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TMI Blog2017 (3) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... The products which are imported in India by the assessee are fashion accessories, leather bags and shoes. The assessee filed return declaring Nil income and also reported certain international transactions. The AO referred the matter of determination of arm's length price (ALP) of the international transactions to the Transfer Pricing Officer (TPO). The TPO observed that the international transactions reported by the assessee included Import of finished goods, Export of goods and Reimbursement of expenses. For Import and Export transactions, the assessee applied Resale Price Method (RPM) as the most appropriate method, whereas for the Reimbursement of expenses paid, the assessee applied Comparable Uncontrolled Method. During the course of the proceedings, the TPO observed that the assessee incurred advertisement, marketing and promotion (AMP) expenses. Treating this as an international transaction, the TPO applied bright line test and determined the ratio of the assessee's operating income to AMP expenses (excluding distribution expenses) at 6.91%. Certain comparables were chosen whose average of similar ratio was determined at 1.42%. Considering such average ratio as a benchmark, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Act, 2011 has inserted sub-section (2A) to section 92CA w.e.f. 1.6.2011 which provides that : `Where any other international transaction [other than an international transaction referred under subsection (1),] comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1).' A bare perusal of the above provision fairly indicates that where any international transaction, other than those referred by the AO, comes to the notice of the TPO during the course of proceedings before him, it shall be considered as if such an international transaction has also been referred to him. Since the reference was made by the AO to the TPO on 22.2.2012, which is a date posterior to 1.6.2011, being the date of insertion of sub-section (2A), we hold that the TPO was justified in assuming jurisdiction over the international transaction of AMP, which came to his notice during the course of proceedings before him. 8. Similar to the Nikon's case (supra), the ld. AR relied on Instruction No.3/2016 dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction before seeking approval of the PCIT or CIT to refer the matter to the TPO for determination of the ALP: * where the taxpayer has not filed the Accountant's report under Section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO; * where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under Section 92E of the Act and the said transaction or transactions come to the notice of the AO; and * where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under Section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer. In the above three situa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction of AMP expenses, this para of the Instruction, can have no application. 14. Now, we take up the challenge to the jurisdiction of the TPO, made by the ld. AR, similar to Nikon's case (supra), by relying on para 4 of the Instruction, which reads as under :- "4.1 The role of the TPO begins after a reference is received from the AO. In terms of Section 92CA, this role is limited to the determination of the ALP in relation to international transactions or specified domestic transactions referred to him by the AO. However, if any other international transaction comes to the notice of the TPO during the course of the proceedings before him, then he is empowered to determine the ALP of such other international transactions also by virtue of Section 92CA (2A) and (2B). The transfer price has to be determined by the TPO in terms of Section 92C. The price has to be determined by using any one of the methods stipulated in sub-section (1) of Section 92C and by applying the most appropriate method referred to in Sub-section (2) thereof. There may be occasions where application of the most appropriate method provides results which are different but equally reliable. In all such case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or a specified domestic transaction not referred to him. The distinction between sub-section (2A) and (2B) being that the first clause relates to a declared international transaction, i.e. in respect of which a report under Section 92E has been furnished, whereas sub- section (2B) refers to international transactions in respect of which report under Section 92E is not furnished'. 17. In the light of the above articulation of law by the Hon'ble jurisdictional High Court on sub-sections (2A) and (2B) of section 92CA of the Act, it is clear beyond any shadow of doubt that the TPO is empowered to determine the ALP of any other international transaction which comes to his notice during the course of proceedings before him. As the instant international transaction of AMP expenses was taken note of by the TPO, we do not find any lack of jurisdiction in his proceeding with the determination of its ALP. 18. Now we espouse the second aspect as to whether the Instruction is retrospective as urged by the ld. AR similar to Nikon's case (supra) or only prospective as contended by the ld. DR. In our considered opinion, there is no merit in the argument of the ld. AR that Instruction dated 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, as argued by the ld. AR, is construed as retrospective enjoining upon the AO to record satisfaction as discussed in para 3.4, it would render several earlier assessment orders containing transfer pricing additions, null and void. Since this procedure has been put in place by the CBDT with effect from 10th March, 2016, it has to be treated as prospective at least in respect of assessments which have been completed before the date prescribed in the Circular, which means that the TPOs/AOs will follow the same qua the matters under their consideration on 10th March, 2016 and onwards. 19. Reliance of the ld. AR on the judgment of the Hon'ble Delhi High Court in Indorama Synthetics (India) Ltd. VS. Adtl. CIT (2016) 386 ITR 665 (Delhi) to buttress the contention that the assessment be set aside for not giving opportunity to the assessee before making reference to the TPO, in our considered opinion is far-fetched. In that case, it was held that the AO must provide opportunity of being heard to taxpayer before recording his satisfaction or otherwise. The decision is not germane to the issue under consideration, primarily, because it was delivered on a writ petition filed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the draft assessment order or the assessment order as the case may be'. Thus it is vivid that this decision also does not bolster the assessee's point of view because here, the Hon'ble High Court held that failure to supply satisfaction note to the assessee before making reference of international transaction to the TPO is at the highest a mere irregularity, which does not itself make reference void ab initio. Thus it is clear that none of the cases relied by the ld. AR fortify his contention of quashing the assessment order. We, therefore, jettison the argument advanced by the ld. AR that this Instruction be given retrospective effect in respect of the completed assessments. It is, ergo, held that the TPO was within his jurisdiction in proceeding to determine the ALP of the international transaction of AMP expenses and further, in principle, there is no flaw in the AO making transfer pricing addition, which action is also intra vires. 20. Now we are left with the merits of addition on account of transfer pricing adjustment of AMP expenses. The ld. AR contended that the incurring of AMP expenses is not an international transaction at all and, hence, there can be no question of det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on still another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction, has been restored for a fresh determination. Similar to Nikon's case (supra), he still further referred to three later judgments of the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the Hon'ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued the matter should be restored for a fresh determination. 22. We have heard the rival submissions and perused the relevant material on record. We find that when the TPO held AMP expenses to be an internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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