2015 (10) TMI 312 - AT - Income Tax

Addition on account of arm s length price under sec. 92CA(3) - whether marketing and selling expenses like trade discount etc. are not AMP expenses? - Held that - We find that the Hon ble jurisdictional High Court of Delhi in the case of Sony Ericsson Mobile Communication India (P) Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT after discussing the majority view of the Special Bench of the ITAT in the case of L.G. Electronics (2013 (6) TMI 217 - ITAT DELHI), has been pleased to hold that marketing and selling expenses like trade discount etc. are not AMP expenses. Thus we set aside the matter to the file of the Assessing Officer to decide afresh the issue as to whether local transaction of the assessee involving advertisement, cash discount, service expenses and business promotion expenses with unrelated parties are international transaction under sec. 92B of the Income-tax Act, 1961 and if so as to whether transfer pricing provisions are applicable on them and made the adjustment, if any, accordingly in view of the above ratios laid down by the Hon ble Jurisdictional High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd. (supra) after affording opportunity of being heard to the assessee. Decided in favour of assessee for the statistical purposes.

Summary

Issues:
Validity of addition of Rs. 6,70,36,527 on account of arm's length price under sec. 92CA(3) of the Income-tax Act, 1961; Whether local transactions involving advertisement, cash discount, service expenses, and business promotion expenses with unrelated parties are international transactions under sec. 92B and subject to transfer pricing provisions.

Analysis:

1. The assessee challenged the addition of Rs. 6,70,36,527 as arm's length price under sec. 92CA(3) of the Income-tax Act, 1961. The authorities below found the assessee engaged in brand building activity for its associated enterprise (AE) with local transactions treated as international transactions under sec. 92B. The transfer pricing provisions were applied without substantiating the basis for a 12% markup on reimbursements, resulting in the addition. The TPO observed high expenses promoting the brand "Panasonic," not owned by the assessee, leading to the adjustment. The DRP upheld the TPO's decision.

2. The AR cited precedents where expenses for sales in India were not considered AMP expenses. The decreasing sales trend despite substantial selling expenses required the assessee to intensify advertising and promotional efforts. The AR emphasized past years' orders where no AMP expenses issue arose, and margins were better than comparables, negating the need for ALP adjustments.

3. The High Court held that marketing and selling expenses like trade discounts are not AMP expenses. Expenses related to cash discounts, business promotions, and service expenses were not categorized as AMP expenditure. The AR argued that advertisement costs were for immediate sales benefit, not AMP expenses. The Court emphasized that AMP expenses should not be examined separately if the margin of tested parties aligns with comparables.

4. Considering the arguments and legal precedents, the Tribunal set aside the matter for the AO to determine if local transactions are international under sec. 92B and subject to transfer pricing provisions. The AO was directed to make adjustments, if necessary, following the High Court's rulings. The grounds challenging the validity of the addition of Rs. 6,70,36,527 were allowed for statistical purposes, resulting in the appeal being allowed.

In conclusion, the Tribunal's decision highlighted the importance of aligning expenses with sales benefits and ensuring that transfer pricing provisions are applied in accordance with legal precedents and the Income-tax Act, 1961.