2019 (2) TMI 1643 - HC - Income Tax

Court dismisses Revenue's appeal, upholds ITAT decision on Transfer Pricing. Importance of tax parity emphasized.

Commissioner Of Income Tax Versus Sony Mobile Communications

Commissioner Of Income Tax Versus Sony Mobile Communications - TMI Issues Involved:1. Transfer Pricing Adjustment2. Arm's Length Price (ALP) Determination3. Advertisement, Marketing, and Promotion (AMP) Expenses4. Application of Bright Line Test (BLT)5. Compensation for AMP Expenditure6. Natural Justice and Opportunity of Being Heard7. Bundled Transaction vs. Separate International Transaction8. OECD Guidelines on Transfer Pricing9. Comparability Analysis and Selection of MethodDetailed Analysis:1. Transfer Pricing Adjustment:The Revenue challenged the decision of the ITAT, which reversed the Assessing Officer's (AO) confirmation of the Transfer Pricing Officer's (TPO) analysis regarding the respondent-assessee's international transactions. The TPO had proposed ALP adjustments amounting to Rs. 69,94,95,650/-.2. Arm's Length Price (ALP) Determination:The TPO determined the ALP by comparing the ratio of AMP/sales using the Bright Line Test (BLT), which was not approved by the court. The ITAT held that the TPO's method of determining ALP was flawed as it did not consider the bundled transaction approach.3. Advertisement, Marketing, and Promotion (AMP) Expenses:The ITAT found that the AMP expenses incurred by the assessee were for its business promotion and not exclusively for the AE's brand building. The court noted that the assessee's AMP expenses could not be considered as having added value to the brand name of the AE.4. Application of Bright Line Test (BLT):The court disapproved the use of BLT for determining ALP, stating that it lacked statutory mandate. The court emphasized that TP adjustments should ensure tax parity between controlled and uncontrolled taxpayers.5. Compensation for AMP Expenditure:The ITAT concluded that the assessee was suitably compensated by its AE through credit notes worth Rs. 73.83 crores, which were adjusted against purchases. The court upheld this finding, stating that the compensation model ensured the assessee earned an arm's length return.6. Natural Justice and Opportunity of Being Heard:The Revenue argued that the ITAT erred by not giving the AO/TPO an opportunity to be heard or calling for a remand. However, the court found that the ITAT had sufficient materials and conducted a thorough analysis, thus dismissing the Revenue's argument.7. Bundled Transaction vs. Separate International Transaction:The ITAT held that if the AO/TPO accepts the comparables adopted by the assessee as a bundled transaction, it would be illogical to treat AMP expenses as a separate international transaction. The court agreed, noting that the TPO treated the transactions as bundled.8. OECD Guidelines on Transfer Pricing:The ITAT referred to the OECD Guidelines, which suggest that a distributor should be compensated with a service fee rather than a return on marketing intangibles. The court found that the assessee's compensation model was aligned with these guidelines.9. Comparability Analysis and Selection of Method:The ITAT found no dispute regarding the comparables and the use of the Transactional Net Margin Method (TNMM) as the most appropriate method. The court upheld the ITAT's analysis, noting that the assessee's net margin was higher than the comparables.Conclusion:The court dismissed the Revenue's appeal, concluding that there was no substantial question of law. The ITAT's findings were deemed exhaustive and reasonable, and the assessee was found to have been suitably compensated by its AE, negating the need for further adjustments.