DCIT Vs Mattel Toys (India) Pvt. Ltd (ITAT Mumbai)
ITAT Mumbai held that as there doesn’t exist any formal/ informal agreement between the assessee and AE to share/ reimburse AMP (Advertising Marketing and Promotion) expenses incurred by the assessee in India. The same cannot be held liable as an international transaction.
Facts-
The assessee company is incorporated in India. It is an indirectly wholly owned subsidiary of Mattel Inc., USA and is engaged in manufacturing and sales of ‘toys’ products of Mattel ground in India. In the assessment order passed u/s 143(3) r.w.s. 144C(3) of the Act, AO made addition for transfer pricing adjustment of advertising marketing and promotion (AMP) expenses of ₹4,80,31,291/ – along with disallowance of depreciation on unused plant and machinery of ₹1,73,829/- . Further, AO vide order u/s 154 dated 30.03.2017 rectified the transfer pricing adjustment and added further sum of ₹36,86,308/-making the transfer pricing adjustment to ₹5,20,17,599/ -. On further appeal, the Ld. CIT(A) deleted the transfer pricing adjustment. Being aggrieved, the present appeal is filed by the revenue.
In the cross-objection, the assessee had raised that the AMP expenditure would not fall within the ambit of an international transaction and no adjustment to arm’s length price need to be made thereof.
Conclusion-
In the case under consideration, the AO/TPO did not bring on record exists of any formal or informal agreement between the assessee and AE to share/reimburse AMP expenses incurred by the assessee in India. In absence on any such agreement, the first and primary condition of holding the transaction in question as an international transaction remains to be fulfilled. As the assessee cannot be held liable for expenses incurred on advertising marketing and promotion as an international transaction of AMP, the consequent benchmarking by the Ld. TPO is also not justified.
Since, we have already held that AMP expenditure is not an international transaction therefore, adjustment to said transaction for arm’s length price is rendered infructuous and no adjustment could have been made. The ground of appeal of the Revenue is accordingly dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the Revenue and cross-objection by the assessee are directed against order dated 08.10.2021 passed by the Ld. Commissioner of Income-tax (Appeals)-57, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2012 -13.
2. The grounds raised by the Revenue in its appeal are reproduced as under:
1. i. ‘Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in admitting and accepting new evidence on the basis of different PLI of Operating Profit/Operating Income, which was not remanded to the TPO/AO for his report, in contravention to Rule 46A of the Income Tax Rules, 1962?
ii. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified accepting the contention of the assessee based on incorrect factual data?
iii. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in rejecting the benchmarking done by TPO on the basis of PLI of AMP expenses/Sales, without assigning any cogent reason and adopting and accepting an entirely different PL of Operating Profit/Operating Income?
2. The learned CIT(A)’s order is contrary in law and deserves to be set aside.
3. The appellant prays that the order of the CIT(A) on the above grounds b e set aside and that of the AO be restored. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary at the time of
3. The grounds raised cross-objection of the assessee are reproduced as under:
1. Transfer Pricing grounds:
1.1 On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) [“CIT(A)”] erred in rejecting the Respondent’s contention that expenditure on Advertising, Marketing and Promotion (“AMP”) is not an international transaction.
1.2 The Respondent submits that expenditure on AMP is not an international transaction as held by the Hon’ble Tribunal in its own case vide Order(s) dated 8 July 2016 and 10 September 2020 in ITA Nos 4415/M/2014, CO No . 33/M/2015 and CO No. 152/M/2019 for AY 2008 -09, 200910 and 2010-11 respectively.
4. Briefly stated facts of the case are that the assessee company is incorporated in India. It is an indirectly wholly owned subsidiary of Mattel Inc., USA and is engaged i n manufacturing and sales of ‘toys’ products of Mattel ground in India. For the year under consideration, the asessee filed return of income on 29.11.2012 declaring total income of ₹9,59,73,110/-. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. In the assessment order passed u/s 143(3) r.w.s. 144C(3) of the Act, the Assessing Officer made addition for transfer pricing adjustment of advertising marketing and promotion (AMP) expenses of ₹4,80,31,291/ – along with disallowance of depreciation on unused plant and machinery of ₹1,73,829/- . Further, the Assessing Officer vide order u/s 154 dated 30.03.2017 rectified the transfer pricing adjustment and added further sum of ₹36,86,308/-making the transfer pricing adjustment to ₹5,20,17,599/ -.
5. On further appeal, the Ld. CIT(A) deleted the transfer pricing adjustment following the finding of his predecessor on the issue-in- dispute. Aggrieved the Revenue is in appeal before the Tribunal and the assessee is by way of cross-objection as reproduced above.
6. We have heard rival submission of the parties on the issue-in- dispute and perused the relevant material on record. The issue-in-dispute is with regard to transfer pricing adjustment of AMP expenses. According to the Assessing Officer/Transfer Pricing Officer, the AMP expenses incurred by the assessee for its own business made to promotion of the brand owned by the Associated Enterprises, thereby creating marketing intangible and resultant benefit to the Associated Enterprises, which being an international transaction, the arm’s length price was required to be computed by the assessee. The assessee however, contested that AMP expenses were not incurred by the assessee on behalf or for the benefit of the Associated Enterprises and if any it was incidental. The Ld. TPO applied bright line test (BLT) for making adjustment in respect of excess AMP expenditure. The Ld. CIT(A) following the finding of his predecessor, deleted the addition, observing as under:
“My predecessor has deleted the addition on the ground that the appellant has higher operating profit t the comparables even after considering AMP expenses and therefore no separate adjustment can be r in respect AMP expenditure. In the current year the assessee submitted that the operating profit of assessee is 15.80% as against 3.34% of the comparables. The details are as under.
