2023 (3) TMI 676 - HC - Income Tax

Revenue's appeal under Section 260A dismissed; Tribunal's decision on marketing intangible ALP adjustment upheld for AY 2012-13 & 2013-14.

PRINCIPAL COMMISSIONER OF INCOME TAX-4, KOLKATA Versus M/s. ORGANON (INDIA) PVT. LTD.

The HC dismissed the revenue's appeal under Section 260A of the Income Tax Act, 1961, against the ITAT's order for AY 2012-13 and 2013-14. The ITAT had ... TP Adjustment - upward adjustment on account of ALP of marketing intangible created by the assessee for the associate enterprises - HELD THAT:- After examining the facts, the Tribunal found that the revenue had only assumed that the assessee had promoted the brand of the AE by incurring AMP expenditure in India thereby warranting any compensation. On facts, it was found that the assessee had not paid any royalty or trade-mark fee to its Associated Enterprises and had been benefited by the excess premium return in the same price of goods.Tribunal found that AMP expenditure is duly factored into the said pricing fixed by the Associated Enterprises. Tribunal found that the international transactions with the Associated Enterprises of purchase of raw materials, purchase of finished goods, sale of finished goods and recovery of expenses have been duly accepted to be at arm’s length. Selling expenses which were sought to be included as part of AMP expenditure by the TPO and the DRP - Tribunal after thoroughly examining the factual position found that these expenses are purely related to products of the assessee and not for any brand. Further, it found that the total expenditure towards AMP and selling expenditure had duly bifurcated the same by identifying at the time of incurrence itself, whether the said expenditure constitutes AMP expenditure or selling expenditure. This bifurcation of expenditure was ignored by the revenue and this has been rightly pointed out by the learned Tribunal in the impugned order. Thus, we are fully satisfied that the Tribunal, on facts, was convinced with the case of the assessee and granted relief and in the absence of any perversity in the order passed by the learned Tribunal, we find no grounds to interfere with the same. Decided against the revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether the adjustment made by the Transfer Pricing Officer and sustained by the Dispute Resolution Panel treating Advertisement, Marketing and Promotion (AMP) expenditure as an international transaction and determining an upward arm's length price (ALP) was legally sustainable. 2. Whether the assessee's commercial character (manufacturer versus mere distributor) precluded reliance on authorities treating AMP as a cross-border intangible transaction. 3. Whether the use of a non-Indian or foreign word in the assessee's name or alleged promotion of an associate enterprise's brand in India constitutes an international transaction giving rise to compensatory ALP adjustments. 4. Whether expenses classified and incurred as selling expenses could be recharacterised by the revenue as AMP expenditure attributable to an associate enterprise for transfer-pricing adjustment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of treating AMP expenditure as an international transaction and making ALP adjustments Legal framework: The Tribunal's and DRP's actions arose under the transfer-pricing regime, with directions under Section 144C(5) and challenge under Section 260A. Central to the controversy was whether AMP expenditure fell within 'international transaction' such that ALP determination and upward adjustment were warranted. Precedent treatment: The revenue relied on precedent distinguishing the assessee from cases where AMP was treated as international; the assessee relied on authorities where AMP was not held to attract ALP adjustments. The Tribunal referred to a coordinate-bench decision dealing with near-identical facts and followed it. Interpretation and reasoning: The Tribunal examined factual materials - production arrangements (use of toll/contract manufacturers), financial statements showing manufacture, excise levy, and sales of finished goods - and concluded the assessee carried on manufacturing activity, not merely distribution. On this factual matrix the Tribunal found no material to treat AMP expenditure as conferring a marketing intangible for which the associate enterprise was entitled to compensation. The Tribunal also found that AMP costs had been factored into inter-company pricing and that other international transactions (purchase/sale of goods, recovery of expenses) were accepted as at arm's length. Ratio vs. Obiter: The factual finding that AMP expenditure did not constitute an international transaction in the reported circumstances is ratio where supported by the evidentiary record and followed by the Tribunal; discussion of statutory procedure (Sections invoked) is incidental but supportive of the ratio. Conclusion: The Tribunal correctly deleted the ALP additions as there was no valid basis, on the materials, to treat the AMP spending as an international transaction requiring