In the absence of a contract between the assessee and the AE, the expense is not deductible as an overseas transaction

Fact and issue of the case

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/ -.

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.

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:

Observation of the court

We find that the Tribunal in ITA No. 3903/M/2016 along with CO No. 152/M/2019 for assessment year 2010 -11 has allowed the cross-objection of the as sessee. 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. Since, this being a legal issue and challenging the route of the addition made by the Ld. TPO/AO. Therefore, firstly, we may like to address the cross -objection of the assessee. AS per the definition of international transactions u/s 92B of the Act means a transaction between two or more associated enterprises, either on both of whom are non-residents, in the nature of purchase, sale, etc. or other transactions having bearing on profit, income or loss of such enterprises.

Respectfully, following the above, we uphold the finding of the Ld. CIT(A) that AMP expenditure is not an international transaction. The grounds of the cross-objection of the assessee are accordingly allowed.

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.

Further, we note that in the ground raised, the Revenue has referred the issue of accepting new evidence on the basis of the different PLI operating profit/operating income, however, perusal of the order of the Ld. CIT(A), we do not find any reference of admission of any additional evidence. Nothing in this regard brought before us by the Ld. DR. Therefore, other grounds raised by the Revenue are also dismissed.

In the result, the appeal of the Revenue is dismissed, whereas, the cross-objection of the assessee is allowed.

Read the full order from here

DCIT-Vs-Mattel-Toys-India-Pvt.-Ltd-ITAT-Mumbai