2019 (12) TMI 1221 - AT - Income Tax

Order passed by the Addl. JCIT u/s 92CA (3) - Disharge of function of Transfer pricing officer (TPO) by the additional Commissioner Of Income Tax - assessee submitted that order passed u/s 92CA was passed by The Additional Commissioner Of Income Tax and he is not the authorised officer to pass such an order - HELD THAT - Here it is not the case of the assessee that the additional Commissioner of income tax who passed the order of the transfer pricing under section 92CA (3) of the act was not authorised by the central board of direct taxes to perform all or any of the functions of an assessing officer specified u/s 92C of the Act. Here it is not the case of the assessee that the additional Commissioner of income tax who passed the order of the transfer pricing under section 92CA (3) of the act was not authorised by the central board of direct taxes to perform all or any of the functions of an assessing officer specified u/s 92C of the Act. Thus we hold that, the order passed by the additional Commissioner of income tax u/s 92CA (3) of the income tax act is appellate order passed by a transfer pricing officer in case of the assessee for assessment year 2002 03. In view of this, the additional ground raised by the assessee in the cross objection is dismissed. Cost for working out PLI of the assessee for benchmarking international transactions - Whether third-party cost should be included in the total cost of the assessee for providing marketing support services and therefore markup thereon should also be placed to determine the arm s-length price of the market support and services fee on by the assessee? - In this case the agreement between the assessee and the associated enterprise was not produced before the lower authorities. In absence of examination of such agreement with the actual conduct of the parties, it cannot be decided that what are the operating costs incurred by the assessee for marketing support services functions, therefore, the order of the learned CIT A cannot be sustained. Further, we do not find that on what basis certain cost not allocated to the marketing support function of the assessee have been accepted by the learned CIT A. No basis has been given for accepting the contention of the assessee by him. As the assessee has also produced the agreement between the associated enterprise and the assessee now (it was not before the learned assessing officer, the transfer pricing officer or before the learned CIT appeal) before us, there is no explanation with respect to what is the operating cost as well as what is the indirect overhead on which the assessee is required to be remunerated, the whole issue is required to be set aside to the file of the learned Assessing Officer/Transfer Pricing Officer with a direction to the assessee to produce all relevant agreement as well as to demonstrate the conduct of the assessee in accordance with those agreements , and to justify what the parties mean by the operating cost and indirect overhead . Thereafter the learned transfer-pricing officer may determine the arm s-length price of the market support service fee, which would have been charged by an independent party to the associated enterprise. Accordingly, we set aside this issue to the file of the learned transfer-pricing officer accordingly. Thus, ground number one of the appeal of the learned assessing officer challenging the order of the learned CIT A, wherein it has been held that no mark up was required on 3rd party cost incurred by the taxpayer on account of sales promotion, marketing and other expenses and expenses incurred for distribution of the digital satellite receiver for which dealers/agents were engaged and also the commission paid to dealers and agents for selling such digital satellite receiver is allowed for statistical purposes as per above directions.

Issues Involved:
1. Transfer Pricing Adjustment
2. Allocation of Third-Party Costs
3. Allocation of Indirect Expenses
4. Interest and Exchange Loss as Operating Expenses
5. Validity of the Order Passed by the Additional Commissioner of Income Tax

Detailed Analysis:

1. Transfer Pricing Adjustment:
The core issue revolves around the transfer pricing adjustments made by the Assessing Officer (AO) and the Transfer Pricing Officer (TPO). The Revenue contended that the Assessee should be adequately compensated for its market support services, arguing that the Assessee's functions in India required significant effort and thus warranted a markup on third-party costs. The Assessee, however, maintained that it acted merely as an intermediary and that third-party costs reimbursed by the Associated Enterprise (AE) should not form part of the cost base for markup purposes. The Tribunal set aside the matter to the TPO to re-examine the agreements and actual conduct between the Assessee and AE to determine the appropriate cost base and arm's-length price.

2. Allocation of Third-Party Costs:
The TPO included third-party costs in the cost base, arguing that these expenses were incurred by the Assessee and should be subject to markup. The Assessee argued these costs were pass-through expenses and should not be included in the cost base. The Tribunal noted that the agreement between the Assessee and AE did not clearly define "operating costs" and "indirect overheads," and thus remanded the issue to the TPO to determine the correct cost base after examining the agreements and actual conduct.

3. Allocation of Indirect Expenses:
The TPO included indirect expenses such as directors' salaries and common administrative expenses in the cost base, while the Assessee argued these should not be allocated to the market support services segment. The Tribunal remanded this issue to the TPO for a detailed examination of the allocation methodology and to ensure that the cost base accurately reflects the expenses attributable to the market support services.

4. Interest and Exchange Loss as Operating Expenses:
The Revenue argued that interest expenses and exchange losses should be considered operating expenses. The Assessee contended otherwise. The Tribunal remanded this issue to the TPO to re-determine the arm's-length price, considering whether these expenses should be included in the operating cost base.

5. Validity of the Order Passed by the Additional Commissioner of Income Tax:
The Assessee raised an additional ground questioning the validity of the order passed by the Additional Commissioner of Income Tax, arguing that only a Joint Commissioner, Deputy Commissioner, or Assistant Commissioner is authorized to act as a Transfer Pricing Officer (TPO). The Tribunal examined the definition of "Transfer Pricing Officer" under Section 92CA and "Joint Commissioner" under Section 2(28C) and concluded that the Additional Commissioner was authorized to act as a TPO. Thus, this ground was dismissed.

Conclusion:
The Tribunal remanded the issues related to transfer pricing adjustments, allocation of third-party and indirect expenses, and the inclusion of interest and exchange losses as operating expenses back to the TPO for detailed examination and re-determination of the arm's-length price. The additional ground challenging the validity of the order passed by the Additional Commissioner was dismissed, affirming the authority of the Additional Commissioner to act as a TPO. The appeals were allowed for statistical purposes, and the cross-objections filed by the Assessee were dismissed.

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