of Income Tax, Special Range-8, New Delhi
ITA No.: 6813/Del/2017
Assessment Year: 2012-13
Forum: Income Tax Appellate Tribunal, Delhi Bench ‘I-2’, New Delhi
Date of Pronouncement: 07 January 2020
Coram: Ms. Sushma Chowla, Judicial Member and Dr. B. R. R. Kumar, Accountant Member
ITAT Rules on AMP Expenditure and Transfer Pricing
The Income Tax Appellate Tribunal, Delhi Bench, considered Samsung India Electronics Pvt. Ltd.’s appeal against the assessment order dated 23 October 2017 passed under Section 144C read with Section 143(3) of the Income-tax Act, 1961. The principal disputes concerned transfer pricing adjustments relating to advertising, marketing and promotion (“AMP”) expenditure, interest on outstanding receivables from associated enterprises, and reduction of the arm’s length price of fixed assets purchased from associated enterprises.
The assessee contended that the AMP expenditure incurred in India could not be treated in its entirety as an international transaction merely because part of such expenditure was reimbursed by its associated enterprise under a Marketing Fund Agreement (“MDF Agreement”). The Revenue, however, sought to treat the AMP expenditure as an international transaction and make a transfer pricing adjustment.
AMP Expenditure Cannot Automatically Become an International Transaction
The Tribunal followed its earlier decision in the assessee’s own case for preceding assessment years and held that the scope and value of the international transaction could not be expanded beyond the reimbursement received under the MDF Agreement.
It observed that AMP expenditure incurred by an assessee ordinarily represents payments to third parties for advertising and brand promotion activities and cannot, by itself, assume the character of an international transaction under Section 92B unless the statutory conditions are satisfied.
Where the assessee denies the existence of any arrangement or understanding with its associated enterprise regarding AMP expenditure, the initial onus lies upon the Revenue to demonstrate, through tangible material, the existence of an agreement, arrangement, understanding or action in concert between the associated enterprises.
MDF Agreement Did Not Cover Entire AMP Expenditure
The Tribunal examined the Marketing Fund Agreement and found that only certain advertising and marketing activities were eligible for reimbursement by the associated enterprise on a pre-approval basis.
The reimbursement was treated as assistance relating to specified activities and did not establish that the entire AMP expenditure incurred by Samsung India was undertaken at the instance or behest of its associated enterprise. The arrangement was therefore confined to the amounts reimbursed under the MDF Agreement.
The Tribunal held that expenditure incurred beyond the reimbursement covered by the MDF Agreement was incurred by Samsung India on its own commercial judgment and business requirements. Consequently, the entire AMP expenditure could not be treated as an international transaction.
Bright Line Test Rejected
The Tribunal also considered the application of the Bright Line Test for determining an AMP adjustment. Referring to the judgment of the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd., it held that the Bright Line Test could not be used to presume the existence of an international transaction.
Accordingly, no international transaction could be presumed merely on the basis of the quantum of AMP expenditure, and no transfer pricing addition on that basis was sustainable.
Interest Adjustment on Outstanding Receivables Deleted
The dispute also concerned an adjustment of ₹51,66,082 by treating delayed receivables from associated enterprises as a separate international transaction and imputing interest thereon.
The Tribunal observed that the proper enquiry was not merely to examine each invoice independently, but to analyse the entire transaction pattern between associated and non-associated enterprises and determine whether there existed any overt or covert arrangement to shift profits through delayed realization of receivables.
It held that unless the Revenue established such a pattern, an adjustment on outstanding receivables could not be sustained. Since no such pattern was established in the present case, the Tribunal directed deletion of the addition relating to outstanding receivables.
Adjustment on Purchase of Fixed Assets Also Deleted
The Transfer Pricing Officer had also reduced the arm’s length price of fixed assets purchased by the assessee from its associated enterprises and, consequently, depreciation of ₹2,05,26,740 was disallowed.
The Tribunal noted that the IPC division charged a mark-up not exceeding 1% on procurement cost, while iMarket Korea Inc. charged a mark-up of 5%. It held that a mark-up of 1% to 5% could not be disallowed merely because certain other divisions of the associated enterprise supplied assets at cost.
The Tribunal observed that an associated enterprise could not necessarily be expected to render procurement-related services free of cost. Accordingly, the adjustment to the arm’s length price of fixed assets and the consequential depreciation disallowance were directed to be deleted.
Final Decision
The Tribunal allowed the assessee’s appeal. It held that the AMP international transaction could not be expanded beyond reimbursements under the MDF Agreement, rejected the transfer pricing adjustment based on the Bright Line Test, deleted the adjustment relating to outstanding receivables for want of an established profit-shifting pattern, and deleted the adjustment relating to purchase of fixed assets and consequential depreciation disallowance.
Key Takeaway: AMP expenditure incurred by an Indian entity does not automatically become an international transaction merely because the entity uses a foreign associated enterprise’s brand or receives limited reimbursement under a marketing agreement. The Revenue must establish an arrangement, understanding or action in concert under Section 92B before invoking transfer pricing provisions in respect of expenditure beyond the agreed reimbursement.