Diageo India Pvt Ltd vs. ACIT (ITAT Mumbai)

Transfer Pricing: Even unrelated parties can be “associated enterprises” if there is “de facto” control. High profit/loss companies are not per se un-comparable. TPO cannot go into issues not specifically referred to him

The Tribunal had to consider the following Transfer Pricing issues (i) whether a “contract bottling unit” (CBU), an unrelated party, manufacturing beverages using the trademarks of the assessee and raw materials purchased from the assessee’s affiliate entities can be treated as the assessee’s “associated enterprise” and the transactions entered into by the CBU with the assessee’s affiliates was an “international transaction” warranting ALP adjustment in the hands of the assessee, (ii) whether comparables with exceptionally high & low profit are required to be excluded even though there are no functional differences between the assessee and such comparables, (iii) whether the TPO could hold that the advertisement expenses incurred by the assessee on brands owned by the AE was excessive (40.64% of turnover) and that the AE should reimburse the excess even though the AO had not made a reference on this issue to the TPO. HELD by the Tribunal:

(i) U/s 92A(1)(a) & (b), if one enterprise controls the decision making of the other or if the decision making of two or more enterprises are controlled by same person, these enterprises are required to be treated as ‘associated enterprises’. Though the expression used in the statute is ‘participation in control or management or capital’, essentially all these three ingredients refer to de facto control on decision making. The assessee had “de facto control” over the CBU as the CBU was wholly dependent on the use of trade-marks in respect of which the assessee had exclusive rights. Further, the entities from which the CBU imported the raw materials were affiliates of the assessee and controlled by the common parent Diageo Plc. Accordingly, the assessee, the CBU and its Diageo group supplier of raw materials were “associated enterprises” as they were de facto controlled, directly or indirectly or through intermediaries, by the same person i.e. Diageo PLC. Further, as the costs incurred by the CBU for purchase of the raw materials was borne by the assessee, the transaction was actually between the assessee and the Diageo group concerns supplying the raw material to the CBU and constituted an “international transaction“;

(ii) The argument, based on Quark Systems 38 SOT 307 (SB), that exceptionally high and low profit making comparables are required to be excluded from the list of TNMM comparables is not acceptable. Merely because an assessee has made high profit or high loss is not sufficient ground for exclusion if there is no lack of functional comparability. While there is some merit in excluding comparables at the top end of the range and at the bottom end of the range as done in the US Transfer Pricing Regulations, this cannot be adopted as a practice in the absence of any provisions to this effect in the Indian TP regulations. (Benefit of +/- 5% adjustment as directed in UE Trade Corporation 44 SOT 457 to be given);

(iii) The adjustment made by the TPO with regard to the advertisement expenditure incurred by the assessee was without jurisdiction because the AO had not made any reference on this issue to the TPO. As the reference to the TPO is transaction specific and not enterprise specific, the TPO Officer has no power to go into a matter which has not been referred to him by the AO. Even the CBDT Instructions are clear on this (3i Infotech Ltd 136 TTJ 641 followed)