2019 (5) TMI 91 - AT - Income Tax

Transfer pricing adjustment - correction of reimbursement wrongly grossed - TPO while working out the operating cost has made an addition of reimbursement received on account of advertisement and warranty - comparable selection - HELD THAT - When the original expenses were incurred they were also included by debiting those expenditure to those expenditure accounts. Once those expenditure have been debited whenever they were incurred and at the time of reimbursement they were credited to the same expenditure account, both should have been excluded. Therefore addition to the operating expenses of assessee amounts to double addition to the operating cost by the sum. Therefore it is apparent that the adjustment made by the learned transfer pricing officer by increasing the operating expenses by this amount is erroneous and incorrect. Therefore the learned TPO is directed to remove the addition made to the other operating expenses of the assessee. Comparable selection - acceptability of 2 comparable companies being Micromax informatics Ltd and Lava international Ltd - availability of brands registered in their name in current assessment year - HELD THAT - We set aside the issue with respect to the selection of comparable companies with respect to these 2 companies back to the file of the learned transfer pricing officer to determine whether there is any brand registered in the name of this companies for assessment year 2013 14 or not and then to find out whether such brands have made any impact on their profitability. Such information may be obtained by the learned transfer pricing officer by exercising powers u/s 133 (6). On receipt of such information, it should be provided to the assessee to submit its contention, and then decide about whether such companies can be selected as a comparable companies are not. AMP expenditure - international transactions for marketing and development of marketing services based on Bright line test approach on protective basis - bright line test used for making an adjustment of excessive advertisement marketing promotion expenditure - HELD THAT - With respect to the protective adjustment made by the learned transfer pricing officer by bright line test method it was submitted by the learned authorised representative that it is contrary to the decision of the honourable Delhi High Court in Sony Ericsson 2015 (3) TMI 580 - DELHI HIGH COURT . We hold that bright line test cannot be used for making an adjustment of excessive advertisement marketing promotion expenditure. We direct the learned assessing officer/transfer pricing officer to not to make adjustment by addition of reimbursement received to the operating expenses of the assessee and also to examine the 2 comparable companies afresh discussed above.

Summary

Issues Involved:
1. Transfer pricing adjustment for international transactions in marketing and development of marketing services using the Bright Line Test (BLT).
2. Transfer pricing adjustment for import of finished goods due to additional Advertisement, Marketing, and Promotion (AMP) functions using the intensity method.
3. Correct computation of the margin of the assessee.
4. Inclusion of comparables, specifically Micromax Informatics Ltd. and Lava International Ltd., in the comparability analysis.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for International Transactions in Marketing and Development of Marketing Services Using the Bright Line Test (BLT):
The appeal challenged the transfer pricing adjustment made on a protective basis using the Bright Line Test (BLT). The assessee contended that the BLT approach was held unlawful by the Delhi High Court in multiple cases, including Sony Ericsson Mobile Communications India Private Limited. The tribunal agreed with the assessee, ruling that the BLT method cannot be used for making an adjustment of excessive AMP expenditure. Consequently, the tribunal directed the assessing officer and transfer pricing officer not to make adjustments using the BLT method.

2. Transfer Pricing Adjustment for Import of Finished Goods Due to Additional AMP Functions Using the Intensity Method:
The assessee argued against the intensity adjustment made on substantive grounds, asserting that the adjustment was based on erroneous computations and inappropriate comparables. The tribunal scrutinized the computation of the margin and the selection of comparables. The tribunal found that the reimbursement received was incorrectly added to the operating expenses, resulting in double addition. The tribunal directed the transfer pricing officer to remove the erroneous addition of INR 12710 lakhs from the operating expenses.

3. Correct Computation of the Margin of the Assessee:
The tribunal examined the computation of the margin, particularly the addition of reimbursement received on account of advertisement and warranty expenses to the operating expenses. The tribunal concluded that the reimbursement should not be added to the operating expenses as it led to double counting. The tribunal directed the transfer pricing officer to correct the computation by removing the erroneous addition, thereby ensuring accurate margin computation.

4. Inclusion of Comparables, Specifically Micromax Informatics Ltd. and Lava International Ltd., in the Comparability Analysis:
The assessee contested the inclusion of Micromax Informatics Ltd. and Lava International Ltd. as comparables, arguing that these companies owned brands and thus were not comparable. The tribunal reviewed evidence from the Controller General of Patents, Designs, and Trademarks, which indicated that both companies had registered brands. The tribunal found that the dispute resolution panel's exclusion of these brands based on the absence of brand value in annual accounts was incorrect. The tribunal remanded the issue to the transfer pricing officer to verify the brand ownership status for the assessment year 2013-14 and its impact on profitability. The transfer pricing officer was directed to gather information using powers under section 133(6) and provide it to the assessee for further submissions.

Conclusion:
The tribunal directed the transfer pricing officer to:
1. Exclude the erroneous addition of reimbursement received from the operating expenses.
2. Re-examine the inclusion of Micromax Informatics Ltd. and Lava International Ltd. as comparables by verifying brand ownership status and its impact on profitability.
3. Avoid using the BLT method for adjustments related to AMP expenditure.

The appeal was disposed of with these directions, leaving all other issues open for adjudication. The order was pronounced in the open court on 08/03/2019.