2024 (11) TMI 1017 - AT - Income Tax

Upward TP adjustment on account of AMP expenses - HELD THAT - We find an identical issue raised in assessee's own case for assessment year 2012- 2013 2023 (3) TMI 656 - ITAT BANGALORE which subsequently followed in A.Y. 2017-18 2022 (12) TMI 1542 - ITAT BANGALORE - The Tribunal in assessee's own case followed the dictum laid down in the case of Maruti Suzuki India Ltd. 2015 (12) TMI 634 - DELHI HIGH COURT , case of Sony Ericsson Mobile Communications India (P.) Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT directed the A.O. to delete the AMP TP adjustment and the mark up thereon wherein held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned. its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure - Appeal of the revenue is hereby dismissed.

Issues Involved:

1. Classification of AMP expenses as international transactions.
2. Benchmarking of AMP expenses under Indian Transfer Pricing legislation.
3. Examination of AMP expenditure's role in brand creation versus marketing intangibles.
4. AMP activities' impact on sales versus brand building.
5. Revenue's assertion on AMP expenses and marketing intangible creation.
6. Use of the bright line test for AMP services benchmarking.
7. Existence of international transactions due to excessive AMP expenditure for foreign brands.
8. Influence of continuous business desires on AMP expenditure and unwritten agreements.
9. Equating trademark use prohibition with agreements for brand promotion.

Issue-wise Detailed Analysis:

1. Classification of AMP Expenses as International Transactions:
The Tribunal examined whether AMP expenses fall under the definition of international transactions as per section 92B(1). The Revenue argued that AMP expenses constituted an international transaction due to the benefits provided to the AE. However, the Tribunal, following the Delhi High Court's decision in Maruti Suzuki India Ltd., held that the mere incurrence of AMP expenses does not automatically constitute an international transaction. The existence of such a transaction cannot be presumed without explicit evidence.

2. Benchmarking of AMP Expenses:
The Revenue contended that AMP expenses should be benchmarked separately under Indian Transfer Pricing legislation. However, the Tribunal, citing the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd., rejected the bright line test (BLT) as a means for determining the ALP of AMP expenses. The Tribunal emphasized that the TPO must establish the existence of an arrangement or understanding with the AE for incurring AMP expenses, which was not demonstrated in this case.

3. Examination of AMP Expenditure's Role:
The Tribunal considered whether AMP expenditure should be examined solely for its role in brand creation or as part of marketing intangibles. The Tribunal found that the Revenue's approach of treating AMP expenses as creating marketing intangibles was not supported by evidence. The Tribunal reiterated that AMP expenses should not be presumed to benefit the AE without concrete evidence of an international transaction.

4. AMP Activities' Impact on Sales versus Brand Building:
The Tribunal addressed the Revenue's argument that AMP activities are not solely for increasing sales but also for brand building. The Tribunal found no basis for treating AMP expenses as separate international transactions when the entity's overall margins were accepted under the TNMM. The Tribunal emphasized that AMP expenses are part of the business strategy and should not be isolated for TP adjustments.

5. Revenue's Assertion on AMP Expenses:
The Tribunal examined the Revenue's assertion that increased AMP expenses led to the creation of marketing intangibles for the overseas AE. The Tribunal, following the Delhi High Court's reasoning, held that the Revenue failed to demonstrate the existence of an international transaction or an arrangement with the AE for AMP expenses. The Tribunal rejected the notion that AMP expenses inherently create marketing intangibles for the AE.

6. Use of the Bright Line Test:
The Tribunal rejected the use of the bright line test (BLT) for benchmarking AMP services, aligning with the Delhi High Court's decision in Sony Ericsson. The Tribunal emphasized that the BLT is not a valid method for determining the ALP of AMP expenses and that any TP adjustment must be based on explicit evidence of an international transaction.

7. Existence of International Transactions Due to Excessive AMP Expenditure:
The Tribunal considered whether excessive AMP expenditure for promoting foreign brands implies an international transaction. The Tribunal found no statutory basis for presuming the existence of an international transaction based on AMP expenditure levels. The Tribunal reiterated that the burden is on the Revenue to establish the existence of such a transaction.

8. Influence of Continuous Business Desires:
The Tribunal addressed the Revenue's argument that the desire for continuous business with a foreign AE may compel excessive AMP expenditure, equating this with an unwritten agreement. The Tribunal found no evidence of an unwritten agreement and emphasized that business decisions on AMP expenditure are independent of presumed compulsion.

9. Equating Trademark Use Prohibition with Agreements:
The Tribunal examined whether prohibitions on trademark use equate to agreements for brand promotion. The Tribunal found no evidence supporting this equivalence and reiterated that any agreement must be explicitly demonstrated to establish an international transaction.

Conclusion:

The Tribunal dismissed the Revenue's appeal, holding that the AMP TP adjustment was not justified. The Tribunal emphasized the need for explicit evidence of international transactions and rejected presumptions based on AMP expenditure levels. The Tribunal's decision was consistent with the Delhi High Court's rulings in Maruti Suzuki and Sony Ericsson, reinforcing that AMP expenses should not be isolated for TP adjustments without concrete evidence of an international transaction.

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