2017 (4) TMI 452 - AT - Income Tax

Tribunal Overturns Transfer Pricing Adjustments for AMP Expenses

M/s. Grohe India Private Ltd. C/o Perfect Accounting and Shared Services Private Limited Versus ACIT, Circle 10 (2), New Delhi

The Tribunal set aside the transfer pricing adjustments of Advertising, Marketing, and Promotion (AMP) expenses for Assessment Years 2010-11 and 2011-12, ... TPA - AMP expenses to be an international transaction - Held that:- It is a matter of record that the Hon’ble High Court in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT) has held AMP expenses as an international transaction. It can be seen that in some later decisions, view taken is at variance. Equally, the tribunal is also not consistent in its stand. When the TPO in the instant case held AMP expenses to be an international transaction, he did not have any occasion to consider the ratio laid down in several judgments of the Hon’ble jurisdictional High Court, which is now available for consideration. Respectfully following the predominant view taken in several Tribunal orders of co-ordinate benches, 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 Addition on account of difference in the closing stock valuation as per section 145A on accounting of non-inclusion of Special Additional Duty (SAD) - Held that:- The assessment year under consideration is 2010-2011. Section 145A, which was inserted by the Finance (No.2) Act, 1998 with effect from 1.4.1999, has been made applicable from the assessment year 1998-1999. It provides that the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be in accordance with the method of accounting regularly employed by the assessee and further adjusted to include the amount of any tax, duty, cess etc. paid or incurred by the assessee to bring the goods to the place of its location as on the date of valuation. According to the prescription of this section, which is applicable to the year under consideration, the amount of tax, duty, cess etc. is liable to be included in the value of purchases, sales, opening and closing stock. It is not appropriate to include the figure of SAD only in the figure of closing stock without modifying the figures of purchases, sales and opening stock. As the AO has not adjusted all the relevant figures with the amount of tax, duty, cess etc., we set aside the impugned order and restore the matter to the file of A.O. for deciding it afresh on the provisions of section 145A. Issues:1. Transfer pricing adjustment of Advertising, marketing and promotion expenses (AMP expenses) for Assessment Year 2010-11.2. Difference in closing stock valuation due to non-inclusion of Special Additional Duty (SAD) for Assessment Year 2010-11.3. Transfer pricing adjustment of AMP expenses and addition under section 145A for Assessment Year 2011-12.Analysis:Issue 1: Transfer pricing adjustment of AMP expenses for Assessment Year 2010-11The assessee contested the addition of &8377; 3,55,87,494 by the AO on account of transfer pricing adjustment of AMP expenses. The argument was that AMP expenses were not an international transaction. The assessee relied on judgments of the Hon'ble Delhi High Court to support this claim. The Tribunal noted inconsistencies in views and decisions regarding the nature of AMP expenses as an international transaction. Considering the prevailing view and judgments, the Tribunal set aside the impugned order and remitted the matter to the TPO/AO for a fresh determination. The Tribunal emphasized the need to establish the existence of an international transaction of AMP expenses, as per relevant judgments, before any transfer pricing addition could be made.Issue 2: Difference in closing stock valuation due to non-inclusion of SAD for Assessment Year 2010-11The AO made an addition of &8377; 16,72,848 on account of the difference in closing stock valuation due to the non-inclusion of Special Additional Duty (SAD). The Tribunal observed that Section 145A mandates the inclusion of tax, duty, cess, etc., in the valuation of purchases, sales, and inventory. As the AO had not adjusted all relevant figures with the amount of SAD, the Tribunal set aside the order and directed the matter to be reconsidered by the AO in accordance with the provisions of Section 145A and relevant judicial precedents. The assessee was granted a reasonable opportunity of hearing in this regard.Issue 3: Transfer pricing adjustment of AMP expenses and addition under section 145A for Assessment Year 2011-12For the Assessment Year 2011-12, similar issues were raised regarding transfer pricing adjustment of AMP expenses and addition under section 145A. The Tribunal found the facts and circumstances to be similar to the preceding year and set aside the order on both counts. The matters were remitted to the AO for fresh consideration in line with the observations made for the preceding year. The assessee was granted a reasonable opportunity of hearing in this regard.In conclusion, the Tribunal allowed the appeals for statistical purposes in both Assessment Years 2010-11 and 2011-12, emphasizing the need for a fresh determination based on the legal principles and precedents discussed in the judgments.