2015 (11) TMI 1197 - AT - Income Tax

Adjustment in respect of Advertisement/Marketing Promotional (AMP) and selling expenses - TPA - TPO concludeD that the assessee had incurred non-routine AMP expenses contributed in the brand development of the assessee s parent company - Held that - The assessee has a prima facie good case on merit in the appeals for both the years under consideration. The contention put forth by the ld. Counsel for the assessee that in view of the decision in the case of Sony Ericsson Mobile Communications India Private Limited and others (2015 (3) TMI 580 - DELHI HIGH COURT), the adjustment made on AMP expenses by the authorities below, needs to be deleted as have not been successfully replied by the department. Also since the recipient would have already discharged their tax liability on the amounts, the assessee cannot be treated as an assessee in default and that tax payment by the recipient ought to be regarded as sufficient compliance for the purposes of the provisions of section 40(a)(ia) of the Act and no disallowance is warranted in the hands of the assessee. The existence of a prima facie good case in its favour leads to the balance of convenience tilting in favour of the assessee. Therefore, finding that the assessee is likely to suffer substantial mischief, damage and injury otherwise the assessee s request for stay for both the years i.e. the years under consideration is accepted. The recovery for both the years shall remain stayed for six months from today, or till the disposal of the appeals, whichever is earlier.

Summary

Issues Involved:
1. Adjustment of Advertisement/Marketing Promotional (AMP) and selling expenses.
2. Adjustment on account of import of finished goods.
3. Adjustment on account of cost recovery expenses of super stockists/distributors.

Analysis:

Issue 1: Adjustment of Advertisement/Marketing Promotional (AMP) and selling expenses
The Appellant contended that it had a prima facie good case as it was the economic owner of long-term distribution rights and bore all expenses related to AMP for earning entrepreneurial profits. The Appellant submitted a bilateral letter with BDF AG to support this arrangement. The issue of Marketing intangible property was crucial, and the Appellant relied on the decision in 'Sony Ericsson Mobile Communications India Private Limited' to challenge the adjustment made by the authorities. The Appellant argued that the TPO incorrectly computed AMP expenditure and chose comparables wrongly.

Issue 2: Adjustment on account of import of finished goods
The Appellant asserted that it was an entrepreneur licensee procuring finished goods from low-risk manufacturers at an arm's length price. The Appellant highlighted its high-risk functional profile and fluctuating profits based on Indian market conditions. The Appellant justified the choice of Manufacturing AEs as the tested party for benchmarking transactions and cited various Tribunal decisions and guidelines to support its position.

Issue 3: Adjustment on account of cost recovery expenses of super stockists/distributors
Regarding cost recovery expenses, the Appellant argued that payments made to super stockists/distributors were below the basic exemption threshold and subject to TDS. The Appellant contended that such payments without a profit element were not taxable income for recipients. The Appellant relied on several case laws and circulars to support its stance, emphasizing that no liability existed to deduct tax on these payments.

In conclusion, the Tribunal found that the Appellant had a prima facie good case on merit for both years, as the contentions raised were not adequately addressed by the department. Considering the potential harm to the Appellant, the Tribunal granted a stay on recovery for six months or until the appeal's disposal, whichever was earlier.

This detailed analysis highlights the key arguments and legal principles involved in each issue addressed in the judgment delivered by the Appellate Tribunal ITAT Mumbai.