2020 (1) TMI 82 - AT - Income Tax

TP Adjustment - adjustment of AMP expenses - TPO had used Bright Line Test as a tool to benchmark the international transaction of AMP expenditure - whether it was an international transaction or not ? - xpenditure incurred on sales and marketing team - HELD THAT - The Hon ble High Court in Sony Ericsson 2015 (3) TMI 580 - DELHI HIGH COURT had excluded similar expenditure out of the umbrella of AMP expenditure. The assessee has also booked this expenditure separately and the Assessing Officer had aggregated the same with Marketing, Advertisement and Promotion (in short MAP ) expenses and benchmarked the same, treating it to be an international transaction. We find no merit in the order of Assessing Officer/DRP/TPO in this regard and hold that the expenditure booked under the head sales and marketing team totaling to ₹ 24.13 crores, which was incurred by the assessee for spreading awareness of the products dealt in by the assessee, amongst doctors and others as part of direct selling expenditure and was incurred for the business needs of the assessee and is to be allowed as revenue expenditure. Accordingly, we direct the Assessing Officer to allow the expenditure of ₹ 24.13 crores. Expenditure booked under the head Advertising, Marketing and Promotion ( AMP ) - There is no provision either in the Act or in the Rules to justify the application of BLT for computing the arms length price and also in the absence of BLT, the existence of an international transaction vis - vis the AMP expenditure cannot exist. Further, we hold that there cannot be a quantification of adjustment for determining the AMP expenses incurred by the assessee after applying the BLT, to hold the same to be excessive and thereby an existence of international transaction between the assessee and its AE. We find no merit in exercise carrying of Assessing Officer/DRP/TPO in this regard and delete the Transfer pricing adjustment made on account of AMP expenditure. Accordingly, we delete the adjustment on account of transfer pricing analysis of AMP expenditure. Distribution segment - The RPM method identifies the price at which product purchased from the AE is resold to unrelated party; then in the case of resellers, who do not alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e. resale is made without any value addition, then in such facts and circumstances, RPM method is to be applied as method to benchmark the international transaction undertaken. We hold so and allow the ground raised by the assessee on this issue. The Assessing Officer is directed to apply the RPM method in order to benchmark the international transaction undertaken by the assessee in the distribution segment, after allowing reasonable opportunity of hearing to the assessee. Subvention income received by its AE - The said adjustment was made by the Assessing Officer in the draft assessment order and objections were rejected by the DRP and final assessment order was passed against the assessee. The assessee has raised Ground of appeal No.7 with regard to non-inclusion of subvention income as part of operating income. Reliance of Safe Harbour Rules - subvention amount received by the assessee before us is operating in nature and the same has to be included as operating income, while computing PLI in the hands of the assessee. The assessee in the present appeal has not raised any issue about its taxability and hence, the said status is not disturbed. This Ground of appeal No.7 is allowed. Depreciation claimed on UPS, computer cables wiring etc. - @ 16% OR 15% - HELD THAT - We direct the Assessing Officer to allow depreciation @ 16%.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Transfer pricing issues, including comparables selection, method selection (TNMM vs RPM), AMP expenses, and subvention income.
3. Corporate tax issues, including depreciation disallowance.
4. Other issues, including penalty initiation and interest charging.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order passed by the Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP) was bad in law. However, this issue was not elaborated upon in the judgment.

2. Transfer Pricing Issues:
a. Comparables Selection:
The assessee argued that the comparables selected in its transfer pricing documentation were functionally comparable to its distribution activity. The TPO disagreed, including Liva Healthcare Ltd. despite it failing the related party to sales filter of 25%. The Tribunal did not find merit in the TPO's approach and directed re-evaluation.

b. Method Selection (TNMM vs RPM):
The TPO considered the Transactional Net Margin Method (TNMM) as the most appropriate method, disregarding the Resale Price Method (RPM) proposed by the assessee. The Tribunal held that RPM was the most appropriate method for the assessee's distribution activities, as the assessee was not adding substantial value to the goods. The Tribunal directed the AO to apply RPM for benchmarking the international transaction.

c. AMP Expenses:
The TPO included Advertising, Marketing, and Promotion (AMP) expenses as part of the brand-building activity, applying the Bright Line Test (BLT). The Tribunal, referencing the Hon’ble Delhi High Court's rulings in Maruti Suzuki and Sony Ericsson, held that AMP expenses incurred by the assessee were not an international transaction and should not be benchmarked. The Tribunal emphasized that there was no agreement or arrangement obliging the assessee to incur such expenses on behalf of its AE.

d. Subvention Income:
The TPO excluded subvention income from operating income, considering it an extraordinary item. The Tribunal, following the Pune Bench's decision in Nalco Water India Ltd., held that subvention income was operating in nature and should be included in the computation of the Profit Level Indicator (PLI). The Tribunal directed the AO to include subvention income as part of the operating income.

3. Corporate Tax Issues:
a. Depreciation Disallowance:
The AO proposed to disallow depreciation on UPS, computer cables, and wirings. The DRP directed the AO to allow depreciation at 60%, but the AO allowed only 15%. The Tribunal directed the AO to allow depreciation at 60%.

4. Other Issues:
a. Penalty Initiation:
The initiation of penalty under section 274 read with section 271(1)(c) was deemed pre-mature by the Tribunal.

b. Interest Charging:
The Tribunal directed the AO to verify the interest charged under section 234C, ensuring it is on the returned income.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-evaluate the comparables, apply RPM for benchmarking, include subvention income as operating income, and allow depreciation at 60%. The Tribunal also held that AMP expenses were not an international transaction and should not be benchmarked.