2012 (5) TMI 317 - AT - Income Tax

Transfer pricing - international transactions - selection of comparable - TPO rejected the CUP method - held that - the first appellate authority was wrong in basing his decision on the fact that RBI has granted permission. This is not a ground to allow an appeal. Every remittance would bear the approval of RBI. The ground that the TPO has not brought out any evidence on record that part of the money paid to AEs was returned back to the assessee is also not a basis contemplated under T.P. provisions. The fact that expenses were audited and payments were through banking channels are not issues that determine the transfer pricing adjustment. These are not grounds on which a transfer pricing adjustment could be deleted. Hence the CIT(A) was wrong on basis in his decision on these findings. Nevertheless as the TPO has not given any reason as to why the method adopted by the assessee i.e., CUP method is not acceptable as the most appropriate method and as the Assessing Officer has not adopted any of the methods prescribed under the Act and has method adopted by the TPO cannot be called TNMM prescribed under the Act and Rules, we have to necessarily uphold the Order of the first appellate authority, though for different reasons. - Decided in favor of assessee.

Issues Involved:
1. Determination of arm's length price (ALP) for reimbursement of business promotion expenses.
2. Rejection of Comparable Uncontrolled Price (CUP) method by the Transfer Pricing Officer (TPO).
3. Application of Transactional Net Margin Method (TNMM) by the TPO.
4. Validity of the TPO's findings and adjustments.
5. Role and jurisdiction of the TPO versus the Assessing Officer (AO).
6. Acceptance of additional evidence by the Commissioner of Income Tax (Appeals) [CIT(A)].
7. Genuineness of the advertising and marketing expenses.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Reimbursement of Business Promotion Expenses:
The core issue was the determination of the ALP for the reimbursement of business promotion expenses incurred by the assessee in relation to its Associated Enterprises (AEs). The TPO had determined the ALP of these expenses at Rs. 2,13,46,528/- against the ALP of Rs. 32,11,57,736/- determined by the assessee, resulting in an upward adjustment of Rs. 29,98,11,208/-.

2. Rejection of Comparable Uncontrolled Price (CUP) Method by the TPO:
The TPO rejected the CUP method adopted by the assessee without providing any cogent reasons. The Tribunal held that no method could be rejected without giving cogent reasons, and the TPO failed to state why the CUP method was not applicable in this case.

3. Application of Transactional Net Margin Method (TNMM) by the TPO:
The TPO applied the TNMM by taking the average of expenditure incurred on marketing and advertisement by 17 top pharmaceutical companies. The Tribunal found that this approach was incorrect and not in accordance with the law. The methodology adopted by the TPO was deemed an ad hoc method rather than a proper application of TNMM as prescribed under the Income Tax Act and Rules.

4. Validity of the TPO's Findings and Adjustments:
The Tribunal criticized the TPO's findings, noting that the TPO did not provide a proper analysis or reasons for rejecting the CUP method and applying TNMM. The TPO's approach of averaging the percentage of expenditure incurred by 17 companies and treating it as the industry average was found to be flawed and not a proper application of TNMM.

5. Role and Jurisdiction of the TPO versus the Assessing Officer (AO):
The Tribunal emphasized that the TPO's role was limited to determining the ALP in relation to international transactions referred to him by the AO, and it was the AO's role to compute the total income of the assessee having regard to the ALP. The TPO's involvement in questioning the genuineness of the expenditure was beyond his jurisdiction.

6. Acceptance of Additional Evidence by the Commissioner of Income Tax (Appeals) [CIT(A)]:
The Revenue contended that the CIT(A) erred in accepting additional evidence in the form of copies of bills for advertisement without giving an opportunity to the AO as provided under Rule 46A. However, the Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO based on the TPO's order.

7. Genuineness of the Advertising and Marketing Expenses:
The Tribunal noted that the TPO and AO did not bring any evidence on record to suggest that part of the money paid to the AEs was returned to the assessee. The Tribunal also found that the expenses were audited, and the payments were made through banking channels, which supported the genuineness of the expenses.

Conclusion:
The Tribunal upheld the order of the CIT(A) and dismissed the Revenue's appeal, primarily on the grounds that the TPO did not provide valid reasons for rejecting the CUP method and incorrectly applied TNMM. The Tribunal also emphasized the limited role of the TPO and the AO in determining the ALP and computing the total income, respectively. The Tribunal found that the CIT(A) was correct in deleting the addition made by the AO based on the TPO's flawed methodology and lack of evidence questioning the genuineness of the expenses.

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