Outward freight in India except for freight for import of material distributed cannot be considered for adjustment: ITAT

Outward freight in India except for freight for import of material distributed cannot be considered for adjustment: ITAT

The Income Tax Appellate Tribunal (ITAT), New Delhi Bench held that outward freight in India except import freight cannot be considered for adjustment for not operating from a transaction perspective

M/s. Michelin India Pvt. Ltd. (assessee) is engaged in the import, resale, and trading of tyres for cars, trucks and buses under the brand name 'Michelin'. It was noticed by the Transfer Pricing Officer (TPO) that the taxpayer had incurred a huge amount in the Advertisement, Marketing, and Promotional (AMP) for expanding its Associated Enterprise's (AE's) brand reach in India.

It was also noticed by TPO that the taxpayer had invested a huge amount increating marketing intangible for AE. TPO sought an explanation from the taxpayer for incurring huge AMP expenses that should not be subjected to benchmarking as an international transaction.

The issue was brought to the notice of the Commissioner of Income Tax Appeals CIT(A). It relied upon the decisions of the Delhi High Court (HC) in Sony Ericsson Mobile Pvt. Ltd. case in which the HC held that gross profit margin should be computed after including AMP expenditure and RPM is considered as the most appropriate method for import segment for resale.

The order of CIT(A) was challenged by the Revenue as the Resale Price Method (RPM) as RPM was not the Most Appropriate Method (MAM) to determine arm's length price (ALP) of AMP expenditure i.e. marketing intangibles. The rejection of Bright line Test (BLT) in benchmarking the AMP expenditure was also challenged by the revenue.

The Income Tax Appellate Tribunal (ITAT) dismissed the appeal filed by the revenue on the grounds that "Outward freight in India except for the freight for import of material distributed cannot be considered for adjustment as it is not operating from a transaction perspective".

The ITAT upheld the order of the CIT(A) and stated that there is no scope to interfere in the finding of the CIT(A) as it had relied upon the HC's judgment in the case of Sony Ericssion Mobile Pvt. Ltd.

Regarding the issues related to BLT, ITAT stated, "As far as rejecting Bright line test (BLT) by the Ld. CIT(A) is concerned it has been rejected in several judgments by the Hon'ble High Courts on the ground that bright line test has no statutory mandate for benchmarking AMP expenses".