2017 (9) TMI 376 - AT - Income Tax

Transfer pricing adjustment on Advertisement, Marketing and Promotion (AMP) expenses - determination of the existence or otherwise of an international transaction on account of AMP expenses incurred by the assessee - TPO treated the AMP spend as a separate international transaction - Held that - We do not find any logic in applying 5% as a benchmark mark-up, which is not emerging from any discussion in the order. In other words, there is no attempt to find out the mark-up of comparables by analyzing the AMP functions carried out by the assessee vis- -vis the comparables. To put it straight, neither the assessee nor the TPO have followed the prescription of the judgment in the case of Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT) for benchmarking. Further, we note that no detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO. The ld. AR also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. Since the orders of the authorities below are not in conformity with the ratio laid down in Sony Ericsson (supra) as discussed above and further necessary details for doing this exercise at our end are also not available, 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). Before parting, we consider it relevant to record that similar issue was raised by the assessee before the Tribunal for the immediately preceding two assessment years. The Tribunal in both the years, by its separate orders, has restored the matter to the Assessing Officer/TPO for a fresh adjudication. Not allowing deduction towards interest on Customs Duty - Held that - We are convinced with the view canvassed by the DRP as followed in the impugned order. Obviously, the assessee paid interest on Customs Duty in the financial year 2015-16. The liability towards such interest got crystalised and paid during such later year only. By no standard, the assessee can claim deduction for a part of such interest in the year under consideration. As the claim pertains to a subsequent period, the assessee may take necessary action for getting the deduction in such later year as per law.

Summary

Issues Involved:
1. Transfer pricing adjustment on Advertisement, Marketing, and Promotion (AMP) expenses.
2. Deduction for additional claim of employees’ contribution to PF.
3. Deduction towards interest on Customs Duty.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on AMP Expenses:

The first issue concerns the addition of ?38,60,51,832/- towards transfer pricing adjustment on AMP expenses. The assessee, a wholly-owned subsidiary of Toshiba Corporation, Japan, filed a return declaring a total income of ?31.99 crore. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions. The TPO identified an international transaction for brand promotion and applied the bright line approach, resulting in a protective adjustment of ?77.46 crore. On a substantive basis, the TPO noted that the assessee incurred total AMP expenses of ?148.77 crore, with non-routine expenses amounting to ?89.66 crore. After applying a 5% mark-up, the TPO proposed a transfer pricing adjustment of ?41.75 crore, which the Dispute Resolution Panel (DRP) reduced to ?38.60 crore.

The Tribunal examined whether AMP expenses constitute an international transaction. The assessee argued, citing judgments from the Delhi High Court, that AMP expenses should not be considered an international transaction. In contrast, the Department relied on other judgments where AMP expenses were considered an international transaction. The Tribunal found that the assessee had an express understanding with its AE to promote the Toshiba brand in India, substantiated by reimbursements from the AE. Thus, the Tribunal concluded that the AMP expenses constituted an international transaction.

The Tribunal then addressed the determination of the ALP. The TPO had applied the Cost Plus Method, adding a 5% mark-up. The Tribunal referred to the Delhi High Court judgment in Sony Ericsson Mobile Communications, which emphasized the need to consider distribution and AMP functions as inter-connected transactions and to determine their ALP in a bundled manner. The Tribunal noted that neither the assessee nor the TPO had followed this approach, and there was no detailed analysis of AMP functions performed by the assessee and comparables. Consequently, the Tribunal set aside the order and remanded the matter to the TPO/AO for fresh determination in line with the guidelines from the Sony Ericsson judgment.

2. Deduction for Additional Claim of Employees’ Contribution to PF:

The second issue relates to the deduction for the additional claim of employees’ contribution to PF. The assessee contended that the DRP directed the Assessing Officer to allow the deduction subject to verification of the deposit of dues in the Government account. However, the Assessing Officer did not address this issue. The Tribunal directed the Assessing Officer to examine the claim in light of the DRP's direction and allow the deduction accordingly.

3. Deduction Towards Interest on Customs Duty:

The third issue concerns the deduction for interest on Customs Duty, which arose in the financial year 2015-16 but relates to the financial year 2011-12. The Settlement Commission determined the interest liability at ?40.46 crore, which the assessee paid. The DRP rejected the claim for deduction in the year under consideration, stating that it pertains to a subsequent period. The Tribunal agreed with the DRP, noting that the liability crystallized and was paid in a later year, and thus, the assessee should claim the deduction in that subsequent period.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal remanding the matter of AMP expenses back to the TPO/AO for fresh determination and directing the Assessing Officer to examine the claim for employees’ contribution to PF. The claim for deduction towards interest on Customs Duty was not allowed.