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Income Tax Appellate Tribunal, DELHI BENCHES : I-2 : NEW DELHI
Before: SHRI R.S. SYAL & SHRI KULDIP SINGH
ORDER
PER R.S. SYAL, AM:
This appeal filed by the assessee is directed against the final assessment order dated 27.11.2014 passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2010-11.
The first ground is against the addition on account of transfer pricing adjustment towards Advertisement, marketing and promotion expenses amounting to Rs.4,48,09,156/-.
Briefly stated, the facts of the case are that the assessee is an Indian subsidiary of Louis Vuitton Malletier SA, France and is engaged in the business of retailing the products of the group. The assessee imports material from its group companies and resells the same in the Indian markets. The products which are imported in India by the assessee are fashion accessories, leather bags and shoes. The assessee filed return declaring Nil income and also reported certain international transactions.
The AO referred the matter of determination of arm’s length price (ALP) of the international transactions to the Transfer Pricing Officer (TPO).
The TPO observed that the international transactions reported by the assessee included Import of finished goods, Export of goods and Reimbursement of expenses. For Import and Export transactions, the assessee applied Resale Price Method (RPM) as the most appropriate method, whereas for the Reimbursement of expenses paid, the assessee applied Comparable Uncontrolled Method. During the course of the proceedings, the TPO observed that the assessee incurred advertisement, marketing and promotion (AMP) expenses. Treating this as an international transaction, the TPO applied bright line test and determined the ratio of the assessee’s operating income to AMP expenses (excluding distribution expenses) at 6.91%. Certain comparables were chosen whose average of similar ratio was determined at 1.42%. Considering such average ratio as a benchmark, the TPO proposed transfer pricing adjustment on account of AMP expenses at Rs.4,48,09,156/-. No relief was allowed by the Dispute Resolution Panel (DRP). The AO in the final assessment order, made the said addition, against which the assessee has come up in appeal before us.
We have heard the rival submissions and perused the relevant material on record. The assessee, in the extant case, has raised two sets of additional grounds, one of which is as under :-
“i. That on facts and circumstances of the case and in law, the Transfer pricing Officer (TPO) has erred in law and facts, in determining the Arm’s Length Price (ALP) for an alleged international transaction wherein no specific reference has been received from the Assessing Officer (AO). ii. That on the facts and circumstances of the case and in law, the action of the TPO in categorizing the unilateral advertising, marketing and business promotion expenditure as an ‘international transaction’ under chapter X of the Income-tax Act, 1961 (‘Act’) is erroneous as TPO exceeded his jurisdiction particularly when section 92CA of the Act enables the TPO only to compute the arm’s length of international transaction.”
The ld. DR did not object to the admission of the above additional grounds. We, therefore, admit the same and take them up for disposal on merits.
Before taking up the issues, it is relevant to mention that the ld. AR argued similar issues as have been raised in the instant appeal before the Delhi tribunal in Nikon India Pvt. Ltd. vs. DCIT (ITA No. 6314/Del/2015 firstly, challenging the jurisdiction of the Transfer Pricing Officer (TPO) in determining the arm’s length price (ALP) of the international transaction of Advertising, marketing and promotion expenses (AMP expenses) and secondly, contending that the incurring of AMP expenses is not an international transaction. The tribunal vide its order dated 15.7.2016 since reported as (2016) 47 CCH 0458 DelTrib rejected both the contentions of the assessee. Certain additional arguments have been instantly made, which we will advert to at the appropriate place.
Through these additional grounds, the assessee has contended that in the absence of any specific reference received from the AO, the TPO was not entitled to determine the ALP of the international transaction of AMP and, in doing so, he exceeded his jurisdiction. It is noticed that the Finance Act, 2011 has inserted sub-section (2A) to section 92CA w.e.f.
1.6.2011 which provides that : `Where any other international transaction [other than an international transaction referred under sub- section (1),] comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1).’ A bare perusal of the 5 above provision fairly indicates that where any international transaction, other than those referred by the AO, comes to the notice of the TPO during the course of proceedings before him, it shall be considered as if such an international transaction has also been referred to him. Since the reference was made by the AO to the TPO on 22.2.2012, which is a date posterior to 1.6.2011, being the date of insertion of sub-section (2A), we hold that the TPO was justified in assuming jurisdiction over the international transaction of AMP, which came to his notice during the course of proceedings before him.
