No Upward Adjustment Required To Be Carried Out For Amount Received By Sony India From Its AE: Delhi High Court

The Delhi High Court has held that no upward adjustment concerning advertising, marketing, and promotion expenses (AMP) ought to have been made as the comparables chosen by the Transfer Pricing Officer (TPO) had a net margin lower than that registered by the assessee, Sony India.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that according to the TPO's findings, they are contradictory in as much as, on the one hand, he notes that the money expended on AMP has resulted in increasing the sales of the respondent or assessee in India, while on the other, he concludes that the increase in sales has benefited the AE. Contrary to business realities, the TPO observed that the high AMP spending had resulted in lowering the assessee's profitability.

In and about November 1994, the assessee was incorporated as a wholly-owned subsidiary of Sony Corporation, Japan (SCJ). SCJ held shares in the respondent/assessee via its subsidiaries, Sony Holding (Asia) B.V., Netherlands, and Sony Gulf FZE, Dubai. Initially, the assessee was into manufacturing, assembling, importing, and distributing various colour televisions, audio recording media equipment, information technology products, software, and general audio products.

However, with effect from July 1, 2004, the assessee shut down its manufacturing activities. On April 1, 2005, the assessee entered into an advertisement agreement with Sony Electronics Asia Pacific Pte. Ltd.

The TPO issued a notice calling upon the assessee to show cause as to why international transactions concerning reimbursement of advertisement expenses should not be benchmarked under the provisions of Section 92C. The thrust of the show cause notice was that the assessee, which was primarily engaged in the distribution of imported audio and visual products in the Indian market, was incurring AMP expenses on behalf of its AE.

As per the TPO, although the assessee had incurred expenses towards brand promotion and developing marketing intangibles for its AE, it was reimbursed only Rs. 72,63,324.

The TPO passed an order by which Rs. 65,34,38,272 was added to the taxable income of the assessee, having regard to the amount by which AMP expenses incurred by the assessee exceeded the amount, as determined by applying the BLT dicta.

The Assessing Officer (AO), thus, passed a draft assessment order in line with the adjustment made by the TPO. Against the TPO's order, the assessee preferred objections with the Dispute Resolution Panel (DRP), which were rejected.

The assessee preferred an appeal to the Tribunal against the directions issued by the DRP. The Tribunal remitted the matter to the TPO/AO for determination of AMP expenses after taking into account a proper comparison and granting a hearing to the authorized representative of the assessee.

The department contended that the “Sony” brand is promoted by the assessee in India. The assessee has incurred huge expenses for the promotion and development of the brand and has, therefore, created a marketing intangible for its AE. Therefore, the TPO was right in holding that the effort made by the respondent or assessee qua its AE needed to be adequately compensated. Because of the advent of modern technology, brand promotion in India has a cross-border impact, and thus, the benefit to the AE is direct and immediate, contrary to the view held by the Tribunal.

The department urged that merely because the TPO accepted other international transactions by applying the transactional net margin method (TNMM), it cannot be said that the respondent or assessee was not required to be compensated for promoting the brand owned by its AE.

The assessee contended that the TPO erroneously rejected the assessee's contention that the better net margin earned by it, as compared to the companies or entities selected by the TPO for employing the BLT tool, only demonstrated that the distribution business satisfied the ALP test.

The court noted that the assessee was only in the business of the import and distribution of Sony products. The amount spent on AMP activities by the respondent or assessee in the relevant FY was Rs. 119,54,43,600. The compensation for this expense was, according to the Tribunal, received by the respondent or assessee in terms of higher profitability for the product sold.

The court refused to interfere with the order passed by the tribunal.

Counsel For Petitioner: Zoheb Hossain

Counsel For Respondent: Nageswar Rao

Case Title: PCIT Versus M/s Sony India Pvt. Ltd

Citation: 2023 LiveLaw (Del) 1304

Case No.: ITA 7/2023 & CM APPL. 920/2023

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