2023 (3) TMI 1022 - AT - Income Tax

TP Adjustment - adjustment on account of Advertisement, Marketing and Promotion expenses (AMP expenses) - HELD THAT - The Co-ordinate Bench of the Tribunal 2018 (12) TMI 111 - ITAT DELHI held that the there does not exist any international transaction between the assessee and the AE with regard to incurring of AMP expenses. Thus by following the principle of consistency we are of the considered opinion that the adjustment made by the TPO/DRP/A.O by applying BLT on account of AMP expenses in the absence of international transactions between the tax payer and the A.E is not sustainable in the eyes of law. Hence, the same is order to be deleted. Decided in favour of assessee.

Issues Involved:
1. Validity of assessment orders under section 144C read with section 143(3) of the Income-tax Act, 1961.
2. Transfer pricing adjustments related to Advertisement, Marketing, and Sales Promotion (AMP) expenses.
3. Characterization of AMP expenses as international transactions.
4. Application of the Bright Line Test (BLT).
5. Economic ownership and control over marketing intangibles.
6. Benchmarking analysis and comparables.
7. Limitation period for passing assessment orders.

Detailed Analysis:

1. Validity of Assessment Orders:
The assessee contended that the assessment orders for the years 2014-15 and 2015-16 were barred by limitation and thus liable to be quashed. However, the tribunal did not make a specific ruling on this issue, focusing instead on the substantive grounds of appeal.

2. Transfer Pricing Adjustments Related to AMP Expenses:
The primary issue was the transfer pricing adjustment made by the TPO concerning AMP expenses. The TPO applied the Bright Line Test (BLT) to determine that the AMP expenses incurred by the assessee were excessive and thus required adjustment. The tribunal, however, found that similar adjustments made in previous years (2010-11 and 2013-14) had been deleted by the tribunal, as there was no evidence of an international transaction between the assessee and its associated enterprise (AE) regarding AMP expenses.

3. Characterization of AMP Expenses as International Transactions:
The tribunal emphasized that for AMP expenses to be considered international transactions under Section 92B of the Act, there must be tangible evidence of an arrangement or understanding between the assessee and the AE. The tribunal noted that the Revenue failed to provide such evidence, merely relying on the BLT, which is not a legally sustainable method.

4. Application of the Bright Line Test (BLT):
The tribunal reiterated that the BLT is not a legally sustainable method for determining the existence of international transactions concerning AMP expenses. This position aligns with the Delhi High Court's rulings in cases like Maruti Suzuki India Ltd. and Sony Ericsson Mobile Communications Pvt Ltd., which have rejected the BLT for benchmarking AMP expenses.

5. Economic Ownership and Control Over Marketing Intangibles:
The tribunal rejected the TPO's assertion that the AE benefited from the AMP expenses and that valuable marketing intangibles were created for the AE. The tribunal found that the AMP expenses were incurred to enhance the assessee's sales in India and any benefit to the AE was incidental.

6. Benchmarking Analysis and Comparables:
The tribunal held that the TPO erred in selecting comparables with different product profiles and in applying a markup on the alleged excess AMP expenditure. The tribunal directed the exclusion of certain companies from the set of comparables and rejected the application of a 9.48% markup for the 2014-15 assessment year and a 21.17% markup for the 2015-16 assessment year.

7. Limitation Period for Passing Assessment Orders:
The assessee argued that the assessment orders were passed beyond the limitation period prescribed under Section 153(1) of the Act. However, the tribunal did not specifically address this issue, focusing instead on the substantive grounds related to transfer pricing adjustments.

Conclusion:
The tribunal allowed the appeals filed by the assessee for both assessment years 2014-15 and 2015-16. It held that the transfer pricing adjustments made by the TPO/DRP/A.O. concerning AMP expenses were not sustainable in the absence of evidence of international transactions between the assessee and its AE. The tribunal ordered the deletion of the adjustments, following the principle of consistency with its previous rulings in the assessee's own cases for earlier years.

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