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2018 (12) TMI 1208 - AT - Income TaxExistence of AMP being an international transaction - creation of AMP expenses for the A.E - Held that - The components of the assessee s Advertising and Sales promotion and postal expenses are different from what is ordinarily understood as an advertisement, marketing and promotion (AMP) expenses. The components of these expenses are that of billing material, personalization, promotion freight, list rentals and other promotions, premiums, sweeptakes judging, paper and printing of brouchers and also postage. Therefore, the same cannot in any circumstances lead to creation of AMP expenses for the A.E. From the records, it can be seen that the assessee is incurring its own selling and distribution expenses. There was no advertisement in media nor the products are available in the shop. It is made available only through order placed. There exist a distinction between product promotion and brand promotion. The mechanism used by the assessee company is altogether different for its product promotion. From the records, it can be seen that there is only a mail order marketing use as promotion for products sales TPO/DRP ignored these basic differences while holding that these expenses are international transaction itself. Besides that both the revenue authorities failed to bring on record as to how the said activity of the assessee company is having an element of international transaction itself. These factors were not at all verified by the revenue authorities. The issue of Bright Line Test method is now settled by the judicial precedence in case of the decision of the Hon ble Delhi High Court in case of PR. CIT vs. Mary Kay Cosmetic Pvt. Ltd. 2018 (9) TMI 1761 - DELHI HIGH COURT Thus, this also should be looked into by the AO/TPO. Therefore, it will be appropriate to remand back this entire issue to the file of the AO/TPO for fresh adjudication.
Issues Involved:
1. Reference to Transfer Pricing Officer (TPO) and transfer pricing adjustment. 2. Existence and determination of Advertisement, Marketing, and Promotion (AMP) expenses as an international transaction. 3. Methodology and provisions under the Income Tax Act for determining AMP expenses. 4. Classification of AMP expenses and its components. 5. Determination of Arm's Length Price (ALP) and Bright Line Test (BLT). 6. Treatment of selling and distribution expenses. 7. Penalty proceedings and interest levied under various sections. Detailed Analysis: 1. Reference to Transfer Pricing Officer (TPO) and Transfer Pricing Adjustment: The assessee contested the reference to the TPO and the subsequent transfer pricing adjustment of ?15,92,54,270 made to the total income for AY 2011-12. The adjustment was based on the premise that there existed an international transaction under Section 92B of the Income Tax Act between the assessee and its Associated Enterprise (AE) on account of alleged AMP expenses. The Tribunal noted that the TPO made an addition of ?16,62,47,629, which was later revised to ?15,92,54,270 following the Dispute Resolution Panel (DRP) directions. 2. Existence and Determination of AMP Expenses as an International Transaction: The assessee argued that there were no machinery provisions under the Act to determine AMP as an international transaction. It was also contended that the TPO/DRP did not provide evidence of any understanding or arrangement between the assessee and the AE for the promotion of the brand owned by the AE. The Tribunal observed that the components of the assessee’s advertising and sales promotion expenses were different from what is ordinarily understood as AMP expenses and could not lead to the creation of marketing intangible for the AE. 3. Methodology and Provisions Under the Income Tax Act for Determining AMP Expenses: The Tribunal noted that the TPO/DRP failed to substantiate the existence of AMP expenses as an international transaction. The Tribunal relied on precedents such as the Delhi High Court’s decision in Maruti Suzuki India Ltd. vs. CIT and the Tribunal’s decision in Cengage Learning India Pvt. Ltd. vs. ACIT, which emphasized the need for concrete evidence to prove the existence of AMP expenses as an international transaction. 4. Classification of AMP Expenses and Its Components: The Tribunal highlighted that the assessee’s expenses, including billing materials, personalization, promotion freight, list rentals, premiums, and postage, could not be categorized as AMP expenses for the AE. These expenses were incurred wholly and exclusively for the assessee’s own business, and any benefit to the AE was incidental. The Tribunal found that the TPO/DRP ignored the expert opinion and failed to appreciate the nature of these expenses. 5. Determination of Arm's Length Price (ALP) and Bright Line Test (BLT): The Tribunal observed that the TPO used an incorrect cost base for making the adjustment and arbitrarily levied a markup of 25.88% without providing a reasonable basis. The Tribunal referred to the judicial precedence set by the Delhi High Court in PR. CIT vs. Mary Kay Cosmetic Pvt. Ltd., which settled the issue of the Bright Line Test method. The Tribunal remanded the issue back to the AO/TPO for fresh adjudication, emphasizing the need to follow principles of natural justice. 6. Treatment of Selling and Distribution Expenses: The Tribunal noted that the TPO/DRP incorrectly treated the assessee’s selling and distribution expenses as having been incurred on behalf of the AE. The Tribunal found that the assessee was an entrepreneurial entity and could not be categorized as a limited risk distributor. The Tribunal remanded the issue back for reconsideration, directing the AO/TPO to verify the facts and provide a fair opportunity for hearing. 7. Penalty Proceedings and Interest Levied Under Various Sections: The Tribunal addressed the grounds related to short credit of taxes deducted at source, levy of interest under Sections 234A, 234B, and 234D, and initiation of penalty proceedings under Section 271(1)(c). The Tribunal remanded these issues back to the AO for verification and appropriate action, noting that they were consequential in nature. Conclusion: The Tribunal partly allowed the appeals of both the assessee and the Revenue for statistical purposes. The Tribunal remanded the issues related to AMP expenses, ALP determination, and penalty proceedings back to the AO/TPO for fresh adjudication, ensuring that the assessee is given a fair opportunity of hearing. The order was pronounced in the open court on 20th December 2018.
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