Similar to the Nikon’s case (supra), the ld. AR relied on Instruction No.3/2016 dated 10th March, 2016 laying down guidelines for implementation of transfer pricing provisions. Referring to para 3.4 of this Instruction, the ld. AR argued that the AO must have first provided an opportunity of being heard to the assessee before recording a satisfaction in respect of the transaction of AMP expenses. Then, he referred to para 4.1 of the Instruction to submit that the TPO could not have undertaken the exercise of determining the ALP of the international transaction of AMP expenses. It was submitted that the said Instruction, albeit dated March, 2016, is curative and, hence, retrospective in nature.
It was submitted that the Instruction be given retrospective effect and, accordingly, the jurisdiction of the AO/TPO to determine the ALP of AMP expenses be declared invalid. He relied on certain decisions to fortify his point of view, which we will discuss a little later.
This was opposed by the ld. DR, who, similar to Nikon’s case (supra), submitted that the Instruction dated 10th March, 2016 is procedural in nature and, hence, can never have a retrospective effect.
To be more specific, he submitted that no Instruction issued by the CBDT laying down a particular procedure to be followed by the authorities can ever be retrospective in nature. It was submitted that since the language of section 92CA(2A) and (2B) is clear and unambiguous which does not admit of any doubt in providing that the jurisdiction of the TPO is not limited to the international transactions either reported by the assessee or referred to by the AO, there is no need to look into the Instruction, at least before the date of its applicability.
We find that there are two aspects of this issue requiring our decision, first, the content of the Instruction and second, the prospective or retrospective effect of the Instruction.
The ld. AR, similar to Nikon’s case (supra), relied on para 3.4 of the Instruction to bolster his argument that the AO could not have referred the matter of ALP of AMP expenses to the TPO without recording his satisfaction and such satisfaction could have recorded only after giving opportunity of hearing to the assessee. Let us see the contents of para 3.4 of the Instruction, which read as under :-
“3.4 For cases to be referred by the AO to the TPO in accordance with paragraphs 3.2 and 3.3 above, in respect of transactions having the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction before seeking approval of the PCIT or CIT to refer the matter to the TPO for determination of the ALP:
• where the taxpayer has not filed the Accountant’s report under Section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO;
• where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant’s report filed under Section 92E of the Act and the said transaction or transactions come to the notice of the AO; and • where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant’s report filed under Section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.
In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised by the taxpayer to the applicability of Chapter X [Sections 92 to 92F] of the Act to these three situations, then AO should refer the international transaction or specified domestic transaction to the TPO for determining the ALP after obtaining the approval of the PCIT or CIT. However, where the applicability of Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the taxpayer’s objections and pass a speaking order so as to comply with the principles of natural justice. If the AO decides in the said order that the transaction in question needs to be referred to the TPO, he should make a reference after obtaining the approval of the PCIT or CIT.”
The ld. AR, similar to Nikon’s case (supra), submitted that his case falls under the second bullet point of the para inasmuch as the assessee did not report AMP expenses as an international transaction.
We find that the language of the above para makes it clear that before making a reference by the AO to the TPO, there is a jurisdictional requirement on the part of the AO to record his satisfaction that there is an income or a potential of an income arising on determination of the ALP of an international transaction before seeking approval of the CIT where the assessee, inter alia, has not declared a particular transaction as international transaction in its report filed u/s 92E. Before recording such a satisfaction, it is incumbent on the part of the AO to provide an opportunity of hearing to the assessee and, thereafter, pass a speaking order, if the assessee objects to the AO’s version. It is only when the taxpayer fails to declare an international transaction, which comes to the notice of the AO, who makes reference to the TPO for determining its ALP, that the satisfaction has to be recorded by him after giving an opportunity of hearing to the assessee. We do not find the assessee’s case falling under the second bullet point, because it is not the AO who formulated his view on AMP expenses as an international transaction and then required determination of its ALP by the TPO. As in the instant case, the AO did not make any reference to the TPO for determining the 10 ALP of the unreported international transaction of AMP expenses, this para of the Instruction, can have no application.
