2019 (4) TMI 413 - AT - Income Tax

Adjustment on account of AMP expenses - international transaction - Bright line Test application - HELD THAT - As relying on M/S PEPSICO INDIA HOLDINGS PVT LTD, ERSTWHILE M/S PEPSI FOODS PVT. LTD.) VERSUS ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE 1, CHANDIGARH 2018 (12) TMI 277 - ITAT DELHI reject Bright line Test applied by TPO and further hold that, AMP expenditure cannot be considered as International transaction in the facts and circumstances of present case. - Decided in favour of assessee.

Issues Involved:
1. Assessment of loss under normal provisions of the Act.
2. Adjustment under section 92CA(3) of the Act without finding circumstances specified in section 92C(3).
3. Adjustment in arm’s length price (ALP) of AMP expenditure.
4. AMP expenditure as a separate international transaction.
5. AMP expenses and full risk-bearing licensed manufacturer status.
6. Consideration of Gross Profit (GP) rate in AMP expenses.
7. Application of AMP/GP ratio for determining ALP.
8. Fallacies in applying AMP/GP ratio and selection of comparables.
9. Inclusion of direct sales expenses in AMP expenses.
10. Functional profile and re-characterization of the appellant.
11. Treatment of advertising as brand promotion.
12. Initiation of penalty proceedings under section 274 read with section 271(1)(c).

Detailed Analysis:

1. Assessment of Loss:
The appellant challenged the assessment of loss at INR 267,771,897 against the returned loss of INR 337,317,454. This general ground did not require adjudication as per the appellant's submission.

2. Adjustment under Section 92CA(3):
The appellant contended that the adjustment was made without returning a finding about the existence of the circumstances specified in clauses (a) to (d) of section 92C(3). The Tribunal observed that the TPO must establish the existence of an international transaction before making any adjustment.

3. Adjustment in ALP of AMP Expenditure:
The appellant argued against the adjustment of INR 6,95,45,557 to the total income on account of AMP expenditure. The Tribunal noted that the TPO applied the Bright Line Test (BLT), which was overruled by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. and Maruti Suzuki India Ltd. cases. The Tribunal emphasized that BLT is not a prescribed method under Indian Income Tax laws.

4. AMP Expenditure as a Separate International Transaction:
The Tribunal examined whether AMP expenditure represents an international transaction. It was concluded that unilateral incurring of AMP expenses by the appellant for its own business does not constitute an international transaction under section 92B.

5. AMP Expenses and Full Risk-Bearing Licensed Manufacturer:
The appellant, being a full risk-bearing licensed manufacturer, argued that AMP expenses were incurred for its own business considerations. The Tribunal agreed, noting that the appellant performed all business functions independently and any benefits to the AE were incidental.

6. Consideration of GP Rate in AMP Expenses:
The Tribunal found that the GP rate of the appellant was high compared to comparable companies, indicating that remuneration for AMP expenses might be subsumed in the GP earned from its manufacturing activities.

7. Application of AMP/GP Ratio for Determining ALP:
The Tribunal held that applying the AMP/GP ratio to determine the ALP of AMP expenses is not a prescribed method under section 92C, rendering the analysis illegal, null, and void.

8. Fallacies in Applying AMP/GP Ratio and Selection of Comparables:
The Tribunal noted deficiencies in the TPO's approach of applying the AMP/GP ratio and selecting inappropriate comparables, leading to erroneous conclusions about excessive AMP expenses.

9. Inclusion of Direct Sales Expenses in AMP Expenses:
The Tribunal observed that direct sales expenses like sales promotion and selling expenditure should not be included in AMP expenses as they do not lead to brand building.

10. Functional Profile and Re-characterization of the Appellant:
The Tribunal rejected the TPO's re-characterization of the appellant as a limited risk distributor, emphasizing that AMP expenses were incurred for market penetration and business considerations, benefiting the appellant directly.

11. Treatment of Advertising as Brand Promotion:
The Tribunal disagreed with the TPO's view that advertising is solely for brand promotion, noting that no expenditure attributable to brand promotion could be separately identified.

12. Initiation of Penalty Proceedings:
The Tribunal noted that the penalty proceedings initiated by the AO under section 274 read with section 271(1)(c) were consequential and did not require separate adjudication.

Conclusion:
The Tribunal allowed the appeal, rejecting the Bright Line Test and holding that AMP expenditure could not be considered an international transaction in the given facts and circumstances. The adjustments made by the TPO were found unsustainable, and the penalty proceedings were deemed consequential.

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