2015 (12) TMI 634 - HC - Income Tax

Transfer pricing adjustment - determination of arm s length price ( ALP ) of the advertisement, marketing and sales promotion ( AMP ) expenses incurred by the Assessee, MSIL - Held that - Question stands answered by the judgment in Sony Ericsson viz. 2015 (3) TMI 580 - DELHI HIGH COURT that the TPO could have examined the question whether AMP expenses by themselves constitute an international transaction in the absence of any specific reference being made in that behalf by the AO. Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? - Held that - Question No.2 is answered in the negative i.e. in favour of the Assessee and against the Revenue. In other words, it is held that AMP expenses incurred by MSIL cannot be treated and categorised as an international transaction under Section 92B of the Act. Since answer to Question above is in favour of the Assessee, the question of the TPO making any transfer pricing adjustment in respect of such transaction Chapter X does not arise and, therefore, question (3) is answered in the negative and in favour of the Assessee and against the Revenue. Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd. 2013 (6) TMI 217 - ITAT DELHI ? - Held that - Question is answered in the negative i.e. in favour of the Assessee and against the Revenue. It is held that the ITAT was not right in directing a fresh benchmarking comparative analysis to be undertaken by the TPO in view of the decision of the Special Bench of the ITAT in LG Electronics India Pvt. Ltd.

Issues Involved:
1. Determination of arm's length price (ALP) of advertisement, marketing, and sales promotion (AMP) expenses.
2. Jurisdiction of the Transfer Pricing Officer (TPO) to make transfer pricing adjustments.
3. Whether AMP expenses can be treated as an international transaction.
4. Application of the Bright Line Test (BLT) for determining ALP.
5. Economic ownership and legal ownership of the brand.
6. Impact of earlier judgments and the Supreme Court's directions.
7. Allowability of AMP expenses under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Determination of ALP of AMP Expenses:
The primary issue in these appeals is the determination of the ALP of AMP expenses incurred by the Assessee, MSIL. The TPO had benchmarked the AMP expenses using the BLT, comparing MSIL's AMP expenses with those of comparable companies. The TPO concluded that the excess AMP expenses incurred by MSIL were for promoting the brand 'Suzuki' owned by its Associated Enterprise (AE), SMC, and made a transfer pricing adjustment accordingly.

2. Jurisdiction of the TPO:
The ITAT and the High Court considered whether the TPO had the jurisdiction to make a transfer pricing adjustment in relation to AMP expenses. The Court concluded that the TPO could examine whether AMP expenses by themselves constitute an international transaction, even in the absence of a specific reference by the Assessing Officer (AO).

3. AMP Expenses as an International Transaction:
The Court examined whether AMP expenses incurred by MSIL could be treated and categorized as an international transaction under Section 92B of the Income Tax Act. The Court held that AMP expenses incurred by MSIL could not be treated as an international transaction, as the Revenue failed to demonstrate the existence of an agreement or understanding between MSIL and SMC regarding the AMP spend.

4. Application of the Bright Line Test (BLT):
The Court noted that the decision in Sony Ericsson had expressly negatived the use of the BLT for determining the ALP of an international transaction involving AMP expenses. Consequently, the Court held that the existence of an international transaction on account of the quantum of AMP expenditure by MSIL could not be established using the BLT.

5. Economic Ownership and Legal Ownership of the Brand:
The Court discussed the concepts of economic and legal ownership of the brand. It was noted that the co-brand 'Maruti-Suzuki' used by MSIL did not belong to SMC and could not be used by SMC either in India or elsewhere. The Court found that the benefit of MSIL's AMP spend to SMC was incidental and not substantial enough to infer an international transaction.

6. Impact of Earlier Judgments and Supreme Court's Directions:
The Court addressed the effect of the earlier decision in the writ petition filed by MSIL and the Supreme Court's directions. It concluded that the earlier judgment of the Division Bench of the High Court in the writ petition by MSIL could not preclude MSIL from contesting the finding regarding the existence of an international transaction concerning AMP expenses.

7. Allowability of AMP Expenses under Section 37(1):
The Court observed that once AMP expenses are allowed under Section 37(1) of the Act, they cannot be disallowed for the purpose of Chapter X by attributing some part of the expenditure to promoting the brand of the foreign AE. However, the Court did not dwell further on this aspect as it was not necessary for the answers to the central questions arising in the case.

Conclusion:
The Court answered the questions framed in favor of the Assessee, holding that AMP expenses incurred by MSIL could not be treated and categorized as an international transaction under Section 92B of the Act. Consequently, the TPO could not make any transfer pricing adjustment in respect of such expenses. The impugned orders of the ITAT, DRP, AO, and TPO were set aside, and the appeals were allowed with no orders as to costs.

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