Now, we take up the challenge to the jurisdiction of the TPO, made by the ld. AR, similar to Nikon’s case (supra), by relying on para 4 of the Instruction, which reads as under :-
“4.1 The role of the TPO begins after a reference is received from the AO. In terms of Section 92CA, this role is limited to the determination of the ALP in relation to international transactions or specified domestic transactions referred to him by the AO. However, if any other international transaction comes to the notice of the TPO during the course of the proceedings before him, then he is empowered to determine the ALP of such other international transactions also by virtue of Section 92CA (2A) and (2B). The transfer price has to be determined by the TPO in terms of Section 92C. The price has to be determined by using any one of the methods stipulated in sub-section (1) of Section 92C and by applying the most appropriate method referred to in Sub-section (2) thereof. There may be occasions where application of the most appropriate method provides results which are different but equally reliable. In all such cases, further scrutiny may be necessary to evaluate the appropriateness of the method, the correctness of the data, weight given to various factors and so on. The selection of the most appropriate method will depend upon the facts of the case and the factors mentioned in Rule 100. The TPO, after taking into account all relevant facts and data available to him, shall determine the ALP and pass a speaking order.
On going through the above para, it becomes palpable that the role of the TPO is limited to the determination of the ALP of the international transactions referred to him by the AO. This para further provides : “However, if any other international transaction comes to the notice of the TPO during the course of proceedings before him then he is empowered to determine the ALP of such other international transaction also by virtue of section 92CA(2A) and (2B).” On going through this mandate of the Instruction, it becomes overt that though the original jurisdiction of the TPO is confined to the international transactions referred to him by the AO for determination of the ALP, but, such jurisdiction is extendable to other international transactions which come to his notice during the course of proceedings before him. It is nowhere laid down that the power of the TPO to determine the ALP of an international transaction is restricted to those referred by the AO alone.
This part of the Instruction is in line with the statutory mandate contained in sub-section (2A) and (2B) of section 92CA.
The Hon’ble jurisdictional High Court in Sony Ericson Mobile Communications India Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has decided this very issue in favour of the Revenue by holding in para 47 that:
`The majority decision of the Tribunal in L.G. Electronics India Pvt Ltd. (supra) has rightly drawn a distinction between sub-section (2B) and sub- section (2A) to Section 92CA of the Act. Sub-section (2A) was inserted in 2011, i.e. nearly one year before insertion of Section (2B) by the Finance Act, 2012. Sub- section (2A) has not been given retrospective effect and it applies only w.e.f. 1st June, 2011. Sub-section (2A) applies to any international transaction or specified domestic transaction of which reference has not been made to the TPO under sub-section (1). With effect from 1st June, 2011, the TPO can go into arm’s length pricing of an international transaction or a specified domestic transaction not referred to him. The distinction between sub-section (2A) and (2B) being that the first clause relates to a declared international transaction, i.e. in respect of which a report under Section 92E has been furnished, whereas sub- section (2B) refers to international transactions in respect of which report under Section 92E is not furnished’.
In the light of the above articulation of law by the Hon’ble jurisdictional High Court on sub-sections (2A) and (2B) of section 92CA of the Act, it is clear beyond any shadow of doubt that the TPO is empowered to determine the ALP of any other international transaction which comes to his notice during the course of proceedings before him.
As the instant international transaction of AMP expenses was taken note of by the TPO, we do not find any lack of jurisdiction in his proceeding with the determination of its ALP.
Now we espouse the second aspect as to whether the Instruction is retrospective as urged by the ld. AR similar to Nikon’s case (supra) or only prospective as contended by the ld. DR. In our considered opinion, there is no merit in the argument of the ld. AR that Instruction dated 10th March, 2016 is curative in nature and, hence, be given retrospective effect. It is a simple case of an Instruction dated 10th March, 2016 put in place by the CBDT as a guideline to be followed by the AOs and TPOs in implementing the transfer pricing provisions. This Instruction is in supersession of the earlier Instruction No.15 of 2015. It has been clearly mentioned in para 7 of the later Instruction dated 10th March, 2016 that: “This issues u/s 119 of the Income-tax Act, 1961 and replaces Instruction No.15 of 2015 with immediate effect.” It is plentifully clear that this later Instruction has been implemented ‘with immediate effect’ from the date of its issuance, which is 10th March, 2016. Instructions to the Officers given by the Board setting up a procedure for implementation of certain provisions cannot assume the character of a legislative provision so as to toy with the possibility of applying the same retrospectively. We are reminded of the decision of the Hon’ble jurisdictional High Court in DIT vs. Ericsson A.B. (2012) 246 CTR 422 (Del), in which the assessee, inter alia, relied on Instruction no. 1829 dt.
