2017 (1) TMI 1083 - HC - Income Tax

Court emphasizes nuanced approach in AMP expenditure cases, clarifies not all AMP transactions are international.

The Court remitted the case back to the Income Tax Appellate Tribunal for reevaluation, emphasizing the need for a nuanced approach in determining ... Transfer pricing adjustment - ALP determination - whether the reporting of the AMP in regard to the outbound business constitutes an international transaction for which ALP determination was necessary? - Held that:- The I.T.A.T. in our opinion, should have first decided whether in the circumstances of this case, the nature of the AMP reported, could lead to the conclusion that there was an international transaction. When doing so, it should have remitted the matter back for examination to the A.O. in this case. Accordingly, following the decision of Sony Ericsson Mobile Communications India Pvt. Ltd.(2015 (3) TMI 580 - DELHI HIGH COURT) and a subsequent decision in Daikin Airconditioning India Pvt. Limited v. Assistant Commissioner of Income Tax [2017 (1) TMI 957 - DELHI HIGH COURT] this Court hereby remits the matter for a comprehensive decision by the I.T.A.T. In other words, the I.T.A.T. will decide whether the reporting of the AMP in regard to the outbound business constitutes an international transaction for which ALP determination was necessary and if so, the effect thereof. Issues:1. Interpretation of international transactions involving outbound business.2. Application of the 'bright line method' in transfer pricing assessments.3. Relevance of AMP expenditure in determining international transactions.4. Judicial precedent on the treatment of AMPs in transfer pricing assessments.Analysis:1. The primary issue in this case revolved around the interpretation of international transactions involving outbound business for Assessment Years 2009-10 and 2010-11. The tax authorities, including the Transfer Pricing Officer (T.P.O.) and the Assessing Officer (A.O.), contended that the Assessee's returns indicated the existence of outbound travel business based on substantial AMP expenditure. The Dispute Resolution Panel (D.R.P.) and the Income Tax Appellate Tribunal (I.T.A.T.) also supported this view, leading to a dispute regarding the applicability of the AMP determination method.2. The Court noted that the tax authorities consistently applied the 'bright line method' based on a previous decision by the I.T.A.T.'s Special Bench in L.G. Electronics (India) Pvt. Ltd. v. ACIT. However, a subsequent Division Bench ruling in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT overturned this method, creating a discrepancy in the application of transfer pricing principles.3. The Revenue argued that the I.T.A.T. had adequately addressed the legal question by referencing the discussion in the impugned judgment. On the other hand, the Assessee's counsel contended that the issue was clearly raised in the appeal grounds before the D.R.P. and the I.T.A.T., emphasizing the need for a thorough examination of the nature of AMP expenditure in determining international transactions.4. In its analysis, the Court emphasized that not all transactions reporting AMPs should automatically be treated as international transactions. Referring to the conflicting decisions in L.G. Electronics India Pvt. Ltd. and Sony Ericsson Mobile Communications India Pvt. Ltd., the Court highlighted the importance of evaluating each case individually. Consequently, the Court remitted the matter back to the I.T.A.T. for a comprehensive decision, directing a reevaluation of whether the AMP reported in relation to the outbound business constituted an international transaction requiring Arm's Length Price (ALP) determination.In conclusion, the judgment clarified the need for a nuanced approach in determining international transactions involving AMP expenditure, emphasizing the significance of judicial precedents and thorough case-specific evaluations in transfer pricing assessments.