Income Tax Appellate Tribunal - Delhi
Nikon India Pvt. Ltd., Gurgaon vs Assessee on 15 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAV, JUDICIAL MEMBER
ITA No.6314/Del/2015
Assessment Year : 2011-12
Nikon India Pvt. Ltd., Vs. DCIT,
Plot No.71, Sector-32, Circle-3, 3rd Floor,
Institutional Area, HSIIDC Building,
Gurgaon. Vanijya Nikunj,
Udyog Vihar,
PAN: AACCN5100F Gurgaon.
(Appellant) (Respondent)
Assessee By : Shri Mukesh Bhutani &
Shri Vishal Kalra, Advocates
Department By : Shri Amrendra Kumar, CIT, DR
Date of Hearing : 14.07.2016
Date of Pronouncement : 15.07.2016
ORDER
PER R.S. SYAL, AM:
This appeal filed by the assessee is directed against the final assessment order passed by the AO u/s 143(3) read with section 144C of ITA No.6314/Del/2015 the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2011-12.
2. The ld. AR challenged the jurisdiction of the Assessing Officer (AO) / Transfer Pricing Officer (TPO) in determining the arm's length price (ALP) of the international transaction of Advertising, marketing and promotion expenses (AMP expenses). He submitted that the authorities embarked on treating the AMP expenses as an international transaction; determining its ALP; and then making transfer pricing addition, without any jurisdiction. This was countered by the ld. DR, who made two-fold submissions on this issue, viz., first, that the assessee could not take up the jurisdiction issue before the tribunal for the first time without raising it before the authorities below, and second, that the assessee has not taken any such ground in its Memorandum of appeal. In response, the ld. AR submitted that the assessee did assail the jurisdiction of the TPO during the course of proceedings before him, but, the TPO went ahead with the determination of the ALP of AMP expenses without deciding that issue. On a specific query as to by which 2 ITA No.6314/Del/2015 document the assessee challenged the jurisdiction of the TPO, the ld. AR referred to page 490 of the paper book, being the assessee's reply dated 15th December, 2014 to the show cause notice issued by the TPO. In particular, the ld. AR drew our attention towards para C.1 of the assessee's reply to the show cause notice, which reads as under:-
"C.1 Your goodself has concluded that the marketing intangible is an international transaction by disregarding the fact that the AMP expenses incurred by the Assessee represent purely domestic transaction(s) undertaken towards third parties, not covered under the purview of Section 92 of the Act and that the analysis of "domestic" transactions undertaken with third parties, in respect of which no TP reference has been made by the ld. AO to the ld.TPO, is beyond the powers vested with the TPO under Section 92CA of the Act."
3. On the second objection by the ld. DR that since the assessee has not taken up any such ground in the Memorandum of Appeal and, hence, should be debarred from raising this issue, the ld. AR invited our attention towards Ground 3 in its Memorandum of Appeal before the Tribunal, which reads as under:-
"3. That on the facts and circumstances of the case and in law, the orders passed by the AO/TPO were bad in law as the pre-requisite of applying Chapter-X i.e., existence of an international transaction between two Associated Enterprises ("AE") under the provisions of 3 ITA No.6314/Del/2015 section 92B of the Act, was not satisfied or existed in the present case."
4. On the basis of the above ground, it was contended that the assessee has raised this issue vide ground no. 3 of the appeal.
5. As regards the assessee's reply to the first objection of the ld. DR about not raising jurisdiction issue before the TPO, we find that the assessee contended that since : `no TP reference has been made by the ld. AO to the ld.TPO, is beyond the powers vested with the TPO under Section 92CA of the Act.' The above para is in the nature of a challenge to the jurisdiction of the TPO to determine the ALP of the AMP expenses. Insofar as the second objection of the ld. DR is concerned about there being no specific ground in the memorandum of appeal, we find that ground no. 3 simply states that the `existence of an international transaction between two Associated Enterprises ("AE") under the provisions of section 92B of the Act, was not satisfied or existed in the present case.' The ground only challenges the existence of an international transaction and not the jurisdiction of the TPO to determine the ALP of the AMP expenses. There is a vast difference 4 ITA No.6314/Del/2015 between saying that AMP expenses is not an international transaction and that the TPO did not have jurisdiction to determine the ALP of AMP expenses. Be that as it may, in our considered opinion, this is not going to help the Revenue in forbidding the assessee from challenging the jurisdiction of the TPO, even in the absence of any specific ground in this regard. This being a legal issue can be taken up before the Tribunal even for the first time notwithstanding the same having not been raised either before the authorities below or not taken up in the Memorandum of Appeal. The Hon'ble Supreme Court in NTPC Ltd. vs. CIT (1998) 229 ITR 383 (SC), has held that an additional ground on question of law can be raised before the Tribunal for the first time which has a bearing on the tax liability of the assessee notwithstanding the fact that the same was not raised before the lower authorities. The only condition for raising such a ground is that the factual position governing such a legal ground should be available on record and the ground should be capable of rendering decision without carrying out any fresh investigation of facts. Since the issue of jurisdiction of the AO/TPO in determining the ALP of the AMP expenses is a question of 5 ITA No.6314/Del/2015 law and the relevant material for delivering decision on it is available on record, we admit this issue for consideration on merits.
6. On merits, the ld. AR submitted that the assessee did not indicate AMP expenses as an international transaction in its audit report in Form No.3CEB and the same was not referred by the AO to the TPO, hence, the TPO/AO did not have any jurisdiction to determine the ALP of this international transaction. The ld. AR heavily banked upon 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. To fortify the argument of retrospectivity, he relied on the judgment of 6 ITA No.6314/Del/2015 the Hon'ble Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 (SC). 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.
