Background:

The Income Tax Appellate Tribunal, New Delhi (hereinafter referred as ‘ITAT’) delivered a landmark judgment in the case of Honda Siel Power Products Ltd. v. DCIT[1] pronounced on April 17, 2018 wherein the ITAT has added clarity to the position with respect to transfer pricing issues related to advertising, marketing and promotion expenditure (hereinafter referred as ‘AMP expenses’) amongst other issues.

Issues of law raised in the appeal:

The following issues were raised and discussed by the ITAT:

  1. Transfer Pricing issues with respect to AMP expenses;
  2. Other issues:
    1. disallowance of royalty and technical guidance fees;
    2. disallowance of provision for warranty;

Major grounds for appeal raised with respect to AMP expenses:

  1. The AMP expenditure was independently incurred by the Appellant without any understanding/ arrangement or any other influence from the associated enterprise (located in foreign jurisdiction). Thus, such expenses incurred in India do not constitute an international transaction as per Section 92B of the Act in absence of any proved understanding/ arrangement with the associated enterprise.
  2. The transfer pricing adjustment permitted under Chapter X of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) is in respect of the difference between the arm’s length price (ALP) and the contract or declared price, but the said provision could not be invoked to determine the ‘quantum’/ extent of business expenditure.
  3. Opportunity should be provided in terms of Section 92C (3) of the Act.
  4. No adjustment on account of AMP expenses is warranted when the assessee is operating independently as a full-fledged manufacturer and full risk distributor.
  5. No adjustment on account of excessive AMP expenses is warranted even if AMP expenses incurred are separately benchmarked applying the guidelines prescribed by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd[2].
  6. Transfer pricing adjustment cannot be made without determining the Arm’s Length Price by applying one of the methods specified in Section 92 C of the Act.
  7. The use of AMP intensity adjustment is not mandated under the Indian transfer pricing regulations.

Tribunal’s opinion with respect to AMP expenses:

The Tribunal held that the these issues are decided in favour of the assessee as per the Hon’ble Delhi High Court decision in the assessee’s own case dated December 23, 2015[3] and dated January 14, 2016[4] and therefore, allowed the appeal on the above grounds.

Remarks:

This ITAT order has added some clarity in instances wherein due to AMP expenses incurred there is incidental brand building of the associated enterprise located in the foreign jurisdiction. The Tribunal has accepted the ground of appeal as per earlier High Court decisions. In instances where an Indian enterprise incurs AMP expenses for its own brand building without any understanding/ arrangement or any other influence from the associated enterprise, it cannot be said that there has been an implied international transaction when the Indian enterprise is operating independently as a full-fledged manufacturer and full risk distributor (and not as a contract manufacturer for the associated enterprise). The brand building of the foreign associated enterprise can only be said to be incidental in nature in such cases.