2017 (2) TMI 120 - HC - Income Tax

TPO exceeded jurisdiction by adhoc adjustment to arm's-length price; Chapter X, Rules 10A-10E govern; Section 37 is for AO

Commissioner of Income Tax-1, Mumbai Versus M/s. Lever India Exports Ltd.

HC held that the Transfer Pricing Officer exceeded jurisdiction by making an adhoc adjustment to the arm's length price of reimbursement of overseas ... International transaction being reimbursement of advertisement expenses incurred by the Associated Enterprise of the assessee in Dubai, Egypt and Malaysia at arm's length of the basis of the profits earned by the assessee on its entire exports of various products on application of Rule 10B(1)(e) - Held that:- TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and / or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the adhoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained. Issues:Challenging order of Income Tax Appellate Tribunal under Section 260A of Income Tax Act for Assessment Years 2003-04, 2004-05, and 2005-06. Dispute over acceptance of international transaction as reimbursement of advertisement expenses.Analysis:The case involved an appeal challenging the order of the Income Tax Appellate Tribunal regarding the acceptance of an international transaction as reimbursement of advertisement expenses incurred by the Associated Enterprises of the assessee. The respondent, engaged in manufacturing and exporting cosmetic products, reimbursed a portion of advertisement expenses as part of its business strategy. The respondent applied the Transaction Net Margin Method (TNMM) to determine the Arms Length Price (ALP) for the advertisement expenses, considering the profit margin of its entire export activity. The Transfer Pricing Officer (TPO) disallowed the reimbursement, leading to the ALP being determined at Nil. The Assessing Officer followed this determination.The Commissioner of Income Tax (Appeals) found that the reimbursement was part of a business strategy resulting in better profits and deleted the addition made by the TPO. The Tribunal upheld this decision, noting that the TPO did not challenge the method or comparables used to determine the ALP. The Revenue contended that as the transactions were on a principal to principal basis, no reimbursement should be allowed, and the ALP should remain Nil. However, the Tribunal emphasized that the TPO's role was limited to determining the ALP of international transactions, not assessing the genuineness of expenses under Section 37 of the Act. The TPO's adhoc determination of ALP was found to be unsustainable as it did not challenge the method or comparables used by the respondent.The Court held that the TPO's jurisdiction was specific and limited to determining the ALP of international transactions as per Chapter X of the Act. Since the method and comparables chosen by the respondent were not disputed, the TPO's adhoc determination of ALP was not valid. The Court dismissed the appeals, stating that the proposed question did not raise any substantial legal issue.In conclusion, the Court upheld the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal, emphasizing the limited scope of the TPO's jurisdiction in determining the Arms Length Price of international transactions and the importance of following the prescribed rules and methods in such assessments.