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Issues: (i) Whether a separate transfer pricing adjustment on account of advertisement, marketing and promotion expenses was permissible when the trading segment margin had been accepted under the transactional net margin method. (ii) Whether the comparables Majestic Research Services & Solutions Ltd. and Scarecrow Communications Ltd. were liable to be excluded from the business support services segment, and whether Pressman Advertising Ltd. required fresh examination.
Issue (i): Whether a separate transfer pricing adjustment on account of advertisement, marketing and promotion expenses was permissible when the trading segment margin had been accepted under the transactional net margin method.
Analysis: The dispute concerned whether AMP expenditure could be carved out as a separate international transaction for adjustment when the assessee's trading segment had already been tested on the basis of margins. The Tribunal followed its earlier view in the assessee's own case and the principle that once the net margin under TNMM is accepted and the gross and net margins of the tested segment are not rejected, a horizontal item like AMP expenditure cannot be separately adjusted in isolation.
Conclusion: The separate AMP adjustment was not permissible and was deleted in favour of the assessee.
Issue (ii): Whether the comparables Majestic Research Services & Solutions Ltd. and Scarecrow Communications Ltd. were liable to be excluded from the business support services segment, and whether Pressman Advertising Ltd. required fresh examination.
Analysis: Majestic Research Services & Solutions Ltd. was found functionally different because it rendered marketing research services and was not comparable to business support services. Scarecrow Communications Ltd. was also held to be functionally dissimilar because it rendered advertising services in radio, television and public relations. As regards Pressman Advertising Ltd., the Tribunal found that its profile appeared different from the assessee's business support services profile and that the issue needed reconsideration by the lower authority.
Conclusion: Majestic Research Services & Solutions Ltd. and Scarecrow Communications Ltd. were directed to be excluded, while the issue of Pressman Advertising Ltd. was remanded for fresh examination, resulting in partial relief to the assessee.
Final Conclusion: The appeal succeeded on the AMP adjustment and partly succeeded on the comparable-selection dispute in the business support services segment, with one comparable excluded, one comparable excluded, and one issue restored for reconsideration.
Ratio Decidendi: Where TNMM has been accepted for the tested segment and its margins are not rejected, AMP expenditure cannot be separately benchmarked as an independent transfer pricing adjustment unless the existence of a distinct international transaction is first established; comparables must also satisfy functional similarity.
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