2020 (1) TMI 912 - AT - Income Tax

Tribunal rules AMP expenses not international transaction, allows appeal

NGC Network (India) Pvt. Ltd. Versus The Additional CIT Range 11 (1), Mumbai

The Tribunal ruled in favor of the appellant, finding that the Advertisement Marketing and Publicity (AMP) expenses incurred were for the appellant's ... TP Adjustment - AMP expenses addition - international transaction - HELD THAT:- In Maruti Suzuki India Ltd. X [2015 (12) TMI 634 - DELHI HIGH COURT] held that “there being no international transaction on AMP spend with an ascertainable price, neither substantive nor machinery provision of Chapter X were applicable to the transfer pricing adjustment exercise. In Bausch & Lomb Eyecare (India) (P.) Ltd. [2015 (12) TMI 1332 - DELHI HIGH COURT] held that “where existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is Nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. In Whirlpool of India Ltd. [2015 (12) TMI 1188 - DELHI HIGH COURT] held that “where revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between Indian subsidiary and foreign parent, revenue cannot proceed to determine ALP of AMP expenses by inferring existence of an international transaction based on bright line test. In Honda Siel Power Products Ltd. [2015 (12) TMI 1333 - DELHI HIGH COURT] held that “when assessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of AE, hence benefit of creation of marketing intangibles for foreign AE on account of AMP expenses can at best said to be incidental”. In view of the principles laid down the in the above decisions, the AMP spend is not an international transaction in the absence of an arrangement between the taxpayer and the AE. In the instant case there cannot be said to be any international transaction between the appellant and the AE for incurring the AMP expenditure. Further, we find that on a TNMM basis, the appellant’s margin after including these costs is higher than comparables and hence, no adjustment on AMP expenses can be made when the primary international transactions have been accepted by the TPO to be at arm’s length. We delete the transfer pricing adjustment made by the AO - Decided in favour of assessee. Issues Involved:1. Transfer Pricing Adjustment2. Referral to Transfer Pricing Officer (TPO)3. Use of Financial Year Data4. Comparable Companies Rejection5. Data Obtained Under Section 133(6)6. Functional, Asset, and Risk Profile Differences7. Incorrect Operating Margins8. Advertisement Marketing and Publicity (AMP) Expenses as Separate International Transaction9. AMP Expenses Incurred for Associated Enterprises (AEs)10. AMP Expenses Adjustment Despite Principal Transactions at Arm's Length11. Use of Comparables for Benchmarking AMP Expenses12. Carriage Fees as AMP Expenses13. Reduction of AMP Expenses from Total Expenses14. Dispute Resolution Panel (DRP) Order Not Addressing Objections15. Adjustment Limited to Lower End of 5 Percent RangeDetailed Analysis:1. Transfer Pricing Adjustment:The AO made a transfer pricing adjustment of Rs. 135,910,231 under Section 92C(4) of the Act, asserting that the international transactions entered by the appellant with its associated enterprise were not at arm's length.2. Referral to Transfer Pricing Officer (TPO):The AO referred the appellant's case to the TPO under Section 92CA(1) without satisfying the requisite conditions, which the appellant challenged but did not press for the impugned assessment year.3. Use of Financial Year Data:The AO's rejection of the appellant's transfer pricing analysis using a 3-year average margin and instead using only data for FY 2007-08 was contested by the appellant but not pressed for the impugned year.4. Comparable Companies Rejection:The AO's rejection of certain companies considered comparable by the appellant for benchmarking was also challenged but not pressed for the impugned year.5. Data Obtained Under Section 133(6):The AO used data obtained under Section 133(6) for comparability analysis without providing the appellant an opportunity to cross-examine the relevant companies, which was contested but not pressed for the impugned year.6. Functional, Asset, and Risk Profile Differences:The AO did not consider differences in the functional, asset, and risk profiles of the appellant and comparable companies, which the appellant contested but did not press for the impugned year.7. Incorrect Operating Margins:The AO considered incorrect operating margins for certain companies due to typo/incorrect computation, which the appellant contested but did not press for the impugned year.8. AMP Expenses as Separate International Transaction:The AO unilaterally held that AMP expenses incurred by the appellant constituted a separate international transaction under Section 92B(1) and subjected it to transfer pricing provisions. The appellant argued that AMP expenses benefit the appellant alone and not the AE, citing the 'Distribution Agreement' that grants the appellant rights to distribute channels and sell advertisement airtime, retaining the entire revenue.9. AMP Expenses Incurred for AEs:The AO held that AMP expenses incurred by the appellant were for its AEs and should have been recovered from the AEs. The appellant contended that the AMP expenses were for its own business benefit, with no arrangement with the AE to undertake marketing activities/incur AMP expenses, thus not qualifying as an international transaction.10. AMP Expenses Adjustment Despite Principal Transactions at Arm's Length:The TPO selected AMP expenses as a separate line item for adjustment despite accepting the principal international transactions of channel distribution and advertisement airtime sales to be at arm's length. The appellant argued that the AMP expenses were already considered in the cost base for computing margins, which were higher than comparables.11. Use of Comparables for Benchmarking AMP Expenses:The AO used the same set of comparables for benchmarking AMP expenses, which the appellant contested as inappropriate. The appellant's margin after including AMP expenses was higher than comparables, negating the need for adjustment.12. Carriage Fees as AMP Expenses:The AO considered carriage fees amounting to Rs. 52,395,207 paid to Multiple System Operators/Cable Operators as AMP expenses, which the appellant contested.13. Reduction of AMP Expenses from Total Expenses:The appellant argued that if AMP expenses were considered a separate international transaction, they should be reduced from the total expenses in the advertisement and distribution segments, resulting in higher margins and absurd results.14. DRP Order Not Addressing Objections:The AO passed an order based on the DRP's direction, which did not address certain objections raised by the appellant, lacking a speaking order.15. Adjustment Limited to Lower End of 5 Percent Range:The appellant argued that any adjustment to the arm's length price should be limited to the lower end of the 5 percent range, as per the proviso to section 92C of the Act.Conclusion:The Tribunal found that the AMP expenses incurred by the appellant were for its own benefit and not for the AE, citing previous decisions in the appellant's favor. The AMP expenses did not qualify as an international transaction in the absence of an arrangement with the AE. The appellant's margin after including AMP expenses was higher than comparables, negating the need for adjustment. Consequently, the transfer pricing adjustment of Rs. 13,59,10,231/- made by the AO was deleted, and the appeal was partly allowed.