2017 (9) TMI 376 - AT - Income Tax

AMP transfer pricing adjustment remitted to TPO/AO to redetermine ALP using Sony Ericsson benchmark; customs duty interest deductible when paid

ITAT DELHI - AT set aside the transfer pricing adjustment on AMP expenses and remitted the matter to the TPO/AO to determine the ALP afresh, directing ... International transaction - arm's length price - aggregation of distribution and AMP functions - comparison of AMP functions with comparables - Cost Plus Method - binding nature of DRP directions - deduction confined to year of payment/realisationInternational transaction - aggregation of distribution and AMP functions - comparison of AMP functions with comparables - Whether AMP expenses incurred by the assessee constitute an international transaction and how they should be treated for transfer pricing purposes - HELD THAT: - The Tribunal held that, on the facts (exclusive distribution agreement obliging the assessee to promote the Toshiba brand and reimbursement by AEs), AMP expenses are an international transaction. The Tribunal applied the legal framework in Sony Ericsson Mobile Communications (India) Pvt. Ltd., observing that distribution and AMP activities are separate but inter connected international transactions which, for ALP determination, should be aggregated where appropriate so surplus in one may offset deficit in the other. Crucially, the Tribunal emphasised that AMP functions (the means of performing AMP activity) must be examined and compared with functions performed by probable comparables; where comparables perform both functions suitable comparables should be used, and where differences exist adjustments must be made or comparables dropped. If no comparable performs both functions, the transactions should be de bundled and the ALP of AMP determined separately, allowing set offs from distribution where applicable. The Tribunal rejected the assessee's contention that a favourable entity level profit margin obviates the need to examine AMP functions and benchmarking, observing that failure to compare functions would effectively strip AMP of its character as an international transaction. [Paras 7, 9, 11, 12]AMP expenses are an international transaction; distribution and AMP transactions must be tested per Sony Ericsson, including comparison of AMP functions with comparables and aggregation or segregation of transactions as mandated.Arm's length price - Cost Plus Method - comparison of AMP functions with comparables - Whether the ALP determination made by the TPO (applying a 5% mark up on non routine AMP expenses by Cost Plus method) is sustainable - HELD THAT: - The Tribunal found that neither the assessee nor the TPO followed the Sony Ericsson prescription: there is no analysis on record of AMP functions performed by the assessee or by the comparables, and the TPO's application of a 5% mark up lacks any justificatory analysis or linkage to comparables. Absent the requisite functional comparison and adjustments, the Tribunal could not sustain the TPO's benchmarking or mark up determination. Because necessary details are missing and the authorities' orders do not conform to the High Court's ratio, the Tribunal set aside the impugned addition and remitted the matter to the TPO/AO to determine the ALP afresh in accordance with Sony Ericsson, including appropriate aggregation/segregation, functional comparability, adjustments or eliminations of comparables, and allowance of set offs from distribution activity where warranted. [Paras 8, 13, 14, 15]Order set aside and matter remitted to TPO/AO for fresh determination of ALP of AMP expenses in accordance with Sony Ericsson principles.Binding nature of DRP directions - deduction - Whether the Assessing Officer was bound to follow the DRP direction to allow deduction for employees' contribution to PF subject to verification - HELD THAT: - The Tribunal noted the DRP had directed the AO to allow the deduction subject to verification of deposit of dues in government accounts. The DRP direction is binding on the AO. Since the AO had not given effect to the DRP direction, the Tribunal directed the AO to examine the claim in the light of the DRP's binding direction and allow the deduction if verification is satisfied. [Paras 18, 19, 20]Assessing Officer directed to give effect to the DRP direction and examine/allow the employees' PF contribution claim subject to verification.Deduction confined to year of payment/realisation - Whether interest on Customs Duty paid in financial year 2015 16 but relating to FY 2011 12 is deductible in assessment year 2012 13 - HELD THAT: - The Tribunal upheld the DRP's conclusion that the interest crystallised and was paid in financial year 2015 16 and therefore cannot