2019 (7) TMI 1516 - AT - Income Tax

Tribunal rules AMP expenses not international transactions, rejects Bright Line Test

India Medtronic Private Ltd. Versus Assistant Commissioner of Income Tax, Circle-10 (1) (1), Mumbai

The Tribunal concluded that Advertising, Marketing, and Promotion (AMP) expenses incurred by the assessee were not international transactions. The ... TP Adjustment - AMP expenditure - international transaction - whether incurring of the AMP expenditure by the assessee is an international transaction, or not ? - HELD THAT:- The aforesaid issue under consideration is squarely covered by the order passed by the Tribunal in the assesses own case for A.Y. 2010-11 [2018 (1) TMI 1033 - ITAT MUMBAI] . Admittedly, the “distribution agreement” which had been effective from 28.04.2007 was renewable automatically on year-to-year basis and involving the same terms and conditions was applicable during the period relevant to A.Y.2010-11. Accordingly, the terms of the distribution agreement had not changed/modified. Also, we find that the similarly placed “distribution Agreement” was relied upon by the Tribunal while disposing off the appeal of the assessee for the immediately preceding year viz. A.Y. 2008-09. A perusal of the order of the Tribunal in the assesses own case for A.Y. 2010-11, viz. India Medtronic Vs. DCIT-10(1)(1), Mumbai [2018 (1) TMI 1033 - ITAT MUMBAI] reveals that the Tribunal had observed viz. (i) that, in the agreements between the assessee and its AE there was no condition of sharing of AMP; (ii) that, the agreements only referred to using best efforts to distribute the products or promote products in a commercially reasonable manner; and (iii) that, the terms of the agreement did not provide that the assessee had to share AMP expenses; (iv) that, even if the AE was benefitted indirectly by the AMP expenditure incurred by the assessee, it could not be inferred that it had entered into an agreement for sharing AMP expenses; and (v) that, the “Bright Line Test‟ should not have been applied by the TPO. We find that the Tribunal after relying on its earlier order in the case of Thomas Cook India Ltd. [2016 (7) TMI 318 - ITAT MUMBAI] had therein decided the issue in favour of the assessee. Non granting the consequential depreciation on non-compete fees as the same was held to be in the nature of a capital expenditure in A.Y. 2002-03 - HELD THAT:- As perused the order of the Tribunal passed in the first round of appeal and find that no such contention of the assessee as regards its entitlement towards depreciation of non-compete fees was remanded by the Tribunal to the file of the A.O. Accordingly, respectfully following the directions of the Hon‟ble High Court that other issues raised in the first round of appeal (except those remanded) are not to be re-adjudicated by the Tribunal, therefore, we refrain from adverting to and therein adjudicating the aforesaid claim of the assessee which as observed by us hereinabove, arises from a fact that had not been remanded by the Tribunal to the file of the A.O for fresh adjudication. Issues Involved:1. Whether the Advertising, Marketing, and Promotion (AMP) expenses incurred by the assessee are considered international transactions.2. The application of the Bright Line Test (BLT) for benchmarking AMP expenses.3. The approach for benchmarking AMP expenses as a bundled transaction.4. The assessee's entitlement to depreciation on non-compete fees.Issue-wise Detailed Analysis:1. Whether AMP Expenses are International Transactions:The core issue revolves around whether the AMP expenses incurred by the assessee should be treated as international transactions. The Tribunal observed that the assessee, a part of Medtronic Inc., USA, engaged in marketing and distributing proprietary products, had no explicit arrangement with its Associated Enterprises (AEs) for sharing AMP expenses. The Tribunal relied on its earlier decisions in the assessee's own case for A.Y. 2010-11 and A.Y. 2008-09, where it was held that in the absence of an agreement for sharing AMP expenses, such expenses could not be treated as international transactions. The Tribunal reiterated that even if the AMP expenses indirectly benefited the AEs, it could not be inferred that there was an agreement for sharing such expenses.2. Application of the Bright Line Test (BLT):The Tribunal noted that the BLT was not a proper method for benchmarking AMP expenses. The decision of the Hon’ble High Court of Delhi in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. vs. CIT had rejected the BLT for benchmarking AMP transactions. The Tribunal directed the Transfer Pricing Officer (TPO) to reconsider the benchmarking of AMP transactions without applying BLT, following the principles laid down by the Hon’ble High Court of Delhi in the case of Maruti Suzuki India Ltd. vs. CIT.3. Benchmarking AMP Expenses as a Bundled Transaction:The Tribunal emphasized that the AMP expenses should be benchmarked using a bundled approach, considering the overall transactions between the assessee and its AEs. The TPO had accepted the comparables adopted by the assessee for its core international transactions but had separately benchmarked the AMP expenditure, which the Tribunal found unjustified. The Tribunal remanded the matter to the TPO for fresh adjudication, considering the rejection of BLT and applying the bundled approach for benchmarking AMP expenses.4. Depreciation on Non-Compete Fees:The assessee contended that it was entitled to depreciation on non-compete fees, which was held to be a capital expenditure in A.Y. 2002-03. However, the Tribunal observed that this issue was not remanded by the Tribunal in the first round of appeal and, following the directions of the Hon’ble High Court, refrained from adjudicating this claim.Conclusion:The Tribunal concluded that AMP expenses incurred by the assessee were not international transactions and deleted the TP adjustment made by the A.O. The Tribunal allowed the appeals of the assessee and dismissed the appeal filed by the revenue. The issue of depreciation on non-compete fees was not adjudicated as it was not remanded for fresh consideration. The Tribunal’s order was pronounced in the open court on 24.07.2019.