2017 (5) TMI 1367 - AT - Income Tax

Addition on account of transfer pricing adjustment AMP expenses - AR contended that the TPO for the A.Y. 2012-13 in assesse s own case has not made any transfer pricing adjustment on account of AMP expenses but has factored in the AMP intensity adjustment in the profit margin of the comparables and made transfer pricing addition on account of the international transaction of Import of finished goods - Held that - We are not convinced with the proposition put forth on behalf of the assessee because the entire proceedings before the TPO/DRP/AO have proceeded on the basis of a separate international transaction of AMP and its independent benchmarking. There is not even a whisper in the orders about carrying out AMP intensity adjustment instead of treating AMP as an international transaction. If the contention of the ld. AR is accepted it will change the entire complexion of the case and would amount to travelling beyond the impugned order. As the TPO has considered AMP as a separate international transaction and determined its ALP; and further that the tribunal in assessee s own case for the immediately preceding A.Y. 2009-10 has dealt with the determination of the AMP as a separate international transaction we cannot now concur with the request of the assessee in allowing the setting up of an altogether different case. This contention ergo fails. To sum up since the facts and circumstances of the instant appeals are mutatis mutandis similar to the immediately preceding year respectfully following the precedent we set aside the impugned order and send the matter back to the A.O./TPO for deciding this issue afresh in light of the foregoing discussion and the directions given by the Tribunal in its order for the immediately preceding year in the second round. Needless to say the assessee will be allowed a reasonable opportunity of hearing in the resulting fresh proceedings. Transfer pricing adjustment AMP expenses - Assessment Year 2012-13 - Held that - Respectfully following the decision taken for the A.Y. 2009-10 we hold that firstly the RPM should be applied as the most appropriate method for determining the ALP of the international transaction of purchase of material from the AE but by carrying out the AMP intensity adjustment in the profit rate of comparables. If however it turns out that such an adjustment cannot be done due to one reason or the other then the RPM should be discarded and another suitable method be adopted which encompasses the effect of AMP intensity adjustment. Our view is fortified by the judgment in the case of Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT) in which it has been held in para 165 that Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch adjustment could be made when the result would be reliable and accurate. Otherwise RP Method should not be adopted . We therefore set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for re-determining the ALP of the international transaction of Import of finished goods in the manner delineated above. The assessee should be given an adequate opportunity of hearing in such fresh proceedings.

Issues Involved:
1. Transfer pricing adjustment in advertisement, marketing, and promotion (AMP) expenses for assessment years 2010-11 and 2011-12.
2. Determination of the arm's length price (ALP) of AMP expenses.
3. Treatment of AMP expenses as an international transaction.
4. Methodology for benchmarking AMP expenses.
5. AMP intensity adjustment in the profit margins of comparables for assessment year 2012-13.
6. Application of the Resale Price Method (RPM) versus Transactional Net Margin Method (TNMM).

Detailed Analysis:

1. Transfer Pricing Adjustment in AMP Expenses for AY 2010-11 and 2011-12:
The assessee, part of the Luxottica group, incurred significant AMP expenses, which the Transfer Pricing Officer (TPO) adjusted using the bright line test. The Dispute Resolution Panel (DRP) largely upheld the TPO's adjustments with minor modifications. The assessee contested these additions, arguing that AMP expenses should not be considered an international transaction based on judgments from the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT and CIT vs. Whirlpool of India Ltd. The Revenue, however, cited the Hon'ble Delhi High Court's ruling in Sony Ericsson Mobile Communications (India) Pvt. Ltd. vs. CIT, which treated AMP expenses as an international transaction and called for fresh determination of ALP.

2. Determination of ALP of AMP Expenses:
The Tribunal noted that the TPO did not consider the ratio laid down in several judgments from the Hon'ble jurisdictional High Court. The Tribunal had previously restored a similar issue to the AO/TPO for fresh adjudication in light of the Hon'ble Delhi High Court's judgment in Sony Ericsson Mobile Communications (India) Pvt. Ltd. vs. CIT. Following this precedent, the Tribunal set aside the impugned order and sent the matter back to the AO/TPO for fresh determination, allowing the assessee a reasonable opportunity of hearing.

3. Treatment of AMP Expenses as an International Transaction:
The Tribunal acknowledged the conflicting judgments regarding whether AMP expenses constitute an international transaction. It referred to multiple judgments, including those from the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications (India) Pvt. Ltd. and Yum Restaurants (India) P. Ltd. vs. ITO, which restored the issue for fresh determination. The Tribunal followed the precedent set in the assessee's own case for the preceding year, directing the AO/TPO to decide the issue afresh.

4. Methodology for Benchmarking AMP Expenses:
The Tribunal rejected the assessee's proposition to carry out AMP intensity adjustment instead of treating AMP as an international transaction, as it would alter the case's complexion. The Tribunal emphasized that the TPO had considered AMP as a separate international transaction and determined its ALP independently. Therefore, the Tribunal could not concur with the assessee's request to change the benchmarking methodology.

5. AMP Intensity Adjustment in Profit Margins of Comparables for AY 2012-13:
For AY 2012-13, the TPO did not make a separate transfer pricing adjustment for AMP expenses but factored in the AMP intensity adjustment in the profit margins of comparables. The TPO observed that the assessee incurred significant AMP expenses, benefiting the AE by enhancing the brand's value. The TPO made the AMP intensity adjustment by comparing the intensity of AMP expenses of the assessee and comparables. The Tribunal upheld this approach, noting that it aligned with the Hon'ble jurisdictional High Court's judgment in Bausch & Lomb Eyecare India Pvt. Ltd. and Ors. vs. Addl.CIT and Ors.

6. Application of RPM versus TNMM:
The assessee applied RPM as the most appropriate method, while the TPO used TNMM without providing reasons for rejecting RPM. The Tribunal noted that for AY 2009-10, the Tribunal had approved RPM as the most appropriate method, and the Hon'ble High Court did not interfere with this decision. However, for AY 2012-13, the TPO embedded the AMP function in the international transaction of purchase of material from the AE and made the transfer pricing adjustment accordingly. The Tribunal directed the AO/TPO to apply RPM as the most appropriate method for determining the ALP of the international transaction of purchase of material from the AE, with AMP intensity adjustment in the profit rate of comparables. If AMP intensity adjustment could not be done, another suitable method should be adopted.

Conclusion:
The Tribunal set aside the impugned orders and remitted the matters to the AO/TPO for fresh determination in light of the judgments and directions provided. The appeals were allowed for statistical purposes, ensuring the assessee received a reasonable opportunity of hearing in the fresh proceedings.

← Previous Next →