2018 (4) TMI 254 - AT - Income Tax

Transfer pricing analysis on account of AMP expenses - Held that - Following the decision rendered by the coordinate Bench of the Tribunal in taxpayer s own case, we are of the considered view that in view of the ratio of LG Electronics India Pvt. Ltd. (2013 (6) TMI 217 - ITAT DELHI) rendered by the Special Bench of the Tribunal, expenses qua sales which do not lead to brand promotion cannot be brought within the ambit of AMP expenses for the purpose of determining the value of international transactions. So, in these circumstances, we find no illegality or perversity in the findings returned by the ld. CIT (A). So far as question of making alternative disallowance of AMP expenses u/s 37 (1) of the Act by AO and deleted by the ld. CIT (A) is concerned, there is no dispute that the ld. CIT (A) has granted relief by following the decision of Whirlpool of India Limited (supra) rendered by the Hon ble Delhi High Court because when the allowability of total amount of advertisement and marketing expenditure is concerned under Chapter X in order to make TP adjustment, this issue cannot be examined by making addition u/s 37 of the Act for the same amount. AO, after due verification, is directed to exclude selling expenses to recompute the ALP of the international transaction.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for International Transactions
2. Disallowance of Advertising, Marketing & Promotion (AMP) Expenses
3. Alternative Disallowance under Section 37(1) of the Income-tax Act, 1961

Transfer Pricing Adjustment for International Transactions:
The taxpayer, a subsidiary of a multinational company, engaged in international transactions with its Associated Enterprises (AE). The taxpayer applied Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) of transactions. The Assessing Officer (AO) made adjustments based on significant Advertising, Marketing & Promotion (AMP) expenses incurred by the taxpayer, alleging creation of marketing intangibles for the AE. The Commissioner of Income Tax (Appeals) deleted the addition, citing a Delhi High Court judgment and emphasizing that no addition under Section 37(1) of the Act was justified. The Tribunal upheld the CIT (A)'s decision, stating that expenses not leading to brand promotion are not considered AMP expenses for TP adjustments.

Disallowance of Advertising, Marketing & Promotion (AMP) Expenses:
The AO disallowed AMP expenses, asserting that they were not incurred wholly and exclusively for the taxpayer's business but to create marketing intangibles for the AE. However, the CIT (A) ruled in favor of the taxpayer, highlighting that the expenses were aimed at generating sales and providing incentives to the sales team. The Tribunal agreed with the CIT (A) and directed the AO to exclude selling expenses while recomputing the ALP of international transactions, thereby partially allowing the Revenue's appeal.

Alternative Disallowance under Section 37(1) of the Income-tax Act, 1961:
The AO contended for an alternative disallowance under Section 37(1) if the TP adjustment on AMP expenses did not hold. The CIT (A) rejected this, following a High Court judgment, and held that the total advertisement and marketing expenditure, processed under Chapter X for TP adjustment, cannot be additionally disallowed under Section 37. The Tribunal upheld this decision, directing the AO to exclude only selling expenses for ALP computation, thus partially allowing the Revenue's appeal.

In conclusion, the Tribunal's judgment addressed the issues of transfer pricing adjustments for international transactions, disallowance of AMP expenses, and alternative disallowance under Section 37(1) of the Income-tax Act, 1961. The decision was based on detailed analysis, legal precedents, and the nature of expenses incurred by the taxpayer, ultimately providing a balanced resolution in favor of the taxpayer while partially allowing the Revenue's appeal.