2018 (5) TMI 936 - AT - Income Tax

Expenses towards marketing sales and promotional kits - Allowable business expenses OR brand building either of the assessee or of the foreign associated enterprise - scope of tpa - Held that - Marketing sales and promotional kits relate to the distribution of price lists, book and brochures etc. to the customers; marketing-sponsorship relating to promotion/exhibitions etc., free sample cost relating to the distribution of free sample activities of books to prospective customers/colleges/book stores/authors etc.; and free samples cost-free courier and packaging relate to the freight carrier cost for distribution of free sample copies of books. Revenue failed to give any interpretation to these expenses other than the one explained by the learned authorised representative. It is not known how any of these expenses relate to the brand building either of the assessee or of the foreign associated enterprise. All the four expenses as the head suggests relate to the promotion of the sales of the product and not in any way connected to the brand building. Thus the expenses relate to the business of the assessee alone for promotion of the sales of the products i.e. the books and such an expense had nothing to do with the brand promotion of any of them. With this view we are of the considered opinion that the approach of the Transfer Pricing Officer is not in accordance with law laid down in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (2015 (3) TMI 580 - DELHI HIGH COURT) and cannot be sustained. We, therefore, direct the learned Assessing Officer to delete the same. - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the assessee's international transactions invited transfer pricing adjustments.
2. Whether the expenses incurred by the assessee on account of trade discount for printing of the price list should be treated as selling expenses and excluded from AMP expenses.
3. Whether the expenses on marketing sales and promotional kits, marketing sponsorship, free samples cost, and free samples cost-freight relate to brand promotion or business promotion.

Issue-Wise Detailed Analysis:

1. International Transactions and Transfer Pricing Adjustments:
The assessee, a subsidiary of a foreign company, engaged in book distribution and reprinting, filed a return of income declaring a total income of ?5,45,78,949 for the assessment year 2011-12. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) under section 92CA(1) of the Income-tax Act. The TPO summarized the international transactions and observed AMP expenditure. The TPO suggested a demand of ?3,13,77,110, which was later reduced to ?96,32,628 after directions from the Dispute Resolution Panel (DRP).

2. Trade Discount for Printing of Price List as Selling Expenses:
The DRP accepted the assessee's contention that expenses on trade discount for printing price lists should be treated as selling expenses. The AO excluded marketing catalogues, brochures, and turnover discount/early payment rebate from AMP expenses but retained expenses on marketing sales and promotional kits, marketing sponsorship, free samples cost, and free samples cost-freight.

3. Marketing and Promotional Expenses:
The assessee argued that the TPO's method was not in accordance with the jurisdictional High Court's decision in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT. The TPO used the bright line method to determine non-routine expenditure, concluding an international transaction existed. The assessee contended that the expenses were legitimate business expenses essential for creating a market for book sales in India, not for brand promotion.

The DRP analyzed the expenses and held that trade discount and printing of price lists should be excluded from AMP expenses. The assessee argued that distributing free samples was necessary for market awareness and did not promote the brand. The agreements with associated enterprises prohibited brand publicity, supporting the assessee's claim.

The Departmental representative argued that the TPO justified the ALP adjustment, stating the assessee assumed greater risk and should be reimbursed for non-routine AMP expenses.

Judgment:
The Tribunal reviewed the records, agreements, and expenses. It found that the expenses on marketing sales and promotional kits, marketing sponsorship, free samples cost, and free samples cost-freight were for business promotion, not brand building. The Tribunal concluded that these expenses were related to the promotion of book sales and not to brand promotion. The approach of the TPO was not in accordance with the law laid down by the jurisdictional High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT. The Tribunal directed the AO to delete the adjustment of ?96,32,628.

Conclusion:
The appeal was allowed, and the order was pronounced in the open court on 13th February 2018.