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 adherence to the High Court's Sony Ericsson benchmark methodology and requiring detailed functional analysis of AMP activities for the assessee and comparables. The tribunal rejected the use of an unexplained 5% mark-up and found the record insufficient to benchmark AMP. Separately, the tribunal denied deduction for interest on customs duty in the year under assessment, permitting the assessee to claim it in the year the interest was actually paid.

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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.

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