Tribunal rules on appeal, adjusts interest calculations, excludes advertising expenses. Transfer Pricing Officer's jurisdiction limited.

The tribunal partly allowed the appeal, deleting the addition of Rs.1,55,52,470/- for advertising expenses and directing the adjusting of interest calculations in accordance with the law. The Transfer Pricing Officer was found not competent to include transactions suo moto for the assessment year 2002-03, as the relevant provision allowing this was prospective. Interest under sections 234-B and 234-D of the Income Tax Act was addressed, with section 234-B deemed applicable but section 234-D not applicable for the said assessment year.

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Issues Involved:

1. Determination of arm's length price for advertising expenses.
2. Competence of the Transfer Pricing Officer (TPO) to include transactions suo moto.
3. Charging of interest under sections 234-B and 234-D of the Income Tax Act, 1961.

Detailed Analysis:

1. Determination of Arm's Length Price for Advertising Expenses:

The first issue examined was the determination of the arm's length price concerning advertising expenses incurred by the assessee. The assessee, a wholly-owned subsidiary of McDonalds Corporation, US (MDC), operated McDonalds restaurants in India through joint ventures and licensees. Under the Master License Agreement (MLA) with MDC, the assessee was required to pay a royalty and an initial franchise fee. During the assessment year 2002-03, the assessing officer identified three international transactions, including the payment of royalty, franchisee fee, and consulting services rendered to MDC. The TPO accepted these transactions at arm's length price but included the advertisement expenses suo moto for determination of arm's length price, applying a cost plus mark-up of 8.37%. This resulted in an enhancement of the assessee's total income by Rs.1,55,52,470/-. The CIT (Appeals) upheld this adjustment.

2. Competence of the TPO to Include Transactions Suo Moto:

The assessee contended that the TPO was not competent to include transactions suo moto that were not referred by the assessing officer under section 92-CA(1) of the Income Tax Act, 1961. The assessee relied on the ITAT Delhi Bench decision in Amadeus India (P.) Ltd. v. Asstt. CIT, which was upheld by the Delhi High Court. The tribunal noted that as per sections 92-CA(1) and (2), the TPO's role is limited to computing the arm's length price of transactions specifically referred by the assessing officer. The insertion of section 92-CA(2A) by the Finance Act, 2011, effective from 1/6/2011, allowed the TPO to take cognizance of other international transactions suo moto, but this provision was prospective. Therefore, for the assessment year 2002-03, the TPO could not include the advertising expenses transaction suo moto. The tribunal, following the Delhi High Court's decision, held that the TPO's action was not in accordance with the law and directed the deletion of the addition of Rs.1,55,52,470/-.

3. Charging of Interest under Sections 234-B and 234-D:

The final issue addressed was the charging of interest under sections 234-B and 234-D of the Income Tax Act. The tribunal noted that charging interest under section 234-B is mandatory as per the Supreme Court's decision in CIT v. Anjum M.H. Ghaswala. However, section 234-D, inserted with effect from 1/06/2003, is applicable from the assessment year 2004-05, as held by the Special Bench of the ITAT in ITO v. Ekta Promoters (P.) Ltd. Consequently, interest under section 234-B would be chargeable after giving effect to the tribunal's order, but interest under section 234-D would not be applicable for the assessment year 2002-03.

Conclusion:

The tribunal concluded by partly allowing the appeal. The addition of Rs.1,55,52,470/- on account of advertising expenses was deleted, and the assessing officer was directed to adjust the interest calculations accordingly.

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