2023 (7) TMI 1629 - AT - Income Tax

Transfer pricing: AMP expense internationality denied; PLI for software services accepted at 15%, no TP adjustment required

Transfer pricing treatment of Advertisement, Marketing and Promotion (AMP) expenses was examined and the Tribunal found absence of any agreement creating ... TP Adjustment - Advertisement, Marketing and Promotion (AMP) expenditure as international transaction - international transactions or not? - HELD THAT - Tribunal in favour of the assessee in the assessee’s own case for AY 2017-18 [2023 (3) TMI 1609 - ITAT BANGALORE] held there has been no agreement between Essilor International which owns the various brands set out by the TPO in his order and the Assessee to incur any Advertisement and Marketing or Sales promotion expenses. None of the other reasons given by the TPO which have been explained by the Assessee and set out in the earlier paragraph can be the basis to hold that there was in fact an international transaction in the matter of incurring of AMP expenses by the Assessee. The order of the Tribunal in Assessee's own case for A.Y.2009-10 and 2010-11 in our view requires to be followed and there are no reasons whatsoever to take a different view. Consequently, there could not be any exercise of determining the ALP of the AMP expenses by comparing the expenses incurred by the Assessee with comparable companies. IT support services / Software Development (SWD) segment - Profit Level Indicator (PLI) and percentile testing - AR submitted that in the TP study the assessee calculated the PLI @ 15%. However, in the OGE to the DRP directions, the TPO has considered the assessee’s PLI at 10.12% which is wrong - HELD THAT:- We find substance in the submission of the ld. AR. We note that at page 516 of the Appeal set, the operating margin (OP/OC) has been calculated at 15% by the assessee. In the OGE to the DRP directions, the TPO has considered the taxpayer’s PLI at 10.12% which is wrong. The assessee’s PLI at 15% has not been disputed by the TPO/DRP, which is more than the 35th percentile at 13.37%. In view of the this, no adjustment can be made in the SWD segment. It is held accordingly. The grounds are allowed. Business Support Services (BSS) - selection of comparables and functional comparability - HELD THAT:- Exclusion of Dun & Bradstreet Information Services India Pvt. Ltd. on the basis of functional dissimilarity. Disallowance u/s 37 - Disallowance of Seminar, Conventions & Sales Promotion expenses - scope of Indian Medical Council Regulations and CBDT Circular - HELD THAT:- We note that similar issue has been decided by the coordinate Bench of the Tribunal in the assessee’s own case for AY 2017-18 [2023 (3) TMI 1609 - ITAT BANGALORE] It is pertinent to note that prior to the judgment of the Hon’ble Apex Court in the case of M/s. Apex Laboratories Pvt. Ltd. [ 2022 (2) TMI 1114 - SUPREME COURT] many of the judicial pronouncements had held that MCI Regulations are not applicable on pharmaceutical companies and expenses incurred by such companies are not violative of CBDT Circular. During this phase of assessment, there were only adhoc summary basis evaluation of expenditure. In the present case also there is no critical evaluation of the expenses and post the Hon’ble Supreme Court judgment, the dictum laid down, same needs to be followed and each of the expenditure needs to be evaluated to see if the disallowance is justified. Matter needs fresh verification by the A.O. Issues: (i) Whether adjustment for AMP expenditure treated as a separate international transaction and addition to ALP should be sustained; (ii) Whether adjustment in respect of IT support services/SWD segment is warranted; (iii) Whether comparables in Business Support Services (BSS) segment are correctly selected and whether adjustment of Rs.61,89,154 is sustainable; (iv) Whether disallowance of Seminar, Conventions & Sales Promotion expenses of Rs.9,42,88,256 under section 37(1) is sustainable.Issue (i): Whether the AMP expenditure can be characterised and benchmarked as a separate international transaction leading to transfer pricing adjustment.Analysis: The Tribunal considered coordinate-bench decisions in the assessee's own case and other precedents holding that absent an agreement or tangible evidence obliging the taxpayer to incur AMP expenditure for the AE, AMP cannot be treated as a separate international transaction. The Tribunal observed that AMP/expenditure should be considered within the bundle of transactions tested under TNMM where appropriate and that bright-line deduction of AMP by comparison with third-party comparables is not permissible without requisite machinery or agreement. Facts for the year under consideration were found identical to those earlier decided in favour of the assessee.Conclusion: The adjustment made for AMP expenditure is deleted and the issue is decided in favour of the assessee.Issue (ii): Whether the IT support services/SWD segment requires a TP adjustment because the taxpayer's Profit Level Indicator (PLI) was incorrectly recorded by the TPO.Analysis: The Tribunal noted that the assessee's TP study calculated the operating margin (PLI) at 15% and that figure was not disputed; the TPO/DRP in OGE had used 10.12% erroneously. The assessee's PLI (15%) exceeded the 35th percentile (13.37%) of comparables, removing basis for adjustment under TNMM.Conclusion: No transfer pricing adjustment is warranted for the IT support services/SWD segment; the issue is decided in favour of the assessee.Issue (iii): Whether the comparable companies used for benchmarking the BSS segment are appropriate and whether the shortfall adjustment of Rs.61,89,154 should be sustained.Analysis: The Tribunal examined functional dissimilarity of one comparable (Dun & Bradstreet Information Services India Pvt. Ltd.) and followed coordinate-bench authority excluding that company from the comparable set. On that basis the Tribunal directed exclusion of the company for functional dissimilarity; remaining comparability/contentions were treated as not pressed or not required for further adjudication.Conclusion: Part of the BSS-related adjustment is disallowed by directing exclusion of the specified comparable; the issue is partly allowed in favour of the assessee.Issue (iv): Whether the disallowance of Seminar, Conventions & Sales Promotion expenses under section 37(1) (total Rs.9,42,88,256) is sustainable.Analysis: The Tribunal followed coordinate-bench practice after the Supreme Court's recent pronouncements, observed that detailed and fresh examination of the nature of each expense is required in light of Apex Court guidance, and concluded that the matter should be verified afresh by the Assessing Officer with opportunity to the assessee.Conclusion: The disallowance is not finally adjudicated by the Tribunal and the issue is remitted to the Assessing Officer for fresh examination in accordance with law; this relief is in favour of the assessee to the extent of obtaining fresh consideration.Final Conclusion: The appeal is partly allowed: AMP-related TP addition deleted; no adjustment in SWD segment; specified comparable excluded in BSS segment (part allowance); disallowance of seminar/sales-promotion expenses remitted to AO for fresh consideration. The Tribunal partly allows the appeal for statistical purposes.Ratio Decidendi: Absent an agreement or tangible evidence obliging the taxpayer to incur AMP expenditure for an associated enterprise, AMP expenditure cannot be treated as a separate international transaction and a transfer-pricing adjustment cannot be made by comparing AMP outlays with third-party comparables; such expenditure must be considered within the appropriate bundled transactional analysis (e.g., under TNMM) unless statutory machinery and evidence support separate treatment.