2020 (5) TMI 732 - AT - Income Tax

Tax Tribunal Rules AMP Expenses Not International Transaction, Bright Line Test Invalid

Casio India Company Pvt. Ltd. Versus ACIT, Circle 5 (2), A – 41, 1st Floor, New Delhi.

The Tribunal allowed the taxpayer's appeal, ruling that the AMP expenses were not an international transaction. It held the Bright Line Test (BLT) as ... TP Adjustment - AMP expenditure - International transaction - HELD THAT:- In the instant case, there is not an iota of material on the file apart from applying the BLT and by taking the view that the taxpayer has incurred huge AMP/sales expenses to the tune of 6.42%, no cogent material is there to treat the incurring of AMP expenses as international transaction more particularly when basis for treating the AMP expenses as international transaction i.e. BLT is not a legally sustainable method. Undisputedly, there is no change in the FAR of the taxpayer company since AY 2010-11 and the taxpayer is performing same functions. In AY 2010-11, the coordinate Bench of the Tribunal vide [2019 (4) TMI 1774 - ITAT DELHI] held that the Revenue has failed to prove that AMP expenditure by the taxpayer is a separate international transaction. In view of what has been discussed above and following the order passed by the Tribunal in taxpayer’s own case in AY 2010-11, when there is no international transaction no separate benchmarking qua AMP expenditure can be made, hence liable to be deleted. In view of what has been discussed above, the appeal filed by the taxpayer is allowed. Issues Involved:1. Adjustment on account of AMP expenses.2. Validity of proceedings.3. Treatment of AMP as an international transaction.4. Protective adjustment using Bright Line approach.5. Substantive adjustment using Residual Profit Split Method approach.6. Penalty proceedings under section 271(1)(c).Detailed Analysis:1. Adjustment on account of AMP expenses:The taxpayer, Casio India Company Pvt. Ltd., reported AMP expenses of INR 26,40,06,099 for the assessment year 2015-16. The TPO used the Bright Line Test (BLT) to determine the AMP/Sales ratio and selected comparables with an average AMP/Sales ratio of 2.84%. The TPO computed the amount that should have been compensated by the AE as INR 17,02,92,370 and proposed this adjustment on a protective basis. The DRP upheld the adjustment, noting that the AMP expenditure was considered without proper discussion and rationale.2. Validity of proceedings:The taxpayer argued that the final assessment order under sections 143(3) read with 144C was not in accordance with the provisions of the Act. The taxpayer contended that the adjustment based on a protective assessment was erroneously added to the total income, contrary to the DRP's directions that no demand should be computed on protective adjustment.3. Treatment of AMP as an international transaction:The taxpayer challenged the characterization of AMP expenditure as an 'international transaction' under section 92B. The taxpayer cited multiple judicial precedents, including its own case for AY 2010-11, arguing that there was no explicit arrangement with the AE regarding AMP expenses. The Tribunal noted that the Revenue failed to provide any material evidence of an arrangement between the taxpayer and its AE for incurring AMP expenses. The Tribunal relied on the Delhi High Court's rulings in Sony Ericsson Mobile Communications India Pvt. Ltd. and Maruti Suzuki India Ltd., which rejected the BLT for determining international transactions involving AMP expenses.4. Protective adjustment using Bright Line approach:The Tribunal referred to its previous decision in the taxpayer's own case for AY 2014-15, where the protective adjustment using the BLT was held unsustainable. The Tribunal reiterated that the BLT is not a valid basis for determining the existence of an international transaction or for computing the ALP of such transactions involving AMP expenses.5. Substantive adjustment using Residual Profit Split Method approach:The TPO also used the Residual Profit Split Method (RPSM) to benchmark the AMP spend, considering the AMP expenditure of 6.42% vis-à-vis 3.58% for comparable companies. The Tribunal observed that the DRP's adjustment under RPSM could not exceed the excess non-routine AMP expenditure computed under the BLT. The Tribunal found that the Revenue failed to prove that the AMP expenditure was a separate international transaction, thus no separate benchmarking was warranted.6. Penalty proceedings under section 271(1)(c):The taxpayer contested the initiation of penalty proceedings under section 271(1)(c), arguing that the adjustments made were not justified. The Tribunal's decision to delete the AMP adjustment rendered the penalty proceedings infructuous.Conclusion:The Tribunal allowed the taxpayer's appeal, finding that there was no material evidence to treat the AMP expenses as an international transaction. The Tribunal held that the BLT is not a legally sustainable method and that the Revenue failed to prove any explicit arrangement between the taxpayer and its AE regarding AMP expenses. Consequently, the Tribunal deleted the entire AMP adjustment and dismissed the penalty proceedings.