2015 (6) TMI 590 - HC - Income Tax

Disallowance of selling expenses - determination of AMP expenses - Held that - The decision of the LG Electronics (2013 (6) TMI 217 - ITAT DELHI) and all questions concerning the tax implications and transfer pricing arising therefrom in AMP related matters was considered by the Division Bench judgment of this Court in Sony Ericsson Mobile Communications India Private Limited v. CIT-III (2015 (3) TMI 580 - DELHI HIGH COURT). In the said decision, direct selling expenses such as the one which are the subject matter of these proceedings including incentives paid to distributors and dealers for services rendered are treated as AMP expenses and, therefore, held to be excluded from the determination of transfer pricing. In the light of this decision, this Court is of the opinion that the main question as to the correctness of the ITAT s decision with respect to ₹ 54.75 crores does not survive consideration. So far as balance amount of ₹ 3.91 crores is concerned, we notice that the matter was remitted for fresh consideration to the AO who was bound by the decision in Sony (supra).

Summary

Issues:
Transfer pricing adjustment on advertising, marketing, and promotional expenses claimed as selling expenses.

Analysis:
In this case, the appellant, the Revenue, challenged the order of the Income Tax Appellate Tribunal (ITAT) regarding the deduction claimed by the assessee on account of selling expenses. The assessee, engaged in data processing services, claimed a deduction of a substantial amount as selling expenses. The Transfer Pricing Officer (TPO) considered these expenses as advertising, marketing, and promotional (AMP) expenses and proposed a significant adjustment. The Dispute Resolution Panel (DRP) partially allowed the assessee's appeal, reducing the adjustment amount. The ITAT, following the Special Bench decision in LG Electronics case, allowed a further deduction from the total AMP expenses. However, the ITAT directed the Assessing Officer (AO) to reconsider a balance amount for fresh determination based on guidelines from the LG Electronics case.

The High Court referred to the Division Bench judgment in Sony Ericsson case, which clarified that direct selling expenses, including incentives paid to distributors and dealers, should be treated as AMP expenses and excluded from transfer pricing determination. The Court concluded that the main issue regarding the deduction of a significant amount as AMP expenses was settled by the Sony Ericsson judgment. As for the remaining balance amount subject to fresh determination, the AO was bound by the Sony Ericsson decision. Consequently, the Court held that the Revenue's appeals did not raise any substantial question of law and dismissed them. The cross-objections were also dismissed in light of the developments.

Therefore, the High Court upheld the ITAT's decision to allow deductions from the total AMP expenses and directed the AO to reconsider the remaining amount based on the principles established in the Sony Ericsson case. The judgment clarified the treatment of direct selling expenses as AMP expenses and their exclusion from transfer pricing calculations, providing guidance for future similar cases.