2019 (3) TMI 1837 - AT - Income Tax

Assessee's Appeal Granted, AMP Expenses Reassessment Ordered

M/s. Olympus Medical Systems India Pvt. Ltd. Versus DCIT, Circle-3 (1), Gurugram

The Tribunal partially allowed the appeal of the assessee, directing the Transfer Pricing Officer to re-examine the benchmarking of Advertisement, ... TP Adjustment - AMP expenditure - International transaction - bechmarking technique - HELD THAT:- International transaction of AMP functions exists in the case of the assessee, however, as far as benchmarking of the said transaction is concerned, we find that the Ld. Transfer Pricing Officer has claimed to have followed the directions in the case of Sony Ericsion [2015 (3) TMI 580 - DELHI HIGH COURT]. The assessee is aggrieved with not considering the AMP expenses in aggregated manner with imports of goods under TNMM. The assessee is also aggrieved with cost plus method in segregated manner without properly comparing the functions of the comparable companies. In such circumstances, we feel it appropriate to restore the issue to the file of the Ld. TPO for following the direction of the Hon’ble Delhi High Court for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE or in the segregated manner, after taking into account appropriate comparables or applying of resale price method or cost-plus method - We are restoring this issue to Ld. Transfer Pricing Officer because factual information on the issues raised by the Hon’ble Court are not before fully. The Ld. TPO may also decide the issue of direct selling expenses and applying markup following the decision of the Hon’ble Delhi High Court in the case of Sony Ericsson (supra). It is needless to mention that assesses shall be afforded adequate opportunity of being heard. Issues Involved:1. Adjustment to Advertisement, Marketing, and Promotion (AMP) expenses.2. Determination of AMP expenses as an international transaction.3. Benchmarking of AMP expenses.4. Protective adjustment based on Bright Line Test (BLT).5. Penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Adjustment to Advertisement, Marketing, and Promotion (AMP) Expenses:The assessee contested the adjustment made to AMP expenses, arguing that the expenses were routine selling expenses and not solely for the brand promotion of the foreign associated enterprise (AE). The Tribunal noted that the assessee incurred AMP expenses of Rs. 8,63,61,000, which the Transfer Pricing Officer (TPO) considered as promoting the brand owned by the AE. The TPO benchmarked the AMP expenses using the Bright Line Test (BLT) on a protective basis and the cost-plus method on a substantive basis.2. Determination of AMP Expenses as an International Transaction:The Tribunal examined whether the AMP expenses constituted an international transaction. The assessee argued that there was no agreement with the AE regarding the sharing of AMP expenses and that the expenses were incurred to augment sales revenue. The Tribunal referred to the case of PepsiCo India Holding Private Limited, which emphasized that an international transaction must arise from an arrangement or understanding between the parties. In the instant case, the Tribunal found that the AE shared business and inventory risk and bore product liability risk, indicating an international transaction.3. Benchmarking of AMP Expenses:The Tribunal held that the AMP expenses should be benchmarked following the directions of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. The Tribunal rejected the BLT method and directed the TPO to benchmark the AMP expenses either in an aggregated manner with the purchase of goods under the Transactional Net Margin Method (TNMM) or in a segregated manner using appropriate comparables or the resale price method or cost-plus method.4. Protective Adjustment Based on Bright Line Test (BLT):The Tribunal noted that the Hon’ble Delhi High Court in the case of Sony Ericsson had rejected the BLT for separating routine and non-routine AMP expenses. Consequently, the Tribunal directed the deletion of the adjustment made on a protective basis using the BLT.5. Penalty Proceedings Under Section 271(1)(c) of the Income Tax Act:The assessee raised the issue of penalty proceedings initiated under section 271(1)(c). The Tribunal found that no penalty had been levied at this stage, making the prayer premature, and thus dismissed this ground.Conclusion:The Tribunal allowed the appeal of the assessee partly for statistical purposes, directing the TPO to re-examine the benchmarking of AMP expenses in line with the directions of the Hon’ble Delhi High Court. The protective adjustment based on the BLT was deleted, and the issue of penalty proceedings was dismissed as premature.