Tribunal rules Transfer Pricing Officer exceeded jurisdiction in adjusting expenses. Assessee's appeal partly allowed.

The Tribunal set aside the Assessing Officer's order, ruling that the Transfer Pricing Officer's adjustment on advertisement, marketing, and promotion expenses was beyond his jurisdiction as it was not referred by the Assessing Officer. The Tribunal emphasized that the Transfer Pricing Officer cannot independently address international transactions for suggesting adjustments in the arm's length price. The appeal by the assessee was partly allowed, with no other issues contested by the parties, rendering them academic.

---

---

Issues Involved:
1. Assumption of jurisdiction by the Assessing Officer/TPO/DRP to determine the arm's length price.
2. Addition to total income under Chapter X of the Income-tax Act, 1961.
3. Validity of the Transfer Pricing Officer's adjustment regarding advertisement, marketing, and promotion (AMP) expenses.
4. Whether the TPO can consider issues beyond the reference made by the Assessing Officer.
5. Benchmarking of AMP expenses under the transactional net margin method (TNMM).

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction by the Assessing Officer/TPO/DRP:
The assessee argued that the Transfer Pricing Officer (TPO) proposed adjustments to the Assessing Officer (AO) concerning an international transaction not referred to him under section 92CA(1) of the Income-tax Act. The assessee contended that the TPO's role is limited to determining the arm's length price (ALP) of the international transaction referred by the AO. The Tribunal agreed, citing section 92CA(1) and the Central Board of Direct Taxes (CBDT) Instruction No. 3 of 2003, which states that the TPO's role begins after a reference from the AO and is limited to the transactions referred.

2. Addition to Total Income under Chapter X:
The Dispute Resolution Panel (DRP) upheld an addition of Rs. 32,92,83,589 to the total income of the assessee under Chapter X of the Income-tax Act, 1961. This addition was based on the TPO's assertion that the assessee incurred more than normal sales and marketing expenses to build the "aMaDEUS" brand in India, which is legally owned by Amadeus Spain. The TPO concluded that the assessee should have been reimbursed with an appropriate markup on such additional marketing expenses.

3. Validity of the TPO's Adjustment Regarding AMP Expenses:
The TPO compared the AMP expenses of the assessee with three companies: Galileo India Private Ltd., Aztec Soft Ltd., and Geometric Ltd. The TPO computed the average AMP expenses of these companies at 12.16% and concluded that any expenditure above this percentage would be considered more than routine marketing expenses. The TPO imputed an income of Rs. 32,92,83,589 by adding a markup of 10% on more than normal marketing expenses of Rs. 29,93,48,718. The Tribunal found that the TPO's adjustment was beyond his jurisdiction as the AMP expenses were not referred to him by the AO.

4. Whether the TPO Can Consider Issues Beyond the Reference Made by the AO:
The Tribunal held that the TPO could not consider issues beyond the reference made by the AO. If the TPO identifies other transactions not referred by the AO, he must take up the matter with the AO to receive a fresh reference. This interpretation aligns with section 92CA(1) and the CBDT Instruction No. 3 of 2003. The Tribunal emphasized that the TPO's role is transaction and enterprise-specific and limited to the transactions referred by the AO.

5. Benchmarking of AMP Expenses under TNMM:
The assessee used the transactional net margin method (TNMM) to justify the ALP of its international transactions, showing an operating profit/total cost (OP/TC) of 43.46%, much higher than the 8.02% of comparable companies. The TPO, however, benchmarked the AMP expenses using the AMP expense/sales ratio, which is not one of the five methods provided under the Transfer Pricing Regulations in India. The Tribunal agreed with the assessee that the TPO's approach was incorrect and that benchmarking should be done within the framework of the transfer pricing regulations using one of the five prescribed methods.

Conclusion:
The Tribunal set aside the AO's order, concluding that the TPO's adjustment regarding AMP expenses was beyond his jurisdiction as it was not referred by the AO. The Tribunal emphasized that the TPO cannot suo motu take cognizance of any international transaction for suggesting adjustments in the ALP. The appeal by the assessee was partly allowed, and no other items were agitated by the parties, thus remaining academic.

---