2014 (6) TMI 565 - AT - Income Tax

Transfer pricing adjustment Advertisement, marketing and sales promotion expenses - LG. Electronics India P. Ltd. Versus Assistant Commissioner of Income-tax 2013 (6) TMI 217 - ITAT DELHI not followed Held that - Incurrence of AMP expenses higher than those incurred by comparable companies resulted in creation of marketing intangibles for the AE, thus amounting to an international transaction - Expenditure on Selling and distribution, being in the nature of selling expenses had to be excluded from the ambit of AMP expenses - DRP does not appear to have recorded categorical findings - apart assessee s pleas on comparables are not found to have been considered objectively thus the order of the AA is set aside and the matter is remitted back to the Assessing Authority for fresh adjudication Decided in favour of Assessee.

Summary

Issues:
Transfer pricing adjustment on account of Arms Length Price Adjustments based on AMP expenses.

Analysis:
The appellant, engaged in the business of footwear, apparel, fitness equipment, and sportswear, challenged the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) regarding the Arms Length Price Adjustments (ALP). The TPO applied the bright-line test to compare the ratio of AMP expenditure to sales of the appellant with that of comparable companies. The TPO concluded that any excess expenditure beyond the bright line for brand promotion activities needed to be compensated by the Associate Enterprise (AE). The TPO calculated an adjustment of Rs. 70,52,68,339/- for brand building activities undertaken by the appellant. However, the Dispute Resolution Panel (DRP) directed the Assessing Officer to reduce the markup to 12.50%, resulting in an adjustment of Rs. 68,70,75,253/-. The appellant contended that the incurrence of AMP expenses did not create marketing intangibles for the AE and did not constitute an international transaction for brand promotion. They argued that selling and distribution expenses should be excluded from AMP expenses. The appellant relied on the decision of the Special Bench in LG Electronics India Pvt. Ltd Vs. ACIT to support their case.

The appellant further argued that the TPO and DRP's findings contradicted the Special Bench's judgment in LG's case regarding the selection of comparable companies. They emphasized the importance of choosing domestic cases without foreign brand usage for meaningful comparisons. The appellant stressed that benchmarking should consider specific characteristics and the nature of advertisement expenditure. They highlighted that their AMP/Sales ratio was lower than the mean ratio of comparable companies, justifying the deletion of the adjustment on AMP expenses. The appellant presented a fresh search of comparable companies showing a lower AMP/Sales percentage than the industry average, supporting their claim for deletion of the adjustment.

On the other hand, the Departmental Representative (DR) argued that the DRP had considered the Special Bench decision and reduced the adjustment after a comprehensive review. However, the Appellate Tribunal found that the DRP did not provide categorical findings aligning with the parameters set by the Special Bench in LG's case. The Tribunal set aside the order and remitted the matter back to the Assessing Authority for a fresh decision in accordance with the law. The Assessing Authority was directed to consider the Special Bench's judgment and provide a reasoned order after giving the appellant a fair opportunity to present their case.

The Tribunal allowed the appeal for statistical purposes only, emphasizing the need for a proper assessment based on the legal principles established by the Special Bench. The Assessing Officer was instructed to address the issue of charging interest under the relevant sections of the Act in accordance with the law and by passing a speaking order.