2015 (6) TMI 514 - AT - Income Tax

Transfer pricing adjustment - AO/ TPO had accepted and adopted TNMM method with regard to other international transaction, therefore, no separate bifurcation of AMP expenses is to be made as per assessee - Held that - Submission of assessee cannot be accepted because TPO had applied the bright line test by considering those comparables which were routine distributors. He did not carry out any study with reference to the functions performed by comparables selected by him vis a vis functions performed by assessee in regard to its marketing and distribution activities. The international transaction of AMP expenses can be clubbed with other international transactions carried out by assessee as distributor, if AMP functions performed by tested party and comparables are same. If there is difference in the functions between the assessee and comparables, the suitable adjustment was to be first made to bring the both at same pedestals. It is pertinent to note that comparables selected by assessee in its TP study for benchmarking the distribution activity and for benchmarking the AMP functions only Remi Elektrotechnik Ltd. is common in both. Therefore, the plea that since TPO has accepted TNMM method, therefore, AMP expenditure should not be separately considered is devoid of any merit. In view of the decision of Hon ble High Court in Sony Ericsson case (2015 (3) TMI 580 - DELHI HIGH COURT ), there is no dispute that the discount and sales commission being directly attributable to selling activities of assessee, have to be excluded from the components selected by TPO in regard to AMP expenses. However, as far as submissions of ld. counsel with regard to the expenses in connection with the sponsorship and sales promotion are concerned, we are of the opinion that since the assessee s plea has not been examined by ld. DRP/ TPO, the matter should be restored to file of TPO/ DRP to record a finding on the assessee s claim as noted in the submissions of ld. authorized representative. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Jurisdictional error in referring the matter to the TPO.
2. Determination of arm's length adjustment for AMP expenses.
3. Inclusion of certain expenses under the AMP head.
4. Application of the bright line test.
5. Selection of comparables for benchmarking AMP expenses.
6. Application of a mark-up on AMP expenses.
7. Charging of interest under sections 234D and 244A.
8. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Jurisdictional Error:
The assessee argued that the AO did not record any reasons for referring the matter to the TPO for computation of the arm's length price, as required under section 92CA(1) of the Income Tax Act, 1961. This was claimed to be a jurisdictional error.

2. Determination of Arm's Length Adjustment for AMP Expenses:
The assessee contended that since their international transactions were accepted to be at arm's length under TNMM, analyzing individual elements of cost like AMP expenses was inconsistent with the tenets of TNMM. The assessee relied on the decision in BMW India Pvt. Ltd. for AY 2008-09. The Tribunal noted that the TPO applied the bright line test considering the assessee as a distributor without carrying out a study of the functions performed by the comparables vis-`a-vis the assessee.

3. Inclusion of Certain Expenses Under the AMP Head:
The TPO included items like discounts and sales commissions under AMP expenses, which the assessee argued were purely linked with actual sales. The Tribunal agreed that discount and sales commission being directly attributable to selling activities should be excluded from AMP expenses. However, the Tribunal restored the matter to the TPO/DRP to examine the assessee's claim regarding sponsorship and sales promotion expenses.

4. Application of the Bright Line Test:
The assessee objected to the use of the bright line test for determining excessive AMP expenses. The DRP upheld the TPO's finding regarding the use of the bright line test, referring to the decision of the Special Bench in LG Electronics India Pvt. Ltd. The Tribunal noted that the bright line test should not be applied in a manner that introduces a new concept not recognized in the statute or international commentaries.

5. Selection of Comparables for Benchmarking AMP Expenses:
The TPO selected five comparables for determining the bright line for AMP expenses. The assessee objected to the selection, arguing that the comparables were not operating at the same level of the business value chain and were dissimilar in respect of the brands promoted. The Tribunal noted that the TPO did not carry out a detailed functional analysis of the comparables and restored the matter for a fresh examination.

6. Application of a Mark-up on AMP Expenses:
The TPO applied a mark-up of 12.50% on the alleged excessive AMP expenses. The assessee argued that this mark-up was applied without any basis. The Tribunal did not specifically address this issue in the detailed analysis but restored the matter to the TPO/DRP for a fresh examination.

7. Charging of Interest Under Sections 234D and 244A:
The assessee contended that the AO erred in charging interest under sections 234D and 244A. The Tribunal did not specifically address this issue in the detailed analysis.

8. Initiation of Penalty Proceedings Under Section 271(1)(c):
The assessee argued that the AO initiated penalty proceedings mechanically and without recording adequate satisfaction. The Tribunal did not specifically address this issue in the detailed analysis.

Conclusion:
The Tribunal restored the matter to the AO/TPO for a fresh examination, particularly to carry out a detailed functional analysis of the comparables and to record findings on the assessee's claims regarding the components of AMP expenses. The appeal was allowed for statistical purposes.

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