2018 (4) TMI 394 - AT - Income Tax

Addition on account of transfer pricing adjustment in the international transaction of Provision of marketing support services - comparability analysis - transaction between a head office in a foreign country and its branch office in India - principle of mutuality - Held that - If transactions between the foreign head office and the Indian branch office are not at ALP, it is certainly going to affect the income of the non-resident assessee chargeable to tax in India, which definitely requires the determination of the ALP of such transactions. Thus, the view canvassed by the ld. AR that since the Indian branch office is a part of the Japanese enterprise and, hence there can be no applicability of transfer pricing provisions, is devoid of merits and the same is hereby repelled. India branch office admittedly constitutes the permanent establishment of the assessee in India in terms of Article 5 of the DTAA. Thus it is axiomatic that income of the Japanese assessee, as is relatable to the operations carried out in India through its Branch office, is chargeable to tax in India not only under the Act but also under the DTAA. There can be no embargo on the determination of ALP of the services of brand promotion, rendered by the Indian branch by incurring AMP expenses. This additional ground raised by the assessee also stands dismissed. AMP expenses - International transaction or not - Held that - it would be in the fitness of things if the impugned order on this issue is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments after allowing a reasonable opportunity of being heard to the assessee. - matter remanded back.

Issues Involved:
1. Transfer pricing adjustment in the international transaction of 'Provision of marketing support services'.
2. Transfer pricing adjustment in AMP (Advertisement, Marketing and Promotion) expenses.
3. Applicability of transfer pricing provisions to transactions between a head office and its branch office.
4. Determination of ALP (Arm's Length Price) for AMP expenses.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment in 'Provision of Marketing Support Services':
The assessee, a Japanese company operating in India through its branch, reported seven international transactions, including 'Provision of marketing and technical support services'. The AO referred the matter to the TPO, who proposed a transfer pricing adjustment of ?47.05 lakh, later revised to ?47,35,843/- after DRP's directions. The assessee contested the inclusion of three comparables selected by the TPO: Apitco Ltd., Choksi Lab Ltd., and WAPCOS Ltd. The Tribunal found these companies functionally dissimilar to the assessee and ordered their exclusion from the final set of comparables.

2. Transfer Pricing Adjustment in AMP Expenses:
The TPO considered AMP expenses as a separate international transaction, proposing an adjustment of ?1,28,11,130/-. The assessee argued that being a branch of its head office, it could not render brand-building services to itself, and hence, transfer pricing provisions were inapplicable. The Tribunal held that transactions between a head office and its branch are subject to transfer pricing regulations, rejecting the assessee's contention. The Tribunal also noted that AMP expenses are deductible under Article 7(3) of the India-Japan DTAA but must be at arm's length.

3. Applicability of Transfer Pricing Provisions to Transactions Between Head Office and Branch Office:
The Tribunal clarified that a permanent establishment (PE) is considered an 'enterprise' under Section 92F(iii) of the Act. Consequently, transactions between a head office and its branch are subject to transfer pricing provisions. The Tribunal distinguished the case from earlier judgments, noting that the assessee, being a non-resident, is chargeable to tax in India only on income from Indian operations, making transfer pricing adjustments necessary to ascertain the correct amount of income attributable to Indian operations.

4. Determination of ALP for AMP Expenses:
The Tribunal addressed the contention that AMP expenses are not an international transaction, citing conflicting judgments from the Delhi High Court. It decided to restore the matter to the TPO/AO for fresh determination, considering the latest legal precedents. The Tribunal emphasized that selling expenses should not be included in AMP expenses for benchmarking. It also noted that similar issues for subsequent years were remitted for fresh determination in light of the judgment in Sony Ericsson Mobile Communication India Ltd.

Conclusion:
The Tribunal set aside the impugned orders for both assessment years and remitted the matters to the AO/TPO for fresh determination of the ALP for the international transactions of 'Provision of marketing and technical support services' and AMP expenses, in accordance with the directions provided. The appeals were partly allowed for statistical purposes.

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