www.pwc.com/in Sharing insights News Alert 23 February, 2011 Transfer Pricing Officer cannot propose any adjustment to a transaction in the absence of a valid reference for the transaction by the Assessing Officer In brief In a recent decision, the Delhi Income-tax Appellate Tribunal ( the Tribunal ), in the case of Amadeus India Pvt. Ltd. 1 ( the taxpayer ), held on a legal ground that the Transfer Pricing Officer ( TPO ) is not empowered to adjust an international transaction unless the transaction is expressly referred to him by the Assessing 1 Amadeus India Pvt. Ltd. v. ACIT [2011-TII-22-ITAT-DEL-TP] Officer ( AO ). While the case included the aspect of marketing intangibles, the Tribunal has not dealt with the merits of the same. Facts The taxpayer is a provider of IT solutions to tourism and travel industry. The taxpayer selected Transaction Net Margin Method ( TNMM ) as the most appropriate method to determine arm s length nature of its international transactions with associated enterprises ( AEs ). Operating Profit / Total Cost ( OP/TC ) was selected as the profit level indicator ( PLI ). During the course of 1
the transfer pricing assessment proceedings, the TPO made the following assertions: Taxpayer had incurred more than normal advertising, marketing and promotion ( AMP ) expenses to build "amadeus" brand in India which is legally owned by Amadeus Spain. Taxpayer should have been reimbursed the excess AMP expenses with an appropriate mark-up. The TPO compared AMP expenses as a percentage of sales of the taxpayer with the average AMP expenses to sales of three companies and made an adjustment for the excess. The adjustment proposed by the TPO was incorporated in the AO s draft assessment order. The taxpayer filed its objections with the DRP. Aggrieved with the order passed in accordance with DRP s directions, the taxpayer filed an appeal before the Tribunal. In its appeal to the Tribunal, apart from arguing on merits, the taxpayer put forth a legal argument that the TPO could not have proposed an adjustment with respect to an international transaction which was not specifically referred by the AO to the TPO. Since the Tribunal s decision only relates to this legal argument, and there has been no adjudication on the merits of the case, the contentions of the Revenue as well as the taxpayer which related to merits have not been reproduced hereunder. Revenue s contentions When a file is referred to the TPO for examining matters relating to ALP determination, the Assessing Authority is referring to the entire gamut of international transactions. In this regard, the Revenue placed reliance on the decision of the Bangalore Tribunal in the case of Logix Micro Systems Ltd 2. Transfer pricing regulations are to be applied keeping in mind the overall scheme of the taxpayer's business arrangement, rather than just the 'form' of a transaction. Assessee s contentions As per section 92CA(1) and 92CA(2) of the Act and as clarified by CBDT Instruction No.3 dated 20th March, 2003, TPO has the authority to determine ALP in respect of only those international transactions as have been referred to him by the AO. If TPO wants to analyse any international transaction in addition to what has been referred, the TPO is required to bring this to the notice of the AO and seek a fresh reference. The decision to refer is not solely of the AO, it also involves the approval from the Commissioner of Income-tax ( CIT ). Therefore, jurisdiction of the TPO cannot be extended either by the TPO itself or even by the AO without CIT's approval. Considering that no fresh reference was made by the AO vis-à-vis AMP expenses, the TPO had committed a jurisdictional error which vitiates his order. As for the Revenue s reliance on the case of Logix Micro Systems Ltd. (above), that case was distinguishable primarily because the outstanding receivables were generated by the taxpayer from its international transactions, and this was not a separate international transaction. Once an international transaction is referred, all aspects are referred. Further, provisions of section 92CA(1) of the Act, 92CA(2) of the Act and CBDT Instruction No.3 which have a direct 2 Logix Micro Systems Ltd. v. ACIT [2010-TII-50-ITAT-BANG-TP] 2
bearing on the issue were neither cited nor considered in the case of Logix Micro Systems Ltd. (above). Since the AO did not refer this transaction it proves AO s acceptance of the arm's length nature of the transaction. Substance over form should be seen for transactions referred to the TPO and not for new/separate transactions which have not been referred to him. Also, on a separate note, the taxpayer relied on the decisions in the cases of Vodafone Essar Ltd. 3 and GAP International Sourcing India Pvt. Ltd. 4, and submitted that it had filed detailed voluminous submissions before the DRP against the draft assessment order, which were not considered by the DRP. Tribunal ruling As per the Tribunal, the dispute was whether the TPO can suggest adjustments in respect of international transactions which have not been referred to him by the AO under section 92CA(1) of the Act. In this regard, correct interpretation of section 92CA(1) was the key. Therefore, basic principles of interpretation of the statute should be borne in mind, for which the Tribunal relied upon several case laws which had concluded that when the language of the statute is plain and unambiguous, then effect must be given to words used in the statute rather than adopt a hypothetical construction. In deciding the case, the Tribunal took the following into account: Section 92CA(1) of the Act reveals certain conditions: - The taxpayer should have entered into an international transaction in the previous year. - The AO may consider it necessary and expedient to verify the ALP of the international transactions. - The AO would take previous approval from the CIT for referring the computation of the ALP in relation to the said international transaction. The expression "said international transaction" indicates that operative force of this expression related to that international transaction which has been considered by the AO for computation of ALP and for which he took approval from the CIT. The role of the TPO has been restricted to that transaction which has been referred to him by the AO for computation of ALP. In this regard reliance was placed on CBDT Instruction No. 3/2003. In the next assessment year the TPO referred the matter to the AO regarding these expenses and sought a fresh reference. The Tribunal recognised that every assessment year is an independent assessment year, and that this was only a corroborating fact. The Tribunal eventually concluded that as per section 92CA(1) of the Act, the TPO can suggest adjustment on the international transactions entered into by a taxpayer with its AEs, which were sent to him for computation of ALP by the AO. Suo moto, he cannot take cognisance of any international transaction for suggesting an adjustment in ALP. 3 Vodafone Essar Ltd. v. DRP [2010-TII-22-HC-DEL-INTL] 4 Gap International Sourcing India Pvt. Ltd. v. DCIT [2010-TII-59-ITAT-DEL-TP] Therefore, no adjustment was required in respect of the transaction relating to incurrence of AMP expenses in this assessment year in the present proceedings. Accordingly, the AO s order was set aside as adjustment had been proposed without any jurisdiction. 3
Conclusion The Tribunal has adjudicated only with respect to the legal ground argued by the taxpayer. The Tribunal ruled that the TPO is not empowered to adjust an international transaction unless the transaction is expressly referred by the AO to the TPO. However, it is evident that this is simply a matter of administrative procedure, as a TPO can always revert to the AO with a request to make a specific reference on a particular international transaction. Therefore, resorting to this technical argument only defers the discussion on merits but does not avert it. In the present case, the issue of marketing intangibles has not been ruled upon on merits. The matter has been left open for adjudication to be decided upon as and when it comes up. Nonetheless, given the paucity of local precedence on this very critical issue, taxpayers are advised to prepare for and put up a defense for it based on international best practices. 4
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