing the Arm’s Length Price (ALP). Detailed Analysis: 1. Legality of the Assessment Order: The appellant contended that the assessment order framed by the Assessing Officer (AO) in pursuance of the directions of the Dispute Resolution Panel (DRP) under Section 143(3) read with Section 144C of the Income-tax Act, 1961, was bad in law, violative of principles of natural justice, and void ab initio. The AO determined the income of the appellant at ?3,39,05,406 against the returned total income of Rs. Nil (after set-off of brought forward loss and depreciation) and at ?26,952,818 on a protective basis. 2. Transfer Pricing Adjustment for Advertisement, Marketing, and Sales Promotion (AMP) Expenses: The AO/TPO made an addition of ?3,74,72,708 on account of the alleged difference in the arm's length price (ALP) of the international transaction of AMP expenses. The DRP upheld the TPO's finding that AMP expenses incurred by the appellant constituted an international transaction. The taxpayer argued that AMP expenses unilaterally incurred in India could not be characterized as an international transaction as per section 92B of the Act, in the absence of any proved understanding or arrangement between the appellant and the associated enterprise (AE). The DRP/TPO relied on the decision of the Special Bench of the Tribunal in the case of LG Electronics (ITA No. 5140/Del/2011), which was overruled by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications (374 ITR 118). The taxpayer contended that the AMP expenses were incurred wholly and exclusively for its business purposes in India and not on behalf of or for the benefit of the AE. 3. Application of Bright Line Test (BLT): The TPO/DRP used BLT to compare the AMP expenses of the taxpayer with that of the comparables. The Hon'ble Delhi High Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) categorically held that BLT is not a valid basis for determining the existence of international transactions or for computing the ALP of such transactions involving AMP expenses. The TPO made TP adjustment on AMP expenses on the ground that the taxpayer incurred huge expenses of AMP, which benefited its AE by developing marketing intangibles and brand name. The Hon'ble Delhi High Court in Valvoline Cummins Private Limited in ITA 158/2016 held that merely because the taxpayer was permitted to use the brand name "Valvoline" does not automatically lead to an inference that any expense incurred towards AMP was only to enhance the brand. The Revenue must prove a specific arrangement or agreement between the taxpayer and the AE leading to the conclusion that AMP expenses were not for its benefit but for the AE's benefit. Judgment: The Tribunal held that the adjustment made by the TPO/DRP/AO on AMP expenses is not sustainable in the eyes of law. The Tribunal set aside the orders of the authorities below and restored the matter to the file of the AO. The AO is directed to pass the order afresh, considering the decision of the Hon'ble Apex Court if the decisions of the Hon'ble Jurisdictional High Court are modified or reversed. The AO should also allow the opportunity of being heard to the assessee. The appeal filed by the assessee is allowed pro tanto. Order Pronounced: The order was pronounced in open court on the 19th day of November, 2018.
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