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2022 (5) TMI 725 - AT - Income TaxTP Adjustment - existence of international transaction of AMP Expenses - HELD THAT - Admittedly assessee has been engaged in the distribution of goods produced by the AE, further the assessee is also not the exclusive distributor of the goods being sold in India and apart from the assessee, independent third party customer based in India can directly place the order for buying the goods from AE. The assessee is neither manufacturer of the goods nor the exclusive distributor and the assessee has also reported huge expenses on account of AMP and reporting loss in India being distributor. Tribunal in the case of Vodafone India Services Ltd. 2018 (1) TMI 1302 - ITAT AHMEDABAD relying on the Supreme Court judgment in the case of CIT Vs. Jubilee Mills Ltd. 1962 (9) TMI 47 - SUPREME COURT and Raghuvanshi Mills Ltd. Vs. CIT 1960 (12) TMI 7 - SUPREME COURT declared that the test is not whether the AE and the assessee have actually acted in concert, but whether circumstances are that human experience tells us that it can be safely be taken that they must be acting together. By applying the ratio laid down in the above judicial pronouncements, on verifying the material on record, we have no hesitation to hold that, the assessee and AE have acted in concert between the assessee and the AE s for carrying out the AMP expenses. We hold that the revenue has also substantially proved the onus of existence of international transaction between assessee and its AE s as defined u/s 92B of the Act. Ergo, we are of the opinion that, the TPO/DRP/AO are right in holding the existence of international transaction in the AMP undertaken by the Assessee. Accordingly we dismiss the assessee s Grounds of Appeal No. 4 to 10. Whether the Method of Profit Split Method (PSM) adopted by the AO in determination Arm Length Price (ALP) of the Advertisement Marketing and Promotion (AMP) expenses is the proper or not? - The international transaction of AMP functions exists in the case of the assessee and restore the issue to the TPO for following the direction of the Hon ble Delhi High Court in the case of Sony Ericsson 2015 (3) TMI 580 - DELHI HIGH COURT for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE s or in the segregated manner, after taking into account appropriate comparables or applying of Resale price method or Cost Plus Method or Profit Split Method keeping in view the findings of the Hon ble Delhi High Court. Needles to say that, the Assessee shall be given opportunity of being heard. Further Assessee is directed to provide all the relevant documents including the financials of its AE s if required, failing to which the Authorities can act in accordance with law by invoking the relevant provisions. Accordingly, we allow the Ground No.11 to 26 for statistical purposes.
Issues Involved:
1. Existence of International Transaction of AMP Expenses 2. Method for Determining Arm's Length Price (ALP) of AMP Expenses 3. Initiation of Penalty Proceedings Detailed Analysis: I. Existence of International Transaction of AMP Expenses: The primary issue was whether the Advertisement, Marketing, and Promotion (AMP) expenses incurred by the assessee constituted an international transaction. The Tribunal examined various arguments and evidence presented by both parties. The assessee argued that there was no international transaction related to AMP expenses, citing the absence of any formal agreement or understanding with its Associated Enterprises (AEs) mandating such expenses. The assessee relied on judgments like Maruti Suzuki India Limited and Whirlpool of India Limited, which emphasized the need for a formal agreement to establish an international transaction. However, the Tribunal found that the assessee's business model and the nature of its transactions indicated a clear understanding and coordinated action with its AE. The assessee was not an exclusive distributor, and third parties could directly purchase from the AE. The Tribunal referred to the assessee's own documentation and promotional activities, which demonstrated the involvement of the AE's representatives and the promotion of the AE's brand. The Tribunal also cited the judgment in Sony Ericsson Mobile Communication India Pvt. Ltd., which rejected the contention that AMP expenses are not international transactions for distributors. It emphasized that the onus is on the Revenue to establish the existence of an international transaction, which, in this case, was sufficiently demonstrated. II. Method for Determining Arm's Length Price (ALP) of AMP Expenses: The second issue was the method adopted by the Transfer Pricing Officer (TPO) to determine the ALP of AMP expenses. The TPO used the Profit Split Method (PSM), which the assessee contested, arguing that it was not the appropriate method and that the TPO failed to obtain the audited financials of the AE to apply this method correctly. The Tribunal noted that under Section 92D of the Income Tax Act, the assessee is required to maintain and furnish information and documents related to international transactions, including the financials of its AE. The Tribunal held that the TPO/AO could not apply an incorrect method due to the absence of the AE's financials but also could not give the benefit to the assessee for non-cooperation. The Tribunal referred to the Supreme Court's judgment in Kapurchand Shrimal, which mandates that an appellate authority must correct errors and issue appropriate directions. The Tribunal decided to restore the issue to the TPO for fresh determination, following the directions of the Delhi High Court in Sony Ericsson Mobile Communication India Pvt. Ltd., and considering the appropriate comparables and methods. III. Initiation of Penalty Proceedings: The final issue was the initiation of penalty proceedings under Section 271(1)(c) of the Act. The Tribunal found this issue to be consequential and premature at this stage and hence dismissed it. Conclusion: The Tribunal concluded that the AMP expenses constituted an international transaction and upheld the TPO/DRP/AO's findings on this matter. However, it restored the issue of determining the ALP of AMP expenses to the TPO for fresh determination, following the appropriate methods and comparables. The penalty proceedings were deemed premature and were dismissed. The appeal was partly allowed for statistical purposes.
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