21.9.1989 to claim that no taxable event took place in India. The Revenue argued before the Hon’ble High Court that such Instruction stood withdrawn `with immediate effect’ by a later Circular No. 7 of 2009 dt. 22nd Oct., 2009, and hence the later Circular be treated as retrospective. The argument of the ld. AR in case before us is similar to that advanced by the Revenue in that case before the Hon’ble High Court that the later Instruction implemented `with immediate effect’ be given retrospective effect. Rejecting the contention of retrospective effect advanced on behalf of the Revenue, the Hon’ble High Court held that : `Although Instruction No. 1829 stands withdrawn by virtue of Circular No. 7 of 2009 dt. 22nd Oct., 2009, such withdrawal can have no retrospective effect and the principle laid down in Instruction No. 1829 must continue to govern the assessment for the relevant year’. 15 When the language of sections 92C and 92CA etc. does not provide for the AO to afford an opportunity of being heard to the taxpayer before recording his satisfaction in terms of para 3.4, we fail to comprehend as to how this procedural aspect made applicable ‘with immediate effect’ from 10th March, 2016, can be read in the provision ab initio. If this Instruction, as argued by the ld. AR, is construed as retrospective enjoining upon the AO to record satisfaction as discussed in para 3.4, it would render several earlier assessment orders containing transfer pricing additions, null and void. Since this procedure has been put in place by the CBDT with effect from 10th March, 2016, it has to be treated as prospective at least in respect of assessments which have been completed before the date prescribed in the Circular, which means that the TPOs/AOs will follow the same qua the matters under their consideration on 10th March, 2016 and onwards.
Reliance of the ld. AR on the judgment of the Hon’ble Delhi High Court in Indorama Synthetics (India) Ltd. VS. Adtl. CIT (2016) 386 ITR 665 (Delhi) to buttress the contention that the assessment be set aside for not giving opportunity to the assessee before making reference to the TPO, in our considered opinion is far-fetched. In that case, it was held that the AO must provide opportunity of being heard to taxpayer before recording his satisfaction or otherwise. The decision is not germane to the issue under consideration, primarily, because it was delivered on a writ petition filed by the assessee against the notice and not in an appeal after the completion of assessment. Further, the matter was closed by giving option to the AO to consider the question if a reference should be made to the TPO `afresh after giving the petitioner an opportunity of being heard’. Similar position prevails in Alpha Nippon Innovatives Ltd. VS. DCIT - Special Civil Application No. 7720 of 2016 (Gujarat), a copy of which order dated 16.11.2016 has been placed at page 48 onwards of the assessee’s paper book. In that case also, the matter was remitted to the AO for passing a speaking order before making a reference to the TPO, after considering the objections raised by the assessee and simultaneously the assessee was specifically restrained from taking a plea of limitation. Similarly, in the other case of Shri Vishnu Eatables (India) Ltd. VS. DCIT (2016) 74 taxmann.com 89 (P&H), the assesee 17 challenged the validity of reference on the ground that the non-passing of the reasoned order in terms of Instruction no. 3/2016 dated 10.3.2016 as to whether a transaction is an international transaction or not and non- service of the order upon the assessee would make the reference null and void. Rejecting this contention, the Hon’ble High Court held : `As we noted earlier, the purpose of this entire exercise is inter alia to afford the assessee an opportunity of establishing at the threshold that the transaction is not an international transaction. If his objections are overruled it is open for him to challenge the same before the Commissioner of Income Tax (Appeals) or the Disputes Resolution Panel, as the case may be. An assessee is not entitled as a matter of right to invoke the writ jurisdiction at the stage of reference by the Assessing Officer to the TPO. His grievances can be raised in a challenge to the draft assessment order before the Disputes Resolution Panel or the final assessment order before to the Commissioner of Income Tax (Appeals).
