TPO cannot separately benchmark AMP expenses when distribution business already benchmarked using TNM method within ALP

The ITAT Delhi ruled on multiple transfer pricing and depreciation issues. Regarding AMP expenses, the tribunal held that separate AMP adjustment is unnecessary when distribution business is already benchmarked using TNM method and found within ALP. Following HC precedent in Maruti Suzuki case, the tribunal rejected TPO's approach of benchmarking AMP expenses separately using BLT method. For reimbursement of marketing expenses, considering time elapsed and to resolve the long-pending issue, the tribunal directed 20% addition to reimbursement expenses as ALP adjustment rather than remitting back to AO/TPO. The appeal was partly allowed with directions for completing benchmarking of international transactions.

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Issues Involved:
1. Transfer Pricing Adjustment for Advertisement, Marketing, and Promotion (AMP) Expenses.
2. Transfer Pricing Adjustment for Software Services.
3. Depreciation on Dharuhera Unit.
4. Disallowance of Deduction under Section 10AA of the Income Tax Act.
5. Additional Ground on Dividend Distribution Tax (DDT).

Detailed Analysis:

1. Transfer Pricing Adjustment for Advertisement, Marketing, and Promotion (AMP) Expenses:
The Tribunal held that the AMP expenses should not be separately benchmarked when the distribution business of the assessee is already benchmarked and found to be at arm's length. The Tribunal referred to the decision of the Hon'ble Delhi High Court in the assessee's own case for AY 2007-08, which concluded that no separate AMP adjustment is required if the distribution business is at arm's length. The Tribunal also noted that the TPO's use of the Bright Line Test (BLT) for benchmarking AMP expenses was invalidated by the Hon'ble Delhi High Court. Therefore, the Tribunal directed to follow the decision of the Hon'ble High Court and allowed the assessee's grounds, concluding that separate AMP adjustments are uncalled for.

2. Transfer Pricing Adjustment for Software Services:
The Tribunal reviewed the comparables selected by the TPO and the assessee's request to exclude certain comparables. The Tribunal followed the decision in the case of the assessee's group concern, Sony Mobile Communications International, and directed the AO/TPO to exclude the comparables E-Infochips, Infinite Data Systems, Infosys Ltd., Persistent Systems, and Thirdware Solutions. The Tribunal concluded that these companies were functionally dissimilar and lacked sufficient segmental information, making them inappropriate for comparison.

3. Depreciation on Dharuhera Unit:
The Tribunal noted that this issue was covered by the Hon'ble Delhi High Court's decision in the assessee's own case, which held that depreciation should be allowed on the block of assets concept. The Tribunal directed the AO to follow the High Court's decision and allow the claim of the assessee for depreciation on the Dharuhera Unit.

4. Disallowance of Deduction under Section 10AA of the Income Tax Act:
The Tribunal remitted this issue back to the AO for verification. It was noted that in AY 2011-12, the AO, based on the directions of the DRP, had verified the expenses and allowed the claim. The Tribunal directed the AO to verify the calculations submitted by the assessee and allow the claim after verification as per the law.

5. Additional Ground on Dividend Distribution Tax (DDT):
The Tribunal referred to the decision of the Special Bench in the case of Total Oil India Pvt Ltd., which held that the additional income tax payable by a domestic company on distributed profits should be at the rate mentioned in Section 115-O of the Act and not at the rate specified in the relevant DTAA with reference to such dividend income. Therefore, the Tribunal dismissed the additional grounds raised by the assessee regarding the claim of refund of DDT paid in excess of the rate prescribed under the applicable DTAA.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee and dismissed the appeal filed by the revenue. The Tribunal directed the AO/TPO to follow the decisions of higher authorities and relevant coordinate bench decisions in resolving the issues related to AMP expenses, software services, depreciation on the Dharuhera Unit, and the deduction under Section 10AA. The Tribunal upheld the decision of the Special Bench regarding the DDT issue.

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