upward ALP adjustment; the Court found no perversity in that conclusion and declined to interfere. Issue 2 - Characterisation as manufacturer versus distributor and effect on transfer-pricing analysis Legal framework: Characterisation of the taxpayer's commercial activity is a primary factual inquiry relevant to determining whether advertising/branding expenditures relate to promotion of an associate enterprise's intangible and whether cross-border compensation arises. Precedent treatment: The revenue sought to distinguish a High Court decision relied upon by the assessee on the ground the taxpayer was not a manufacturer. The Tribunal relied on its coordinate-bench decision where similar facts led to acceptance of manufacturing character. Interpretation and reasoning: The Tribunal analysed procurement, conversion by contract manufacturers, consumption of raw materials, inventory, sales of finished goods and incidence of excise duty - concluding the assessee manufactured products (directly or through contract manufacturers) and was thus not merely a distributor. That factual determination undermined the revenue's categorical contention and the reliance on authorities inapplicable to manufacturing entities. Ratio vs. Obiter: The factual determination that the assessee is a manufacturer and not a pure distributor is ratio for the present assessment years as it materially influenced the finding that AMP did not create compensable cross-border intangibles. Conclusion: The Tribunal's finding that the taxpayer was a manufacturer was supported by records and was dispositive of the revenue's contention; this factual conclusion was upheld as not perverse. Issue 3 - Effect of use of a foreign/associate-name and alleged promotion of associate enterprise's brand Legal framework: Whether mere usage of a foreign word or name, or alleged promotion of an associate's brand, automatically converts domestic AMP expenditure into an international transaction requiring transfer-pricing adjustment. Precedent treatment: The Tribunal rejected the revenue's reliance on the company name as determinative; it applied principle that the substance of the transactional relationship and the beneficiary of expenditure, not nomenclature, determines transfer-pricing treatment. Interpretation and reasoning: The Tribunal held that the presence of a foreign word in the company name is immaterial; what matters is whether the expenditure genuinely promoted an associate enterprise's brand and whether any royalty/branding fee was payable or received. The Tribunal found no evidence of royalty/mark fee payments, nor of promotion of an associate's brand that would require compensation. Use of an illustrative example (product with non-Indian name) supported the conclusion that mere foreign wording does not create an international transaction. Ratio vs. Obiter: The principle that a foreign name alone does not convert domestic AMP into an international transaction is ratio for the facts before the Tribunal; illustrative examples are obiter but persuasive. Conclusion: The Tribunal rightly rejected the contention that the company's name or assumed brand promotion sufficed to establish an international transaction; the Court found this conclusion unimpeachable. Issue 4 - Classification of selling expenses versus AMP expenditure and capacity to reclassify by revenue Legal framework: Correct classification of expenditures (AMP vs selling expenses) is factual and relevant to transfer-pricing adjustments; the assessing authorities cannot disregard contemporaneous bifurcation of expenses without supporting material. Precedent treatment: The Tribunal examined documentary records and the manner in which expenses were identified at the time of incurrence; reliance was placed on the assessee's contemporaneous bifurcation. Interpretation and reasoning: The Tribunal found that the expenses in question were product-specific selling expenses, not brand promotion for an associate enterprise. The assessee had identified at the time of incurrence which costs were AMP and which were selling; the revenue's after-the-fact reclassification ignored that bifurcation and lacked supporting evidence to justify treating selling expenses as AMP benefiting an associate enterprise. Ratio vs. Obiter: The holding that revenue cannot arbitrarily reclassify selling expenses as AMP without evidentiary basis is ratio on the facts and procedural posture of the matter. Conclusion: The Tribunal's factual finding that the impugned expenses were selling expenses (not AMP attributable to an associate) was justified; reclassification by the revenue was unsustainable and the deletion of adjustments consequent upon that reclassification was correct. Cross-reference The factual determinations on manufacturing character (Issue 2), absence of brand promotion/royalty payments (Issue 3), and contemporaneous bifurcation of selling versus AMP expenditure (Issue 4) collectively underpin the Tribunal's principal conclusion (Issue 1) that AMP expenditure did not constitute an international transaction giving rise to ALP additions.