2018 (12) TMI 1264 - AT - Income Tax

Tribunal rules in favor of assessee on AMP expenses in ITA appeal

M/s Sony India Pvt Ltd Versus The Addl. C.I.T, Range - 9, New Delhi

The tribunal allowed the appeal of the assessee in ITA No. 4978/DEL/2011, concluding that the assessee's operating profit margin adequately compensated ... TPA - AMP expenditure - whether Advertisement and marketing expenditure incurred by the appellant assessee can be treated as international transaction and made subject matter of adjustment in arms length pricing? - Held that:- TPO has used the same comparables as that of the assessee and the TPO chose to examine the international transaction, if any, by applying BLT, knowing fully well that the operating margin of the assessee is better than those of the comparables. It would not be proper to ask the TPO to rework the AMP expenses into that which was incurred for building the brand value of the foreign AE and that the same was incurred wholly or exclusively of the benefit of the brand building of the AE. Moreover, in our considered opinion, multiple opportunities are not permissible to any authority to experiment in setting up case as held in the case of Rajesh Babubhai Damania [2000 (6) TMI 5 - GUJARAT HIGH COURT]. The benefit, if any, gone to the AE can only be termed as incidental benefit. Merely because there is an incidental benefit to AE, Sony Company, it cannot be stated that the AMP expenses incurred by the assessee was for promoting the brand Sony Japan. Since the operating profit margin of the appellant company is better than those of the comparables, it can be safely concluded that the assessee has been suitably remunerated and no further adjustment is required to bench mark the AMP expenses. Following the guidelines listed by the Hon'ble High Court in the case of Sony Ericson Mobile Communication India Private Limited [2015 (3) TMI 580 - DELHI HIGH COURT], the grounds raised by the assessee are allowed. Issues Involved:1. Whether the Advertisement and Marketing Promotion (AMP) expenditure incurred by the assessee can be treated as an international transaction and made subject to adjustment in arm's length pricing.Issue-wise Detailed Analysis:1. Detailed Functional Analysis Including AMP Expenses:The first step in transfer pricing is to conduct a detailed functional analysis, which includes AMP expenses. The Transfer Pricing Officer (TPO) mentioned an Advertisement Agreement dated 01.04.2005, but no agreement relevant to the assessment year (A.Y) 2007-08 was found. The assessee argued there was no agreement for the year under consideration, necessitating fresh comparables.2. Business Profile and Core Activities:The assessee's business profile shows a distribution network with over 7,000 channel partners, 215 Sony World and Sony Exclusive outlets, and 21 direct branch locations. The assessee has ceased manufacturing operations since 01.07.2004 and has become a full-fledged distributor of goods. The core business activity is distribution, with marketing as a supportive function.3. Ownership of Intangibles and AMP Expenses:The assessee does not own any intangibles such as brand names or marketing intangibles. The AMP expenses incurred include:- Advertisement expenses: Rs. 38,62,51,002/-- Sales Promotion expenses: Rs. 77,54,79,113/-- Selling expenses: Rs. 2,64,50,161/-- Reimbursement of expenses: Rs. 72,63,324/-4. Compensation for AMP Expenses:The TPO noted that the assessee did not benchmark the international transaction of reimbursement received from its Associated Enterprise (AE). The TPO believed the assessee was not fully compensated by its AE for the brand promotion and market development costs in India. The TPO argued that the marketing intangible created by the assessee was legally owned by the AE.5. Assessee's Argument on AMP Expenditure:The assessee argued that as the sole distributor of Sony products in India, any benefit from advertisement activities, including brand value increment, accrues to the assessee. The assessee's management independently undertakes strategic decisions based on market conditions and competition. The assessee claimed to be the sole beneficiary of the AMP expenditure.6. Economic Ownership of Intangibles:The tribunal opined that the assessee cannot acquire ownership of intangibles by incurring AMP expenditure. The AMP expenditure was not incurred for the AE. The brand 'Sony' is globally recognized, and its popularity in India cannot be solely attributed to the assessee's efforts.7. Return on AMP Expenditure:Assuming the AMP expenditure resulted in creating the Sony brand in India, the tribunal noted that if the assessee's returns are similar to or higher than those of other companies owning brands, no further amount should be attributed to brand activities. The assessee's higher profitability indicates adequate compensation for any marketing intangibles created.8. Rejection of Bright Line Test (BLT):The TPO applied the BLT to benchmark the AMP expenditure. However, the High Court in the case of Sony Ericson Mobile Communication India Private Limited discarded the BLT. The tribunal noted that the comparables used by both the assessee and the TPO were the same, and the TPO chose to apply BLT despite knowing the assessee's better operating margin.9. Clarification on AMP Expenses:The High Court of Delhi in the case of Casio India Pvt Ltd clarified that AMP expenses are part of distribution expenses and should be considered while determining the Arm's Length Price (ALP).10. Incidental Benefit to AE:The tribunal concluded that any incidental benefit to the AE from the assessee's AMP expenditure does not imply that the expenses were incurred for promoting the AE's brand.11. Conclusion on AMP Expenses:Since the assessee's operating profit margin is better than those of the comparables, it was concluded that the assessee has been suitably remunerated. No further adjustment is required to benchmark the AMP expenses. The tribunal allowed the grounds raised by the assessee, following the guidelines from the High Court in the case of Sony Ericson Mobile Communication India Private Limited.Final Judgment:The appeal of the assessee in ITA No. 4978/DEL/2011 is allowed. The order was pronounced in the open court on 21.12.2018.