TMI Blog2020 (1) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... d on bright line test. In Honda Siel Power Products Ltd. [ 2015 (12) TMI 1333 - DELHI HIGH COURT] held that when assessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of AE, hence benefit of creation of marketing intangibles for foreign AE on account of AMP expenses can at best said to be incidental . In view of the principles laid down the in the above decisions, the AMP spend is not an international transaction in the absence of an arrangement between the taxpayer and the AE. In the instant case there cannot be said to be any international transaction between the appellant and the AE for incurring the AMP expenditure. Further, we find that on a TNMM basis, the appellant s margin after including these costs is higher than comparables and hence, no adjustment on AMP expenses can be made when the primary international transactions have been accepted by the TPO to be at arm s length. We delete the transfer pricing adjustment made by the AO - Decided in favour of assessee. - ITA No. 6829/MUM/2012 - - - Dated:- 10-1-2020 - Shri C.N. Prasad (Judicial Member) And Shri N.K. Pradhan (Accounta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of Rule 10C(2)(e) of the Rules. 7. The AO erred in considering incorrect operating margins for certain companies on account of typo/incorrect computation. 8. The AO erred in unilaterally holding that the advertisement marketing and publicity ('AMP ) expenses incurred by the Appellant constitutes a separate international transaction with its associated enterprise u/s 92B(1) of the Act and subjecting the same to transfer pricing provisions. 9. The AO erred in holding that incurring of AMP expenses by the Appellant were for and on behalf of its Associated Enterprises (AEs) and accordingly, the Appellant should have recovered the same from the AEs. 10. Having accepted the principal international transactions of Channel distribution and sale of advertisement airtime to be at arm's length, the TPO has erred in selecting an individual line item of expenses i.e. AMP expenses paid to unrelated parties and making a transfer pricing adjustment in respect of the same. 11. Whilst AMP expenses incurred by the assessee were for its own business and no additional consideration is warranted in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions entered into by the appellant. The TPO passed an order dated 14.10.2011 proposing a total adjustment of ₹ 13,59,10,231/-. The TPO held the primary international transactions of acquisition of distribution rights and purchase of ad airtime from the AE to be at ALP, as the appellant had earned substantially higher margins in these two segments. The TPO disallowed the marketing expenses on the reasons that (i) the appellant AE is the owner of the Channel; (ii) AEs should have expended resources towards popularizing the channel ; (iii) the appellant had no responsibility/business compulsion towards incurring the advertisement and publicity expenses ; (iv) AEs have derived the benefit from these expenses incurred by the appellant, and therefore, AEs should have compensated the appellant at arm s length, (v) whole scheme of incurring the expenditure falls within the meaning of arrangement between the appellant and AEs and therefore, the amount receivable by the appellant from these two AEs fall within the meaning of international transactions as per section 92B(1) of the Act. Subsequently, the AO issued a draft assessment order dated 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of accounts from distribution of channels. Further, it is explained that the appellant also purchased under the same agreements the right to use the brand of the AE for its use in its business (clause 6.2 of the Distribution Agreement ). Similarly, the Ld. counsel submits that the appellant purchases the rights to sell the advertisement airtime ; deals with the advertisement rights at its own risk ; in consideration for the advertisement rights, it pays the AE a fixed fee; the appellant is also the owner of the income earned from advertisements on the Channels; it independently takes decisions for monetizing the distribution and advertisement rights and the appellant also purchased under the same agreements, the right to use the brand of the AE for use in its business. In this regard, reference is made by him to the relevant clauses of the Advertisement Sales Agreement . The Ld. counsel explains that the transaction for purchase of both these rights has been held to be at ALP and in fact, even after including AMP expenditure, the margin of the appellant is way above the comparables. Further, it is explained that as the owner of the distributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. counsel that there is no arrangement or agreement between the appellant and its AE to undertake marketing activities/incur the AMP expenses ; the appellant decides the marketing strategy and quantum of AMP expenses to be incurred, which is not dictated by its AE, and hence, there being no arrangement with its AE for undertaking marketing activities/incurring AMP expenditure, the same does not qualify as an international transaction . Referring to the decision by the Hon ble Bombay High Court in appellant s own case in ACIT v. NGC Network (India) Pvt. Ltd. (2014) 50 taxmann.com 240 (Bom), it is stated the view that the AMP expenses incurred by the appellant is not an international transaction is supported by the above decision. In this context, reliance is placed by him inter alia on the decision in Maruti Suzuki India Limited v. CIT [2016] 381 ITR 117 (Del.), Bausch Lomb Eyecare (India) Pvt. Ltd. Ors. v. Addl. CIT. (2015) [2016] 381 ITR 227 (Del.), CIT v. Whirpool of India Limited (2015) [2016] 381 ITR 154 (Del.), Honda Siel Power Products Limited v. Deputy CIT (2015) (94 CCH 0170) (Del.). Further, it is stated that the AMP expenses form part of the cost ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Sales Agreement with its AEs. As per the terms of the agreement, the appellant pays a fixed consideration to the AE for acquiring the right to distribute the channels and sell advertisement airtime on the channels. As the owner of the rights and consequently, income arising from them, the appellant incurs product promotion expenditure to promote the programs being telecast on the channels, giving program details, timing of the program etc. to the viewers. We find that the appellant in the Transfer Pricing Report disclosed the primary international transactions of acquisition of distribution rights and purchase of advertisement airtime from the AE and it adopted TNMM as the most appropriate method and determined the profitability of the transaction using the operating profit over operating income. It computed the margin at 29.85% and 32.80% for Distribution of the channel and Sale of advertisement airtime respectively. It is seen that the appellant, while computing margin earned by it for benchmarking the international transactions in the distribution and advertisement airtime segments had considered the marketing cost also specifically while d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ublished by the appellant only a few days prior to the telecast of the program on the channel to help create viewers/advertiser s awareness of the program. The advertisement published by the appellant is not for brand building but is focused on program being telecast. In the case of Nivea India (P.) Ltd. (supra), it is held that the product promotion expenses cannot be considered to be in the nature of AMP brand building ; the relevant extract of the decision is reproduced below : In our opinion, there is a subtle but definite difference between the product promotion and brand promotion. In the first case product is the focus of the advertisement campaign and the brand takes secondary or backseat, whereas in second case, brand is highlighted and not the product. In the case under consideration the assessee was introducing new products in the fields of body - care, deodorants, creams, shower soaps talc, first aid dressing etc. If it has to penetrate the local market, it will have to promote the products that could compete with the similar products of other players. It is well settled that as per section 92B(1) r.w.s. 92F(v), for the AMP expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of AE, hence benefit of creation of marketing intangibles for foreign AE on account of AMP expenses can at best said to be incidental . In view of the principles laid down the in the above decisions, the AMP spend is not an international transaction in the absence of an arrangement between the taxpayer and the AE. In the instant case there cannot be said to be any international transaction between the appellant and the AE for incurring the AMP expenditure. Further, we find that on a TNMM basis, the appellant s margin after including these costs is higher than comparables and hence, no adjustment on AMP expenses can be made when the primary international transactions have been accepted by the TPO to be at arm s length. In view of the above reasons, we delete the transfer pricing adjustment of ₹ 13,59,10,231/- made by the AO. Thus the grounds of appeal No. 1, 8 to 13 are allowed. 7. In the result, the appeal is partly allowed. Order pronounced in the open Court on 10/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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