In a significant case, the Delhi High Court upheld the calculation at Arm’s Length of Reimbursement of advertising, marketing and promotion expenses (AMP) Expenses Incurred by Sony India on its Associated Enterprises (AE).
The appellant/revenue challenged the order passed by the Income Tax Appellate Tribunal [“the Tribunal”]. The issue, is, whether the reimbursement of advertising, marketing and promotion expenses (AMP), incurred by the respondent/assessee on behalf of its Associated Enterprise (AE), was at arm’s length.
The inter-related issue that arose for consideration was whether the Transfer Pricing Officer (TPO) ought to have used the bright line test (BLT) in computing the arm’s length price (ALP) concerning AMP activities carried out by the respondent/assessee.
The respondent/assessee was incorporated as a wholly-owned subsidiary of Sony Corporation, Japan (SCJ). SCJ held shares in the respondent/assessee via its subsidiaries, Sony Holding (Asia) B.V., Netherlands, and Sony Gulf FZE, Dubai.
Initially, the respondent/assessee was into manufacturing, assembling, importing, and distributing various colour televisions, audio recording media equipment, information technology products, software, and general audio products. With effect from 01.07.2004, the respondent/assessee shut down its manufacturing activities. The respondent/assessee entered into an advertisement agreement with Sony Electronics Asia Pacific Pte. Ltd.
The respondent/assessee filed its return of income (ROI), and declared its income as Rs. 82,58,38,988/-. Notices under Sections 143(2) and 142(1) of the Act were issued. A reference was made to the TPO, under Section 92CA of the Act, for the determination of ALP.
The TPO issued a noticecalling upon the respondent/assessee to show cause as to why international transactions concerning reimbursement of advertisement expenses should not be benchmarked under the provisions of Section 92C of the Act. The thrust of the show cause notice was that the respondent/assessee, which was primarily engaged in the distribution of imported audio and visual products in the Indian market, was incurring AMP expenses on behalf of its AE.
As per the TPO, although the respondent/assessee had incurred Rs. 119,54,43,600/- towards brand promotion and developing marketing intangibles for its AE, it was reimbursed only Rs. 72,63,324/-.
The TPO passed an orderwhereby, Rs. 65,34,38,272/- was added to the taxable income of the respondent/assessee, having regard to the amount by which AMP expenses incurred by the respondent/assessee exceeded the amount, as determined by applying the BLT dicta.
The Assessing Officer (AO)passed a draft assessment order in line with the adjustment made by the TPO. Against the TPO‟s order, the respondent/assessee preferred objections with the Dispute Resolution Panel (DRP), which were rejected via order dated 27.09.2011.
On appeal, the Tribunalremitted the matter to the TPO/AO for determination of AMP expenses, albeit, after taking into account a proper comparable, and granting a hearing to the authorized representative of the respondent/assessee.
It was argued that merely because the TPO accepted other international transactions by applying the transactional net margin method (TNMM), it cannot be said that the respondent/assessee was not required to be compensated for promoting the brand owned by its AE.
A division bench comprising Justice Rajiv Shakdher and Justice Girish Kathpalia observed that, in the period in issue, the respondent/assessee was only in the business of import and distribution of Sony products. The amount spent on AMP activities by the respondent/assessee in the relevant FY was Rs. 119,54,43,600/-.
The compensation for the expense was received by the respondent/assessee in terms of higher profitability for the product sold. The TPO stated the AMP expenditure incurred by the respondent/assessee resulted in increased sales in India for products, albeit developed by the AE but sold by the respondent/assessee.
The fact that the comparables chosen by the TPO had a net margin lower than that registered by the respondent/assessee would persuade us to hold that no upward adjustment concerning AMP expenses ought to have been made. The Court refused to interfere with the impugned order and dismissed the appeal.
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