2014 (1) TMI 1529 - AT - Income Tax

Pricing adjustment from total Advertisement, Marketing and Promotion (AMP) expenses - Held that - Relying on the decision in LG Electronics India Pvt. Vs. ACIT 2013 (6) TMI 217 - ITAT DELHI - The expense in connection with the sales which do not lead to brand promotion cannot be brought within ambit of 'Advertisement, Marketing and Promotion expenses' for determining the cost/value of international transactions' - The expenses which are in the nature of discount are outside the purview of total composition of AMP expenses for the purposes of determination of their ALP - Decided in favour of assessee. Component of AMP expenses - Held that - The amount was in the nature of reimbursement of salary paid to sales staff of dealers/distributors, but no material has been shown to substantiate this contention - The correct nature of this amount is not clear - The issue has been restored for fresh adjudication for ascertaining the correct nature of this amount. Disallowance as per section 37(1) - Held that - The overall AMP expenses are required to be processed as per the mandate of the LG Electronics 2013 (6) TMI 217 - ITAT DELHI to find out the amount spent towards brand building for the foreign AE and then making addition by way of TP adjustment with appropriate mark-up - The total AMP expenses are segregated into two classes, one benefiting the assessee's business and two, benefiting the foreign AE by way of promotion of the brand. Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee's business, there can be no scope for again reverting to section 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred wholly and exclusively' for the purposes of assessee's business. - The AO was not justified in observing alternatively that a sum of ₹ 180 crore and odd is not allowable as per section 37(1) of the Act - The issue has been restored for fresh adjudication.

Issues Involved:
1. Jurisdiction of the Transfer Pricing Officer (TPO) to make Transfer Pricing (TP) adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses.
2. Exclusion of a sum of Rs.143,36,26,136/- characterized as 'Pricing Adjustment' from the computation of total AMP expenses.
3. Inclusion of a sum of Rs.52.70 crore in the total AMP expenses.
4. Selection of comparables chosen by the TPO.
5. Alternative confirmation of disallowance amounting to Rs.180.73 crores under section 37(1) of the Income-tax Act, 1961.

Detailed Analysis:

1. Jurisdiction of the TPO to make TP adjustment on account of AMP expenses:
The first issue questioned the jurisdiction of the TPO to make a TP adjustment on AMP expenses. The appellant's representative acknowledged that the Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT had upheld the TPO's jurisdiction under similar circumstances. Consequently, the tribunal upheld the jurisdiction of the TPO to make the TP adjustment on AMP expenses.

2. Exclusion of 'Pricing Adjustment' from AMP expenses:
The second issue involved the exclusion of Rs.143,36,26,136/-, termed as 'Pricing Adjustment,' from the total AMP expenses for determining the Arm's Length Price (ALP). The assessee argued that this amount was a leverage in the Maximum Retail Price of products sold to dealers, acting as an extra trade discount. The TPO included this amount in the total AMP expenses, viewing it as a tool for brand loyalty among dealers. The tribunal, referencing the Special Bench decision in LG Electronics, concluded that expenses in the nature of discounts should be excluded from AMP expenses. Hence, the tribunal ordered the exclusion of the 'Pricing Adjustment' amount from the total AMP expenses for ALP determination.

3. Inclusion of Rs.52.70 crore in AMP expenses:
The third issue dealt with the inclusion of Rs.52.70 crore in the total AMP expenses. The appellant conceded that, as per the Special Bench order in LG Electronics, this amount was in the nature of AMP expenses, except for Rs.6 crore, which represented salaries paid to demonstrators at dealers' outlets. The tribunal found that the true nature of the Rs.6 crore was not clear and remitted the matter to the AO/TPO to ascertain the correct nature of this amount. If it was found to be related to advertising or promotion, it should be included in the AMP expenses; otherwise, it should be excluded.

4. Selection of comparables by the TPO:
The fourth issue concerned the selection of comparables by the TPO. The tribunal noted that the Special Bench in LG Electronics had set out the mechanism for selecting comparables in similar situations. The appellant argued that some comparables chosen by the TPO violated this mandate. The tribunal remitted the matter to the AO/TPO to adhere to the Special Bench's guidelines for selecting comparables and determining the ALP of AMP expenses.

5. Alternative disallowance under section 37(1):
The final issue was the alternative confirmation of disallowance amounting to Rs.180.73 crores under section 37(1) of the Act. The AO had proposed that this amount was not allowable as it was not incurred wholly and exclusively for the assessee's business, benefiting the parent company's brand. The tribunal referenced the Supreme Court judgment in Sassoon J. David & Co. P. Ltd. Vs. CIT, which allowed deductions for expenses incurred for business purposes, even if they incidentally benefited a third party. However, in the context of international transactions, the tribunal emphasized that TP provisions under Chapter X of the Act would prevail. The tribunal concluded that the overall AMP expenses should be processed to identify amounts spent on brand building for the foreign AE and make the appropriate TP adjustment. The remaining amount should be allowed as incurred for the assessee's business, subject to regular provisions. The tribunal vacated the AO's alternative finding and remitted the matter to the AO/TPO for reworking the TP adjustment on AMP expenses, following the Special Bench's decision in LG Electronics.

Conclusion:
The tribunal partly allowed the appeal, setting aside the impugned order on certain issues and remitting them to the AO/TPO for fresh consideration in line with the Special Bench's decision in LG Electronics and the tribunal's specific directions. The tribunal also clarified that no addition was warranted under section 37(1) on account of AMP expenses in the present case.

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