2019 (8) TMI 1197 - AT - Income Tax

TP Adjustment - mean/average ratio of AMP/sales of the comparables chosen by the assessee itself as the CUP to determine the routine AMP expenditure with companies in similar business profile of manufacture and sale of liquor - HELD THAT - Following the judgment of the Hon ble High Court of Delhi in WHIRLPOOL OF INDIA LTD. VERSUS DY. CIT 2015 (12) TMI 1188 - DELHI HIGH COURT we hold that BLT has no mandate under the Act and accordingly the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the AE. Considering the facts of the case in hand in the light of judicial decisions discussed hereinabove we are of the considered opinion that the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction for provisions of brand building services between the assessee and the AE. Mere agreement or arrangement for allowing use of their brand name by the AE on products does not lead to an inference that there is an action in concert or the parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. Such inference would be in the realm of assumption/surmise. In our considered opinion for assumption of jurisdiction u/s 92 of the Act the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an agreement or arrangement for incurring such AMP expenses. The Hon ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd 2015 (3) TMI 580 - DELHI HIGH COURT has held that if an Indian entity has satisfied Transactional Net Margin Method (TNMM) i.e. as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies no further separate compensation for AMP expenses is warranted Adjustment on account of mark-up on reimbursement of marketing support services - HELD THAT - ECD Guidelines at clause 7.36 provides that it would be sufficient for the AEs to reimburse such costs to the assessee without any mark-up for efforts expended by the assessee in undertaking marketing support and coordination activity for which it is already getting commission paid on sales. Moreover it is not the case of the revenue that the assessee is in the business of providing advertisement marketing and sales promotion services to unrelated parties. We further find that the costs of running marketing support services and coordination services plus costs reimbursed considered together do not comprise a significant proportion of the total cost of the assessee. In our considered view any benefit arising to the AEs is purely incidental and not intentional so as to warrant any mark up on the costs incurred by the assessee. Considering the facts of the case in the light of the agreement we do not find any merit in the adjustment on account of mark-up on reimbursement of marketing support services and the same is directed to be deleted. We therefore do not find it necessary to dwell into inclusion/exclusion of the comparables. Treating the outstanding receivables from AEs as loan and thereby imputing interest at the rate equal to SBI PLR 150 basis points - AO charged interest on receivable having delay beyond 30 days - HELD THAT - Indebtness cannot be construed to have arisen out of a loan transaction and interest is involved only in relation to a debt created out of loan transaction. For this proposition we draw support from the decision of Hon ble Supreme Court in the case of Bombay Steam Navigation 1964 (10) TMI 12 - SUPREME COURT . This view further finds support from the decision of Hon ble High Court of Delhi in the case of Kusum Healthcare Private Limited 2017 (4) TMI 1254 - DELHI HIGH COURT wherein the Hon ble High court in the context of receivables held that not every item of receivable will be considered as an international transaction of receivable and each receivable has to be seen on case to case basis Since the receivables have been received by the assessee within ordinary time period it cannot be recharacterized as unsecured loans and accordingly no adjustment on account of delay in receipt of receivable can be made in the income of the assessee considering the fact that delay is not inordinate but reasonable. Considering the facts in hand in totality in light of the factual matrix discussed hereinabove vis a vis the judicial decisions on the point of issue we are of the considered opinion that resorting to Explanation (1)(c) to section 92B is uncalled for. We accordingly direct the Assessing Officer/TPO to delete the adjustment Additional claim of expenses u/s 37(1) - HELD THAT - Ratio laid down by Hon ble Supreme Court in the case of Goetz India Ltd 2006 (3) TMI 75 - SUPREME COURT does not put any fetter on the appellate authorities to consider a legitimate claim even if the same is made by way of a letter. We accordingly restore this issue to the file of the Assessing Officer. The Assessing Officer is directed to examine /verify the genuineness of the claim made by the assessee after affording reasonable opportunity of being heard to the assessee. The assessee is directed to furnish all details in support of its claim. Ground treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer pricing adjustments on account of Advertisement, Marketing, and Promotion (AMP) expenses.
2. Adjustment on account of provision of marketing support services.
3. Enhancement of income by treating outstanding receivables from AEs as loans and imputing interest.

Detailed Analysis:

1. Transfer Pricing Adjustments on Account of AMP Expenses:
The assessee challenged the transfer pricing adjustments for AMP expenses amounting to Rs. 35.09 crores. The TPO argued that the high AMP expenditure aimed to expand the AE's brand reach in India, benefiting the AE as the brand value increased. The TPO used the mean/average ratio of AMP/sales of comparables chosen by the assessee to determine routine AMP expenditure, resulting in an AMP expenditure percentage of 27.48% compared to 4.92% for comparables. The TPO proposed an adjustment of Rs. 36.82 crores for brand promotion.

The assessee contended that the revenue failed to demonstrate the existence of an international transaction for AMP expenditure and that the Bright Line Test (BLT) applied by the TPO was contrary to the Delhi High Court's judgment in Sony Ericsson Mobile Communications India Pvt Ltd vs CIT. The court held that the BLT is not mandated by the Act or Rules, and the existence of an international transaction must be established through tangible evidence.

The Tribunal concluded that the revenue needs to establish the existence of an international transaction before undertaking benchmarking of AMP expenses. The Tribunal relied on the Delhi High Court's judgments in Maruti Suzuki India Ltd and Whirlpool of India Ltd, which emphasized that the existence of an international transaction cannot be inferred merely based on BLT. The Tribunal directed the AO/TPO to verify the calculations and, if satisfied, delete the AMP adjustment.

2. Adjustment on Account of Provision of Marketing Support Services:
The assessee provided marketing support services to its AE and received reimbursement on an actual cost basis. The TPO included these reimbursements in the cost base, leading to an erroneous profit margin. The TPO proposed an adjustment of Rs. 31.79 lakhs after including the reimbursement in the cost base and applying a mark-up.

The assessee argued that the reimbursements did not involve any service provision and were actual costs incurred on behalf of the AE without any mark-up. The Tribunal agreed with the assessee, stating that the reimbursement of expenditure at actual cost does not call for any mark-up. The Tribunal directed the deletion of the adjustment on account of the mark-up on reimbursement of marketing support services.

3. Enhancement of Income by Treating Outstanding Receivables from AEs as Loans:
The TPO treated outstanding receivables from AEs as loans and imputed interest at the rate equal to SBI PLR + 150 basis points, resulting in an adjustment of Rs. 9.34 lakhs. The assessee argued that the delay in remittances cannot be recharacterized as unsecured loans and that the benchmarking should be done with internal comparables.

The Tribunal held that not every item of receivable constitutes an international transaction of receivable. The Tribunal relied on the Delhi High Court's judgment in Kusum Healthcare Private Limited, which stated that the existence of an international transaction involving receivables must be established through proper inquiry. The Tribunal directed the deletion of the adjustment, considering the delay in receivables was not inordinate but reasonable.

Conclusion:
The Tribunal allowed the assessee's appeal partly, directing the deletion of adjustments on account of AMP expenses and marketing support services, and the deletion of the adjustment for outstanding receivables. The Tribunal emphasized the need for tangible evidence to establish the existence of international transactions before making transfer pricing adjustments.