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2018 (12) TMI 59 - AT - Income TaxTPA - adjustment of AMP expenditure - international transaction between the taxpayer and its AE with regard to AMP expenses - Held that - 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. Determination of income by the Assessing Officer (AO). 2. Addition on account of transfer pricing adjustment related to Advertisement, Marketing, and Sales Promotion (AMP) expenses. 3. Characterization of AMP expenses as an international transaction. 4. Application of Bright Line Test (BLT) for benchmarking AMP expenses. 5. Recharacterization of the taxpayer as a limited risk service provider. 6. Commercial expediency and economic ownership of marketing intangibles. 7. Arm's Length Price (ALP) determination and application of markup on AMP expenses. Issue-wise Detailed Analysis: 1. Determination of Income by AO: The AO determined the income of the taxpayer at ?1,300,133,746 against the returned total income of ?1,080,299,471. The taxpayer contested this determination, arguing that the AO erred in law and on facts. 2. Addition on Account of Transfer Pricing Adjustment Related to AMP Expenses: The AO/DRP made an addition of ?219,834,275 for AMP expenses, which the taxpayer argued was incorrect. The taxpayer contended that the only permissible transfer pricing adjustment was the difference between the ALP and the declared price, not the quantum of business expenditure. 3. Characterization of AMP Expenses as an International Transaction: The taxpayer argued that AMP expenses incurred unilaterally in India could not be characterized as an international transaction under section 92B of the Income-tax Act, 1961. The DRP concluded otherwise, relying on the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT. 4. Application of BLT for Benchmarking AMP Expenses: The TPO used the BLT to benchmark AMP expenses, concluding that the taxpayer incurred non-routine expenditure to promote the AE's brand. The taxpayer argued that the BLT has no statutory mandate and that the Hon’ble Delhi High Court in its own case for AY 2010-11 had ruled against the use of BLT. 5. Recharacterization of the Taxpayer as a Limited Risk Service Provider: The DRP/TPO recharacterized the taxpayer as a limited risk service provider entitled to cost-plus remuneration for its marketing efforts. The taxpayer argued this recharacterization was incorrect and that it was a licensed manufacturer. 6. Commercial Expediency and Economic Ownership of Marketing Intangibles: The taxpayer argued that the AMP expenditure was incurred for its own benefit and that it was the economic owner of any marketing intangibles created. The DRP/TPO, however, held that the expenditure incidentally resulted in brand building for the AE and was a service provision by the taxpayer to the AE. 7. ALP Determination and Application of Markup on AMP Expenses: The TPO applied a markup of 49.05% on the alleged excess AMP expenditure. The taxpayer argued that no adjustment was warranted as the expenses were bona fide and deductible business expenditures. The taxpayer also contended that the operating profit margins were higher than those of comparable companies, indicating adequate compensation for AMP expenses. Tribunal's Findings: The Tribunal noted that the taxpayer's business model and terms with its AE had not changed. The Hon’ble Delhi High Court had ruled that the BLT was not a valid basis for determining the existence or ALP of an international transaction involving AMP expenses. The Tribunal found that the Revenue failed to establish the existence of an international transaction regarding AMP expenses. Conclusion: The Tribunal set aside the orders of the authorities below, holding that the adjustment made by the TPO/DRP/AO concerning AMP expenses was not sustainable. However, it acknowledged that the matter is pending before the Hon’ble Apex Court and directed the AO to reconsider the issue if the Apex Court's decision modifies or reverses the High Court's ruling, providing the taxpayer an opportunity to be heard. Result: The appeal filed by the taxpayer was allowed to the extent indicated.
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