2019 (9) TMI 937 - AT - Income Tax

Transfer Pricing (TP) adjustment in relation to an alleged international of Advertisement, Marketing Sales Promotion (AMP) expenses - HELD THAT - A copy of the computer generated trademarks certificate report from Govt. of India, Ministry of Commerce Industry, Department of Industrial Policy Promotion, Controller of Patents, Designs Trademarks Website, was filed before us to demonstrate the fact that the trademark 'Unibic' is owned by assessee and application for grant of registration of this trademark was made by the assessee as early as on 23.09.2009. This fact is very vital. If the trademark is owned by assessee, AMP expenses cannot be disallowed consequent to determination of ALP because those expenses would be in the nature of business expenses of assessee. Assessee also filed before us sample advertisements to demonstrate that whatever advertisements were carried out in India were India-specific and by no stretch of imagination said to promote the brand of owned by the AE. Correctness of determination of Arm's Length Price (ALP) in respect of a trading transaction of sale of cookies by the assessee to its Associated Enterprise (AE) - HELD THAT - DRP ought to have considered the TP study filed by the assessee before it and considered the objections of assessee. We are also of the view that in the light of the fact that net margins on cost of goods sold to unrelated parties being less than the net margins on sale of related parties, the transactions with AE has to regarded as at arm's length. The internal TNMM adopted by the assessee would show that the price charged in the international transaction on sale of cookies to Unibic, Australia was at arm's length. Since the TPO did not have an occasion to examine this report, we deem it fit and appropriate to set aside the order of the ld. DRP on this issue and remand the question of determination of ALP in respect of transaction on sale of cookies to Unibic, Australia for fresh consideration by the AO/TPO keeping in mind the observations made in this order and also taking note of the TP study and other details filed by the assessee and referred to in this order. All the submissions made above are not borne out of the record of AO/TPO/DRP. In these circumstances, we deem it fit and proper to remand this issue also to the TPO/AO for fresh consideration in the light of submissions made by the assessee before us. The TPO will determine the ALP afresh keeping in mind the submissions as made above. We make it clear that in the event of assessee being held to be the owner of Unibic trademark, there can be no addition on account of any deemed international transaction of incurring of AMP expenses. We also make it clear that the issue whether incurring of AMP expenses can be considered as international transaction in the facts and circumstances of the present case is left open for consideration, if the adjudication of that issue becomes necessary.

Summary

Issues Involved:
1. Transfer Pricing (TP) adjustment related to Advertisement, Marketing & Sales Promotion (AMP) expenses.
2. Correctness of determination of Arm's Length Price (ALP) for the sale of cookies to Associated Enterprise (AE).

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment Related to AMP Expenses:

The primary issue in the appeals concerns the addition of ?9,91,86,369 as a TP adjustment related to AMP expenses incurred by the assessee. The TPO observed that the assessee incurred ?10,11,83,218 on AMP expenses, which was 18.22% of its net sales. The TPO held that these expenses indirectly promoted the brand of the AE and applied the Bright Line Test to determine the ALP. The TPO suggested an addition of ?9,91,86,369 based on the AMP expenses of comparable companies, which was confirmed by the DRP. The DRP justified the TPO's approach, emphasizing that the AMP expenses were excessive and promoted the AE's brand. However, the Tribunal found that the DRP failed to consider the TP study filed by the assessee, which demonstrated that the 'Unibic' trademark was owned by the assessee and not the AE. The Tribunal remanded the issue back to the TPO/AO for fresh consideration, emphasizing that if the trademark is owned by the assessee, AMP expenses should be treated as business expenses and not as an international transaction.

2. Correctness of Determination of ALP for Sale of Cookies to AE:

The second issue concerns the ALP determination for the sale of cookies by the assessee to its AE, Unibic Australia. The TPO, in the absence of a TP study from the assessee, conducted a fresh search and selected five comparable companies, determining an ALP adjustment of ?39,99,056. The DRP upheld this adjustment, noting the assessee's non-compliance in furnishing necessary documents. The Tribunal, however, noted that the DRP did not consider the TP analysis submitted by the assessee, which showed higher profit margins on transactions with the AE compared to unrelated parties. The Tribunal remanded the issue back to the AO/TPO for fresh consideration, instructing them to review the TP study and other details provided by the assessee.

Separate Judgments:

The Tribunal delivered a common judgment for both assessment years (AY 2011-12 and AY 2012-13) due to the identical nature of issues involved. For AY 2012-13, the Tribunal remanded the issue of AMP expenses back to the TPO/AO for fresh consideration, similar to the directions given for AY 2011-12.

Conclusion:

The Tribunal allowed both appeals for statistical purposes, remanding the issues of TP adjustment related to AMP expenses and the determination of ALP for the sale of cookies back to the TPO/AO for fresh consideration, emphasizing the need to consider the TP study and other relevant details submitted by the assessee.