s.92CA(2B) permits treating AMP expenses as international transaction with mark-up; ALP remanded for fresh comparables under s.92B

ITAT (DELHI) held the TPO had jurisdiction under s.92CA(2B) to treat AMP expenditures as an international transaction for creating marketing intangibles on behalf of a non-resident AE, and that a mark-up on such AMP costs is permissible. The Tribunal found sufficient evidence of brand promotion for the foreign AE, rejected the assessee's contention that absence of consideration removes the transaction from s.92B, but set aside the TPO's ALP computation for inadequate selection/analysis of comparables and remitted the matter for redetermination of ALP with opportunity to the assessee.

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Issues Involved:

1. Jurisdiction of the Transfer Pricing Officer.
2. Rule 29.
3. Transaction.
4. International transaction.
5. Cost/value of transaction.
6. Methods for determination of the arm's length price of international transaction.
7. Maruti Suzuki's case.

Issue-wise Detailed Analysis:

I. Jurisdiction of the Transfer Pricing Officer

The Transfer Pricing Officer (TPO) assumed jurisdiction to process the international transaction of brand building for the foreign associated enterprise without any reference made by the Assessing Officer. The TPO's jurisdiction was challenged based on the lack of a valid reference. The Finance Act, 2011 inserted sub-section (2A) of section 92CA, effective from June 1, 2011, which allows the TPO to determine the arm's length price of any international transaction that comes to his notice during the proceedings. However, this provision does not apply retrospectively. The Finance Act, 2012 introduced sub-section (2B) with retrospective effect from June 1, 2002, enabling the TPO to consider any international transaction not reported under section 92E. The Tribunal concluded that the TPO had jurisdiction to process the transaction under reference.

II. Rule 29

The Department filed applications to admit additional evidence under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. The Tribunal allowed the first application, admitting the additional evidence, as it was relevant to the issue and necessary for proper adjudication. The second application, filed after the conclusion of the hearing, was rejected as it would not allow the other party to rebut the evidence.

III. Transaction

The Tribunal examined whether there was a transaction between the assessee and the foreign associated enterprise for brand building. The definition of "transaction" under section 92F(v) includes an arrangement, understanding, or action in concert, whether formal or informal. The Tribunal found that the assessee incurred advertising, marketing, and promotion (AMP) expenses, which promoted the foreign brand, indicating an informal agreement. The Tribunal held that there was a transaction between the assessee and the foreign associated enterprise for creating marketing intangible on behalf of the latter.

IV. International Transaction

The Tribunal analyzed whether the transaction of brand building could be considered an international transaction under section 92B. The definition of "international transaction" includes transactions in the nature of purchase, sale, lease of tangible or intangible property, or provision of services. The Tribunal concluded that the transaction of brand building was in the nature of "provision of service" and, therefore, an international transaction.

V. Cost/Value of Transaction

The Tribunal discussed the determination of the cost/value of the international transaction. The TPO used the bright-line test to segregate the AMP expenses into routine and non-routine expenses. The Tribunal held that the bright-line test was used to determine the cost/value of the international transaction, not the arm's length price. The Tribunal directed the TPO to consider relevant factors and comparable cases before determining the cost/value of the international transaction.

VI. Methods for Determination of the Arm's Length Price of International Transaction

The Tribunal examined the methods for determining the arm's length price of the international transaction. The TPO and the Dispute Resolution Panel (DRP) applied the cost plus method by adding a mark-up to the cost/value of the international transaction. The Tribunal found that the DRP did not correctly determine the rate of mark-up and directed the TPO to re-determine the cost/value and the arm's length price of the international transaction.

VII. Maruti Suzuki's Case

The Tribunal analyzed the relevance of the Maruti Suzuki India Ltd. case. The hon'ble Supreme Court directed the TPO to proceed with the matter uninfluenced by the observations/directions given by the hon'ble Delhi High Court. The Tribunal concluded that the decision of the hon'ble Delhi High Court on the merits of the case was not overruled by the hon'ble Supreme Court.

Conclusion:

The Tribunal held that the transfer pricing adjustment in relation to AMP expenses incurred by the assessee for creating or improving the marketing intangible for the foreign associated enterprise was permissible. The Tribunal also held that earning a mark-up from the associated enterprise in respect of AMP expenses incurred for and on behalf of the associated enterprise was allowable. The matter was restored to the TPO for de novo adjudication.

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