7. This was opposed by the ld. DR, who 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. He also relied on the judgment of the Hon'ble Supreme Court in the case of Anandji Haridas & Co. (P) Ltd. vs. Engineering Mazdoor Sangh and Another (1975) 99 ITR 592 (SC) to put forth that only where a statute is not exhaustive or where its language is uncertain, the external evidence can be looked into. He submitted that since the provisions of section 92CA(2A) and (2B) are clear and unambiguous which do 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 7 ITA No.6314/Del/2015 to by the AO, there is no need to look into the Instruction, at least before the date of its applicability.
8. 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.
9. The ld. AR 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 reads 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 8 ITA No.6314/Del/2015 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."
10. The ld. AR 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 9 ITA No.6314/Del/2015 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 pre 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 ALP of the 10 ITA No.6314/Del/2015 unreported international transaction of AMP expenses, this para of the Instruction, can have no application.
11. Now, we take up the challenge to the jurisdiction of the TPO, made by the ld. AR 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.11 ITA No.6314/Del/2015
12. On going through the above para, it becomes clear 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 palpable 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, which reads as under :-12 ITA No.6314/Del/2015
`(2A) 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).
(2B) Where in respect of an international transaction, the assessee has not furnished the report under section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under sub-section (1).'
13. 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 13 ITA No.6314/Del/2015 international transactions in respect of which report under Section 92E is not furnished'.
14. 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.
15. Now we espouse the second aspect as to whether the Instruction is retrospective as urged by the ld. AR 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. The reliance of the ld. AR on the judgment of the Hon'ble Supreme Court in Vatika Township Pvt. Ltd. (supra) is completely out of context. The question in that case was as to whether the proviso to section 113 introduced by the Finance 14 ITA No.6314/Del/2015 Act, 2002 w.e.f. 1st June, 2002 should be considered as retrospective or prospective. The Hon'ble Supreme Court held that such proviso casting additional burden on the tax payer, must be construed as prospective in nature. We do not approve the borrowing by the ld. AR of certain observations made in this judgment laying down that the beneficial provisions should be applied retrospectively and then canvassing that the Instruction should also be given retrospective effect. Our reason for not accepting the applicability of this judgment to the facts of the instant case is that we are not interpreting any statutory provision, either substantive or procedural, to find out whether it is retrospective or prospective. 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' 15 ITA No.6314/Del/2015 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 0422 (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 16 ITA No.6314/Del/2015 no retrospective effect and the principle laid down in Instruction No. 1829 must continue to govern the assessment for the relevant year'. When the language of the 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, which means that the TPOs/AOs will follow the same qua the matters under their consideration on 10th March, 2016 and onwards. We, therefore, jettison the contention advanced by the ld. AR that this Instruction be given retrospective effect. 17 ITA No.6314/Del/2015
16. 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.
17. 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 judgment of the Hon'ble Delhi High Court in the case of 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. The ld. AR submitted that he has got all the relevant material with him to demonstrate that his case qualifies to be a non-international transaction in terms of the judgment in Whirlpool (supra). He also relied on another judgment of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) for the same 18 ITA No.6314/Del/2015 proposition. 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.
18. In the oppugnation, the ld. DR submitted that there is no blanket rule of the AMP expenses as non-international transaction. He submitted 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. He further contended that the Tribunal in assessee's own case for the immediately preceding assessment year has restored the 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). 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 19 ITA No.6314/Del/2015 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. 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 that the judgments in the case of Yum Restaurants and Sony Ericson (for AY 2010-11) delivered in January, 2016 are posterior in 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. He also relied on a host of orders passed by the Tribunal restoring the matter to the file of TPO for a fresh determination of the question of the existence or otherwise of the international transaction of AMP expenses, post the above referred three sets of judgments by the Hon'ble Delhi High Court
- in favour of the Revenue (Sony Ericsson, the earlier judgment); in favour of the assessee (Whirlpool and Maruti etc.); and restoring the matter for a fresh determination (Yum Restaurant and Sony Ericsson, the 20 ITA No.6314/Del/2015 later judgment). These tribunal orders include Fuji Film India Pvt. Ltd. vs. DCIT (ITA No.6916 & 2535/Del/2015 dated 29.4.2016) and Toshiba India Pvt. Ltd. vs. DCIT (ITA No.944/Del/2016, order dated 8.4.2016).
19. We have heard the rival submissions and perused the relevant material on record. The ld. AR tried to harp on certain agreements and other documents to buttress his point that there was no international transaction on account of AMP expenses in terms of the judgment in the case of Whirlpool (supra). On perusal of the order of the TPO, it emerges that there is no discussion about any of these documents. Since the TPO held AMP expenses to be an international transaction, he did not have any occasion to consider these documents in the light of the judicial view now available for consideration. Respectfully following the Tribunal orders of co-ordinate benches, placed on record by the ld. DR, 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 21 ITA No.6314/Del/2015 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. In doing so, the selling expenses directly incurred in connection with sales not leading to brand promotion, should not be brought within the ambit of AMP expenses. This view taken by the Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. vs. ACIT (2013) 152 TTJ (Del) 273 (SB) has been upheld by the Hon'ble Delhi High Court in the case of Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del. The contention of the ld. DR that SLP has been admitted against the exclusion of selling expenses from the ambit of AMP expenses in the case of Amadus India Ltd., does not alter the legal position prevailing as on today.
22 ITA No.6314/Del/2015
20. In the result, the appeal is partly allowed for statistical purposes.
The order pronounced in the open court on 15.07.2016.
Sd/- Sd/-
[SUDHANSHU SRIVASTAVA] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 15th July, 2016.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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