Amazon Seller Services Private Limited Vs CIT (ITAT Bangalore)
The Income Tax Appellate Tribunal (ITAT) in Bangalore, comprising Vice President George George K. and Accountant Member Laxmi Prasad Sahu, delivered a crucial verdict on the nature of delivery costs and warranty expenses incurred by Amazon Seller Services Private Limited. The tribunal clarified that these costs do not constitute part of advertising, marketing, and promotion (AMP) expenditures.
During transfer pricing (TP) proceedings, the Transfer Pricing Officer (TPO) had extensively reviewed these expenditures. It was determined that they should not be considered as AMP expenditures because they are incurred after sales, categorizing them as sales expenses rather than efforts to develop the brand. This decision came despite detailed inquiries into these expenditures, affirming that their classification was not due to a lack of investigation.
The backdrop involves Amazon Seller Services Private Limited, a subsidiary of Amazon Corporate Holdings Private Limited, which is engaged in offering marketing support services, marketplace services, and trading in e-book readers and accessories. Following a scrutiny selection through CASS and subsequent notices, the case was referred to the TPO, leading to the final assessment order by the Assessing Officer (AO).
The Commissioner of Income Tax (TP) found the exclusion of certain costs like share-based compensation (SBC) and depreciation from operating costs by the TPO to be without proper inquiry, marking the order as potentially erroneous and prejudicial to revenue interests. Specifically, the exclusion of delivery and warranty expenses from AMP expenses was contested, leading to a directive for a fresh order by the TPO.
However, the ITAT supported the original stance that delivery and warranty expenses should not be treated as part of AMP expenditures. This decision implies that the revision directed under Section 263 by the CIT (TP) based on these grounds was unjustified.
This ruling is significant for businesses with similar operational models to Amazon, providing clarity on the categorization of post-sales expenses like delivery and warranty costs in the context of AMP expenditures.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is filed by the assessee against the DIN & Order No.ITBA/COM/F/17/2022-23/1051582070(1) dated 29.3.2023 of the Commissioner of Income-tax (TP) [CIT] passed u/s. 263 of the Act for the AY 2017-18.
2. The brief facts of the case are that the assessee is a wholly owned subsidiary of Amazon Corporate Holdings Private Limited engaged in rendering marketing support services, market place services and in wholesale trading of e-book reader device (kindle) along with The assessee field return of income for AY 2017-18 on 30.11.2017 declaring a loss of Rs.(-) 45,22,69,62,79 1. The case was selected for scrutiny through CASS and statutory notices were served on the assessee. The assessee had international transactions with its AE and the case was referred to the TPO after approval from the competent authority. The TPO passed order on 28.01.2021 and accordingly the AO passed the final assessment order on 24.05.2021.
3. The ld. CIT(TP) on examination of records noted that the assessee has recognized the expense on account of share based compensation transactions and the TPO allowed exclusion of share based compensation(SBC) in the form of ESOP cost from the operating cost and also excluded depreciation and amortization from the operating cost without due inquiry/verification. It was noted that while delivery charges and related warranty charges are to be considered in AMP expenses, the TPO has excluded delivery charges and warranty charges from the AMP expenses without due inquiry/verification while determining the AMP adjustment. Therefore, the ld. CIT(TP) considered the TPO’ s order dated 01.2021 as erroneous and prejudicial to the interests of revenue and issued show cause notice for revision of the order u/s. 263 of the Act. After considering the submissions of the assessee, the ld. CIT(TP) held the order of the TPO as erroneous insofar as it is prejudicial to the interests of revenue and set aside the order of the TPO with a direction to pass fresh order in the light of his findings by observing as under:-
“32. Accordingly, in line with the principles laid down in the above mentioned rulings which clearly apply to the facts and circumstances of this case and for the reasons detailed in the foregoing paragraphs, I hold that the order u/s. 92CA(3) of the Act dated 28.01.2021 is erroneous and prejudicial to the interests of revenue. Accordingly, the said order is set aside on the above two issues of (a) share-based compensation in the form of ESOP cost, depreciation and amortization in the Operating Expense base computation along with correct segmental allocation thereof and (b) Delivery charges and warranty expenses in AMP expenditure computation along with correct segmental allocation thereof and the TPO is directed to pass the order for AY 2017-18 in the light of above findings by carrying out necessary inquiries/verification under the TP provisions after giving sufficient opportunity of being heard to the assessee.”
