2012 (4) TMI 279 - AT - Income Tax

Arm s length price - Section 92CA - Order u/s 144C - Determination of international transaction u/s 92B - addition made on account of alleged difference in arm s length price of reimbursement of advertisement, marketing and brand promotion expenses (AMP expenses) - whether inference by TPO was permissible without reference from the AO? - held that - In the absence of the reference being made by the Assessing Officer to the TPO, the suo moto action taken by the TPO in working out the arm s length price of a particular international transaction, not referred to him by the Assessing Officer, is not warranted under the provisions of section 92CA of the Act. - in respect of the AMP expenditure, the assumption of jurisdiction by the TPO in working out arm s length price in respect of the aforesaid AMP expenditure, is not justified and the order of the TPO in this regard is non-est. Capital or revenue expenditure - expenditure under the head Promotional and Trade Marketing Expenses - held that - the test of enduring benefit is not conclusive to judge true nature of expenditure. One has to go further and ascertain as to whether particular expenditure results into an advantage of enduring nature in the capital field or revenue filed. In the instant case having regard to the nature and details of expenditure it is clear that the expenditure under the head Promotional and Trade Marketing Expenses is an expenditure which is incurred wholly and exclusively for the purposes of business and is in the revenue field. The same is allowable as a revenue expenditure. Capital or revenue expenditure - expenditure under the head Product Development Expenses - held that - it is erroneous to conclude that the assessee acquired a new line of business by merely developing and introducing new products in the existing line of business. The new products clearly relate to the same line of business that the assessee has been hitherto carrying on. Therefore, on above consideration also the plea of the assessee that the expenditure in question is a revenue expenditure deserves to be upheld.

Issues Involved:
1. Whether the transaction considered by the TPO is an international transaction.
2. Whether inference by TPO was permissible without reference from the AO.
3. Allowability as revenue expenses if indirect benefit to third party/AE.
4. Whether capital expenditure results in the creation of an intangible asset.
5. If yes, whether such intangibles are created on behalf of/transferred to AE.
6. Applicability of US Regulations and OECD Guidelines/No deeming provision as in US Regulations.
7. On facts, expenditure normal/not extraordinary and in line with the industry spend.
8. Comparables considered by the TPO not relevant for AMP expenses.
9. In any case, AMP expenses demonstrated to be at arm's length apply entity-wide basis.
10. Adjustment, even otherwise, not sustainable, not being based on any of the methods prescribed in Transfer Pricing regulations.
11. Without prejudice, no adjustment for AMP expenses for Viva Maltova and Boost.
12. Non-allowance of deduction for incremental balance lying in PLA under section 43B.
13. Disallowance of Consumer Product Research expenses under section 37(1).
14. Levying interest under sections 234B and 234D.

Analysis:

1. Whether the transaction considered by the TPO is an international transaction:
The Tribunal analyzed the definition of "international transaction" under section 92B of the Income Tax Act, which includes transactions between associated enterprises involving the purchase, sale, or lease of tangible or intangible property, provision of services, or any other transaction having a bearing on profits, income, losses, or assets. The Tribunal found that the AMP expenses incurred by the assessee were not at the instance of the associated enterprise (AE) and did not result from any arrangement or understanding with the AE. Therefore, the AMP expenses could not be characterized as an international transaction.

2. Whether inference by TPO was permissible without reference from the AO:
The Tribunal held that the TPO's jurisdiction is limited to the international transactions referred to him by the AO. In this case, the AMP expenses were not referred to the TPO by the AO. The Tribunal relied on the CBDT Instruction No. 3 of 2003 and various judicial precedents, including the case of Amadeus India (P.) Ltd., to conclude that the TPO cannot suo moto take cognizance of any transaction not referred to him by the AO.

3. Allowability as revenue expenses if indirect benefit to third party/AE:
The Tribunal did not specifically address this issue in detail as it was rendered moot by the conclusion that the AMP expenses were not international transactions and the TPO's jurisdiction was not valid.

4. Whether capital expenditure results in the creation of an intangible asset:
The Tribunal did not delve into this issue separately, as the primary contention regarding the nature of the AMP expenses was resolved by determining that they were not international transactions.

5. If yes, whether such intangibles are created on behalf of/transferred to AE:
Similar to the previous issue, this point was not separately addressed due to the primary conclusion that the AMP expenses were not international transactions.

6. Applicability of US Regulations and OECD Guidelines/No deeming provision as in US Regulations:
The Tribunal noted that the TPO had relied on US Transfer Pricing regulations and OECD guidelines, but emphasized that Indian transfer pricing regulations do not have a deeming provision similar to the US regulations. Therefore, the application of such guidelines was not warranted in this case.

7. On facts, expenditure normal/not extraordinary and in line with the industry spend:
The Tribunal did not specifically address this issue in detail, as the primary conclusion regarding the nature of the AMP expenses rendered this point moot.

8. Comparables considered by the TPO not relevant for AMP expenses:
The Tribunal did not delve into the appropriateness of the comparables selected by the TPO, as the primary conclusion regarding the jurisdiction of the TPO rendered this point moot.

9. In any case, AMP expenses demonstrated to be at arm's length apply entity-wide basis:
The Tribunal did not specifically address this issue in detail, as the primary conclusion regarding the nature of the AMP expenses rendered this point moot.

10. Adjustment, even otherwise, not sustainable, not being based on any of the methods prescribed in Transfer Pricing regulations:
The Tribunal did not delve into the appropriateness of the adjustment method used by the TPO, as the primary conclusion regarding the jurisdiction of the TPO rendered this point moot.

11. Without prejudice, no adjustment for AMP expenses for Viva Maltova and Boost:
The Tribunal did not specifically address this issue in detail, as the primary conclusion regarding the nature of the AMP expenses rendered this point moot.

12. Non-allowance of deduction for incremental balance lying in PLA under section 43B:
The Tribunal directed the AO to allow the deduction for the incremental balance lying in the PLA account under section 43B, following the precedent set by the Special Bench in the assessee's own case and the decision of the Hon'ble Punjab & Haryana High Court in CIT v. Raj & San Deeps Ltd.

13. Disallowance of Consumer Product Research expenses under section 37(1):
The Tribunal allowed the deduction for Consumer Product Research expenses, following the precedent set in the assessee's own case for earlier assessment years.

14. Levying interest under sections 234B and 234D:
The Tribunal dismissed this ground as consequential.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal held that the TPO's jurisdiction was not valid for the AMP expenses as they were not referred by the AO and directed the AO to delete the addition made on account of AMP expenses. The Tribunal also allowed the deduction for the incremental balance lying in the PLA account under section 43B and the Consumer Product Research expenses under section 37(1).

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