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 Promotion (AMP) expenses for transfer pricing purposes, following Sony Ericsson precedent. After excluding Rs.22.64 crores of rebate/discount from AMP expenses, the arm's length price was determined at Rs.26.31 crores with 9% markup. Since the grant received from associated enterprise (Rs.27.23 crores) exceeded the arm's length price, no transfer pricing adjustment was warranted. The addition of Rs.11.46 crores made by Assessing Officer was deleted. Assessee's appeal allowed partially.

---

---

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.

---