2022 (8) TMI 946 - AT - Income Tax

TP Adjustment - MAM selection - justification of Resale Price Method (RPM) as most appropriate method - HELD THAT - The assessee is primarily in the business of buying and selling of online advertisement space and act as a distributor. The Function, Assets and Risk ( FAR ) analysis placed before the lower authorities also show that assessee is acting as a distributor. Therefore, resale price method generally should have been adopted as the most appropriate method. The learned Transfer Pricing Officer because of the level of expenses incurred by assessee came to conclusion that assessee is providing value added services however, no such services were identified by the learned Transfer Pricing Officer. The learned CIT(A) following the decision in case of CIT vs. L'Oreal India Pvt. Ltd 2015 (2) TMI 407 - BOMBAY HIGH COURT confirmed that in case of assessee, resale price method is the most appropriate method for benchmarking of international transaction. A categorical finding was given that the advertisement publicity and business development expenses are not at all related to the distributor function of purchase and sale of online media transaction. The finding was also given that assessee is a startup company and is expanding its operations in India, therefore, It incurred such expenses for increasing its valuation. The above findings are not controverted by the Revenue authorities. We also do not find any infirmity in the order of the learned CIT(A) and therefore, we confirm his order. Accordingly, ground no.1 to 4 of the appeal of learned Assessing Officer is dismissed.

Summary

Issues:
- Determination of arm's length price using Resale Price Method (RPM) for international transactions involving purchase and sale of online advertisement space.
- Assessment of value-added services provided by the assessee.
- Justification of advertisement, publicity, and business development expenses.
- Application of Transactional Net Margin Method (TNMM) as an alternative method.

Analysis:
1. Determination of arm's length price using Resale Price Method (RPM): The Assessing Officer raised concerns regarding the use of RPM for determining the arm's length price of the assessee's international transactions involving the purchase and sale of online advertisement space. The dispute centered around whether RPM was suitable for transactions with both purchases from and sales to associated enterprises (AE). The assessee argued that it only performed distribution functions and did not add significant value to the products, thus justifying the use of RPM. The Transfer Pricing Officer rejected RPM, citing value-added services provided by the assessee and substantial expenses incurred.

2. Assessment of value-added services: The Transfer Pricing Officer contended that the assessee provided value-added services due to significant employee costs and other expenditures, leading to the rejection of RPM. However, the CIT(A) determined that the advertisement, publicity, and business development expenses were unrelated to the distributor function of the online media transaction. The CIT(A) also noted that the assessee, a startup company expanding operations in India, incurred these expenses to enhance its valuation, not for providing value-added services.

3. Justification of advertisement, publicity, and business development expenses: The Assessing Officer questioned the justification of the assessee's expenses on advertisement, publicity, and business development, suggesting they were unrelated to the core functions of the online media transaction. However, the CIT(A) found that these expenses were aimed at increasing the company's valuation and were not directly linked to providing value-added services, thereby supporting the assessee's position.

4. Application of Transactional Net Margin Method (TNMM) as an alternative: The Transfer Pricing Officer proposed TNMM as an alternative method due to the perceived value-added services provided by the assessee. However, the CIT(A) upheld the use of RPM, emphasizing the distributor function of the assessee and the lack of identified value-added services. The CIT(A) also referenced a decision by the Bombay High Court to support the use of RPM in the given scenario.

5. Judicial Decision: The ITAT, Mumbai, upheld the CIT(A)'s decision, dismissing the appeals filed by the Assessing Officer for both A.Ys. 2011-12 and 2012-13. The ITAT concurred with the CIT(A)'s findings that the advertisement, publicity, and business development expenses were not linked to value-added services but were aimed at enhancing the company's valuation. The ITAT affirmed that the assessee's distributor function justified the use of RPM for determining the arm's length price of the international transactions involving online advertisement space.

In conclusion, the ITAT's judgment supported the CIT(A)'s decision, emphasizing the appropriateness of the Resale Price Method for benchmarking the arm's length price of the assessee's international transactions. The judgment highlighted the distinction between distributor functions and value-added services, ultimately leading to the dismissal of the appeals filed by the Assessing Officer.