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AMICUS AI
Citation Codes
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Case Number
Attorney(S)
  • Mr. Suresh Kumar
  • Mr. Nishant Thakkar a/w Mr. Rajesh Poojary i/b Mulla & Mulla and Craigie Blunt and C
Judges
  • M.S Sanklecha
  • A.K Menon, JJ.
Acts
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Cites
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Mr. Suresh Kumar
  • Mr. Nishant Thakkar a/w Mr. Rajesh Poojary i/b Mulla & Mulla and Craigie Blunt and C
Judges
  • M.S Sanklecha
  • A.K Menon, JJ.
Acts
See more information ...
Smart Summary

Summary of the Opinion

Factual and Procedural Background

The appeals arise under Section 260-A of the Income Tax Act, 1961 and challenge the Income Tax Appellate Tribunal's order dated 11 February 2014 in respect of Assessment Years 2003-04, 2004-05 and 2005-06 (three appeals consolidated on identical issues).

The respondent assessee is engaged in the manufacture and export of cosmetic and toiletry products. For the relevant assessment years the assessee reimbursed 20% of advertisement expenses incurred by its Associated Enterprises (in Dubai, Egypt and Malaysia) in respect of new products, as part of a business strategy to develop brands and improve sales.

The assessee applied the Transaction Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) of the advertisement reimbursements, taking the profit margin of its entire export activity into account. The Transfer Pricing Officer (TPO) held that the transactions were on a principal-to-principal basis and therefore no reimbursement could be allowed, determining the ALP for the reimbursement at nil. The Assessing Officer passed assessment in accordance with the TPO's determination.

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the TPO's addition, holding that the reimbursement was a business strategy and that the TPO had not challenged the method or comparables used by the assessee. On further appeal by the Revenue, the Tribunal dismissed the Revenue's appeal for similar reasons. The Revenue challenged the Tribunal's order before the court under Section 260-A.

Legal Issues Presented

  1. “Whether on facts and in the circumstances of the case and in law, the Tribunal was right in accepting the international transaction being reimbursement of advertisement expenses incurred by the Associated Enterprise of the assessee in Dubai, Egypt and Malaysia at arm's length on the basis of the profits earned by the assessee on its entire exports of various products on application of Rule 10B(1)(e)?”

Arguments of the Parties

Appellant's (Revenue) Arguments

  • The transactions between the assessee and its Associated Enterprises were on a principal-to-principal basis; where transactions are on a principal-to-principal footing, one principal would not reimburse the other's expenditure.
  • Accordingly, no reimbursement for advertisement expenditure should be allowable and the ALP of the advertisement expenses being taken as nil by the TPO should have been sustained by the lower authorities.

Respondent's (Assessee) Position and Administrative Outcomes

  • The assessee reimbursed 20% of advertisement expenses incurred by Associated Enterprises as part of a business strategy to develop brands and improve sales; these expenditures were integral to export activity.
  • The assessee adopted the Transaction Net Margin Method (TNMM) and used the profit margin of its entire export activity to determine the ALP for the advertisement reimbursements; because the operating margin was higher than comparables, no addition was necessary.
  • The TPO did not dispute the appropriateness of the method or the comparables chosen to determine ALP; the CIT(A) and the Tribunal accepted that the TPO's determination was ad hoc and not based on challenging the TNMM or the comparables.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis focused on the limited and specific jurisdiction of the Transfer Pricing Officer (TPO) under Chapter X of the Income Tax Act read with Rules 10A to 10E of the Income Tax Rules. The court emphasized the following points, based only on the findings recorded in the opinion:

  1. The factual backdrop: the assessee launched new products requiring substantial advertising and chose to share such expenditure with Associated Enterprises as a commercial strategy to develop brands and increase sales and profit.
  2. Scope of TPO's jurisdiction: the TPO's role is confined to determining the Arm's Length Price (ALP) of an international transaction by examining whether the method adopted is the most appropriate and whether the comparables selected are appropriate under the transfer pricing provisions.
  3. Limits on the TPO's functions: it is not within the TPO's jurisdiction to assess whether the expenditure satisfies Section 37 of the Act (allowability) or to inquire into the genuineness of the expenditure; those inquiries fall to the Assessing Officer in determining the assessee's income under the Act.
  4. Application to the present case: the Assessing Officer did not outright disallow the expenditure but only adopted the TPO's ALP determination. The TPO did not challenge the method (TNMM) or the comparables used by the assessee to determine ALP. Instead, the TPO made an ad hoc determination of ALP (treating it as nil) without disputing the parameters under Chapter X and Rule 10B(1)(e).
  5. Conclusion of legal sufficiency: because the TPO neither contested the chosen method nor the comparables, the court held that the TPO's ad-hoc determination outside the framework of Section 92C and the transfer pricing rules could not be sustained.

