Tribunal remands AMP expenses and royalty payments for fresh assessment following High Court standards. Assessee's appeal allowed.

The Tribunal remanded the matters of AMP expenses and royalty payments back to the Assessing Officer/Transfer Pricing Officer for de novo consideration, following the legal standards set by the High Court. The appeal of the assessee was allowed for statistical purposes, with the decision announced on 9th October 2015.

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Issues Involved:
1. Jurisdiction of the Transfer Pricing Officer (TPO) regarding AMP expenses.
2. Classification of AMP expenses as an international transaction under Section 92B of the Income Tax Act.
3. Transfer pricing adjustments for AMP expenses under Chapter X of the Income Tax Act.
4. Application of Cost Plus Method for AMP expenses.
5. Fresh benchmarking/comparability analysis for AMP expenses.
6. Exclusion of selling expenses from AMP expenses.
7. Deletion of transfer pricing adjustment for royalty payments.

Detailed Analysis:

1. Jurisdiction of the TPO regarding AMP expenses:
The Tribunal affirmed that the TPO had the jurisdiction to make additions on account of AMP expenses. The Hon'ble High Court of Delhi in its judgment dated 16th March 2015, in the case of Sony Ericsson Mobile Communication India Pvt. Ltd., held that such additions were within the TPO's jurisdiction, especially in light of the retrospective amendment to Section 92CA of the Income Tax Act by the Finance Act, 2012.

2. Classification of AMP expenses as an international transaction:
The Tribunal, guided by the High Court, ruled that AMP expenses incurred by the assessee in India could be treated and categorized as an international transaction under Section 92B of the Income Tax Act. This was based on the detailed discussion under the heading C, paragraphs 51 to 57 of the High Court's judgment.

3. Transfer pricing adjustments for AMP expenses:
The Tribunal noted that transfer pricing adjustments could be made by the TPO/Assessing Officer in respect of AMP expenses under Chapter X of the Income Tax Act. The High Court provided a detailed framework for such adjustments, emphasizing the need for a detailed functional analysis and comparability analysis. The Tribunal was directed to re-examine the facts and apply the legal standards set forth by the High Court.

4. Application of Cost Plus Method for AMP expenses:
The Tribunal was instructed to re-evaluate the use of the Cost Plus Method (CPM) for computing transfer pricing adjustments for AMP expenses. The High Court criticized the Tribunal's reliance on the majority decision in L.G. Electronics India Pvt. Ltd., stating that the legal ratio accepted and applied was erroneous. The Tribunal was ordered to conduct a fresh analysis using the appropriate method as per the High Court's guidelines.

5. Fresh benchmarking/comparability analysis for AMP expenses:
The Tribunal was directed to undertake a fresh benchmarking/comparability analysis for AMP expenses. The High Court emphasized that if suitable comparables engaged in both distribution and AMP functions were found, the arm's length price should be determined on an aggregate basis. If adjustments were not possible, the AMP expenses should be segregated and determined separately, allowing for any available set-off from distribution activities.

6. Exclusion of selling expenses from AMP expenses:
The Tribunal upheld the High Court's decision that selling expenses such as trade/volume discounts, rebates, and commissions paid to retailers/dealers should not be included in AMP expenses. This substantial question of law was answered against the Revenue and in favor of the assessee.

7. Deletion of transfer pricing adjustment for royalty payments:
The Tribunal was instructed to re-examine the transfer pricing adjustment made on account of royalty payments. The High Court ruled that the payment of royalty was a relevant consideration while determining the arm's length price for distribution and marketing transactions. However, the tax treatment of royalty being different, the royalty transaction should be benchmarked separately. The Tribunal was directed to re-assess the arm's length price of royalty payments in light of the High Court's judgment.

Conclusion:
The Tribunal remanded the matters of AMP expenses and royalty payments back to the Assessing Officer/TPO for de novo consideration, applying the legal standards and ratios laid down by the Hon'ble High Court of Delhi in the consolidated judgment dated 16th March 2015. The appeal of the assessee was allowed for statistical purposes, and the decision was pronounced in the open court on 9th October 2015.

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