Tribunal directs reassessment of AMP expenses, emphasizing fresh determination and RPM method

The Tribunal set aside the adjustments made by the Transfer Pricing Officer (TPO) regarding Advertisement, Marketing, and Promotion (AMP) expenses for assessment years 2010-11 and 2011-12. It directed the Assessing Officer/TPO to reevaluate the arm's length price (ALP) of AMP expenses, considering the conflicting judgments on whether AMP expenses constitute an international transaction. The Tribunal emphasized the need for a fresh determination, allowing the assessee a reasonable opportunity of hearing. Additionally, the Tribunal instructed the use of Resale Price Method (RPM) as the most appropriate method for determining the ALP of the international transaction, with AMP intensity adjustment in the profit margins of comparables.

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Issues Involved:
1. Transfer pricing adjustment in advertisement, marketing, and promotion (AMP) expenses for assessment years 2010-11 and 2011-12.
2. Determination of the arm's length price (ALP) of AMP expenses.
3. Treatment of AMP expenses as an international transaction.
4. Methodology for benchmarking AMP expenses.
5. AMP intensity adjustment in the profit margins of comparables for assessment year 2012-13.
6. Application of the Resale Price Method (RPM) versus Transactional Net Margin Method (TNMM).

Detailed Analysis:

1. Transfer Pricing Adjustment in AMP Expenses for AY 2010-11 and 2011-12:
The assessee, part of the Luxottica group, incurred significant AMP expenses, which the Transfer Pricing Officer (TPO) adjusted using the bright line test. The Dispute Resolution Panel (DRP) largely upheld the TPO's adjustments with minor modifications. The assessee contested these additions, arguing that AMP expenses should not be considered an international transaction based on judgments from the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT and CIT vs. Whirlpool of India Ltd. The Revenue, however, cited the Hon'ble Delhi High Court's ruling in Sony Ericsson Mobile Communications (India) Pvt. Ltd. vs. CIT, which treated AMP expenses as an international transaction and called for fresh determination of ALP.

2. Determination of ALP of AMP Expenses:
The Tribunal noted that the TPO did not consider the ratio laid down in several judgments from the Hon'ble jurisdictional High Court. The Tribunal had previously restored a similar issue to the AO/TPO for fresh adjudication in light of the Hon'ble Delhi High Court's judgment in Sony Ericsson Mobile Communications (India) Pvt. Ltd. vs. CIT. Following this precedent, the Tribunal set aside the impugned order and sent the matter back to the AO/TPO for fresh determination, allowing the assessee a reasonable opportunity of hearing.

3. Treatment of AMP Expenses as an International Transaction:
The Tribunal acknowledged the conflicting judgments regarding whether AMP expenses constitute an international transaction. It referred to multiple judgments, including those from the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications (India) Pvt. Ltd. and Yum Restaurants (India) P. Ltd. vs. ITO, which restored the issue for fresh determination. The Tribunal followed the precedent set in the assessee's own case for the preceding year, directing the AO/TPO to decide the issue afresh.

4. Methodology for Benchmarking AMP Expenses:
The Tribunal rejected the assessee's proposition to carry out AMP intensity adjustment instead of treating AMP as an international transaction, as it would alter the case's complexion. The Tribunal emphasized that the TPO had considered AMP as a separate international transaction and determined its ALP independently. Therefore, the Tribunal could not concur with the assessee's request to change the benchmarking methodology.

5. AMP Intensity Adjustment in Profit Margins of Comparables for AY 2012-13:
For AY 2012-13, the TPO did not make a separate transfer pricing adjustment for AMP expenses but factored in the AMP intensity adjustment in the profit margins of comparables. The TPO observed that the assessee incurred significant AMP expenses, benefiting the AE by enhancing the brand's value. The TPO made the AMP intensity adjustment by comparing the intensity of AMP expenses of the assessee and comparables. The Tribunal upheld this approach, noting that it aligned with the Hon'ble jurisdictional High Court's judgment in Bausch & Lomb Eyecare India Pvt. Ltd. and Ors. vs. Addl.CIT and Ors.

6. Application of RPM versus TNMM:
The assessee applied RPM as the most appropriate method, while the TPO used TNMM without providing reasons for rejecting RPM. The Tribunal noted that for AY 2009-10, the Tribunal had approved RPM as the most appropriate method, and the Hon'ble High Court did not interfere with this decision. However, for AY 2012-13, the TPO embedded the AMP function in the international transaction of purchase of material from the AE and made the transfer pricing adjustment accordingly. The Tribunal directed the AO/TPO to apply RPM as the most appropriate method for determining the ALP of the international transaction of purchase of material from the AE, with AMP intensity adjustment in the profit rate of comparables. If AMP intensity adjustment could not be done, another suitable method should be adopted.

Conclusion:
The Tribunal set aside the impugned orders and remitted the matters to the AO/TPO for fresh determination in light of the judgments and directions provided. The appeals were allowed for statistical purposes, ensuring the assessee received a reasonable opportunity of hearing in the fresh proceedings.

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