Volume 5, Issue 8


24 May, 2012
www.skpgroup.com

Tax Alert
Transfer Pricing Officer’s Powers
     

In a recent ruling in the case of Nokia India Pvt. Ltd., the Delhi Bench of the Income-tax Appellate Tribunal (ITAT) has held that pursuant to proposed amendments in Finance Bill, 2012, transfer pricing officer is empowered to determine the arm’s length price of international transactions noticed by him during the course of proceedings, even if said transactions were not referred by the Assessing Officer (AO). The ITAT has remanded the matter back to the file of the AO to decide the issue of advertising, marketing and promotion expenses in the light of proposed provisions by the Finance Bill, 2012. This alert highlights the facts of this interesting decision.

Facts of the case:

  • Nokia India Pvt. Ltd. (the assessee) is a subsidiary of Nokia Corporation, Finland (Nokia Finland).
  • The assessee is engaged in the business of selling / distributing of mobile handsets.
  • The assessee incurred advertising, marketing and promotion expenses  amounting to Rs. 253.48 crores.
  • The assessee being a limited risk distributor was remunerated by Nokia Finland in such manner that it would earn fixed net margin after considering its operating expenditure.
  • Transfer pricing officer (TPO) made upward adjustment on account of excessive AMP incurred by the assessee amounting to Rs. 253.48 crores by applying bright line method.
  • Tax authorities upheld the adjustment proposed by the TPO.

Issue before the Tribunal:

  • Whether an advertising, marketing and promotion expense incurred domestically by the assessee was subject to transfer pricing provisions?
  • Whether TPO has power to determine the arm’s length price (ALP) in respect of a transaction which was not referred to him by the AO?

Contentions of the tax payer:

  • Tax authorities failed to consider global transfer pricing policy of the Nokia group wherein the tax payer was characterised as a limited risk distributor.
  • Bright line principle as laid down under US transfer pricing regulations cannot be relied upon as it was not a prescribed method as per Indian Transfer Pricing Regulations.

  • Comparables selected by the TPO were not only engaged in sale of mobile phones but were also dealing in other IT and telecom equipments, cables etc and hence could not be said to be truly comparable.
  • Further, companies selected by the TPO for applying bright line principle were not as the same level of value chain as compared to the assessee and hence not comparable.
  • Advertising, marketing and promotion expenditure incurred by the assessee does not fall within the definition of international transactions.
  • Advertising, marketing and promotion incurred by the assessee was wholly and exclusively for its own business.
  • The Advertising, marketing and promotion was product centric and not brand centric.
  • The benefit of Advertising, marketing and promotion expenditure incurred by the assessee was received by the assessee in the form of increase in turnover and increase in profit.
  • As per OECD Guidelines, even if any incidental benefit was derived by the overseas associated enterprises, it did not require any compensation to the assessee.
  • Other contentions of the assessee includes use of secret comparable and working capital adjustment

Contentions of the Revenue:

  • As per amendment proposed in the Finance Bill 2012, advertising, marketing and promotion expenses will fall under the definition of international transaction under section 92B of the Act with effect from 1st April 2002 and therefore the transfer pricing provisions would apply to such transaction.

ITAT Ruling:

  • Since both the tax authorities and the assessee agreed for setting aside the issue of Advertising, marketing and promotion adjustment and decide the same in the light of proposed provisions by the Finance Bill, 2012, the ITAT has set aside the matter to the file of the AO with directions to decide the issue afresh after affording the assessee a reasonable opportunity of being heard.
  • Pursuant to proposed retrospective amendment as per Finance Bill, 2012 the TPO is empowered to determine the ALP of international transactions noticed by him during the course of proceedings, even if said transaction was not reported by the AO.
  • As regards not sharing of information in respect of secret comparables, it was held that this was against the principles of natural justice and remanded the matter back to the file of AO.
  • As regards allowance of working capital adjustment, it was held that the adjustment was justified considering the assessee’s own case in the preceding year and thus set aside the matter to the file of the AO with the directions to examine the case and decide the issue afresh.

Our comments:

This ruling opens up the door for the Revenue to contend that the advertising, marketing and promotion expenses incurred by an Indian company result in building of intangible assets for its overseas AE, which if proved, would now be clearly covered under the transfer pricing regulations as per the proposed retrospective amendments. The contention taken by the taxpayers hitherto that the TPO was not empowered to adjudicate the matters not referred by the AO would not hold good in light of the proposed retrospective amendments. The rulings in the case of Glaxo Smithkline Consumer Healthcare Ltd., Amadeus India Pvt. Ltd. and McDonald India Pvt. Ltd. wherein it was held that TPO cannot take suo moto cognizance of international transactions not referred to him by the AO will not hold good anymore. Since the Revenue has argued only on the legal aspect of changes proposed in the Finance Bill, 2012, the ITAT has not ruled on other arguments on merit raised by the assessee. Post this ruling, arguing such cases on legal aspect may not sustain the test of time. However, one issue that arises is whether incurring of domestic advertising, marketing and promotion classifies as international transaction. However, the taxpayers will need to argue in such cases purely on the basis of merit. It is also critical for the taxpayer to demonstrate that advertising, marketing and promotion expenses incurred are purely for its own business and the benefits received against such expenses accrue to the taxpayer only.