Law empowers Transfer Pricing Officer to determine the arm’s length price of only ‘referred’ international transactions. Non-referred international transactions fall outside the TPO’s jurisdiction
The Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of M/s. Amadeus India Pvt Ltd Vs. ACIT, Range-I, New Delhi (ITA No. 5203/Del/2010) held that the role of Transfer Pricing Officer (TPO) is limited to the determination of arm’s length price in relation to the international transaction(s) referred to him by the Assessing Officer (AO). The TPO, suo motto, cannot take cognizance of any other international transaction not referred to him by the TPO.
Facts of the case
• The taxpayer is engaged in the business of providing data processing and related services including software access to the subscribers of the Amadeus products. Transaction Net Margin Method (TNMM) with NCP margin as the Profit Level Indicator (PLI) was applied for determining the Arm’s Length Price (ALP) of international transactions.
• The AO, with due approval of Commissioner of Income Tax, referred the case to the TPO for determination of ALP of the international transactions mentioned in Form No. 3CEB.
• The TPO, while accepting the ALP of the ‘referred’ international transactions of the taxpayer, made an adjustment by adding a mark-up on the excess advertising, marketing and promotion expenses (AMP) incurred by the taxpayer over and above the Bright line limit. It was contented that since such excess AMP expenses were incurred to build “aMaDeus” brand (owned by the AE) in India and hence, the taxpayer should have been compensated at arm’s length by the AE.
• The Dispute Resolution Panel (DRP) has also confirmed the TPO/AO’s proposed adjustment. Hence, the aggrieved taxpayer appealed before the Tribunal.
• The ‘reference’ by the AO to the TPO in essence means an overall examination and analysis on the entire aspects relating to the international transactions concluded by the taxpayer.
• In the instant case, since the taxpayer incurred excessive AMP cost in connection with the benefit and services provided to the AE under an arrangement, the said expenditure was treated as an international transaction.
• The law empowers the TPO to determine the ALP of the international transactions which are referred to him by the AO. Since the transaction of AMP expenses was not referred, it fell outside the jurisdiction of the TPO.
• CBDT Instruction No. 3 dated 20 March, 2003 (reported in 261 ITR 51 (St). further clarifies that the TPO is required to seek fresh reference from the AO to analyze any international transaction in addition to what has been so referred.
• Since AMP expenses were not disallowed by the AO, he has accepted that AMP expenses were incurred wholly and exclusively for the purpose of its business.
• Use of AMP expenses/sales as a base is not supported by any of the methods provided under law. Further, under the Indian law, there is no concept of creation of marketing intangibles due to excess AMP incurred by the taxpayer.
The Tribunal ruled in favor of the taxpayer. The key aspects of Tribunal’s order are summarized below:
• In view of the provisions under law and CBDT Instructions, the TPO is empowered to determine the ALP of the ‘referred’ transactions and a fresh reference from the AO needs to be sought with regard to the new transactions discovered by the TPO.
• No adjustment was warranted on the AMP expenses since the adjustment had been made by the TPO without any jurisdiction.
The Tribunal’s ruling laid down that the TPO has no jurisdiction for determining the ALP of those transactions which have not been referred to him by the AO. Obviously, this ruling does not cover the subsequent proposed amendment in Union Budget 2011 (effective from June 1, 2011) empowering the TPO to determine the ALP of any international transaction discovered by him during the course of proceedings, in addition to those referred by the AO.
The earlier decision of Bangalore bench in case of Logix Micro systems Limited was sought to be distinguished by the taxpayer on the ground of lack of relevant arguments on the jurisdiction of the TPO and also that in the aforesaid case, the non-referred transaction was not a separate transaction but an aspect of the international transaction. This argument that the case of Logix Micro systems Limited was distinguishable seems to have been implicitly accepted by the Tribunal.
Further, the Tribunal has not commented on whether the excessive AMP expense has resulted in creation of marketing intangible of the AE in India.