2016 (3) TMI 959 - AT - Income Tax

Transfer pricing adjustment - determination of ALP - treatment to transaction of expenditure on AMP as a separate transaction - Held that - TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assesseecompany and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. - Decided partly in favour of assessee

Issues Involved:
1. Transfer Pricing Adjustment on Advertisement, Marketing, and Promotion (AMP) Expenditure.
2. Disallowance under Section 14A of the Income Tax Act.
3. Additional Disallowances including Bad Debts, Software Expenses, Warranty Expenses, and Product Launch Expenses.
4. Levy of Interest under Section 234C of the Income Tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment on AMP Expenditure:
The primary issue was whether the AMP expenses incurred by the assessee-company could be considered as an international transaction under Section 92B of the Income Tax Act. The assessee argued that the AMP expenses were incurred solely to promote its sales and not for the benefit of its associated enterprise (AE), Essilor International SA, France. The Transfer Pricing Officer (TPO) had determined that the AMP expenses were excessive compared to comparable companies and made a TP adjustment of Rs. 10,65,96,361.

The Dispute Resolution Panel (DRP) initially confirmed the TPO's stance but remitted the matter back to the TPO for fresh determination in light of the Special Bench decision in LG Electronics India Pvt. Ltd. However, the Tribunal found that the DRP's reliance on LG Electronics was misplaced, as subsequent Delhi High Court rulings in cases like Sony Ericsson Mobile Communication India (P) Ltd., Maruti Suzuki India Ltd., and Whirlpool of India Ltd. clarified that AMP expenses cannot be presumed to be an international transaction without explicit agreements between the assessee and its AE.

The Tribunal held that the onus was on the revenue to prove the existence of an international transaction involving AMP expenditure. In the absence of an explicit agreement or arrangement, no TP adjustment could be made. The Tribunal restored the issue to the AO/TPO to reconsider the AMP expenditure as part of the operating cost under the Transactional Net Margin Method (TNMM).

2. Disallowance under Section 14A:
The assessee contested the disallowance of Rs. 60,98,834 under Section 14A, arguing that no expenditure was incurred to earn exempt income (dividends). The DRP directed the AO to ensure that such expenditure was indeed incurred. However, the AO applied Rule 8D without properly examining the assessee's claim. The Tribunal restored the issue to the AO for a de novo consideration, emphasizing the need to follow the DRP's directive.

3. Additional Disallowances:
- Bad Debts: The DRP directed the AO to verify whether the debtors' accounts had been credited and allow the deduction if found so.
- Software Expenses: The DRP accepted the assessee's claim and directed the AO to allow the expenses.
- Warranty Expenses: Allowed by the DRP following the Supreme Court's decision in Rotork Controls P. Ltd.
- Product Launch Expenses: Treated as revenue expenditure and directed to be allowed by the DRP.

4. Levy of Interest under Section 234C:
The assessee challenged the interest levied under Section 234C amounting to Rs. 8,14,411. However, this issue was not elaborately discussed in the Tribunal's order, and the appeal was treated as partly allowed based on the primary issues discussed.

Conclusion:
The Tribunal's judgment addressed the critical issues of TP adjustments on AMP expenditure and disallowance under Section 14A, providing a detailed legal analysis based on precedents. The Tribunal restored certain issues to the AO/TPO for fresh consideration, ensuring adherence to legal standards and proper examination of facts. The appeals were partly allowed, reflecting a balanced approach to the contentious issues raised.

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