2011 (12) TMI 157 - AT - Income Tax

Validity of computation of Arm Length Price(ALP) by TPO of transcation not referred to him by A.O. - Determination of ALP of advertising expenses Interest leviable u/s 234B, 234D A.Y. 2002-03 Held that - TPO could not take cognizance suo moto of any international transaction for computation in arms length price u/s 92-C. The provisions of section 92-CA(2A) effective from 01.06.11 are prospective in nature and will not apply for the A.Y. under consideration i.e. 2002-03. Therefore, assessing officer is directed to delete the addition made on the basis of the report of the TPO - Decided in favor of assessee. Charging of interest u/s 234-B and 234-D are mandatory. However, provisions of section 234-D have been inserted in the statute with effect from 1/06/2003. Therefore, 234-B interest will be chargeable on tax payable by the assessee after giving effect to this order and interest u/s 234-D will not be leviable in A.Y. 2002-03 under consideration.- Decided partly in favor of assessee.

Issues Involved:
1. Determining the arm's length price for advertising expenses incurred by the assessee.
2. Competence of the Transfer Pricing Officer (TPO) to include transactions suo moto.
3. Legality of the reference made to TPO by the Assessing Officer (AO).
4. Levy of interest under Sections 234-B and 234-D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Determining the Arm's Length Price for Advertising Expenses:
The primary issue was whether the adjustment of Rs. 1,55,52,470 in determining the arm's length price for advertising expenses incurred by the assessee was justified. The assessee, a subsidiary of McDonalds Corporation, US (MDC), entered into a Master License Agreement (MLA) with MDC, which included a royalty payment and an initial franchise fee. The AO identified three international transactions and referred them to the TPO, who accepted them at arm's length price but included an additional transaction for advertising expenses, suggesting a return at cost plus a markup of 8.37%. The CIT (Appeals) upheld this adjustment.

2. Competence of the TPO to Include Transactions Suo Moto:
The assessee contended that the TPO could not include suo moto a transaction not referred by the AO under Section 92-CA(1). The ITAT, referencing the case of Amadeus India P. Ltd. v. ACIT, upheld by the Delhi High Court, agreed that the TPO's jurisdiction is limited to transactions specifically referred by the AO. The TPO's inclusion of advertising expenses was thus deemed beyond his authority, as Section 92-CA(2A) allowing such inclusion was effective only from 1/6/2011 and not applicable to the assessment year 2002-03.

3. Legality of the Reference Made to TPO by the AO:
The assessee argued that the reference to the TPO was made without observing legal requirements and principles of natural justice. The ITAT noted that the TPO's role is confined to computing the arm's length price of transactions referred by the AO. The Delhi High Court clarified that the AO determines the international transaction and may refer specific transactions to the TPO. The TPO's recommendation for an additional adjustment was invalid as it was not referred by the AO.

4. Levy of Interest under Sections 234-B and 234-D:
Interest under Section 234-B is mandatory as per the Supreme Court's decision in Anjum M.H. Ghaswala. However, Section 234-D, effective from 1/6/2003, applies from the assessment year 2004-05. Therefore, for the assessment year 2002-03, interest under Section 234-D is not applicable. The AO was directed to delete the addition of Rs. 1,55,52,470 and adjust interest under Section 234-B accordingly.

Conclusion:
The ITAT ruled in favor of the assessee, directing the deletion of the Rs. 1,55,52,470 adjustment for advertising expenses and confirming that the TPO cannot suo moto include transactions not referred by the AO. Interest under Section 234-B is applicable, but not under Section 234-D for the assessment year 2002-03. The appeal was partly allowed.

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