2021 (8) TMI 953 - AT - Income Tax

TP Adjustment - benchmarking of AMP services - HELD THAT - Applying the principles laid down by the Hon'ble High Court in the assessee's own case 2016 (10) TMI 1073 - DELHI HIGH COURT the benchmarking is undertaken by comparing the gross profit earned by the assessee net of AMP expense with similar adjusted gross profit margin earned in undertaking uncontrolled transactions. Since, the adjusted gross profit margin earned by the assessee from international transaction at 14.92% is higher than the adjusted gross profit margin earned on similar transactions with unrelated third party at 8.17%, the entire adjustment made by the TPO is liable to be deleted. - Decided in favour of assessee.

Issues Involved:
1. Whether the Dispute Resolution Panel (DRP) was justified in rejecting the Bright Line Test (BLT) for benchmarking Advertisement, Marketing, and Promotion (AMP) expenses.
2. Whether routine selling and distribution expenses should be included in AMP expenses.
3. Whether the Prime Lending Rate (PLR) can be used for computing markup on AMP expenses.
4. Whether AMP expenses incurred by the appellant can be characterized as an international transaction.
5. Whether Transfer Pricing adjustments can determine the quantum of business expenditure.
6. Whether the expenditure resulting in brand building for the foreign Associated Enterprise (AE) constitutes a service provision.
7. Whether the penalty proceedings initiated under Section 271(1)(c) of the Income Tax Act are justified.

Detailed Analysis:

1. Rejection of Bright Line Test (BLT) for Benchmarking AMP Expenses:
The DRP followed the decision of the Hon'ble High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd., which rejected the application of BLT. Instead, the DRP directed the computation by considering the Cost Plus Method (CPM) as the most appropriate method, leading to an adjustment of ?11,19,14,589/-. The Tribunal upheld this approach, noting that similar issues had been adjudicated in the assessee's favor in earlier years, specifically for assessment years 2008-09 and 2009-10.

2. Inclusion of Routine Selling and Distribution Expenses in AMP Expenses:
The Tribunal referenced the Hon'ble Jurisdictional High Court's decision, which clarified that direct marketing and sales-related expenses or discounts/concessions should not form part of AMP expenses. The Tribunal upheld that the TPO had incorrectly included rebate and discount of ?22.64 crores as part of AMP expenses, which should be excluded. Consequently, the net AMP expenses were recalculated, and no further TP adjustment was required as the grant received by the assessee exceeded the arm's length price of AMP expenses.

3. Use of Prime Lending Rate (PLR) for Computing Markup on AMP Expenses:
The Tribunal did not find merit in using the PLR of banks as an uncontrolled comparable to benchmark the opportunity cost of money involved in AMP expenses. This issue was implicitly resolved by adopting the CPM method for benchmarking AMP expenses.

4. Characterization of AMP Expenses as an International Transaction:
The assessee argued that AMP expenses incurred unilaterally in India could not be characterized as an international transaction in the absence of any proved understanding or arrangement with the AE. The Tribunal upheld this view, referencing previous decisions that aligned with this interpretation, thereby rejecting the TPO's characterization of such expenses as a service provision to the AE.

5. Transfer Pricing Adjustments and Quantum of Business Expenditure:
The Tribunal noted that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price. It could not be invoked to determine the quantum or extent of business expenditure. This was consistent with the Tribunal's previous rulings in the assessee's case.

6. Expenditure Resulting in Brand Building for Foreign AE:
The Tribunal found that the DRP/TPO erred in holding that the expenditure incurred by the appellant, which incidentally resulted in brand building for the foreign AE, constituted a service provision. The Tribunal reiterated that such expenses, if at arm's length, should not be treated as a separate service provided to the AE.

7. Penalty Proceedings under Section 271(1)(c):
The Tribunal did not find any justification for initiating penalty proceedings under Section 271(1)(c) of the Act, as the primary adjustments made by the TPO were not upheld.

Conclusion:
The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, directing that the addition of ?11,46,01,751/- in respect of AMP expenses made by the Assessing Officer be deleted. The Tribunal's decision was consistent with the principles laid down by the Hon'ble High Court and previous rulings in the assessee's case.

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