2021 (9) TMI 1079 - AT - Income Tax

TP Adjustment - AMP adjustment - CIT-A deleted the addition - HELD THAT - The assessee has reported international transaction of purchase of trade goods and capital goods from its AEs for further sale in India and thus status of the assessee is in the nature of distributor of goods of AEs - CIT(A) has deleted the addition on two grounds. Firstly, the Assessing Officer has marked up expenses incurred by the assessee on advertisement and marketing on behalf of its Associated Enterprises (AEs) following the Bright Line Test (BLT) which was rejected by the Hon'ble Delhi High Court in the case of Sony Ericsson 2015 (3) TMI 580 - DELHI HIGH COURT - CIT(A) following Hon'ble Delhi High Court, being a binding precedent has deleted the addition. Also CIT(A) has noted that in subsequent assessment years, i.e., 2012-13, 2013-14 and 2014-15, the Assessing Officer himself has not made any transfer pricing adjustment on account of AMP expenses in same set of circumstances and, therefore, keeping in view of the principle of the consistency, the Assessing Officer is not justified in making adjustment in the year under consideration. Assessee has already been remunerated for the marketing expenses incurred on behalf of the AEs along with commission markup, and, therefore, there was no requirement of making separate AMP addition in the case of the assessee. No infirmity in the order of the Ld. CIT(A) - Decided against revenue.

Summary

Issues:
1. Aggregation of AMP activities with other international transactions
2. Appropriateness of commission as remuneration for marketing and support services
3. Requirement of separate benchmarking for brand building and marketing intangibles
4. Benchmarking compensation for AMP services under India Transfer Pricing legislation
5. Consistency in transfer pricing adjustments for AMP expenses
6. Jurisdiction of the assessee as a distributor or manufacturer

Analysis:

Issue 1: Aggregation of AMP activities with other international transactions
The Revenue appealed against the deletion of AMP adjustment made by the Assessing Officer. The Ld. CIT(A) allowed relief to the assessee regarding AMP expenses. The main contention was whether the AMP activities of the assessee should be aggregated with other international transactions without evidence of homogeneity and interlinking. The Ld. CIT(A) observed that the appellant provided marketing and service support to its dealer network and received commission income for these services. The TPO applied a markup on marketing expenses based on the Bright Line Test, which was rejected by the Hon'ble Delhi High Court in the case of Sony Ericsson. The Ld. CIT(A) deleted the transfer pricing addition, emphasizing that the expenses were already factored into the net profit of interlinked transactions.

Issue 2: Appropriateness of commission as remuneration
The Ld. CIT(A) noted that the commission received by the appellant covered the marketing support services provided to the dealer network, including expenses incurred. The appellant had prepared separate segmental accounts for marketing services in subsequent years, using TNMM as the method. The TPO considered marketing services as a separate international transaction and applied a markup, which was deemed unnecessary as the appellant had received commission and reimbursement for marketing activities. The Ld. CIT(A) deleted the AMP adjustment based on the principle of consistency and the decision in the Sony Ericsson case.

Issue 3: Requirement of separate benchmarking for brand building
The Ld. CIT(A) highlighted that brand building and creation of marketing intangibles constitute a separate function requiring separate benchmarking. The TPO's approach of applying a markup on non-routine expenditure was not considered appropriate, as the commission received by the appellant covered marketing activities undertaken on behalf of the AE.

Issue 4: Benchmarking compensation for AMP services
Under India Transfer Pricing legislation, the compensation for AMP services rendered to AEs needs to be benchmarked separately. The TPO's application of a markup on marketing expenses was found unjustified as the commission received by the appellant already remunerated the marketing support services provided.

Issue 5: Consistency in transfer pricing adjustments
The Ld. CIT(A) noted that in subsequent assessment years, no transfer pricing adjustment was made on AMP expenses in similar circumstances. Upholding the principle of consistency, the Ld. CIT(A) deleted the AMP adjustment for the year under consideration.

Issue 6: Jurisdiction of the assessee as distributor or manufacturer
The contention that the assessee was a manufacturer was refuted, establishing the assessee as a distributor of goods from its AEs. The Ld. CIT(A) upheld the deletion of the AMP adjustment based on the rejection of the Bright Line Test and the principle of consistency in subsequent assessment years.

Ultimately, the Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s order regarding the deletion of the AMP adjustment.