The requirements of the rules of natural justice and of the said circular dated 10.03.2016 would have been met even if the satisfaction note is furnished subsequently. As we noted earlier, in any event the assessee 18 cannot raise the question as to whether or not the referred transaction is an international transaction before the Transfer Pricing Officer. It is, therefore, sufficient if he is served with the order subsequently even along with the draft assessment order or the assessment order as the case may be’. Thus it is vivid that this decision also does not bolster the assessee’s point of view because here, the Hon’ble High Court held that failure to supply satisfaction note to the assessee before making reference of international transaction to the TPO is at the highest a mere irregularity, which does not itself make reference void ab initio. Thus it is clear that none of the cases relied by the ld. AR fortify his contention of quashing the assessment order. We, therefore, jettison the argument advanced by the ld. AR that this Instruction be given retrospective effect in respect of the completed assessments. It is, ergo, held that the TPO was within his jurisdiction in proceeding to determine the ALP of the international transaction of AMP expenses and further, in principle, there is no flaw in the AO making transfer pricing addition, which action is also intra vires.
Now we are left with the merits of addition on account of transfer pricing adjustment of AMP expenses. The ld. AR contended that the incurring of AMP expenses is not an international transaction at all and, hence, there can be no question of determining the arm’s length price of this transaction or making any addition thereon. He relied on the judgments of the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) and CIT vs. Whirlpool of India Ltd. (2015) 94 CCH 156 DEL-HC to contend that the AMP expenses could not be considered as an international transaction. In the light of these judgments and some other Tribunal orders, it was submitted that there was no international transaction of AMP expenses on the basis of principles laid down in these judgments and, hence, the entire exercise of determining its ALP and, consequently, making transfer pricing adjustment, be set aside.
Au contraire, the ld. DR, similar to Nikon’s case (supra), relied on the judgment of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) in which AMP expenses have been held to be an international transaction and the matter of determination of its ALP has been restored. He also relied on a later judgment of the Hon’ble jurisdictional High Court in Yum Restaurants (India) P. Ltd. vs. ITO (2016) 380 ITR 637 (Del) and still another judgment dated 28.1.2016 of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction has been restored for a fresh determination. It was argued, similar to Nikon’s case (supra), that the judgment in the case of Yum Restaurants and Sony Ericson (for AY 2010-11) delivered in January, 2016 is later in point of time to the earlier judgments in the case of Maruti Suzuki and Whirlpool, etc., and, hence, the matter should be restored for a fresh determination. Similar to Nikon’s case (supra), it was submitted that there is no blanket rule of the AMP expenses as a non-international transaction. He further stated that the Hon’ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expenses, exists. It was argued that the Tribunal in several cases 21 has restored this issue to the file of TPO to be decided afresh in the light of the judgment of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and others. He also relied on still another judgment dated 28.1.2016 of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction, has been restored for a fresh determination. Similar to Nikon’s case (supra), he still further referred to three later judgments of the Hon’ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the Hon’ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued the matter should be restored for a fresh determination.
We have heard the rival submissions and perused the relevant material on record. We find that when the TPO held AMP expenses to be an international transaction, he did not have any occasion to consider the ratio laid down in several judgments of the Hon’ble jurisdictional High Court, which is now available for consideration. Respectfully following the predominant view taken in several Tribunal orders of co- ordinate benches, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses.
If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon’ble High Court, after allowing a reasonable opportunity of being heard to the assessee.
The assessee has also raised one more additional ground which reads as under:-
“i. That on the facts and circumstances of the case and in law, the AO/DRP have erred in not granting set-off of brought forward loss and unabsorbed depreciation, as per the provisions of section 72 and section 32 of the Act, before determining total income of the Appellant.”
The ld. DR did not raise any objection to the admission of this additional ground. As such, we are admitting the additional ground and taking it up for disposal on merits.
The grievance raised by the ld. AR projected through this ground is that the AO did not allow the benefit of brought forward losses and unabsorbed depreciation. We direct the AO to examine the assessee’s claim and allow necessary relief, if any, as per law.
In the result, the appeal is partly allowed for statistical purposes.
The order pronounced in the open court on 01.03.2017.