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2025 (5) TMI 1388 - AT - Income TaxTP Adjustment on AMP expenses - constitutes an international transaction or not? - whether AMP expenditure does not constitute an international transaction under Chapter-X of Income Tax Act in absence of any agreement/arrangement for incurring AMP expenditure on behalf of Associated Enterprises (AE).? - HELD THAT - As consistently held that application of Bright Line (BLT) was invalid under the India Transfer Pricing regulations. In the current assessment year the TPO relied on his predecessor s order and made/suggested adjustment on account of AMP expenditure without bringing anything on record to distinguish the fact from earlier years. CIT(A) while allowing relief followed the decisions of earlier years and deleted the Transfer Pricing adjustment/addition. There is no variation in facts in the year under consideration thus this issue is squarely covered in favor of the assessee and against the revenue by the decisions of Tribunal in assesses own case for AY 2009-10 to 2014-14 and 2018-19 copy of all such decisions are placed on record. Addition made by classifying the assessee as software Development Company - HELD THAT - We find that learned CIT(A) deleted the adjustment on the basis of decision of Tribunal in assessee s own case for A.Ys. 2009-10 to 2014-15. We further find that by following the order of A.Y. 2009-10 similar relief was allowed to assessee in appeal for A.Ys. 2011-12 and 2012-13. We find that consistently similar addition on account of AMP expenditure is deleted in a series of decision. Thus respectfully following the decisions of Coordinate Bench we do not find any merit in the grounds of appeal raised by Revenue. In the result Ground Nos. 1 to 3 of appeal by revenue are dismissed. TP adjustment on account of IT support services - HELD THAT - TPO in his order has accepted functions performed by assessee despite recording such fact TPO inadvertently characterized assessee as company engaged in software development services and wrongly selected companies engaged in software development activities to arrive at the ALP. CIT(A) on perusal of TP study report and order of TPO held that TPO is incorrectly characterized services of assessee. The assessee has rightly selected company engaged in IT enable services or BPO services. Thus no adjustment to ALP was required to on the basis of such observation the CIT(A) deleted the addition/adjustment. We have independently examined the facts of the case and find that once the nature of services rendered by assessee to its group company was accepted by TPO as of IT support services then comparison of assessee with software development services would not justify. We also find that a similar IT support service rendered by assessee s company in AY 2020-21 was reported by matter was referred to TPO. However no adjustments on IT support services were made/ suggested. Thus no merit in the grounds of appeal raised by Revenue.
The core legal questions considered by the Tribunal in this matter primarily revolve around the applicability and correctness of transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and Assessing Officer (AO) concerning advertisement, marketing, and promotional (AMP) expenses and IT support services rendered by the assessee to its Associated Enterprises (AEs). The principal issues addressed include:
1. Whether the AMP expenditure incurred by the assessee constitutes an international transaction under Chapter X of the Income Tax Act, thereby justifying transfer pricing adjustments by the TPO. 2. The validity and jurisdictional competence of the TPO in making transfer pricing adjustments on AMP expenses in the absence of any explicit intercompany agreement or arrangement. 3. The appropriateness of applying the Bright Line Test (BLT) method for determining the arm's length price of AMP expenses. 4. Whether AMP expenses lead to the creation of marketing intangibles benefiting the AE, thus necessitating compensation. 5. The correctness of the CIT(A)'s conclusion that the existence of an international transaction cannot be inferred merely from clauses of intercompany arrangements without factual basis. 6. Whether transfer pricing adjustments can be made on AMP expenses under the Income Tax Act, and if so, under what circumstances. 7. The validity of benchmarking and transfer pricing adjustments made by the TPO on the transaction of provision of IT support services, including the correctness of comparable companies selected and functional comparability. 8. The correctness of the CIT(A)'s deletion of transfer pricing adjustments relating to IT support services on the ground that the assessee is engaged in IT support services and not software development services. 9. The validity of the assessment order in terms of procedural compliance, including signatures and limitation period. 10. The impact of the dismissal of Revenue's appeal on the cross objections filed by the assessee. Issue-wise Detailed Analysis 1. Transfer Pricing Adjustment on AMP Expenses Legal Framework and Precedents: The Tribunal examined the applicability of Section 92B of the Income Tax Act, defining international transactions, and the provisions under Chapter X pertaining to transfer pricing adjustments. The Tribunal relied heavily on precedents including the decisions of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. and various coordinate bench decisions of the Tribunal in the assessee's own case for earlier assessment years (AYs 2009-10 to 2014-15). These precedents consistently held that AMP expenses incurred in India by the assessee for promoting products manufactured and sold in India do not constitute international transactions unless there is an explicit arrangement/agreement with the AE for incurring such expenditure. Court's Interpretation and Reasoning: The Tribunal noted that the TPO made the AMP adjustment by following his predecessor's orders but failed to bring any new material