2016 (6) TMI 787 - AT - Income Tax

High Court guidance on AMP expenses bundling, comparables selection, and TP adjustments

The High Court emphasized bundling AMP expenses with other international transactions, selecting comparables aligned with AMP and distribution functions, ... Transfer pricing adjustment - difference in the arm's length price of the international transaction of incurring of advertisement, marketing and promotion (AMP) expenses relating to creation of marketing intangibles - Held that:- TNMM has been applied as the most appropriate method, which method has not been disturbed by the TPO, then, the international transactions of AMP and Distribution activities should be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that 'of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregate manner at par with those undertaken by the com parables, then, segregation should be done and the international transaction of AMP spent, should be separately processed under the transfer pricing provisions for the purposes of determining its ALP separately. In such determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed.We accordingly dispose of the appeals of the assessee for assessment years 2009-10, 2010-11 and 2011-12, we restore the matter to the file of TPO / AO for deciding the issue in conformity with the directions as deduced from the judgment of the Hon'ble Delhi High Court in the case of Sony Ericson Mobile Communication India (P) Ltd [2015 (3) TMI 580 - DELHI HIGH COURT] Issues:Transfer pricing adjustment due to difference in arm's length price of international transaction of AMP expenses.Analysis:The main issue in this case pertains to transfer pricing adjustment due to a difference in the arm's length price of international transactions involving advertisement, marketing, and promotion (AMP) expenses related to the creation of marketing intangibles. The assessee, a subsidiary of a Japanese company, was engaged in importing and reselling products in India and providing marketing and technical support services to its Japanese counterpart. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) under section 92CA (3) upon observing certain international transactions during the assessment proceedings.The TPO noted that the assessee had incurred expenses related to AMP for promoting the brand owned by its associated enterprise (AE). The assessee argued that it was not a brand owner but incurred expenses to promote the brand owned by its AE. The issue was raised before the tribunal, citing precedents from cases such as M/s LG Electronics India Pvt. Ltd. and Sony Ericson Mobile Communications India Pvt. Ltd.The tribunal considered the submissions from both parties and the relevant material on record regarding the transfer pricing adjustment of AMP expenses. The assessee's counsel requested the issue to be set aside to the TPO/AO, citing recent court decisions that were not available to the TPO/DRP at the time of their orders. The tribunal found merit in the arguments presented and decided to set aside the issue for fresh consideration by the TPO/AO in light of the recent judicial pronouncements.The High Court's judgment emphasized that the international transaction of AMP expenses should be bundled or aggregated with other international transactions carried out by the assessee as a distributor. It highlighted the importance of choosing comparables that conform to the AMP and distribution functions performed by the assessee for determining the arm's length price (ALP). The court also addressed the segregation of routine and non-routine expenses, the exclusion of sales-related expenses from AMP expenses, and the application of suitable methods for TP adjustments on AMP expenses.In conclusion, the tribunal disposed of the appeals for the assessment years in question and restored the matter to the TPO/AO for a fresh decision in line with the directions derived from the High Court's judgment in the case of Sony Ericson Mobile Communication India Pvt. Ltd. The appeal filed by the assessee was allowed on a statistical basis, and the order was pronounced in open court on a specified date.