2018 (12) TMI 2006 - AT - Income Tax

Direct marketing expenses and rebates cannot be included in AMP expenses for transfer pricing calculations

ITAT Delhi held that direct marketing and sales-related expenses including rebates and discounts cannot be included in Advertisement, Marketing and ... Advertisement, Marketing and Promotion (AMP) expenses - Rebate and discount as selling expenses excluded from AMP - Arm's length price - Transfer pricing adjustment - Capital grant/subsidy from associated enterprises set off against AMP - Existence of an international transaction as precondition to a TP exerciseAdvertisement, Marketing and Promotion (AMP) expenses - Rebate and discount as selling expenses excluded from AMP - Arm's length price - Direct marketing and sales related expenses such as rebates and discounts do not form part of AMP expenses for transfer pricing purposes - HELD THAT: - Following the reasoning in the jurisdictional High Court in Sony Ericsson Mobile Communications (as cited in the order), the Tribunal held that trade/volume discounts and similar concessions have an immediate nexus with sale consideration and operate as selling or distribution expenses rather than expenditures incurred for brand building or publicity. Inclusion of such direct marketing discounts within AMP would distort commercial and accounting reality and produce abnormal results. The TPO had included rebate and discount of Rs.22,64,61,618 as AMP; on applying the High Court principle those amounts must be excluded, reducing the AMP base. The Tribunal expressly adopted that analysis and excluded the rebates and discounts from AMP. [Paras 7, 8]Rebate and discount are excluded from AMP expenses and must not be treated as part of AMP for computing arm's length AMPArm's length price - Capital grant/subsidy from associated enterprises set off against AMP - Transfer pricing adjustment - Existence of an international transaction as precondition to a TP exercise - On the facts of the year, the subsidy/grant received from the associated enterprise exceeded the arm's length value of AMP and therefore no transfer pricing adjustment was required in respect of AMP expenses - HELD THAT: - The Tribunal applied the DRP-upheld mark-up of 9% to the net AMP expenses after excluding rebates and discounts, arriving at an arm's length AMP of Rs.26,31,40,313. The actual grant received from the associated enterprise was Rs.27,23,46,104, which exceeded the computed arm's length value. Consequently, there was no deficiency requiring a TP adjustment. Although the jurisdictional High Court had noted that an international transaction must first be established before a TP adjustment, the parties agreed and the Tribunal proceeded to decide the appeal on the factual matrix. Having found the grant exceeded the arm's length AMP, the Tribunal deleted the addition made by the Assessing Officer in respect of AMP. [Paras 9]Since the grant received exceeded the arm's length AMP, no transfer pricing adjustment in respect of AMP is called for and the addition is deletedFinal Conclusion: The appeal is allowed pro tanto: rebates and discounts are excluded from AMP; after exclusion and applying the 9% mark-up the arm's length AMP is less than the grant received from the associated enterprise, and the addition in respect of AMP is deleted for AY 2009-10. Issues:1. Assessment year 2009-10 appeal against directions of Dispute Resolution Panel.2. Examination of existence of international transaction involving the assessee and its associated enterprise (AE).3. Consideration of grant received exceeding net AMP expenses for Transfer Pricing (TP) adjustment.4. Determination of arm's length price of AMP expenses and grant received.5. Exclusion of direct marketing and sales-related expenses from AMP expenses.6. Application of mark up and deletion of TP adjustment for AMP expenses.Analysis:1. The appeal for the assessment year 2009-10 was filed against the directions of the Dispute Resolution Panel. The ITAT, in a common order, set aside the assessee's appeal for fresh examination in light of the decision of the Delhi High Court. The High Court observed the need to establish the existence of an international transaction involving the assessee and its AE before making any TP adjustment.2. The High Court highlighted that the ITAT failed to examine the existence of an international transaction. The court set aside the ITAT's order and restored the matter for fresh adjudication. It emphasized the importance of establishing an international transaction before proceeding with TP adjustments.3. The assessee contended that the grant received from its AE exceeded the net AMP expenses, thereby obviating the need for TP adjustment. The High Court directed the ITAT to consider this aspect while deciding the appeal afresh. The court refrained from expressing an opinion on the merits, leaving it to the ITAT's discretion.4. The ITAT, upon hearing arguments, considered the grant received exceeding net AMP expenses as a basis for no TP adjustment. The assessee's senior advocate argued that the settled law excludes selling and distribution expenses from AMP adjustments. The ITAT agreed to adjudicate the matter on facts, considering the clarity of the situation.5. The ITAT, after careful consideration, excluded direct marketing and sales-related expenses from AMP expenses based on the High Court's decision. After recalculating the net AMP expenses, it determined that the grant received exceeded the arm's length price of AMP, warranting no TP adjustment for AMP expenses.6. Consequently, the ITAT allowed the appeal pro tanto, directing the deletion of the TP adjustment for AMP expenses. The decision was pronounced in open court, emphasizing the importance of considering grant received in relation to net AMP expenses for TP adjustments.