2013 (6) TMI 217 - AT - Income Tax

Transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses - international transaction of brand building - whether the assessee should have earned a mark up from the associated enterprise in respect of advertising, marketing and promotion expenses alleged to have been incurred for and on behalf of the associated enterprise? - Jurisdiction of TPO - improper selection of comparable - TPO/DRP have determined ALP in respect of AMP expenses by applying the bright line test

Held that:- Scope of sub-section (2B) of section 92CA covers all types of international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee's version. Thus the instant case is fully and directly covered under sub-section (2B) of section 92CA as it becomes evident that no fault can be found with the jurisdiction of the TPO to process the transaction under reference. Once there was no reporting of an international transaction by the assessee it was well within the power of the TPO to consider such transaction whether or not it was referred by AO to him.

As noticed that the Revenue has amply shown that the assessee not only promoted its name and products through advertisements, but also the foreign brand simultaneously, which has remained uncontroverted on behalf of the assessee. This factor together with the fact that the assessee's AMP expenses are proportionately much higher than those incurred by other comparable cases, lends due credence to the inference of the transaction between the assessee and the foreign AE for creating marketing intangible on behalf of the latter.

As from the agreement entered into between assessee and LGK, it can be concluded that it is the assessee who agreed to make arrangements for advertising, marketing and sale promotion in India for the LG products manufactured by it as well as LGK. The cost of such advertising, marketing and sale promotion in India was also agreed to be exclusively borne by the assessee. It is not only the products manufactured by LGI for which the assessee has undertaken to incur AMP expenses but even for the products manufactured by LGK as well. Ex consequenti it is held that there is a 'transaction' between the assessee and the foreign AE for the promotion of brand LG in India, which is legally owned by the latter.

The mere fact that no consideration moved between the associated enterprises for a transaction is not a decisive factor to have influence over its nature. Payment of consideration has not been made as a condition precedent for inclusion of any transaction within the ambit of section 92B. The transfer pricing provisions should be seen in the backdrop of the fact that these are special provisions for avoidance of tax on the transactions structured between two associated enterprises. The simple fact that the foreign AE did not pay any consideration to the Indian AE will not take the transaction out of the purview of the transfer pricing provisions, if it is otherwise an international transaction. Thus it is palpable that all the three necessary ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There was a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE was non-resident; such transaction was in the nature of provision of service. Resultantly, the Revenue authorities were fully justified in treating the transaction of brand building as an international transaction under section 92B in the facts and circumstances of case.

Suppose the Indian AE has rendered any service to its foreign AE and has charged less than what an independent comparable entity would have charged, section 92 will intervene to bring the income from such service at arm's length price. In such a situation even though there is no item of income in the profit and loss account of the Indian assessee, still section 92 will apply to dictate that the income should be included in the total income of the Indian AE for rendering such services as an independent comparable entity would have charged. The correct position is that the Revenue by this exercise has only ascertained the cost/value of the service rendered by the assessee to the foreign AE towards creation and improvement marketing intangibles. Therefore, there was no merit in the contention of the assessee that the Assessing Officer/TPO has made any disallowance out of advertisement expenses, which were otherwise deductible in full under section 37(1).

As it is found that the TPO restricted the comparable cases to only two without discussing as to how other cases cited by the assessee were not comparable. Further it can be seen that the TPO has not considered the effect of any of the relevant factors as discussed above. A bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors as discussed above, cannot produce correct result. As the TPO has neither properly considered the request of the assessee for inclusion of some other comparable cases nor examined the effect of determination of the cost/value of international transaction, the ends of justice will meet adequately if the order of the TPO and that of AO giving effect to such order is set aside and the matter is restored to the file of the TPO for determining the cost/value of the international transaction and the consequent ALP afresh.

As per section 92D alongwith section 92C(3), it becomes apparent that if the assessee does not consider a particular transaction as international and further fails to maintain relevant records in this regard, AO is free to determine the ALP on the basis of such material or information or document as are available with him. Here is a case in which the assessee did not maintain any document, information or evidence about the international transaction in question. In such a situation, it became incumbent upon the authorities to determine arm's length price as per section 92C(1) and (2). It is further evident from the order of the DRP that there is no discussion on any such plea raised by the assessee. Rather it can be seen that the assessee assailed the order of the Assessing Officer/TPO tooth and nail before the DRP on merits. As the computation of the ALP has been set aside by the authorities below with a direction to do it afresh as per law after allowing a reasonable opportunity of being heard to the assessee. Now the assessee would get full opportunity to put forth its case against any part of the computation of ALP of the international transaction by the TPO , thus there is no merit in the contention of the assessee that the ALP has been determined by applying the bright line test, which is not one of the recognized methods in India and hence the provisions of Chapter X will not apply.

It has been noticed that the DRP applied the essence of 'cost plus method' in determining the ALP of the transaction. Such addition of mark-up to the costs has the sanction of law as can be seen from sub-clause (iv) of clause (c) to rule 10B(1). Albeit the matter of determining the correct mark-up in the facts and circumstances of the present case has been restored to the file of the TPO, yet there is no hitch in holding that mark-up can be validly imposed.

Thus both the questions posted are answered in positive by holding that the transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee for creating or improving the marketing intangible for and on behalf of the foreign AE is permissible and earning a mark-up from the Associated Enterprise in respect of AMP expenses incurred for and on behalf of the AE is also allowable.