2013 (7) TMI 249 - AT - Income Tax

Jurisdiction of Transfer Pricing Officer - whether the Transfer Pricing Officer can suggest adjustments to the Assessing Officer in respect of international transaction which has not been referred to him by the Assessing Officer under section 92CA(1) - Held that - assessee has entered into international transactions with its associated enterprise - It has followed transactional net margin method for justifying the arm s length price of international transactions - Transfer Pricing Officer computed more than normal marketing expenses by comparing the advertisement, marketing and promotion (AMP expenses) as a percentage to sales of the assessee with the average advertisement, marketing and promotion of other companies - in the next assessment year, i.e., 2007-08, the Transfer Pricing Officer has referred the matter to the Assessing Officer regarding these expenses and sought a fresh reference. We are conscious of the fact that every assessment year is an independent assessment year, for abundant caution, if the parties have adopted a different procedure in the subsequent assessment year then that may not be very relevant factor for pointing out defect in the procedure adopted by the Transfer Pricing Officer or the Assessing Officer in the preceding assess ment year - as per section 92CA(1), the Transfer Pricing Officer can suggest adjustment on the international transaction entered into by an assessee with its associate enterprises which were sent to him for computation of the arm s length price by the Assessing Officer. Suo motu, he cannot take cognizance of any international transaction for suggesting adjustment in the arm s length price - Following decisions of Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. P. Ltd. 2010 (7) TMI 844 - SUPREME COURT , Shamrao V. Parulekar v. District Magistrate, Thana 1952 (5) TMI 12 - SUPREME COURT and Molar Mal v. Kay Iron Works P. Ltd. 2000 (3) TMI 1040 - SUPREME COURT - Decided in favour of assessee.

Issues Involved:
1. Assumption of jurisdiction by the Assessing Officer/TPO/DRP to determine the arm's length price.
2. Addition to total income under Chapter X of the Income-tax Act, 1961.
3. Validity of the Transfer Pricing Officer's adjustment regarding advertisement, marketing, and promotion (AMP) expenses.
4. Whether the TPO can consider issues beyond the reference made by the Assessing Officer.
5. Benchmarking of AMP expenses under the transactional net margin method (TNMM).

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction by the Assessing Officer/TPO/DRP:
The assessee argued that the Transfer Pricing Officer (TPO) proposed adjustments to the Assessing Officer (AO) concerning an international transaction not referred to him under section 92CA(1) of the Income-tax Act. The assessee contended that the TPO's role is limited to determining the arm's length price (ALP) of the international transaction referred by the AO. The Tribunal agreed, citing section 92CA(1) and the Central Board of Direct Taxes (CBDT) Instruction No. 3 of 2003, which states that the TPO's role begins after a reference from the AO and is limited to the transactions referred.

2. Addition to Total Income under Chapter X:
The Dispute Resolution Panel (DRP) upheld an addition of Rs. 32,92,83,589 to the total income of the assessee under Chapter X of the Income-tax Act, 1961. This addition was based on the TPO's assertion that the assessee incurred more than normal sales and marketing expenses to build the "aMaDEUS" brand in India, which is legally owned by Amadeus Spain. The TPO concluded that the assessee should have been reimbursed with an appropriate markup on such additional marketing expenses.

3. Validity of the TPO's Adjustment Regarding AMP Expenses:
The TPO compared the AMP expenses of the assessee with three companies: Galileo India Private Ltd., Aztec Soft Ltd., and Geometric Ltd. The TPO computed the average AMP expenses of these companies at 12.16% and concluded that any expenditure above this percentage would be considered more than routine marketing expenses. The TPO imputed an income of Rs. 32,92,83,589 by adding a markup of 10% on more than normal marketing expenses of Rs. 29,93,48,718. The Tribunal found that the TPO's adjustment was beyond his jurisdiction as the AMP expenses were not referred to him by the AO.

4. Whether the TPO Can Consider Issues Beyond the Reference Made by the AO:
The Tribunal held that the TPO could not consider issues beyond the reference made by the AO. If the TPO identifies other transactions not referred by the AO, he must take up the matter with the AO to receive a fresh reference. This interpretation aligns with section 92CA(1) and the CBDT Instruction No. 3 of 2003. The Tribunal emphasized that the TPO's role is transaction and enterprise-specific and limited to the transactions referred by the AO.

5. Benchmarking of AMP Expenses under TNMM:
The assessee used the transactional net margin method (TNMM) to justify the ALP of its international transactions, showing an operating profit/total cost (OP/TC) of 43.46%, much higher than the 8.02% of comparable companies. The TPO, however, benchmarked the AMP expenses using the AMP expense/sales ratio, which is not one of the five methods provided under the Transfer Pricing Regulations in India. The Tribunal agreed with the assessee that the TPO's approach was incorrect and that benchmarking should be done within the framework of the transfer pricing regulations using one of the five prescribed methods.

Conclusion:
The Tribunal set aside the AO's order, concluding that the TPO's adjustment regarding AMP expenses was beyond his jurisdiction as it was not referred by the AO. The Tribunal emphasized that the TPO cannot suo motu take cognizance of any international transaction for suggesting adjustments in the ALP. The appeal by the assessee was partly allowed, and no other items were agitated by the parties, thus remaining academic.

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