2022 (4) TMI 1491 - AT - Income Tax

Tribunal rules no separate adjustment for AMP expenses in transfer pricing dispute, emphasizing overall profitability

Epson India Private Limited Versus The Dy. Commissioner of Income tax, International Taxation Circle-1 (2), Bengaluru.

The Tribunal held in favor of the assessee, ruling that no separate adjustment for Advertising, Marketing, and Promotional (AMP) expenses was warranted as ... TP Adjustment - treating the AMP expenses as a separate transaction from the distribution segment and making TP adjustment for the same - HELD THAT:- Considering the ratio laid down by the Hon’ble Delhi High Court in the case of Sony Ericsson mobile communication India Private Limited [2015 (3) TMI 580 - DELHI HIGH COURT] with respect to treating AMP expenses as a separate transaction when the TPO has not otherwise rejected the gross margin and the net margin of the assessee, we hold that there is no separate adjustment to be made in respect of AMP expenses. The appeal is allowed in favour of the assessee. Issues:Whether the assessing officer is correct in treating the AMP expenses as a separate international transaction from the distribution segment and making a TP adjustment for the same.Detailed Analysis:The judgment involves an appeal against the order of the Deputy Commissioner of Income Tax International Taxation for the assessment year 2015-16. The case pertains to the treatment of Advertising, Marketing, and Promotional (AMP) expenses incurred by the assessee, a wholly owned subsidiary, in distributing products. The transaction of providing distribution services was considered an international transaction under the Income Tax Act. The Transfer Pricing Officer (TPO) treated AMP expenses as a separate international transaction and proposed a TP adjustment due to excess expenditure incurred by the assessee. The Dispute Resolution Panel upheld the TPO's action, leading to the final assessment order challenged in the appeal before the Tribunal.The key contention raised by the assessee was whether the AMP expenses should be treated as a separate international transaction from the distribution segment, warranting a TP adjustment. The assessee argued that its functional profile identified marketing activities as a key function, and the TPO had not disputed this. The assessee also relied on legal precedents to support its position that once net margins are at arm's length, no separate adjustment is required for AMP expenses. The TPO's attempt to re-characterize the transaction by segregating AMP expenses was challenged by the assessee as impermissible.During the hearing, the assessee focused on the grounds related to AMP expenses, emphasizing that the TPO had accepted the gross and net margins of the distribution segment were higher than comparables. The assessee contended that the TPO's approach of treating AMP expenses as a separate transaction was unwarranted. The Tribunal analyzed the TP methods used, including the Resale Price Method and Transaction Net Margin Method, to determine the arm's length price. The Tribunal also considered the legal principles laid down by the Delhi High Court regarding the treatment of AMP expenses in transfer pricing analysis.Ultimately, the Tribunal held that there was no need for a separate adjustment concerning AMP expenses as the TPO had not rejected the gross and net margins of the assessee. Citing legal precedents and the TPO's failure to establish an international transaction related to AMP expenses, the Tribunal allowed the appeal in favor of the assessee. The judgment highlighted the importance of considering the overall profitability and functional analysis in transfer pricing assessments, emphasizing that separate adjustments for specific expenses should be justified based on clear evidence of international transactions.In conclusion, the Tribunal's decision focused on the proper application of transfer pricing principles, emphasizing the need for a holistic approach in determining arm's length prices. The judgment underscored the significance of considering functional profiles, overall profitability, and legal precedents in transfer pricing disputes involving specific expenses like AMP costs.