[Opinion] Delhi High Court Ruling on Transfer Pricing Implications of AMP Expenditure and Forex Losses

Ashwath S Pai, Sameer & Surya – [2024] 167 taxmann.com 591 (Article)

The issue of AMP expenditure has been an issue which has had the judiciary divided. While there are certain rulings which have ruled in favour of the Tax Department and advocated the use of ‘Bright Line’ Test, there are other rulings which have held that the Bright Line Test cannot be applied.

The above issue was again placed for determination before the Delhi HC in the Case of Samsung India1, wherein the major issues which were taken up before the HC was as follows:

1. Whether advertisement, marketing and promotion (‘AMP’) expenditure constitutes as an international transaction?
2. Whether foreign exchange gain/loss arising from international transactions was to be considered as an item of operating revenue/cost and not as a non-operating revenue/cost?

Background

The appellant Samsung India Electronics Pvt. Ltd. (SIEL or Appellant) was a company primarily engaged in the business of manufacture and sale of consumer electronics and home appliances goods. The appellant company is a part of the Samsung group of companies and a wholly owned subsidiary of Samsung Electronics Co. Ltd. Korea (‘SEC’).

The Appellant incurred certain AMP expenditure during the year concerned and failed to disclose the same in Transfer pricing report. The Transfer Pricing Officer (‘TPO’) had determined the Arm’s Length Price (‘ALP’) of the transaction stating it as International Transaction with the help of Bright Line Test (‘BLT’).

Aggrieved by the same, the appellant had filed appeal before the First Appellate Authority and then subsequently before the Income Tax Appellate Tribunal (ITAT). ITAT had issued order in favour of the Appellant and thereafter the Tax Department challenged this order before the Delhi High Court (Delhi HC).

Here are the key questions of law placed before the Delhi HC:

1. Whether the ITAT was justified in holding that the Advertising, Marketing, and Promotion (AMP) expenditure does not constitute an international transaction?
2. Whether the ITAT was correct in stating that the Brightline Test is not mandated by law and cannot be used to determine price but can only be used as an economic tool for determining costs in transfer pricing?
3. Whether the ITAT was right in observing that under the Transactional Net Margin Method (TNMM), AMP expenditure cannot be segregated for benchmarking?
4. Whether the ITAT was correct in stating that a protective adjustment to preserve revenue interests cannot be made when the issue of AMP is still pending before the Supreme Court?
5. Whether the ITAT erred in not appreciating that the ALP should remain unaffected by foreign exchange fluctuations and other post-transaction events?
6. Whether the ITAT erred in not recognizing that the TPO followed Rule 10B(3) by treating foreign exchange fluctuations and provisions as non-operating costs/revenues to ensure a consistent basis for comparison?

The Hon’ble High Court with regard to the Question of facts stated in Sl. No 1 to 3 hereinabove relied on the judgement in the case of Sony Ericsson Mobile Communications India Pvt Ltd. (‘Sony India’) v. Commissioner of Income-Tax 2015 SCC OnLine Del 8083.

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