Tribunal favors assessee in transfer pricing dispute, rejects TNMM, directs deletion of adjustments.

The Tribunal ruled in favor of the assessee, holding that the Resale Price Method (RPM) was the appropriate benchmarking method for the trading segment, as it involved no value addition to imported products. The Tribunal found the Transfer Pricing Officer's rejection of RPM and adoption of the Transactional Net Margin Method (TNMM) based on surmises without supporting evidence. Consequently, the Tribunal directed the Tax Authorities to delete the adjustments made under the AMP expenses for both assessment years 2013-14 and 2014-15.

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Issues Involved:
1. Validity of Transfer Pricing Adjustment in respect of AMP expenses.
2. Validity of Transfer Pricing Adjustment in respect of Trading Segment by changing the method of benchmarking.

Detailed Analysis:

1. Validity of Transfer Pricing Adjustment in respect of AMP expenses:

The Tribunal initially disposed of the appeal for AY 2013-14 along with AY 2012-13 by a common order dated 10-05-2019, but later recalled the order for AY 2013-14 to adjudicate ground Nos. 32 to 41 related to the Transfer Pricing adjustment of Rs. 58.35 crores concerning AMP expenditure. The TPO had originally made an adjustment of Rs. 207.42 crores under AMP expenses, which was deleted by the Tribunal, leading to the revival of the Rs. 58.35 crores adjustment.

The assessee argued that AMP expenses were incurred for its own business purposes, primarily consisting of trade discounts, sales commissions, and scheme discounts, and should not be considered as brand promotion expenses. The TPO, however, held that the AMP expenditure was more than the average amount spent by comparable companies and considered it as value addition, thus rejecting the Resale Price Method (RPM) in favor of the Transactional Net Margin Method (TNMM).

The Tribunal found the TPO's view to be based on surmises and conjectures, noting that the TPO did not provide material evidence to support his view. The Tribunal emphasized that when no value addition is made to the imported products, RPM is the most appropriate method. It cited several case laws, including M/s Celio Future Fashion P Ltd and M/s A.O. Smith India Water Heating P Ltd, to support this stance.

For AY 2014-15, the Tribunal followed the same reasoning and held that no adjustment was required for AMP expenses, directing the AO to delete the addition.

2. Validity of Transfer Pricing Adjustment in respect of Trading Segment by changing the method of benchmarking:

The TPO rejected the RPM adopted by the assessee for benchmarking its trading segment, arguing that AMP expenses should be included in the cost as they constitute value addition to the AE's brand. Consequently, the TPO adopted TNMM and made an adjustment of Rs. 58.35 crores for AY 2013-14 and Rs. 42.96 crores for AY 2014-15, although no separate addition was made due to the AMP expenses adjustment.

The Tribunal, however, upheld the RPM as the most appropriate method for the trading operations of the assessee, as it involved no value addition to the imported products. The Tribunal directed the AO/TPO to adopt RPM and determine the ALP of the transactions accordingly.

Conclusion:
The Tribunal concluded that the RPM is the most appropriate method for the assessee's trading operations and that no adjustment is required for AMP expenses. Consequently, the Tribunal directed the AO/TPO to adopt RPM and delete the additions made under AMP expenses for both AY 2013-14 and AY 2014-15.

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