2022 (6) TMI 338 - AT - Income Tax

TP Adjustment - AMP expenditure as International Transaction - pre-requisite for commencing the TP exercise - AO/TPO treating AMP as a separate international transaction - using bright line test from benchmarking - incurring expenditure on account of advertisement, marketing and promotion, under influence or control of the AE - HELD THAT - CIT(A) held that there is a rationale to factor in AMP intensity adjustment while equating the functional profit into the comparables in TNMM benchmarking. The bright line test which is the mirror image of intensity approach has no statutory mandate. Hence, cannot be upheld. With regard to the receivables, we hold that the netting of interest paid or receivables as sought by the assessee may be accorded and the benefit of brought forward losses be allowed as per the provisions of Income Tax Act. Appeals of the assessee are allowed.

Issues Involved:
1. Whether AMP expenditure should be treated as an International Transaction.
2. Inclusion of four comparables rejected by the TPO.
3. Fresh benchmarking analysis for the transaction involving "export of finished goods".
4. Determination of arm's length price (ALP) for AMP expenses.
5. Treatment of outstanding trade receivables as a separate international transaction.
6. Penalty proceedings under Section 271(1)(c) and 271AA.

Issue-wise Detailed Analysis:

1. AMP Expenditure as International Transaction:
The primary issue was whether the AMP (Advertising, Marketing, and Promotion) expenditure incurred by the appellant could be treated as an international transaction. The TPO argued that the AMP expenditure was a separate international transaction because the brands promoted were owned by the associated enterprises (AEs) of the appellant. The TPO contended that the appellant's substantial AMP expenditure promoted the AE's brands without reimbursement, thus creating marketing intangibles for the AE. The TPO's position was based on the assumption that the appellant's marketing efforts were under the control of the AE.

The appellant countered that the AMP expenses were incurred independently to cater to the local market and were not influenced by any agreement with the AE. The appellant argued that the expenditure was necessary for its business and not for promoting the AE's brand. The ld. CIT(A) agreed with the appellant, holding that the TPO had no sufficient evidence to prove an understanding or arrangement between the appellant and the AE. The CIT(A) emphasized that the mere high scale of AMP expenditure could not be the sole basis to treat it as an international transaction.

2. Inclusion of Four Comparables:
The Revenue challenged the CIT(A)'s direction to include four comparables that were previously rejected by the TPO. The CIT(A) held that the TPO's rejection of these comparables was not justified, and they should be included in the benchmarking analysis.

3. Fresh Benchmarking Analysis for Export of Finished Goods:
The appellant argued that the CIT(A) erred in directing a fresh benchmarking analysis for the transaction involving the export of finished goods. The appellant contended that the CIT(A) adopted a perplexing approach by considering an intensity-based comparability adjustment for AMP expenses despite concluding that AMP expenditure was not an international transaction. The CIT(A) was also criticized for rejecting the appellant's economic analysis without providing cogent reasons.

4. Determination of ALP for AMP Expenses:
The TPO used the bright line test to determine the ALP for AMP expenses, applying a 7.52% limit and a 15% markup. The CIT(A) disagreed with this approach, stating that the bright line test had no statutory mandate. The CIT(A) held that AMP expenditure should not be treated as an international transaction in the absence of evidence of an agreement or arrangement between the appellant and the AE.

5. Treatment of Outstanding Trade Receivables:
The appellant challenged the TPO's characterization of outstanding trade receivables as a loan extended to AEs and the subsequent benchmarking using the Comparable Uncontrolled Price (CUP) method with the six months London Interbank Offered Rate (LIBOR) plus 400 basis points. The CIT(A) held that the netting of interest paid or receivables as sought by the appellant should be allowed, and the benefit of brought forward losses should be granted as per the Income Tax Act.

6. Penalty Proceedings:
The appellant also contested the initiation of penalty proceedings under Section 271(1)(c) and 271AA of the Act by the AO/TPO. The judgment did not provide specific details on the resolution of this issue, but the overall decision favored the appellant.

Conclusion:
The appeals of the Revenue were dismissed, and the appeals of the assessee were allowed. The CIT(A) held that the AMP expenditure should not be treated as an international transaction in the absence of sufficient evidence of an agreement or arrangement between the appellant and the AE. The CIT(A) also directed the inclusion of four comparables and allowed the netting of interest paid or receivables. The judgment emphasized the need for concrete evidence to treat AMP expenditure as an international transaction and rejected the TPO's use of the bright line test for determining the ALP of AMP expenses.

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