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2024 (5) TMI 1569 - AT - Income TaxTP adjustment - adjustment of the assessee s advertising and market promotion (AMP) expenditure as an international transaction - assessee submitted that the AMP adjustment is the only issue under appeal for the other impugned AYs as well which are also covered under the APA and reiterates the same submissions as detailed above for the other impugned AYs as well - HELD THAT - Upon careful consideration of the impugned APA signed between the assessee and the CBDT we find that the said APA is valid for AYs 2014-15 to 2018-19 and hence all the four pending appeals would fall under the purview of said APA. It is noted that Para-3 4 5 6 clearly lay down the scheme of working which has to be followed by the assessee while reporting its business affairs. It is also be noted that the assessee has reported its financial transactions in complete fulfilment of the stipulations postulated in the said APA. Accordingly there was no case for any adjustment to be made by the TPO and for the DRP to reiterate TPO s actions. The addition made by the AO is thus in conflict with the agreements done in the APA and consequently deserves to be quashed and set aside. Accordingly the addition made by the AO vide his order dated 05.10.2018. In compliance to directions of DRP dated 27.09.2018 is deleted and the ground of appeal no.2 raised by the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity and Applicability of the APA in Respect of AMP Expenditure Legal Framework and Precedents: The APA mechanism under Section 92D of the Income Tax Act provides for pre-determination of the Arm's Length Price (ALP) for international transactions, offering certainty and avoiding transfer pricing disputes. The APA executed between the assessee and CBDT covers AY 2014-15 to AY 2018-19 and adopts the 'One Economic Unit' (OEU) concept for benchmarking. Court's Interpretation and Reasoning: The Tribunal examined the APA agreement, which explicitly includes the assessee and its associated enterprise, RNAIPL, as a single economic unit for transfer pricing analysis. The APA stipulates the operating margins for the Car and After Sales (AS) business segments and the Parts Consolidation Centre (PCC) business. The assessee complied with the APA by filing modified returns reflecting the ALP margins agreed therein. Key Evidence and Findings: The APA's detailed provisions (Paras 3 to 6) lay down the methodology for reporting business affairs and determining ALP. The assessee's AMP expenses were included in the costs considered for operating margin determination under the APA. The assessee's submissions, supported by the APA text, demonstrate that the AMP expenses are integral to its business operations and benchmarking. Application of Law to Facts: Since the APA covers the relevant assessment years and the AMP expenses form part of the costs factored into the agreed ALP margins, the TPO's separate adjustment of AMP expenses conflicts with the APA's terms. Treatment of Competing Arguments: The Revenue contended that AMP expenses are outside the APA's scope and represent a separate international transaction, thus justifying the adjustment. The Tribunal rejected this, holding that the APA's comprehensive coverage includes AMP expenses as part of the business costs. Conclusion: The APA is valid and applicable to the AMP expenses for the relevant years, and no separate adjustment is warranted. Issue 2: Nature of AMP Expenditure as an International Transaction Legal Framework and Precedents: Section 92B defines international transactions to include transactions between associated enterprises. Judicial precedents such as the Delhi High Court's decision in Maruti Suzuki India Ltd. and the Tribunal's ruling in Renault India Pvt. Ltd. have held that unilateral domestic AMP expenses incurred by a distributor do not constitute international transactions unless there is a binding arrangement with associated enterprises. Court's Interpretation and Reasoning: The Tribunal noted that the TPO failed to establish any agreement or arrangement between the assessee and its associated enterprises regarding AMP expenditure. The AMP expenses were incurred for the assessee's domestic business to promote Nissan brand cars in India, targeting third-party customers, and not for the benefit of associated enterprises. Key Evidence and Findings: The TPO's adjustment was based on an arbitrary attribution of 50% of INR 190 crores of AMP expenses as brand-building costs with a mark-up, without evidencing an internal transaction or mutual understanding. The DRP relied on the 'Bright Line Test' and judicial decisions such as Sony Ericsson and BMW to justify the adjustment but did not demonstrate a binding arrangement. Application of Law to Facts: The Tribunal applied the principles from relevant case law, emphasizing that unilateral expenditure without contractual obligation or mutual consent cannot be treated as an international transaction. The AMP expenses were routine business expenses incurred in India and did not qualify as international transactions. Treatment of Competing Arguments: The Revenue argued that the AMP expenses had a common shared objective with associated enterprises and thus constituted international transactions. The Tribunal rejected this, observing that incidental or spin-off benefits to associated enterprises do not convert domestic expenses