2025 (3) TMI 989 - AT - Income Tax

TP Adjustment - AMP expenses - application of Bright Line test - HELD THAT - AMP expenditure quantum alone assessee cannot be said to have benefitted the AEs brand. Brands are not product or services centric but more of customer centric. In exercise of brand building or enhancement it is essential to establish as to how the AMP expenses generated awareness of the brand which was more useful to the foreign AE than to help the assessee in procuring its share of market. AO was thus required to establish that the AMP expenses were not for tearing into the local market alone but were made at the instance of foreign AE for enhancement and creating a brand value beyond the local market. In the absence of any such facts coming out of a concerted action of the assessee with its foreign AE or in absence of independent inquiry on the basis of nature of product services or retail brands catered by the assessee the AO cannot draw any presumption on the basis of AMP expenses quantum or sales that the expenses must have resulted into any benefit to the AE. Therefore we are inclined to accept the case of assessee that in the given facts and circumstances Tax authorities were unable to demonstrate that AMP expenses incurred by the assessee were in any way beneficial to the brand of foreign AE requiring TP adjustment. Thus this issue is decided in favour of the assessee. Payment of royalty - If the tax authorities have erred in rejecting the transfer pricing documentation maintained by the assessee in respect of payment of royalty and erroneously determined arm s length royalty rate at 2% of the sales of the assessee - HELD THAT - The comparable agreements selected by the assessee in its TP documentation maintained for the subject year were rejected by the ld. TPO on account of different geographical reasons but the issue was considered in favour of the assessee and further comparable agreements selected by the assessee and the ld. TPO belong to same industry i.e. kitchenware and home furnishing items. Therefore the rejection of comparable companies selected by the assessee was held to be unjustified. Addition on account of payment of management service fee - HELD THAT - Representatives of both the sides submitted that there is no change in facts and circumstances and in fact we find that when in the final order passed by the ld. AO the DRP directions have been followed wherein only in reference to earlier year orders the DRP had re-asserted any directions. Accordingly the grounds No.8 and 9 before us are also restored to the file of the ld. AO to proceed in accordance with the law as per the directions issued by the coordinate Benches in AY 2013-14 and 2014-15. The ground is sustained for statistical purposes. Interest on outstanding receivable - HELD THAT - As we find that there is no case of the ld. AO that the AE was charging any interest on account of trade payables from the assessee. We find that the DRP has dealt with this issue observing that the assessee has merely put legal arguments and no submissions on facts and the computation made by the TPO has been presented and thus relying in the case of Cotton Naturals upheld the enhancement done by the ld. TPO. Since the case of assessee is that post undertaking working capital adjustment of comparable companies selected in TP documentation the margins earned by appellant are more than that of comparable companies. We consider it appropriate to remit the issue with the ld. AO/TPO to examine the issue afresh on the basis if post undertaking working capital adjustment the assessee selected the comparable companies and ratio of judgment in the case of Kusum Healthcare Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT . The ground is sustained for statistical purposes. Payments made to Dart alleged to be royalty - In assessee s own case for AY 2013-14 the issue has been dealt by the Bench in 2023 (1) TMI 12 - ITAT DELHI and the facts before us are not in any way different. Thus we restore the issue to the files of ld. AO/TPO to determine the same afresh. Accordingly this issue is sustained in favour of the assessee for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the Advertising, Marketing, and Promotion (AMP) expenses incurred by the appellant constitute an international transaction subject to transfer pricing adjustments.
• Whether the payment of royalty by the appellant to its associated enterprise (AE) is at arm's length and whether the Transfer Pricing Officer (TPO) correctly determined the arm's length price (ALP) for royalty payments.
• Whether the payment of management service fees by the appellant is justified and at arm's length.
• Whether the interest imputed on outstanding receivables from the AE is appropriate.
• Whether reimbursements made to Dart Industries Inc. are in the nature of royalty and subject to disallowance under section 40(a)(i) of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

AMP Expenses as International Transaction

• Relevant legal framework and precedents: The Tribunal considered sections 92B and 92F(v) of the Income Tax Act, which define international transactions and the scope of transfer pricing regulations. The Tribunal also referred to precedents from the Hon'ble Delhi High Court in cases such as Maruti Suzuki India Ltd and Sony Ericsson Mobile Communications India Pvt. Ltd.
• Court's interpretation and reasoning: The Tribunal found that AMP expenses do not automatically constitute an international transaction. The burden is on the Revenue to demonstrate an understanding or arrangement between the appellant and its AE regarding AMP expenses.
• Key evidence and findings: The Tribunal noted the absence of any agreement or documentary evidence showing that AMP expenses were incurred at the behest of the AE.
• Application of law to facts: The Tribunal concluded that AMP expenses were incurred by the appellant for its business in India and not for the benefit of the AE.
• Treatment of competing arguments: The Tribunal rejected the Revenue's reliance on the Bright Line Test and emphasized the need for tangible evidence of an international transaction.
• Conclusions: The Tribunal ruled in favor of the appellant, holding that AMP expenses do not constitute an international transaction.

Royalty Payments

• Relevant legal framework and precedents: The Tribunal considered the application of the Comparable Uncontrolled Price (CUP) method for determining the ALP of royalty payments.
• Court's interpretation and reasoning: The Tribunal found that the TPO's determination of a 2% royalty rate was not justified and that the appellant's comparables were appropriate.
• Key evidence and findings: The Tribunal noted that the appellant had provided evidence of marketing information and know-how received from the AE, justifying the royalty payments.
• Application of law to facts: The Tribunal accepted the appellant's comparables and rejected the TPO's arbitrary determination of the royalty rate.
• Treatment of competing arguments: The Tribunal considered and rejected the Revenue's arguments regarding product dissimilarity and geographical differences.
• Conclusions: The Tribunal ruled in favor of the appellant, allowing the royalty payments as being at arm's length.

Management Service Fees

• Relevant legal framework and precedents: The Tribunal referred to previous orders in the appellant's own case for earlier assessment years.
• Court's interpretation and reasoning: The Tribunal found that the issue required further examination to determine whether services were actually rendered and benefits derived.
• Conclusions: The issue was remanded to the Assessing Officer (AO) for fresh examination.

Interest on Outstanding Receivables

• Relevant legal framework and precedents: The Tribunal considered the applicability of working capital adjustments and the Kusum Healthcare Pvt. Ltd. case.
• Court's interpretation and reasoning: The Tribunal found that the issue required further examination in light of working capital adjustments.
• Conclusions: The issue was remanded to the AO for fresh examination.

Reimbursements to Dart Industries Inc.

• Relevant legal framework and precedents: The Tribunal referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd. regarding software payments.
• Court's interpretation and reasoning: The Tribunal found that the nature of the software (standard vs. customized) needed verification.
• Conclusions: The issue was remanded to the AO for verification and fresh examination.

3. SIGNIFICANT HOLDINGS

• AMP Expenses: The Tribunal held that AMP expenses do not constitute an international transaction without tangible evidence of an arrangement with the AE.
• Royalty Payments: The Tribunal allowed the appellant's royalty payments as being at arm's length, rejecting the TPO's arbitrary determination of the royalty rate.
• Management Service Fees, Interest on Receivables, and Reimbursements: These issues were remanded to the AO for further examination and verification.