2020 (10) TMI 1396 - AT - Income Tax

Transfer pricing adjustments on AMP expenses require proof of international transaction before applying Bright line test

The ITAT Delhi held that transfer pricing adjustments on AMP expenses cannot be made without first establishing the existence of an international ... Determination of international transaction - Advertisement, Marketing and Promotional (AMP) expenditure as international transaction - Arm's length price (ALP) determination - Bright line test - Transactional Net Margin Method (TNMM) - Precedent binding of coordinate bench in same assessee's earlier assessment year - Penalty proceedings under section 271(1)(c)Determination of international transaction - Advertisement, Marketing and Promotional (AMP) expenditure as international transaction - Arm's length price (ALP) determination - Bright line test - Transactional Net Margin Method (TNMM) - Precedent binding of coordinate bench in same assessee's earlier assessment year - Adjustment to income on account of ALP of AMP expenditure was not sustainable because the TPO did not establish existence of an international transaction - HELD THAT: - The Tribunal examined whether the TPO had first established that incurrence of higher AMP expenditure constituted an international transaction between the assessee and its associated enterprise; unless such an international transaction is established, determination of its ALP (whether by the Bright line test or by TNMM) cannot arise. The Tribunal noted that a coordinate bench in the assessee's own case for Assessment Year 2011-12 (para 6.10 of that order) had rejected the Bright line test and held AMP expenditure not to be an international transaction on the facts. No convincing reason was shown to deviate from that coordinate-bench decision. On the facts of the impugned year the TPO did not demonstrate existence of an international transaction in respect of AMP spend; accordingly the primary (Bright line) and alternative (TNMM) benchmarking approaches adopted by the TPO/DRP could not be sustained. For these reasons grounds 2-15, challenging the transfer-pricing adjustment, were allowed. [Paras 9]Transfer-pricing adjustment on account of AMP expenditure set aside and grounds 2-15 allowed.Determination of total income under normal provisions - General ground challenging assessment (ground 1) dismissed - HELD THAT: - Ground 1 was general in nature and did not raise a distinct legal contention requiring separate adjudication. The Tribunal dismissed the general ground accordingly. [Paras 10]General ground dismissed.Penalty proceedings under section 271(1)(c) - Challenge to initiation of penalty proceedings was premature and dismissed - HELD THAT: - The Tribunal observed that the question of penalty under section 271(1)(c) was premature, no arguments were advanced on the point, and therefore the ground relating to initiation of penalty proceedings was dismissed without adjudication on merits. [Paras 11]Ground relating to penalty proceedings dismissed as premature.Final Conclusion: The appeal is partly allowed: transfer-pricing additions relating to AMP expenditure (grounds 2-15) are disallowed; the general ground is dismissed and the challenge to initiation of penalty proceedings is dismissed as premature. Issues Involved:1. Adjustment of Arm's Length Price (ALP) of Advertisement, Marketing, and Promotional (AMP) expenditure.2. Classification of AMP expenditure as an international transaction.3. Application of Bright Line Test and Transactional Net Margin Method (TNMM).4. Economic adjustments for differences in risk.5. Penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Adjustment of ALP of AMP Expenditure:The primary issue in this appeal concerns the adjustment of Rs. 79,258,314 to the assessee's income, pertaining to AMP expenditure. The Transfer Pricing Officer (TPO) initially proposed an adjustment of Rs. 79,887,754 by using the Bright Line Test and the TNMM as alternative approaches. The Dispute Resolution Panel (DRP) subsequently directed a reduction in this adjustment to Rs. 79,258,314. The assessee contested this adjustment, arguing that the AMP expenses were not international transactions, and thus should not be subject to ALP determination.2. Classification of AMP Expenditure as an International Transaction:The assessee argued that the AMP expenditure should not be classified as an international transaction under Section 92B of the Income Tax Act, as these expenses were incurred for domestic transactions with unrelated parties. The assessee contended that there was no 'understanding', 'arrangement', or 'action in concert' with its Associated Enterprise (AE) regarding AMP expenditure for brand promotion. The tribunal found that the TPO failed to establish the existence of an international transaction, thereby negating the need for ALP determination.3. Application of Bright Line Test and TNMM:The TPO applied the Bright Line Test, selecting four comparables with an average AMP/sales ratio of 0.83%, compared to the assessee's 57.44%. The tribunal rejected the Bright Line Test, citing a previous decision in the assessee's case for the assessment year 2011-12, where it was held that AMP expenditure could not be considered an international transaction. The tribunal also noted that the TPO did not establish an international transaction before determining the ALP, rendering the application of both the Bright Line Test and TNMM inappropriate.4. Economic Adjustments for Differences in Risk:The assessee argued that the TPO failed to allow economic adjustments for differences in risk, such as working capital, import duty, capacity utilization, and penetration policy. The tribunal did not specifically address these adjustments, as the primary issue was the misclassification of AMP expenditure as an international transaction.5. Penalty Proceedings under Section 271(1)(c):The assessee challenged the initiation of penalty proceedings under section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The tribunal deemed this issue premature and dismissed it without detailed consideration, as no arguments were advanced by the parties.Conclusion:The tribunal allowed the appeal in part, primarily in favor of the assessee, by dismissing the transfer pricing adjustments related to AMP expenditure. The tribunal upheld the assessee's position that the AMP expenses were not international transactions and rejected the application of the Bright Line Test and TNMM for ALP determination. The general ground of appeal was dismissed as it was generic, and the penalty-related ground was dismissed as premature.