Holding and Implications

HOLDING: All three appeals are DISMISSED.

The court held that the Tribunal and the CIT(A) correctly concluded that the TPO had not challenged the assessee's chosen transfer pricing method or comparables and that the TPO's ad-hoc disallowance of the advertisement reimbursements could not be sustained within the statutory transfer pricing framework. The court also held that the question as proposed by the Revenue did not give rise to any substantial question of law.

Direct consequences: the appeals are dismissed and there is no order as to costs. No broader or novel precedent was framed by the court beyond resolving these appeals on the stated factual and legal bases.

Show full summary ...

    Commissioner Of Income Tax-1, Mumbai v. M/S. Lever India Exports Ltd.

    1. These Appeals under Section 260-A of the Income Tax Act, 1961 (the Act) challenge the order dated 11th February, 2014 passed by the Income Tax Appellate Tribunal (the Tribunal). The common impugned order is in respect of Assessment Years 2003-04, 2004-05 and 2005-06. Thus, the three appeals before us.

    2. The Revenue urges the following re-framed question of law for our consideration:—

    “Whether on facts and in the circumstances of the case and in law, the Tribunal was right in accepting the 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)?

    3. The respondent assessee is engaged in the business of manufacture and export of cosmetic and toiletry products. During the subject assessment year, the respondent assessee had reimbursed 20% of the advertisement expenses incurred by its Associated Enterprises in respect of the new products. This expenditure was reimbursed as a part of its business strategy to develop its brands. The respondent assessee applied the Transaction Net Margin Method (TNMM) to determine the Arms Length Price in respect of the advertisement expenditure. For the aforesaid purposes, as the above advertisement expenses were an integral part of export activity, the respondent assessee took into account the profit margin of its entire export activity to determine the ALP not only of its exports but also with regard to the reimbursement of advertisement expenses of its Associated Enterprises. As the operating margin was far in excess of those of the comparables, no addition was made. However, the Transfer Pricing Officer (TPO) held that as the transaction between the parties were on principal to principal basis, no reimbursement of advertisement expenditure by the respondent assessee to its Associated Enterprises can be allowed. Consequently, determined the Arms Length Price (ALP) at Nil by virtue of disallowing the expenditure. The Assessing Officer passed a final assessment order in accordance with the determination of ALP done by the TPO inter alia with regard to the reimbursement of advertisement expenses.

    4. Being aggrieved, the respondent filed appeals to the Commissioner of Income Tax (Appeals) [CIT(A)]. The orders of the CIT(A) held that on examination of facts that reimbursement of advertisement expenditure to the Associated Enterprises is a consequence of a business strategy as it results in better profits. On the question of determination of the ALP it held that the TPO has neither challenged the appropriate method for determining the ALP nor the comparables selected by the respondent assessee to determine it. In the above view, it held that addition was made on ad-hoc basis and the same is not permissible. Thus, the appeals were allowed and the addition deleted.

    5. On further appeal by the Revenue, the Tribunal held that the TPO has not disputed the comparable selected nor the appropriate method of determining the ALP. It was not a case of the TPO that the ALP of the advertisement expenses is nil on application of some other comparables or invoking some other method to determine the ALP. In the aforesaid circumstances, the appeal of the Revenue was dismissed.

    6. Mr. Suresh Kumar, learned Counsel for the Revenue urges that the transaction between the respondent assessee and its Associated Enterprises were on principal to principal basis. In that view, no party would reimburse the expenditure incurred by the other party. Hence, in fact no expenditure was allowable. Therefore, the ALP of advertisement expenses taken as Nil by the TPO should not have been disturbed by the CIT(A) and the Tribunal.

    7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the 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 ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained.

    8. In the above view, the question as proposed does not give rise to any substantial question of law.

    9. Therefore, all the three appeals raising identical issue in the context of similar facts are dismissed. No order as to costs.

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    Comments

    Commissioner Of Income Tax-1, Mumbai v. M/S. Lever India Exports Ltd.
    (Jan 23, 2017)