into international transactions. Conclusion: The AMP expenditure does not constitute an international transaction under Section 92B and cannot be subjected to transfer pricing adjustments independently. Issue 3: Validity of TPO's Methodology and DRP's Confirmation of AMP Adjustment Legal Framework and Precedents: The Transfer Pricing Rules provide various prescribed methods, including the 'Other Method', for benchmarking international transactions. The DRP upheld the TPO's use of the 'Other Method' post-amendment to the TP Rules, relying on judicial decisions that recognized AMP expenditure as an international transaction in certain contexts. Court's Interpretation and Reasoning: The Tribunal acknowledged the DRP's reasoning but found it inapplicable to the facts of this case due to the existence of the APA and the absence of any binding arrangement for AMP expenses. The Tribunal distinguished the cited cases, noting that the facts and legal context differ. Key Evidence and Findings: The DRP's reliance on the 'Bright Line Test' and the 'Other Method' was not supported by evidence of an internal transaction or agreement. The Tribunal observed that the APA's comprehensive coverage and agreed margins negate the need for separate benchmarking of AMP expenses. Application of Law to Facts: The Tribunal held that the methodology adopted by the TPO and upheld by the DRP was not sustainable in the presence of a valid APA covering the AMP expenses. Treatment of Competing Arguments: The Revenue's arguments about the validity of the 'Other Method' and judicial precedents were considered but found insufficient to override the APA's terms and the absence of an international transaction. Conclusion: The TPO's methodology and the DRP's confirmation of the AMP adjustment are not justified in this case. Issue 4: Sustainability of the AO's Addition Pursuant to DRP Directions Legal Framework and Precedents: The AO's assessment order is guided by the DRP's directions. However, the AO's power to make additions is circumscribed by the provisions of the Income Tax Act and any binding APA. Court's Interpretation and Reasoning: The Tribunal found that the AO's addition of INR 369.01 crores, made in compliance with the DRP's directions, conflicts with the APA's terms. Since the APA is valid and covers the relevant years, the AO's addition is not sustainable. Key Evidence and Findings: The assessee had filed modified returns in line with the APA, and the APA's provisions explicitly cover the AMP expenses as part of the operating margin. The addition by the AO was based on an erroneous premise of AMP expenses being a separate international transaction. Application of Law to Facts: The Tribunal applied the principle that an APA precludes separate transfer pricing adjustments on covered transactions. The AO's addition was therefore quashed and set aside. Treatment of Competing Arguments: The Revenue's insistence on the addition was rejected in light of the binding APA and the assessee's compliance. Conclusion: The AO's addition pursuant to the DRP's directions is quashed and deleted. Issue 5: Applicability of the Decision to Subsequent Assessment Years Legal Framework and Precedents: The APA covers AY 2014-15 through AY 2018-19, and the issues and facts for subsequent years are identical to the lead year. Court's Interpretation and Reasoning: The Tribunal held that the decision for AY 2014-15 applies mutatis mutandis to AYs 2015-16, 2017-18, and 2018-19. Key Evidence and Findings: The identical grounds of appeal and common factual matrix justify uniform adjudication. Application of Law to Facts: The Tribunal accordingly deleted the AMP adjustments for all impugned years. Treatment of Competing Arguments: None raised specifically for subsequent years beyond reiteration of earlier arguments. Conclusion: The appeals for all subsequent years are allowed following the lead year decision. 3. SIGNIFICANT HOLDINGS "Upon careful consideration of the impugned APA signed between the assessee and the CBDT, we find that the said APA is valid for AYs 2014-15 to 2018-19 and hence all the four pending appeals would fall under the purview of said APA." "Accordingly, there was no case for any adjustment to be made by the TPO and for the DRP to reiterate TPO's actions. The addition made by the AO is thus in conflict with the agreements done in the APA and consequently deserves to be quashed and set aside." "The AMP expenses were incurred solely in connection with the assessee's business of distribution of Nissan Brand Cars in India, on its own account, in its capacity of a full-fledged entrepreneur undertaking significant risks with a profit motive. Any spin-off / marginal benefits derived by the assessee's overseas AEs cannot by itself convert the said transaction into an 'international transaction'." "Unilateral action by one of the parties, without any binding obligation, in the absence of mutual understanding or contract, cannot be termed as a 'transaction'." "The addition made by the AO vide his order dated 05.10.2018 in compliance to directions of DRP dated 27.09.2018 is deleted and the ground of appeal no.2 raised by the assessee is allowed." Core principles established include:
Final determinations on each issue resulted in the deletion of the AMP adjustment for AY 2014-15 and all subsequent years covered by the APA, with the appeals allowed accordingly.
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