2017 (10) TMI 535 - AT - Income Tax

Transfer pricing adjustment towards Advertisement, Marketing and Promotion expenses - Held that - In light of the non-sustainability of the objections taken by the Ld. AR and following the earlier view taken by the ITAT in assessment year 2010-11 in the case of the assessee, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judicial position, after allowing a reasonable opportunity of being heard to the assessee. As further clarified that if a situation for determining the ALP of AMP expenses arises, then no transfer pricing adjustment should be made by applying the Bright Line Test because the Hon ble Jurisdictional High Court has not approved the application of the bright line test in several decisions.

Summary

Issues Involved:

1. Addition on account of transfer pricing adjustment towards Advertisement, Marketing, and Promotion (AMP) expenses.
2. Determination of Arm’s Length Price (ALP) of international transactions.
3. Jurisdiction and application of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).
4. Application of the Bright Line Test (BLT) and AMP intensity adjustment.
5. Consideration of judicial precedents and High Court judgments.
6. Procedural fairness and opportunity of being heard.

Issue-wise Detailed Analysis:

1. Addition on Account of Transfer Pricing Adjustment towards AMP Expenses:
The primary grievance of the assessee was the addition of ?97,539,656/- due to transfer pricing adjustment towards AMP expenses. The TPO treated AMP expenses as an international transaction and proposed adjustments using both cost-plus method and BLT. The DRP upheld the AMP adjustment using BLT and directed AMP intensity adjustment on a protective basis. The AO made the substantive addition but did not make any protective addition.

2. Determination of Arm’s Length Price (ALP) of International Transactions:
The assessee applied the Resale Price Method (RPM) for import transactions and Comparable Uncontrolled Price (CUP) method for reimbursement of expenses. The TPO, however, proposed adjustments on AMP expenses, considering them as international transactions. The DRP and AO upheld these adjustments, which led to the appeal.

3. Jurisdiction and Application of TPO and DRP:
The assessee argued that the TPO erred in re-characterizing unilateral AMP expenses as an international transaction and that the DRP failed to address jurisdictional challenges. The AO did not grant proper opportunity for the assessee to be heard, nor did he record satisfaction regarding the existence of an international transaction.

4. Application of the Bright Line Test (BLT) and AMP Intensity Adjustment:
The TPO applied BLT on a protective basis, which was not ultimately added by the AO. The DRP directed AMP intensity adjustment, which was also contested by the assessee. The ITAT noted that the Hon’ble Delhi High Court had not approved BLT in several decisions and directed the TPO/AO to reconsider the issue.

5. Consideration of Judicial Precedents and High Court Judgments:
The assessee and revenue cited various judgments, including those of the Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. and Yum Restaurants (India) P. Ltd., which addressed whether AMP expenses constituted an international transaction. The ITAT emphasized the need to apply the entirety of judicial positions available, including judgments delivered after the TPO’s order.

6. Procedural Fairness and Opportunity of Being Heard:
The ITAT found that the AO/TPO did not consider all relevant judicial precedents available at the time. The ITAT directed a fresh determination of the ALP of AMP expenses, ensuring a reasonable opportunity for the assessee to be heard.

Conclusion:
The ITAT set aside the impugned order and remitted the matter to the TPO/AO for a fresh determination on whether AMP expenses constituted an international transaction. If such a transaction exists, the TPO must determine the ALP in light of relevant judicial positions, ensuring no transfer pricing adjustment is made using the BLT. The appeal was allowed for statistical purposes, emphasizing procedural fairness and comprehensive judicial consideration.