TPO cannot determine the arm’s length price of an international transaction, which has not been referred to him by the AO

Delhi Tribunal Ruling –- the Transfer Pricing Officer (TPO) cannot determine the arm’s length price of an international transaction, which has not been referred to him by the Assessing Officer. When brand name is owned by the Associated Enterprise (AE) and the assessee incurs more than normal expenses on advertisement, marketing and promotion (AMP), the TPO cannot make adjustments considering that the AE did not reimburse the assessee for excess AMP expenses. [Amadeus India Pvt Ltd Vs. ACIT (2011-TII-22-ITAT¬DEL-TP)]

Facts:

Amadeus India Pvt Ltd (the assessee) was engaged in the business of providing data processing and related services to its Associated Enterprises (AEs). The assessee was responsible for proving software access to the subscribers of the Amadeus products and computer database within the Indian sub-continent i.e. in India, Nepal and Bangladesh.

During the previous year under consideration, the assessee applied Transactional Net Margin Method (TNMM) to justify the arm’s length price (ALP) of international transactions with its AEs. As the operating margin i.e. net operating profit / total cost (OP/TC) of the assessee was much higher than the arithmetic mean of operating margin of the com parables companies, it was concluded by the assessee that the transaction is at arm’s length basis.

The case was referred to the Transfer Pricing Officer (TPO) as per provisions of section 92CA(1) of the Income tax Act (Act) .The TPO did not raise any objection to the method adopted or to the computation of ALP of the services rendered to the AEs. However, the TPO in the impugned order alleged that the assessee had incurred more than normal sales and marketing expenses to build “aMaDEUS” brand in India, which is legally owned by Amadeus Spain. The TPO asserted that the assessee should have been reimbursed with an appropriate mark up on such additional marketing expenses. The TPO computed more than normal marketing expenses by comparing the advertisement, marketing and promotion (AMP) expenses as a percentage to sales of the assessee with the average AMP% of three companies, viz., Galileo India Private Ltd., Aztec soft Ltd and Geometric Limited. The TPO computed the average AMP% of three companies at 12.16% and concluded that any expenditure over and above 12.16% would be considered as more than routine marketing expenses. The TPO computed AMP% of the assessee at 40.87% and imputed the income by adding a mark-up of 10% on more than normal marketing expenses. Based on this order, the Assessing Officer (AO) passed a draft order.

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