alp of amp expenses to be determined as per sony case

ALP OF AMP EXPENSES TO BE DETERMINED AS PER SONY ERRICSON’S CASE IF ASSESSEE WAS A MANUFACTURER AND NOT A DISTRIBUTOR

Glaxo SmithKline Consumer Healthcare Ltd. v. JCIT [Chandigarh ITAT], ITA No. 290 of 2014 and 208 of 2015, Date of Decision: November 06, 2015

Facts of the Case

The assessee did detailed transfer pricing study relating to export of manufactured malted food biscuits, export of raw material, IT services received and cost reimbursement to and from group company, during the year under consideration.

The said study was not disputed by the TPO and all these international transactions were treated at arms’ length. However, the Transfer Pricing Officer (TPO) undertook the benchmarking analysis of advertisement, marketing and sales production (AMP) expenses incurred by the assessee on product ‘Horlicks’ during the year.

The bench marking was done applying the ‘Bright Line Test’. For applying Bright Line Test, the TPO compared AMP expenditure of the assessee, being 7.076% of total turnover with average expenditure of 1% of the three comparables and made adjustment to the income of the assessee.

Decision of the Tribunal

The Appellate Tribunal held that the Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT, ([2015] 374 ITR 118) has very categorically distinguished between the approach to be adopted in the case of manufacturer and that in the case of a distributor.

The proposition laid down by the High Court can be summarized in simple terms to the effect that in case of a manufacturer, there are two activities, which are to be segregated, one is prime manufacturing activity and the other relating to AMP.

Further, for a manufacturer, TNMM is not an appropriate method. Therefore, in the result, the Arms Length Price (ALP) of the AMP activity has to be computed by using any other suitable method.

However, it is to be taken care that if cost plus method is used, the selling expenses are to be excluded from the total AMP expense.

The instant case being that of manufacturer, the Tribunal remanded back the matter to TPO/AO to decide the issue of AMP afresh as per law laid down by the Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra).

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