2016 (3) TMI 581 - AT - Income Tax

Transfer pricing adjustment of advertisement, marketing and promotion (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 has been pleased to hold that marketing and selling expenses like trade discount etc. are not AMP expenses. As there is inappropriate discussion about the precise nature of expenses which have been assailed before us, we consider it expedient to direct the AO to first ascertain the correct nature of such expenses. If these expenses are found to be in the nature of Selling expenses directly in connection with sales, then, they should be removed from the base amount for computing the ALP of AMP expenses. In the otherwise scenario, the AMP expenses, which are not in the nature of Selling expenses incurred directly for sales, should continue to include in the base amount. Under such circumstances, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon ble High Court in Sony Ericson Mobile (supra) - Decided partly in favour of assessee for the statistical purposes.

Summary

Issues Involved:
1. Transfer pricing adjustment of advertisement, marketing, and promotion (AMP) expenses.
2. Jurisdiction and methodology of the Transfer Pricing Officer (TPO) in determining the arm's length price (ALP) of AMP expenses.

Detailed Analysis:

1. Transfer Pricing Adjustment of AMP Expenses:
The core issue in this appeal is the addition of Rs. 12,15,11,974/- on account of transfer pricing adjustment of AMP expenses. The assessee, a subsidiary engaged in the distribution of various channels and sale of advertisement inventory in India, reported three international transactions using the Transactional Net Margin Method (TNMM) to demonstrate that these transactions were at arm's length price (ALP). The TPO accepted the reported international transactions but observed that the assessee incurred AMP expenses amounting to Rs. 20,54,57,391/-. By applying the bright line test, the TPO identified non-routine expenses for developing intangibles exceeding the bright line at Rs. 10,56,62,586/-. Adding a 15% markup, the TPO worked out a transfer pricing adjustment of Rs. 12,15,11,974/-. This adjustment was upheld by the Dispute Resolution Panel (DRP) and subsequently by the Assessing Officer (AO).

2. Jurisdiction and Methodology of the TPO:
The Tribunal had initially restored the computation of ALP of AMP expenses to the TPO in accordance with the Special Bench decision in LG Electronics India (P) Ltd. vs. ACIT. The Hon'ble jurisdictional High Court, in a batch of appeals led by Sony Ericson Mobile Communication India (P) Ltd. vs. CIT, upheld the majority view of the Special Bench treating AMP as an international transaction and conferring jurisdiction on the TPO to determine the ALP of AMP expenses. The High Court held that AMP expenses should be bundled with other international transactions for a distributor, and suitable comparables performing similar AMP functions should be chosen. If no such comparables are available, segregation should be done, and the ALP of AMP expenses should be determined separately, allowing proper set-off on account of excess purchase price adjustment.

Summary of High Court Judgment:
- AMP expense is an international transaction.
- The TPO has jurisdiction to determine the ALP of AMP expenses.
- Inter-connected international transactions can be aggregated.
- AMP is a separate function, and comparables should perform similar AMP functions.
- Bright line test cannot be applied for benchmarking non-routine AMP expenses.
- ALP of AMP expenses should preferably be determined in a bundled manner with the distribution activity.
- If suitable comparables are not available, adjustments should be made, or the TNMM on an entity level should not be applied.
- Selling expenses cannot be considered as part of AMP expenses.

Tribunal's Decision:
The Tribunal noted that the TPO applied the bright line test, which was later rendered incorrect by the High Court. The High Court mandated that AMP functions performed by the assessee must be compared with those performed by comparables. The Tribunal found no reference to the AMP functions performed by the assessee in the TPO's order and noted the requirement to exclude selling expenses directly incurred in connection with sales from AMP expenses. Consequently, the Tribunal set aside the impugned order and remanded the matter back to the TPO/AO for fresh determination of the ALP of AMP expenses in accordance with the High Court's guidelines in Sony Ericson Mobile.

Conclusion:
The appeal was partly allowed for statistical purposes, with the matter remanded to the TPO/AO for re-evaluation of the AMP expenses' ALP, ensuring compliance with the High Court's directives and excluding selling expenses directly related to sales. The order was pronounced in the open court on 03.12.2015.