2016 (7) TMI 1053 - AT - Income Tax

Appeal partially allowed on AMP expenses classification, remanded for fresh ALP determination.

Nikon India Pvt. Ltd. Versus DCIT, Circle-3, Gurgaon

The Tribunal partly allowed the appeal for statistical purposes, restoring the matter to the Transfer Pricing Officer/Assessing Officer for fresh ... Transfer pricing adjustment - AMP expenses - selling expenses - Held that:- We are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon’ble High Court, after allowing a reasonable opportunity of being heard to the assessee. In doing so, the selling expenses directly incurred in connection with sales not leading to brand promotion, should not be brought within the ambit of AMP expenses. See Sony Ericsson Mobile Communications India Pvt. Ltd. (Now known as Sony India Limited) & others Versus Commissioner of Income Tax – III [2015 (3) TMI 580 - DELHI HIGH COURT ] Issues Involved:1. Jurisdiction of the Assessing Officer (AO) / Transfer Pricing Officer (TPO) in determining the Arm's Length Price (ALP) of Advertising, Marketing, and Promotion (AMP) expenses.2. Whether AMP expenses constitute an international transaction.3. Retrospective or prospective application of Instruction No. 3/2016 dated 10th March 2016 issued by the CBDT.Detailed Analysis:1. Jurisdiction of AO/TPO in Determining ALP of AMP Expenses:The assessee challenged the jurisdiction of the AO/TPO in determining the ALP of AMP expenses, arguing that AMP expenses are purely domestic transactions and not covered under Section 92 of the Income-tax Act. The Department countered that the issue was not raised before lower authorities or in the Memorandum of Appeal. However, the Tribunal found that the assessee did challenge the jurisdiction during proceedings before the TPO, as evidenced by the reply dated 15th December 2014. The Tribunal held that legal issues can be raised for the first time before the Tribunal, as per the Supreme Court's decision in NTPC Ltd. vs. CIT, and admitted the issue for consideration on merits.2. AMP Expenses as an International Transaction:On merits, the assessee contended that AMP expenses were not indicated as an international transaction in the audit report and were not referred by the AO to the TPO, thus questioning the jurisdiction of the TPO/AO. The Tribunal examined Instruction No. 3/2016, particularly para 3.4, which requires the AO to record satisfaction and provide an opportunity of being heard to the assessee before referring any transaction to the TPO. The Tribunal found that this para did not apply as the AO did not make any reference to the TPO for determining the ALP of AMP expenses.Further, para 4.1 of the Instruction, which allows the TPO to determine the ALP of any international transaction that comes to notice during proceedings, was considered. The Tribunal referred to the jurisdictional High Court's decision in Sony Ericson Mobile Communications India Pvt. Ltd. vs. CIT, which upheld the TPO's power to determine the ALP of unreported international transactions. Consequently, the Tribunal found no lack of jurisdiction in the TPO's determination of the ALP of AMP expenses.3. Retrospective or Prospective Application of Instruction No. 3/2016:The assessee argued that Instruction No. 3/2016 should be given retrospective effect, relying on the Supreme Court's decision in CIT vs. Vatika Township Pvt. Ltd. The Tribunal, however, held that the Instruction, being procedural and issued with immediate effect, could not be applied retrospectively. The Tribunal cited the jurisdictional High Court's decision in DIT vs. Ericsson A.B., which stated that instructions issued with immediate effect cannot be applied retrospectively. Thus, the Tribunal concluded that the Instruction dated 10th March 2016 is prospective.Merits of Addition on Account of Transfer Pricing Adjustment of AMP Expenses:The assessee argued that AMP expenses are not an international transaction, relying on the Delhi High Court's judgments in CIT vs. Whirlpool of India Ltd. and Maruti Suzuki India Ltd. & Another vs. CIT. The Department countered with the Delhi High Court's judgment in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT, which held AMP expenses to be an international transaction. The Tribunal found that the TPO did not consider certain documents in light of the judicial view available and decided to restore the matter to the TPO/AO for fresh determination. The Tribunal instructed that if AMP expenses are found to be an international transaction, the TPO should determine the ALP in light of relevant judgments, excluding selling expenses directly connected with sales.Conclusion:The appeal was partly allowed for statistical purposes, with the matter restored to the TPO/AO for fresh determination of whether AMP expenses constitute an international transaction and, if so, to determine the ALP accordingly. The order was pronounced in the open court on 15.07.2016.