2016 (5) TMI 431 - AT - Income Tax

Transfer pricing adjustment - advertisement marketing and sales promotion expenses(AMP expenses) including the mark-up adjustments - Held that - In the case under consideration the AO/TPO has not brought anything on record that there existed and agreement formal or informal between the assessee and the AE to share/reimburse the AMP expenditure incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction in question an international transaction remains un - fulfilled. Conducting FAR analysis or adopting an appropriate method is the second stage of transfer pricing adjustments. The first thing is to find out whether the disputed transaction in is international transaction or not. Without crossing the first threshold second cannot be approached. In the case under consideration we are of the opinion that AMP expenditure is not an international transaction and therefore we are not inclined to restore back the issue to the file of the AO. Thus the additions made by the AO including the mark-up adjustments are directed to be deleted. - Decided in favour of assessee Set of off unabsorbed depreciation - Held that - Assessee is entitled to claim set off of unabsorbed depreciation against business income of the assessment years under consideration. See Associated Cables case 2013 (10) TMI 1363 - ITAT MUMBAI

Issues Involved:
1. Transfer Pricing (TP) Adjustment on Advertisement, Marketing, and Sales Promotion (AMP) Expenses
2. Set-off of Unabsorbed Depreciation
3. Inclusion of Selling Expenses for Determining Brand Value
4. Application of Bright Line Test (BLT) for Determining Arm's Length Price (ALP)

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment on Advertisement, Marketing, and Sales Promotion (AMP) Expenses
The primary issue involved the TP adjustment on AMP expenses, including a mark-up of Rs. 41.74 crores. The Assessing Officer (AO) found that the assessee had entered into international transactions with its associated enterprises (AEs) and referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP). The TPO accepted all transactions except for the AMP expenses, which he deemed excessive. He applied the Profit Split Method (PSM) and the Bright Line Test (BLT) to compute the ALP, resulting in an adjustment of Rs. 333.43 crores.

The assessee contested this, arguing that AMP expenses were not an international transaction and were incurred for its business in India without any agreement with AEs for brand building. The Dispute Resolution Panel (DRP) upheld the TPO's findings. However, the tribunal found that the TPO failed to prove that the AMP expenses were intended to benefit the AEs rather than the assessee's own business. The tribunal referenced several judgments, including Maruti Suzuki and Bausch & Lomb, which clarified that AMP expenses without a formal agreement do not constitute an international transaction. Consequently, the tribunal ruled in favor of the assessee, stating that the AMP expenses were not an international transaction and directed the deletion of the TP adjustments.

2. Set-off of Unabsorbed Depreciation
The second issue pertained to the set-off of unabsorbed depreciation amounting to Rs. 1.52 crores. The AO disallowed this set-off based on the decision in Times Guaranty Ltd., but the assessee argued that unabsorbed depreciation from AY 1995-96 to AY 2001-02 should be carried forward without any limit as per amended section 32(2). The tribunal agreed with the assessee, citing the Gujarat High Court's decision in General Motors India Pvt. Ltd., which allowed the carry-forward of unabsorbed depreciation indefinitely. Thus, the tribunal decided this issue in favor of the assessee.

3. Inclusion of Selling Expenses for Determining Brand Value
In the appeal for AY 2009-10, the AO challenged the DRP's direction to exclude selling expenses for determining the value of the brand. The tribunal, following its earlier decision that AMP expenses are not an international transaction, found this issue to be infructuous and decided against the AO.

4. Application of Bright Line Test (BLT) for Determining Arm's Length Price (ALP)
The AO also contested the DRP's rejection of the BLT for determining the ALP of international transactions. The tribunal referenced the Delhi High Court's decision in Sony Ericsson, which disapproved of using BLT for this purpose. Consequently, the tribunal ruled against the AO, affirming that BLT could not be applied to determine the ALP of international transactions involving AMP expenses.

Conclusion:
The tribunal concluded by allowing the appeals filed by the assessee for all three assessment years and dismissing the appeals filed by the AO for the two assessment years. The order was pronounced in the open court on May 4, 2016.

← Previous Next →