SELLING EXPENSES INCURRED FOR MAKING SALES ARE DISTINCT FROM AMP EXPENSES AND, HENCE, SHOULD NOT BE INCLUDED IN THE BASE AMOUNT FOR COMPUTING ALP OF AMP EXPENSES
Discovery Communications India v. DCIT [Delhi ITAT], ITA No. 2931 of 2015, Date of Decision: December 04, 2015
Facts of the Case
The assessee is a subsidiary of Discovery Channel (Mauritius) Pvt. Ltd. with Discovery Communication Inc., USA as the parent company of this group, engaged in the distribution of Discovery Channel, Discovery Travel and Living Channel and Animal Planet Channel in India region and also sale of advertisement inventory on the channels.
Assessee reported six international transactions. The assessee employed Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that its first three international transactions were at arm’s length price (ALP).
The remaining three were ‘At cost’ only. On a reference made by the AO for determining the ALP of the international transactions, the TPO accepted the reported international transactions at ALP.
He, however, observed that the assessee incurred AMP (Advertisement, Marketing and Promotion) expenses which were not reported.
For determining the ALP of the international transaction of AMP expenses, he chose certain companies as comparables.
In addition to that he noticed that the assessee had not charged any ‘Interest on receivables’ from its AE. The AO, inter alia, made these two additions on account of transfer pricing adjustments.
Decision of the Tribunal
The Appellate Tribunal held that the Distribution and AMP functions are two separate international activities, which need to be compared with uncontrolled transactions.
Because of their inter-twinning, it is only for the purpose of determining their ALP that both these transactions can be aggregated in the first instance so that the surplus from one could be adjusted against the deficit from the other in an overall approach.
As the total AMP expenses incurred by the assessee are on account of its own business and also relatable to the creation of marketing intangibles for its AE, the entire expenditure, which also includes advertisement expenses for promotion of channels of its AEs, for which the assessee received 20% of gross receipts, cannot be considered as exclusively relatable to advertisement of channels of its AEs and hence deductible in full.
As admittedly the AMP expenses are one composite amount and there is no separately identifiable advertisement expense relatable to the promotion of TV channels of its AEs.
The treatment of the entire amount of AMP expenses as deductible u/s 37(1), would amount to considering the entire AMP spend for business purposes, thereby leaving nothing for the promotion of the brand of its AE, which will be contrary to the judgment of the Hon’ble High Court in assessee’s own case for the earlier assessment year.
What is an Advance Pricing Agreement (APA) ?
- An Advance Pricing Agreement is a contract between a taxpayer (also known as an assessee) and the country’s tax authorities for the purpose of determining the arm’s length pricing for future intercompany transactions with its Associated Enterprises in advance.
- The Central Board of Direct Taxes (CBDT) has the authority to issue an Advance Pricing Agreement with the Central Government’s prior consent.
- Advance Pricing Agreement (APA) service aids in determining the Arm’s Length Price for an international transaction that is covered.
Three types of APL :
- Bilateral Advance Pricing Agreement
- Unilateral Advance Pricing Agreement
- Multilateral Advance Pricing Agreement
Decision or Judgement of ALP is binding on
- Taxpayer/ Applicant/Assessee
- Income Tax Department ( Commissioner of IT/Up to Level of Principal Commissioner of IT)
Fee for filing an application of Advance Pricing Agreement
|Value to the transaction for which Advance Pricing Agreement is proposed||Amount of Fees|
|Less than RS 100 Cr||Rs 10,00,000/-|
|More than Rs 100 Cr but upto Rs 200 Cr||Rs 15,00,000/-|
|More than Rs 200 Cr||Rs. 20,00,000/-|
The Time Limit for filing an TP application:
|In case of Non-recurring Transaction||Before the First Day of PY.|
|In case of Recurring Transaction||Before the First Day of PY.|
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