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2020 (12) TMI 1111 - AT - Income TaxTP Adjustment - international transactions resulting from advertisement, marketing and sales promotion expenses ( AMP expenses ) - Benchmarking AMP expenses applying RPM - Haier expenditure on free gifts is in the nature of providing small three gifts like Pens, T-shirts, Caps, Jackets etc. along with the product. Such gifts are purchased from local market and the name of the assessee company is imposed on it through third party printing agencies. Diwali and festival gifts given by the assessee to its employee s dealer etc. HELD THAT - In the present case assessee is not conducting any band promotion, but in fact is engaged in the business of distribution of consumer durable products - In present case the Revenue has not pointed out as to how the Resale Price Method will not be applicable. This is not disputed by the Revenue as the TPO in order dated 21.10.2011 considered Vivek Limited as appropriate comparable for benchmarking AMP expenses, applying Bright Line Test. The TPO considered Vivek Limited as comparable as it is trader/re-seller of home appliances and does not own any brand. But since, the bright line test is not appropriate as held by the Hon ble Delhi High Court 2015 (3) TMI 580 - DELHI HIGH COURT we further examine that the element of adding value to the goods by incurring AMP expenditure creating market intangibles and enhancing brand value of the product is missing in present assessee s case. From the perusal of the records it is found that after excluding selling and distribution expense of ₹ 10,18,50,415, the adjustment works out to ₹ 2,85,10,127/- - From the perusal of the records it is found that after excluding selling and distribution expense of ₹ 10,18,50,415, the adjustment works out to ₹ 2,85,10,127. - Appeal of the assessee is partly allowed.
Issues Involved:
1. Addition on account of arm’s length price of alleged international transactions resulting from advertisement, marketing, and sales promotion expenses (AMP expenses). 2. Rejection of Resale Price Method (RPM) for benchmarking AMP expenses. 3. Inclusion of sales promotion expenses within the ambit of AMP expenses. 4. Determination of the net AMP expenses and the appropriate adjustment. Detailed Analysis: 1. Addition on account of arm’s length price of alleged international transactions resulting from AMP expenses: The assessing officer made an addition of ?13,50,86,400 based on the order passed by the Transfer Pricing Officer (TPO) under section 92CA(3) read with section 254 of the Income Tax Act, 1961, which was sustained by the Dispute Resolution Panel (DRP). The TPO/DRP did not provide tangible material to demonstrate the existence of the international transaction in relation to the AMP expenses incurred by the appellant. The DRP alleged that the conduct of the appellant, in brand promotion per the displays and showroom arrangements, pointed to the existence of the AMP transaction. 2. Rejection of Resale Price Method (RPM) for benchmarking AMP expenses: The TPO/DRP rejected the RPM directed by the Hon’ble High Court for benchmarking the AMP expenses. The reasons included the significant quantum of AMP expenditure, the appellant adding value to the goods by incurring considerable AMP expenditure, and the appellant carrying out two distinct functions: distribution and brand building for its Associated Enterprise (AE). The TPO applied the Transactional Net Margin Method (TNMM) instead, considering comparables providing similar marketing services. 3. Inclusion of sales promotion expenses within the ambit of AMP expenses: The appellant argued that sales promotion expenses should not be included within the AMP expenses. The TPO included these expenses while giving effect to the ITAT's direction, which the appellant contested. The appellant also contended that any mark-up should be restricted to the value-added expenses incurred for providing the alleged service in the nature of brand promotion. 4. Determination of the net AMP expenses and the appropriate adjustment: The appellant provided a detailed breakdown of advertisement and selling and distribution expenses, arguing that certain expenses should be excluded from AMP expenses. The TPO had previously considered Vivek Limited as an appropriate comparable for benchmarking AMP expenses using the Bright Line Test. However, the Hon’ble High Court directed the Tribunal to re-examine the facts and apply the ratio from the Sony Ericsson Mobile Communications India Pvt. Ltd. case. The Tribunal found that the appellant was not conducting brand promotion but was engaged in the distribution of consumer durable products. The Tribunal held that the Resale Price Method (RPM) should be applied and that the AMP expenses should be benchmarked accordingly. The Tribunal also noted that the Revenue had not disputed the computation provided by the appellant, which excluded selling and distribution expenses and grants received from AE. Conclusion: The Tribunal directed the TPO/DRP to restrict the adjustment to ?2,85,10,127 instead of ?13,50,86,400. The appeal of the assessee was partly allowed, and the order was pronounced on September 21, 2020.
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