2022 (10) TMI 272 - AT - Income Tax

TP Adjustment - excessive AMP expenses - whether an international transaction or not? - as per assessee existence of international transaction cannot be inferred by the T.P.O in the absence of any actual transaction and the presumption by the lower authorities that the benefit had enured to its foreign AE is merely based on the conjectures - HELD THAT - In the absence of any agreement between the assessee and its foreign AE to incur any A M expenses to the benefit of its foreign AE, the presumption of existence of international transaction is incorrect. Revenue was unable to prove existence of any agreement between the assessee and the foreign AE for incurring advertisement and marketing expenses for the benefit of such foreign AE. That, no interference can be drawn as to the existence of international transaction on mere incurring excess expenditure on those items as compared to expenditure incurred by comparables as chosen by the T.P.O. Revenue also could not demonstrate the presence of any machinery provision to compute Arm s Length Price nor could demonstrate existence of any agreement between the assessee and its AE that the expenses on AMP was incurred for enhancing the brand value of the AE. That, even the bright line method cannot be used either to determine the existence of international transaction or ALP of international transaction. Merely because on account of expenditure incurred by the assessee the third party also benefits thereby, the expenditure cannot be disallowed. In this case, there does not exist any international transaction and therefore, the question of determination of ALP of such transaction does not arise. Furthermore as we have examined from the case-law cited above, the onus is on the Revenue for establishing that there is an international transaction has not been discharged in this case. Consequently, the relief provided by the learned CIT(A) to the assessee is sustained and furthermore since there is no international transaction at all, the question of determining ALP does not exist. Appeal of assessee allowed.

Issues Involved:
1. Whether the AMP expenditure constitutes an international transaction.
2. Whether the AMP expenditure incurred in India was solely for the assessee's business.
3. Application of the Bright Line Test for determining AMP expenditure.
4. Comparability of AMP expenses with well-established players.
5. Promotion of products vs. promotion of the brand.
6. Non-payment of royalty for the brand name.
7. Functional differences in comparables selected for AMP expenses.
8. Imputation of mark-up on AMP expenses.
9. Existence of DEMPE functions by the respondent.
10. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. AMP Expenditure as International Transaction:
The Revenue contended that the AMP expenditure incurred by the assessee was an international transaction. The assessee argued that there was no arrangement or understanding with the AE for incurring AMP expenses, and hence, it should not be considered an international transaction. The Tribunal held that the Revenue failed to establish any agreement or understanding between the assessee and its AE for incurring AMP expenses for brand promotion. Consequently, 90.42% of the AMP expenditure was deemed not to constitute an international transaction.

2. AMP Expenditure for Assessee's Business:
The assessee maintained that the AMP expenses were incurred solely for its own business purposes and not for the benefit of the AE. The Tribunal upheld this view, noting that the AMP expenses were for promoting products like "Kinder Joy" and "Tic Tac," which did not exhibit the "Ferrero" brand. The Tribunal concluded that the AMP expenditure was wholly and exclusively for the assessee's business.

3. Application of Bright Line Test:
The Tribunal noted that the application of the Bright Line Test and the segregation of non-routine AMP expenses lacked statutory backing. The Tribunal referred to the Delhi High Court's decision in the case of Sony Ericsson, which held that the Bright Line Test was not a valid method for determining AMP expenditure.

4. Comparability of AMP Expenses:
The assessee argued that the comparables selected by the TPO for benchmarking AMP expenses were not appropriate, as they were well-established players in the market. The Tribunal agreed, noting that the assessee was in its initial years of operation and incurred higher AMP expenses to establish its market presence. The Tribunal found that the comparables chosen by the TPO were not in the initial years of operation and thus not suitable for comparison.

5. Promotion of Products vs. Brand:
The Tribunal observed that the major portion of the AMP expenditure was for promoting products like "Kinder Joy" and "Tic Tac," which did not prominently feature the "Ferrero" brand. The Tribunal concluded that the AMP expenses were for product promotion rather than brand promotion.

6. Non-payment of Royalty:
The Tribunal noted that the assessee did not pay any royalty to its AE for using the brand name "Ferrero." This was in contrast to other companies in the industry that typically paid royalty for brand usage. The Tribunal held that the absence of royalty payments indicated that the AMP expenses were not for brand promotion.

7. Functional Differences in Comparables:
The Tribunal found that the comparables selected by the TPO were functionally different from the assessee, as they were engaged in marketing services. The Tribunal held that the comparables were not suitable for calculating the mark-up on AMP expenses.

8. Imputation of Mark-up:
The Tribunal rejected the TPO's imputation of an 18.25% mark-up on the alleged excessive AMP expenses. The Tribunal held that the AMP expenses were incurred solely for the assessee's business and did not result in the creation of marketing intangibles for the AE.

9. Existence of DEMPE Functions:
The Tribunal noted that the assessee did not undertake Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) functions for the AE. The Tribunal held that the AMP expenses were for the assessee's own business and did not benefit the AE.

10. Penalty Proceedings:
The Tribunal did not find it necessary to comment on the initiation of penalty proceedings under section 271(1)(c) since the primary appeal was allowed in favor of the assessee.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, concluding that there was no international transaction concerning AMP expenses. The Tribunal upheld the CIT(A)'s decision to delete the transfer pricing adjustment of Rs. 9,82,82,571/-.

← Previous Next →