or distinguish facts from earlier years. The CIT(A) deleted the adjustment by relying on the consistent line of Tribunal decisions that AMP expenditure without a demonstrable agreement or arrangement with the AE does not fall within the ambit of international transactions. The Tribunal emphasized that the TPO's inference of an arrangement between the assessee and AE was not supported by any factual evidence, and that the burden to prove such arrangement lies on the TPO. Key Evidence and Findings: The TPO conceded that AMP expenditure was incurred with third parties in India and acknowledged the absence of any arrangement with the AE. The Tribunal found no factual basis to support the existence of an international transaction relating to AMP expenses. The Tribunal also observed that the application of the BLT method by the TPO was invalid as it is not prescribed under the statute, following the Delhi High Court's ruling in Maruti Suzuki India Ltd. Application of Law to Facts: The Tribunal applied the legal principle that in the absence of an arrangement or agreement, AMP expenses incurred locally by the assessee do not constitute international transactions. The TPO's adjustment was therefore held to be beyond jurisdiction and bad in law. Treatment of Competing Arguments: The Revenue argued for restoration of the issue pending Supreme Court decision, but the Tribunal rejected this, holding that the settled legal position does not warrant reopening the issue. The assessee's argument that no income arises from international transactions in respect of AMP expenses was accepted. Conclusions: The Tribunal dismissed the Revenue's grounds challenging the deletion of AMP adjustment, affirming that AMP expenses without an intercompany agreement do not constitute international transactions and that the TPO lacked jurisdiction to make such adjustments. 2. Transfer Pricing Adjustment on IT Support Services Legal Framework and Precedents: The transfer pricing provisions under Chapter X and principles of functional comparability and benchmarking were applied. The Tribunal examined whether the nature of services rendered by the assessee was correctly characterized and whether the comparable companies selected by the TPO were appropriate. Court's Interpretation and Reasoning: The Tribunal noted that the assessee provided IT support services, which were accepted by the TPO. However, the TPO erroneously benchmarked these services against companies engaged in software development, which involve significantly different functions and intangibles. The CIT(A) correctly held that IT support services are support functions distinct from software development and that the TPO's selection of comparables was inappropriate. Key Evidence and Findings: The assessee's IT support function involved troubleshooting, resolving user issues, and maintaining records, without owning any intellectual property. The TPO's comparable companies were engaged in software development with significant intangibles, making them functionally incomparable. The Tribunal also noted that in a subsequent assessment year, no adjustment was made on similar IT support services, reinforcing the correctness of the CIT(A)'s decision. Application of Law to Facts: The Tribunal applied the principle that benchmarking must be based on functional comparability. Since the TPO's comparables were not comparable, the transfer pricing adjustment was unjustified. Treatment of Competing Arguments: The Revenue supported the TPO's order, but the Tribunal found the arguments unpersuasive in light of the factual matrix and precedents. Conclusions: The Tribunal upheld the CIT(A)'s deletion of the transfer pricing adjustment on IT support services. 3. Procedural Validity of Assessment Order The assessee raised grounds regarding the validity of the assessment order, including absence of signature and limitation issues. However, since the Revenue's appeal was dismissed on merits, these grounds were rendered academic and dismissed as infructuous by the Tribunal. Significant Holdings On AMP Expenses: "By merely stating that there is an arrangement between the assessee and the AE, the Transfer Pricing Officer cannot bring the AMP expenditure within the purview of international transaction. If the Transfer Pricing Officer alleges that the AMP expenditure comes within the purview of international transaction by virtue of an arrangement between the related parties, the burden is entirely upon the Transfer Pricing Officer to demonstrate the existence of such arrangement." "In absence of an express arrangement/agreement between the assessee and the AE for incurring AMP expenditure to promote the brand of the AE, AMP expenditure incurred by making payment to third parties for promoting and marketing the product manufactured by the assessee, does not come within the purview of international transaction." "Determination of arm's length price of AMP expenditure by applying BLT method is not valid as it is not prescribed in the statute." On IT Support Services: "Once the nature of services rendered by assessee to its group company was accepted by TPO, as of IT support services, then comparison of assessee with software development services would not justify." "The TPO inadvertently characterized assessee as company engaged in software development services and wrongly selected companies engaged in software development activities to arrive at the ALP." Core Principles Established:
Final Determinations: The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s order deleting the transfer pricing adjustment on AMP expenses and IT support services. The Tribunal held that the TPO lacked jurisdiction to make AMP adjustments in absence of an arrangement and that the benchmarking on IT support services was flawed due to incorrect characterization and selection of comparables. Consequently, the cross objections filed by the assessee became infructuous and were dismissed.
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