2011 (12) TMI 365 - AT - Income Tax

Arms length price - Principles of natural justice - Reference to TPO - McDonalds India Pvt. Ltd. MIPL was established as a wholly owned subsidiary of McDonalds Corporation, US MDC in 1993 for the purpose of setting up McDonalds restaurants in India - Under the agreement, in consideration of such license the assessee was required to pay to McDonalds MDC a royalty equal to 5 per cent of the gross sales, and an initial franchise fee at the rate of US 45,000 for each new restaurant opened during the year - the assessing officer made reference under section 92CA(1) in respect of three international transactions and the ld. TPO in his order dated 17th March, 2005 had found those international transactions at arm s length - The provisions of sub section (2A) of section 92CA inserted from 1/6/2011 do not empower the TPO to determine arm s length price in respect of an international transaction, which was not referred to him by the assessing officer - It is quite possible that in the case of a particular assessee, there may be several international transactions and the Assessing Officer may only wish to refer some of those international transactions for the purposes of computing the arm s length price while in respect of others, he may compute the arm s length price himself - The provisions of section 92-CA(2A) are prospective in nature and will not apply for the assessment year under consideration i.e. assessment year 2002-03 - Decided in favor of the assessee

Summary

Issues Involved:

1. Determination of arm's length price for advertising expenses.
2. Competence of the Transfer Pricing Officer (TPO) to include transactions suo moto.
3. Charging of interest under sections 234-B and 234-D of the Income Tax Act, 1961.

Detailed Analysis:

1. Determination of Arm's Length Price for Advertising Expenses:

The first issue examined was the determination of the arm's length price concerning advertising expenses incurred by the assessee. The assessee, a wholly-owned subsidiary of McDonalds Corporation, US (MDC), operated McDonalds restaurants in India through joint ventures and licensees. Under the Master License Agreement (MLA) with MDC, the assessee was required to pay a royalty and an initial franchise fee. During the assessment year 2002-03, the assessing officer identified three international transactions, including the payment of royalty, franchisee fee, and consulting services rendered to MDC. The TPO accepted these transactions at arm's length price but included the advertisement expenses suo moto for determination of arm's length price, applying a cost plus mark-up of 8.37%. This resulted in an enhancement of the assessee's total income by Rs.1,55,52,470/-. The CIT (Appeals) upheld this adjustment.

2. Competence of the TPO to Include Transactions Suo Moto:

The assessee contended that the TPO was not competent to include transactions suo moto that were not referred by the assessing officer under section 92-CA(1) of the Income Tax Act, 1961. The assessee relied on the ITAT Delhi Bench decision in Amadeus India (P.) Ltd. v. Asstt. CIT, which was upheld by the Delhi High Court. The tribunal noted that as per sections 92-CA(1) and (2), the TPO's role is limited to computing the arm's length price of transactions specifically referred by the assessing officer. The insertion of section 92-CA(2A) by the Finance Act, 2011, effective from 1/6/2011, allowed the TPO to take cognizance of other international transactions suo moto, but this provision was prospective. Therefore, for the assessment year 2002-03, the TPO could not include the advertising expenses transaction suo moto. The tribunal, following the Delhi High Court's decision, held that the TPO's action was not in accordance with the law and directed the deletion of the addition of Rs.1,55,52,470/-.

3. Charging of Interest under Sections 234-B and 234-D:

The final issue addressed was the charging of interest under sections 234-B and 234-D of the Income Tax Act. The tribunal noted that charging interest under section 234-B is mandatory as per the Supreme Court's decision in CIT v. Anjum M.H. Ghaswala. However, section 234-D, inserted with effect from 1/06/2003, is applicable from the assessment year 2004-05, as held by the Special Bench of the ITAT in ITO v. Ekta Promoters (P.) Ltd. Consequently, interest under section 234-B would be chargeable after giving effect to the tribunal's order, but interest under section 234-D would not be applicable for the assessment year 2002-03.

Conclusion:

The tribunal concluded by partly allowing the appeal. The addition of Rs.1,55,52,470/- on account of advertising expenses was deleted, and the assessing officer was directed to adjust the interest calculations accordingly.