2015 (12) TMI 561 - AT - Income Tax

Tribunal directs re-examination of AMP expenses, rejects bright line test, emphasizes comparables

The Tribunal partly allowed the appeal, directing the Transfer Pricing Officer (TPO) to re-examine the Arm's Length Price (ALP) of Advertisement, ... Transfer pricing adjustment - transfer pricing adjustment on account of AMP expenses for marketing intangibles - Held that:- The Hon’ble High Court in assessee’s own case for the A.Y. 2008-09 has restored the computation of the transfer pricing adjustment on account of AMP expenses for marketing intangibles to the tribunal, which has been dealt with by us in a separate order. In disposing of the appeal of the assessee against the transfer pricing adjustment towards AMP expenses for the said A.Y. 2008-09, we have restored the matter to the file of TPO/AO for deciding it in conformity with our directions as deduced from the judgment of the Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communication India (P) Ltd. ([2015 (3) TMI 580 - DELHI HIGH COURT] ). As admittedly the AMP expenses are one composite amount and there is no separately identifiable advertisement expenses relatable to promotion of TV channels of its AEs, the acceptance of the view point of the ld. AR in treating the entire amount of AMP expenses as deductible u/s 37(1), would amount to considering the entire AMP spend for business purpose, thereby leaving nothing for the promotion of brand of its AE, which will be contrary to the judgment of the Hon’ble High Court in assessee’s own case for the A.Y. 2008-09. Under such circumstances, we set aside the impugned order on this issue also and send it to the file of AO/TPO for deciding it afresh after hearing the assessee. Needless to say, the AO, while disposing of this issue, will keep into consideration the context and the ratio of the decision rendered by the Hon’ble High Court in the assessee’s own case for AYs 2002-03 to 2004-05. - Decided partly in favour of assessee for statistical purposes. Issues Involved:1. Transfer pricing adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses.2. Disallowance of proportionate advertisement expenses.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment on Account of AMP Expenses:The first issue concerns the addition of Rs. 20,33,78,769/- due to transfer pricing adjustment related to AMP expenses. The assessee, a subsidiary of Discovery Channel (Mauritius) Pvt. Ltd., did not report AMP expenses incurred for developing marketing intangibles. The Transfer Pricing Officer (TPO) applied the bright line test and proposed a transfer pricing adjustment. The Dispute Resolution Panel (DRP) gave directions on the computation of the Arm's Length Price (ALP) of AMP expenses but upheld the adjustment for 'Interest on receivables.'The Tribunal noted that the Special Bench in LG Electronics India Pvt. Ltd. vs. ACIT held AMP as an international transaction and that the TPO has jurisdiction to compute its ALP. The Special Bench's decision was followed by several Tribunal benches, and the Delhi High Court in Sony Ericson Mobile Communications India Pvt. Ltd. vs. CIT upheld the view that AMP expenses should be bundled with other international transactions for distributors. The High Court ruled that AMP expenses must be determined in a bundled manner with distribution activities, using suitable comparables performing similar functions. If no such comparables are available, the AMP transaction should be separately processed.The Tribunal emphasized that AMP functions must be compared with those of comparables, and adjustments should be made for any differences. The TPO's approach of using the bright line test was deemed incorrect, and the Tribunal directed the TPO/AO to re-examine the ALP of AMP expenses by comparing AMP functions performed by the assessee and comparables.2. Disallowance of Proportionate Advertisement Expenses:The second issue pertains to the disallowance of Rs. 3,17,71,475/- out of total advertisement expenses of Rs. 8,51,90,351/-. The AO segregated the expenses into those allocable to total income from advertisement sales commission and those not offered to tax. The assessee contended that this issue had been decided in its favor in earlier years, a view upheld by the Delhi High Court.However, the Tribunal noted that the current year's facts differ from those of earlier years because AMP expenses for promoting marketing intangibles of the assessee's AE were actually incurred. The Tribunal highlighted that the entire AMP expenses, including those for promoting channels of its AEs, cannot be considered exclusively for the assessee's business. The Tribunal restored the matter to the AO/TPO for fresh consideration, keeping in view the context and ratio of the decision rendered by the Delhi High Court in the assessee's own case for earlier years.Conclusion:The appeal was partly allowed for statistical purposes. The Tribunal directed the AO/TPO to re-examine the ALP of AMP expenses and the disallowance of proportionate advertisement expenses in line with the principles laid down by the Delhi High Court.