2023 (1) TMI 259 - AT - Income Tax

TP Adjustment - AMP expenses incurred at the behest of the AE - HELD THAT - We note that the assessee gave details of expenses incurred towards the advertisement and sales promotion that was debited to the profit loss account including the selling expenses, marketing expenses - assessee incurred expenses to enable it to sell its products, rather than, promoting the AE. We note that the facts and circumstances in respect of this issue is identical and similar to the preceding assessment years 2020 (2) TMI 1487 - ITAT BANGALORE considered by this Tribunal. Revenue has brought nothing on record to establish that assessee incurred the AMP expenses at the behest of the AE. Respectfully following the consistent view in identical facts, we direct the Ld.AO to delete the addition made on account of AMP expenses for year under consideration. Appeal of assessee allowed.

Issues Involved:
1. Transfer Pricing Adjustment for Advertisement, Marketing, and Promotion (AMP) Expenses
2. Classification of Selling and Marketing Expenditure as AMP Activity
3. Lack of Machinery Provisions for AMP Adjustment
4. Development of Intangibles for Associated Enterprises (AEs)
5. Distribution Network as Intangible Asset Benefiting AE
6. Advertisement and Marketing Expenses on Own Account vs. AE Benefit
7. Classification of Selling Expenses within AMP Expenditure
8. Application of Bright Line Test (BLT)
9. Non-Compliance with Previous ITAT Decisions
10. Adequate Remuneration through Net Margin
11. Most Appropriate Method (MAM) for AMP Adjustment
12. Markup on Selling and Marketing Expenditure
13. Gross Profit Margin Comparison
14. Selection of Comparable Companies
15. Computation of Operating Margins for Comparable Companies
16. Initiation of Penalty Proceedings
17. Computation of Interest Liability under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment for AMP Expenses:
The learned AO/TPO/DRP erred by making a TP adjustment of INR 46,16,66,814 with respect to AMP expenses. The Tribunal noted that the AMP expenses incurred by the assessee were for enabling the sale of its products rather than promoting the AE.

2. Classification of Selling and Marketing Expenditure as AMP Activity:
The AO/TPO/DRP incorrectly considered selling and marketing expenditure of INR 40,01,61,926 as part of AMP activity and treated it as a separate international transaction. The Tribunal found that these expenses were incurred to sell the assessee's products.

3. Lack of Machinery Provisions for AMP Adjustment:
The AO/TPO/DRP failed to appreciate that there are no machinery provisions in the Act to make adjustments in relation to AMP expenses. The Tribunal upheld this view, citing previous decisions.

4. Development of Intangibles for AEs:
The AO/TPO/DRP incorrectly concluded that the assessee developed intangibles for the AEs by promoting the AE's brand name. The Tribunal found no agreement or evidence to support this conclusion.

5. Distribution Network as Intangible Asset Benefiting AE:
The AO/TPO/DRP erred in concluding that the distribution network created by the assessee is an intangible asset benefiting its AE. The Tribunal noted that the network was created for the assessee's own business purposes.

6. Advertisement and Marketing Expenses on Own Account vs. AE Benefit:
The AO/TPO/DRP failed to appreciate that the advertisement and marketing expenses were for the assessee's own business, and any benefit to the AE was incidental. The Tribunal directed the AO to delete the addition made on account of AMP expenses.

7. Classification of Selling Expenses within AMP Expenditure:
The AO/TPO/DRP ignored that INR 26,64,35,994 out of the total expenditure on selling and marketing was purely selling expenses. The Tribunal did not find it necessary to adjudicate this as the main issue was decided in favor of the assessee.

8. Application of Bright Line Test (BLT):
The AO/TPO/DRP applied the BLT approach to determine excessive AMP expenditure, which is not in accordance with the Income Tax Act. The Tribunal referenced the Delhi High Court's rejection of BLT in similar cases.

9. Non-Compliance with Previous ITAT Decisions:
The AO/TPO/DRP did not follow the ITAT's decisions in the assessee's own case for previous assessment years. The Tribunal reiterated the need to follow these precedents.

10. Adequate Remuneration through Net Margin:
The AO/TPO/DRP failed to appreciate that the assessee's net margin of 5.86% was higher than the comparable companies' margin of 0.98%, indicating adequate remuneration for AMP expenses. The Tribunal noted this point but did not need to adjudicate it separately.

11. Most Appropriate Method (MAM) for AMP Adjustment:
The AO/TPO/DRP incorrectly considered the 'Other method' as the MAM instead of TNMM, which showed the assessee's operating margin was higher than comparable companies. The Tribunal upheld the use of TNMM.

12. Markup on Selling and Marketing Expenditure:
The AO/TPO/DRP made a TP adjustment by applying a 15.37% markup on selling and marketing expenditure. The Tribunal did not find it necessary to address this separately.

13. Gross Profit Margin Comparison:
The AO/TPO/DRP failed to undertake a proper analysis comparing the gross profit margin of the assessee with comparable companies. The Tribunal did not need to adjudicate this issue separately.

14. Selection of Comparable Companies:
The AO/TPO/DRP erred in accepting certain companies as comparables despite their non-comparable functions. The Tribunal did not address this issue separately as the main issue was resolved.

15. Computation of Operating Margins for Comparable Companies:
The AO/TPO/DRP erred in computing the operating margins of certain comparable companies. The Tribunal did not need to adjudicate this issue separately.

16. Initiation of Penalty Proceedings:
The AO erred in initiating penalty proceedings under Section 271(1)(c). The Tribunal did not address this issue separately as it was consequential.

17. Computation of Interest Liability under Section 234B:
The AO erred in computing interest liability under Section 234B. The Tribunal did not address this issue separately as it was consequential.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the AO to delete the addition made on account of AMP expenses for the year under consideration. The Tribunal followed consistent views from previous assessment years and found no evidence that the AMP expenses were incurred at the behest of the AE.

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