Key observation on Transfer Pricing issues by Delhi Tribunal in case of LG Electronics

Key observation on Transfer Pricing issues by Delhi Tribunal in case of LG Electronics;

1. The Transfer Pricing Officer ('TPO') can determine ALP of an international transaction only when a valid reference is made to him by the Assessing Officer ('AO').
2. As per section 92CA(2A), w.e.f  1-6-2011 , the TPO can compute ALP in respect of any transaction other than those referred to him by the AO.
3. As per section 92CA(2B) w.e.f 1-6-2001 any international transaction in respect of which the taxpayer has not furnished report u/s 92E can be considered by the TPO for determining ALP.
4. The jurisdiction of the TPO is activated only when the AO makes reference to him under section 92(1) for determining ALP in respect of certain transactions. Section 92(2A) & (2B) come into play only when sub-sec. (1) has already been set into motion.
5. There is no requirement of previous approval of the Commissioner in respect of the international transactions which come to the notice of the TPO during the course of proceedings before him.
6. So long as there exist some sort of understanding between two Associated Enterprises ('AE') on a particular point, the same shall have to be considered as a transaction, whether or not it has been reduced to writing.
7. Proportionately higher amount on advertisement in comparison with similarly placed independent entities spent by the taxpayer cannot be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE.
8. Proportionately higher amount on AMP can be considered as brand promotion services depending upon facts of the cases like prominently displaying brand of Foreign AE by the taxpayer in its advertisements.
9. When it comes in the context of the Act, it is only the legal ownership of the brand that is recognized and not economic ownership.
10. Brand promotion services in this case satisfies three salient features of international transaction.
11. In order to be characterized as an international transaction, the following salient features must be present: - (1) There should be a `transaction‘ (2) Such `transaction‘ should be between two or more AEs and either or both of whom should be non-residents. (3) Such transaction should be of the nature as referred to in section 92B.
12. In case the taxpayer fails to identify cost for brand promotion services, bright line test can be used as an alternative method to identify the cost.
13.  For the purpose of bright line test, domestic companies not using foreign brands should be considered.
14. AMP expenses refer only to advertisement, marketing and publicity expenses.
15. The expenses in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of “advertisement, marketing and promotion expenses” for determining the cost/value of the international transaction.
16. Under the TNMM the operating profit from each international transaction in relation to the total cost or sales or capital employed etc. of such international transaction should be considered and not the net profit, total costs, sales, capital employed of the taxpayer as a whole on entity level.
17. All the transactions needs to be separately analysed for the purposes of computation of arm's length price.
18. There is no provision which permits set off of negative adjustment with the positive adjustment to the income on account of different international transactions.
19. The arm‘s length price is required to be determined by any single method out of the five prescribed methods.
20. Determination can only be carried out by way of the methods specified in the Act.

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