be claimed as a deduction in the year under consideration (AY 2012 13). The liability became payable and was discharged in a subsequent year; deduction is not allowable in the earlier year on that account. The assessee may seek relief in the year of payment if permissible under law. [Paras 21, 22]Claim for deduction of interest on Customs Duty disallowed for AY 2012 13.Final Conclusion: The Tribunal held that AMP expenses in the facts constitute an international transaction but set aside the TP addition and remitted the ALP determination to the TPO/AO for fresh adjudication in accordance with the Sony Ericsson framework (including functional comparison, aggregation/segregation, adjustments and set offs). The AO was directed to give effect to the DRP direction on employees' PF contribution subject to verification; the claim for interest on customs duty paid in a later year was rejected. Appeal partly allowed for statistical purposes. Issues Involved:1. Transfer pricing adjustment on Advertisement, Marketing, and Promotion (AMP) expenses.2. Deduction for additional claim of employees’ contribution to PF.3. Deduction towards interest on Customs Duty.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment on AMP Expenses:The first issue concerns the addition of Rs. 38,60,51,832/- towards transfer pricing adjustment on AMP expenses. The assessee, a wholly-owned subsidiary of Toshiba Corporation, Japan, filed a return declaring a total income of Rs. 31.99 crore. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions. The TPO identified an international transaction for brand promotion and applied the bright line approach, resulting in a protective adjustment of Rs. 77.46 crore. On a substantive basis, the TPO noted that the assessee incurred total AMP expenses of Rs. 148.77 crore, with non-routine expenses amounting to Rs. 89.66 crore. After applying a 5% mark-up, the TPO proposed a transfer pricing adjustment of Rs. 41.75 crore, which the Dispute Resolution Panel (DRP) reduced to Rs. 38.60 crore.The Tribunal examined whether AMP expenses constitute an international transaction. The assessee argued, citing judgments from the Delhi High Court, that AMP expenses should not be considered an international transaction. In contrast, the Department relied on other judgments where AMP expenses were considered an international transaction. The Tribunal found that the assessee had an express understanding with its AE to promote the Toshiba brand in India, substantiated by reimbursements from the AE. Thus, the Tribunal concluded that the AMP expenses constituted an international transaction.The Tribunal then addressed the determination of the ALP. The TPO had applied the Cost Plus Method, adding a 5% mark-up. The Tribunal referred to the Delhi High Court judgment in Sony Ericsson Mobile Communications, which emphasized the need to consider distribution and AMP functions as inter-connected transactions and to determine their ALP in a bundled manner. The Tribunal noted that neither the assessee nor the TPO had followed this approach, and there was no detailed analysis of AMP functions performed by the assessee and comparables. Consequently, the Tribunal set aside the order and remanded the matter to the TPO/AO for fresh determination in line with the guidelines from the Sony Ericsson judgment.2. Deduction for Additional Claim of Employees’ Contribution to PF:The second issue relates to the deduction for the additional claim of employees’ contribution to PF. The assessee contended that the DRP directed the Assessing Officer to allow the deduction subject to verification of the deposit of dues in the Government account. However, the Assessing Officer did not address this issue. The Tribunal directed the Assessing Officer to examine the claim in light of the DRP's direction and allow the deduction accordingly.3. Deduction Towards Interest on Customs Duty:The third issue concerns the deduction for interest on Customs Duty, which arose in the financial year 2015-16 but relates to the financial year 2011-12. The Settlement Commission determined the interest liability at Rs. 40.46 crore, which the assessee paid. The DRP rejected the claim for deduction in the year under consideration, stating that it pertains to a subsequent period. The Tribunal agreed with the DRP, noting that the liability crystallized and was paid in a later year, and thus, the assessee should claim the deduction in that subsequent period.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal remanding the matter of AMP expenses back to the TPO/AO for fresh determination and directing the Assessing Officer to examine the claim for employees’ contribution to PF. The claim for deduction towards interest on Customs Duty was not allowed.