2023 (1) TMI 569 - AT - Income Tax

TP Adjustment - international transactions u/s. 92B - Absence of prior agreement (formal or informal) - adjustment in respect of excess AMP expenditure - HELD THAT - As per the definition of international transactions u/s. 92B of the Act means a transaction between two or more associated enterprises, either on both of whom are non-residents, in the nature of purchase, sale, etc. or other transactions having bearing on profit, income or loss of such enterprises. The international transaction also include a mutual agreement or arrangement for allocation or apportionment or any contribution to, any cost or expenses incurred or to be incurred in connection with a benefit, service or facility provided or to be provided by any one or more of such enterprises. As per section 92B(2) of the Act the transaction entered into between two associated enterprises shall be deemed to be an international transaction if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprises. In the case under consideration, the AO/TPO did not bring on record exists of any formal or informal agreement between the assessee and AE to share/reimburse AMP expenses incurred by the assessee in India. In absence on any such agreement, the first and primary condition of holding the transaction in question as an international transaction remains to be fulfilled. As the assessee cannot be held liable for expenses incurred on advertising marketing and promotion as an international transaction of AMP, the consequent benchmarking by the Ld. TPO is also not justified. As relying on assessee own case 2020 (10) TMI 924 - ITAT MUMBAI we uphold the finding of the Ld. CIT(A) that AMP expenditure is not an international transaction. The grounds of the cross-objection of the assessee are accordingly allowed. Since, we have already held that AMP expenditure is not an international transaction therefore, adjustment to said transaction for arm's length price is rendered infructuous and no adjustment could have been made. The ground of appeal of the Revenue is accordingly dismissed.

Summary

Issues Involved:
1. Admission and acceptance of new evidence by CIT(A) without remanding it to TPO/AO.
2. Whether AMP expenses constitute an international transaction.
3. Justification of transfer pricing adjustment for AMP expenses by TPO.

Detailed Analysis:

1. Admission and Acceptance of New Evidence by CIT(A) Without Remanding to TPO/AO:

The Revenue contended that the CIT(A) admitted and accepted new evidence based on a different Profit Level Indicator (PLI) of Operating Profit/Operating Income without remanding it to the Transfer Pricing Officer (TPO) or Assessing Officer (AO) for a report, which contravenes Rule 46A of the Income Tax Rules, 1962. However, upon reviewing the CIT(A)'s order, it was found that there was no reference to the admission of any additional evidence, and nothing in this regard was brought before the Tribunal by the Departmental Representative (DR). Consequently, this ground raised by the Revenue was dismissed.

2. Whether AMP Expenses Constitute an International Transaction:

The assessee argued that the expenditure on Advertising, Marketing, and Promotion (AMP) is not an international transaction. The Tribunal noted that for a transaction to be considered an international transaction under section 92B of the Income Tax Act, 1961, there must be a formal or informal agreement between the assessee and its Associated Enterprise (AE) to share or reimburse AMP expenses. In this case, the AO/TPO did not present any evidence of such an agreement. The Tribunal referred to its previous decisions and the Delhi High Court's ruling in Maruti Suzuki India Ltd. vs CIT, which held that AMP expenditure is not an international transaction unless there is an explicit agreement between the parties. Consequently, the Tribunal upheld the CIT(A)'s finding that AMP expenditure is not an international transaction, allowing the cross-objection of the assessee.

3. Justification of Transfer Pricing Adjustment for AMP Expenses by TPO:

The TPO had applied the Bright Line Test (BLT) to make adjustments for excess AMP expenditure, asserting that the AMP expenses incurred by the assessee promoted the brand owned by the AE, thus creating marketing intangibles benefiting the AE. The CIT(A) deleted the addition, observing that the assessee had a higher operating profit compared to the comparables even after considering AMP expenses, and hence, no separate adjustment was necessary. The Tribunal found that the CIT(A)'s approach was consistent with previous orders where it was held that AMP expenditure does not constitute an international transaction. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, holding that AMP expenditure is not an international transaction and no adjustment to the arm's length price is required. The Tribunal also found no merit in the Revenue's contention regarding the admission of new evidence by the CIT(A) without remanding it to the TPO/AO. The order was pronounced in the open Court on 29/12/2022.