4. Aggrieved, the assessee is in appeal before the Tribunal.
5. The ld. AR filed written synopsis which is as under:-
9. The appellant is a private limited company, engaged in the business of operating Amazon.in marketplace and partners with sellers who offer products to buyers on the said store. The appellant, inter alia, also offers services such as warehousing, logistics, order fulfilment and other services to sellers to sell various products via Amazon.in Store.
10. During the previous year relevant to assessment year 2017-18, the appellant filed return of income on 30.11.2017 declaring total loss of Rs.4,522.69 crores. Subsequently, the appellant’s case was selected for scrutiny and reference was made to the TPO for determination of arm’s length price of international transaction(s).
11. In the impugned revisionary proceedings, the CIT(TP) sought to revise the transfer pricing order dated 28.01.2021, passed under section 92CA(3) of the Act, on the alleged ground that the TPO had erroneously computed TP adjustments by:
(a) considering SBC in the form of ESOP and depreciation and amortization expense, to be in the nature of non-operating expense whilst computing operating cost of Marketing Support Service Segment (MSS Segment); and
(b) excluding delivery charges and warranty expenses from AMP Expenses, without making necessary/proper enquiries and verification.
12. It is submitted that in the transfer pricing report for the relevant assessment year 20 17-18, the segmental operating margin of the appellant for MSS Segment was determined at 14.86% by considering total operating cost at 7,103.14 million, after inter-alia excluding SBC cost of Rs.27 million. Refer page 262 of the paperbook.
13. In the present case, CIT(TP) has sought to invoke revisionary jurisdiction qua MSS Segment and inter-alia contended that SBC in the form of ESOP was erroneously considered as non-operating expense by the TPO.
14. It is at the outset submitted that SBC / ESOP attributable to MSS Segment amounted to INR 27 million only as against INR 1,760 million erroneously considered by the CIT(TP). Further, the CIT(TP) has failed to appreciate that since the aforesaid expense was notional and non-operating in nature, the same was excluded from operating cost for the purpose of computation of segmental operating profit/margin for the relevant year.
15. Further, the CIT(TP) failed to appreciate that the appellant as well as the TPO, while computing operating margin had already considered the expenditure on account of depreciation and amortization as operating expenditure [Depreciation – Rs.1,365.30 million (attributable to MSS segment – Rs.2.46 million); Amortization of intangible assets – Rs. 1,281.33 million (attributable to MSS segment – Rs.0.59 million)] and the same stood included in the operating cost base for purposes of computing operating margin. [Refer page 262 of PB and pages 5 to 7 of the TP Order].
16. Insofar as AMP expense, it is submitted that expenditure on account of warranty and delivery costs being incurred only post conclusion of the sale transaction and in no way related to promotion of Amazon brand and therefore did not warrant inclusion in the AMP expenditure (discussed in detail infra).
Re: TPO made enquiries and applied mind – order not erroneous
17. It is emphatically submitted that the TPO, in the course of original transfer pricing proceedings for the assessment year 2017-18, was not only conscious/ aware of the aforesaid issues but also conducted extensive/ necessary enquiries/ investigations, as required in law, therein before accepting the same, as would be evident from the details of enquiries conducted.
18. In this connection, the appellant is providing herein below details of relevant queries raised by the TPO vide notices/questionnaire and information/ replies filed by the appellant in response thereto from time to time, which clearly establishes that the TP order dated 28.01.2021 was passed after due examination and verification of the information! documents submitted during the course of assessment proceedings:
