2022 (9) TMI 1233 - AT - Income Tax

TP adjustments towards AMP expenditure pertaining to trading segment AND reimbursement of warranty expenses to AE - separate international transaction or not? - HELD THAT - The warranty expenses and AMP expenses have been considered as part of operating cost for the purpose of computing the margins of the assessee. We also notice from the order passed under section 92CA of the Act that the TPO has not made any adjustments towards the margin of trading segment thereby accepting the ALP analysis of the assessee with regard to trading segment. We hold that the AMP expenses and warranty expenses cannot be treated as a separate international transaction when the TPO has not otherwise rejected the margins of the assessee in the trading segment. Therefore, the adjustments made in this regard is deleted and the appeal is allowed in favour of the assessee.

Summary

Issues Involved:
1. TP adjustments of Rs.12,85,77,521/- towards AMP expenditure pertaining to the trading segment.
2. TP adjustment of Rs.50,73,76,084/- in relation to the reimbursement of warranty expenses to AE.

Issue-wise Detailed Analysis:

1. TP Adjustments towards AMP Expenditure:
The assessee contested the TP adjustment of Rs.12,85,77,521/- towards Advertisement, Marketing, and Promotion (AMP) expenditure. The TPO treated AMP expenses as a separate international transaction, arguing that the assessee performed additional functions beyond mere distribution, necessitating adequate compensation. The assessee argued that AMP expenses were part of the operating cost considered in the trading segment margin, which the TPO had accepted without adjustments. The Tribunal referenced the case of Epson India Pvt. Ltd. and the Delhi High Court's decision in Sony Ericsson Mobile Communication India Private Limited, which held that AMP expenses should not be treated separately if the overall transaction margins are accepted under TNMM. The Tribunal concluded that AMP expenses could not be treated as a separate international transaction when the TPO accepted the trading segment margins, thus deleting the adjustment.

2. TP Adjustment of Warranty Expenses:
The assessee also contested the TP adjustment of Rs.50,73,76,084/- for the reimbursement of warranty expenses to its AE. The TPO treated the reimbursement as a separate class requiring distinct analysis, arguing that the assessee failed to substantiate the basis for these expenses with adequate evidence. The assessee maintained that these were cost-to-cost reimbursements of third-party warranty expenses, integral to the trading segment margins. The Tribunal noted that warranty expenses were included in the operating costs for the trading segment, which the TPO had accepted without adjustments. Following the rationale in the Epson India Pvt. Ltd. case, the Tribunal held that warranty expenses could not be treated as a separate international transaction when the TPO accepted the trading segment margins, thus deleting the adjustment.

Conclusion:
The Tribunal held that both AMP and warranty expenses should not be treated as separate international transactions when the margins of the trading segment were accepted by the TPO. Consequently, the adjustments made in this regard were deleted, and the appeal was allowed in favor of the assessee.