2023 (4) TMI 624 - AT - Income Tax

TP adjustment on account of excess AMP expenditure - Assessee is engaged in the business of manufacturing and distribution of desktop, laptop, servers, and smartphones and incurred expenditure in connection with campaigning, depicting features of new products, providing information to the public about details of product, its specification etc. - HELD THAT - We notice that the TPO has not made any adjustment in the trading segment and also in the manufacturing segment in which the AMP expenses are included as part of operating cost. In our view, this would mean that there is no adverse inference drawn by the TPO in respect of the arm s length price in the trading segment in the order passed u/s. 92CA and has accepted the entity level margins earned by the assessee with respect to trading segment. Therefore, we hold that no adjustment is warranted separately with respect to AMP expenses in the case where the TPO has accepted the overall margin of the trading segment which included the AMP expenses as part of the operating cost. Accordingly, we delete the adjustment made by the TPO. TPO considering incorrect margins - As prayed to direct the Ld. TPO to rectify the above Arithmetical errors in computation of the weighted average of operating margin to operating cost ratio ( OP/OC') margin of the company - HELD THAT - As considering the submissions, remit the issue back to the TPO to consider the correct margins of the above companies. Working capital adjustment - HELD THAT - It is a settled position that working capital adjustment need to be given while computing the ALP - We direct the Ld.AO/TPO to compute the working capital adjustment while computing the operating margin of the comparables following the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India P. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE

Summary

Issues Involved:
1. General grounds.
2. Transfer Pricing (TP) adjustment on account of excess Advertisement, Marketing, and Promotion (AMP) expenditure.
3. TP adjustment in sales facilitation services segment and administrative and business support services segment.

Summary:

General Grounds:
- Ground No.1 and 32 to 34 were general in nature and not specifically addressed in detail within the judgment.

TP Adjustment on Account of Excess AMP Expenditure:
- The assessee, engaged in manufacturing and distribution of electronic products, incurred AMP expenses for promoting its products in India.
- The Transfer Pricing Officer (TPO) argued that these AMP expenses were excessive compared to industry standards and should be treated as an international transaction, requiring reimbursement from the Associated Enterprise (AE) with a markup.
- The Dispute Resolution Panel (DRP) upheld the TPO's view that AMP expenses benefitted the AE and constituted an international transaction.
- The Tribunal referenced a previous decision in the assessee's own case for AY 2017-18, where it was held that if the net profit margin of the assessee is within the arm's length range, no separate adjustment for AMP expenses is warranted.
- The Tribunal noted that the TPO did not make any adjustment in the trading or manufacturing segments, which included AMP expenses as part of operating costs.
- Consequently, the Tribunal directed the deletion of the AMP adjustment, following the precedent that accepted overall margins without separate AMP adjustments.

TP Adjustment in Sales Facilitation Services Segment and Administrative and Business Support Services Segment:
- The assessee contested the exclusion of MCI Management India Private Limited as a comparable and the incorrect margin computation for PR Pundit Public Relations Private Limited and Marketing Communication & Advertising Limited.
- The Tribunal remitted the issue back to the TPO to consider the DRP's directions and rectify the margin computations.
- Regarding working capital adjustment, the Tribunal acknowledged its necessity in computing the Arm's Length Price (ALP) and directed the AO/TPO to compute the working capital adjustment, following established precedents.

Conclusion:
- The appeal was partly allowed, with specific directions to delete the AMP adjustment and reconsider the working capital adjustments and margin computations for certain comparables. The Tribunal emphasized adherence to previous decisions and proper application of transfer pricing principles.