2023 (12) TMI 721 - HC - Income Tax

TP Adjustment - whether the reimbursement of advertising, marketing and promotion expenses (AMP), incurred by assessee on behalf of its AE was at arm s length - whether any upward adjustment was required to be carried out in the amount received by assessee from its AE? - Whether TPO ought to have used the bright line test (BLT) in computing the arm s length price (ALP) concerning AMP activities carried out by the respondent/assessee? - whether the respondent/assessee was adequately compensated for expenses incurred for AMP activities carried out in India? - HELD THAT - As in the period in issue, the respondent/assessee was only in the business of import and distribution of Sony products. The amount spent on AMP activities by the respondent/assessee in the relevant FY was Rs. 119,54,43,600/-.The compensation for this expense was, according to the Tribunal, received by the respondent/assessee in terms of higher profitability for the product sold. Even according to the TPO, the AMP expenditure incurred by the respondent/assessee resulted in increased sales in India for products, albeit developed by the AE but sold by the respondent/assessee. The fact that the comparables chosen by the TPO had a net margin lower than that registered by the respondent/assessee would persuade us to hold that no upward adjustment concerning AMP expenses ought to have been made. Lastly, the application of the BLT tool, by the TPO, in determining ALP, injected the order issued by him, which was incidentally approved by the DRP, with a legal error. See Sony Ericsson Mobile Communications India case 2015 (3) TMI 580 - DELHI HIGH COURT . We are not inclined to interfere with the impugned order passed by the Tribunal, as no substantial question of law arises for our consideration. Thus, for the foregoing reasons, we are not inclined to interfere with the impugned order passed by the Tribunal, as no substantial question of law arises for our consideration.

Summary

Issues Involved:
1. Whether the reimbursement of advertising, marketing, and promotion expenses (AMP) incurred by the respondent/assessee on behalf of its Associated Enterprise (AE) was at arm's length.
2. Whether the Transfer Pricing Officer (TPO) ought to have used the bright line test (BLT) in computing the arm's length price (ALP) concerning AMP activities.

Summary:

Issue 1: Reimbursement of AMP Expenses at Arm's Length
The appeal concerns the assessment year 2007-08, where the appellant/revenue contested the order of the Income Tax Appellate Tribunal regarding the reimbursement of AMP expenses incurred by the respondent/assessee on behalf of its AE. The primary issue was whether the reimbursement was at arm's length and if an upward adjustment was necessary. The TPO had added Rs. 65,34,38,272/- to the taxable income of the respondent/assessee, arguing that the AMP expenses exceeded the arm's length amount. However, the Tribunal found that the respondent/assessee was adequately compensated through higher profitability for the products sold, and the comparables chosen by the TPO had a lower net margin than the respondent/assessee, indicating no need for an upward adjustment.

Issue 2: Use of Bright Line Test (BLT)
The TPO used the BLT to determine the ALP for AMP expenses, which was contested by the respondent/assessee. The Tribunal, following the decision in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT-III, held that the application of the BLT was legally erroneous. The Tribunal's decision was based on the fact that the respondent/assessee's net operating margin was higher than the comparables chosen by the TPO, and the AMP expenditure resulted in increased sales in India, benefiting the respondent/assessee.

Conclusion:
The High Court upheld the Tribunal's order, stating that no substantial question of law arose for consideration. The court concluded that the respondent/assessee was adequately compensated for the AMP expenses through higher profitability, and the application of the BLT by the TPO was legally incorrect. Consequently, the appeal was disposed of, and the application for condonation of delay in re-filing was rendered infructuous.