Important Judicial Rulings in Transfer Pricing | 2023

Table of Contents

1. Whether selection of comparables, selection of most appropriate method, selection of filters, etc. can raise a substantial question of law allowing High Courts to look into the same under S. 260A of the Act?
2. Can an assessee switch over to a new most appropriate method (MAM) different from the one selected in Form 3CEB/the TP Study Report?
3. Whether advance pricing agreements executed for earlier years can form the basis for determination of the ALP for non APA years?
4. Whether Section 144C inserted by the Finance Act (No. 2) of 2009 w.e.f 1.04.2009 providing additional time can be applied to pending proceedings or apply only prospectively?
5. Whether investment in preference shares can be considered as money lending transaction which could lead to attraction of the TP provisions?
6. Can assesse change its stand in relation to selection of the tested party before the DRP or appellate court?
7. Whether the transaction entered in to before entering into or after the exit from joint venture with a foreign company (Erstwhile AE) could be regarded as international transaction within the meaning of section 92B?
8. Whether an ALP adjustment can be made in respect of interest free loan granted by a foreign AE to its WOS in India?
9. Whether it is mandatory for the AO to make reference to TPO for determination of ALP in respect of international transaction entered into by assessee?
10. Whether an independent third party quotation be taken as a valid CUP for benchmarking an international transaction?
11. Whether the transfer pricing adjustment made by AO/TPO for sham transactions is sustainable under provisions of section 92(F) of the Act?
12. Whether the provision of Section 92 can be invoked in a situation where income of the assessee is exempt and not chargeable to tax in India?

1. Whether selection of comparables, selection of most appropriate method, selection of filters, etc. can raise a substantial question of law allowing High Courts to look into the same under S. 260A of the Act?

1.1 PCIT v/s. Softbrands India Pvt. Ltd. ([2018] 94 Taxmann.com 426/406 ITR 513 (Kar. HC))

Facts of the case

1. The issue pertains to AY 2007-08. Assessee is an Indian company (subsidiary of a foreign parent) providing software services at cost + mark-up to its AEs.
2. CUP method was applied by the assessee; TPO rejected the same and TNMM was applied As per the TPO, margin of 20.68% on cost was the ALP as against the Assessee’s claim of 8.33% on cost. The AO forwarded Draft assessment order dated 30.12.2010 u/s 144C(1).
3. On appeal, CIT(A) applied turnover filter and the list of comparable companies was reduced to three.
4. Both Revenue and Assessee filed appeals with the ITAT.
5. ITAT kept RPT filter @ 15%. Turnover filter of CIT(A) was not changed as revenue did not challenge the same. Based on functional comparability, the list of comparable companies was changed deleting CIT(A)’s comparable companies and adding some of the TPO’s comparable companies.
6. Revenue raised substantial question of law before the Karnataka High Court.

Issue for consideration

Whether ITAT was right in applying 15% RPT filter? Whether ITAT’s act of rejecting comparables (four in the present case) was right?

Decision of the High Court

1. HC summarised that that the dispute related to whether ITAT rightly included/excluded comparable companies after analyzing each of them, whether correct filters have been applied, whether right method has been selected and other connected factors in deciding the appropriate TP adjustment.
2. Karnataka HC formulated the scope of appeal before the HC and held that the appeal before HC can be filed only if it pertains to a “substantial question of law”.
3. Unless perversity in the findings of the ITAT can be demonstrated based on the evidence on record, there cannot be “substantial question of law”. ITAT has analysed each of the comparables in detail and the findings, prima facie, are not perverse, so as to admit the appeal.
4. Arguments of the parties in appeals largely related to either wrong filters applied or filters have been wrongly applied, particularly turnover filter.
5. Contention raised that since there are differing views of several ITATs on above issues, the appeals need to be admitted to enable the HC to lay down general principles of guidance about the filters, most appropriate method, etc. were rejected by the HC holding that these parameters do not satisfy the requirement of “substantial question of law”.

Some predents from other High Courts holding similar view

1. The Division Bench of Delhi High Court in the case of Principal CIT. v. WSP Consultants India (P.) Ltd. in the judgment dated 03/11/2017, [2018] 253 Taxman 58/[2017] 87 taxmann.com 266 (Delhi)] held that reasons given by the Tribunal were justified and any inclusion or exclusion of comparables per se cannot be treated as a substantial question of law unless it is demonstrated to the Court that the Tribunal or any other lower Authority took into account irrelevant consideration or excluded the relevant entries in the ‘Arm’s Length Price’ determination.
2. The Division Bench of the Bombay High Court in the case of CIT v. PTC Software (I)(P) Ltd. [2017] 395 ITR 176/[2016] 75 taxmann.com 31 (Mad.) held that that if there is a functionality difference between the two comparables and the Tribunal was justified in excluding the same do not give rise to any substantial question of law.
3. The Division Bench of Madras High Court in the case of CIT v. Same Deutz-Fahr India (P) Ltd. [2018] 253 Taxman 32/89 taxmann.com 47 (Mad.) held that that right of appeal under Section 260-A of the Act is not automatic and it is limited right of appeal restricted only to the cases which involve substantial questions of law and it is not open to the High Court to sit in an appeal over the factual findings arrived by the Tribunal.

1.2 Sap Labs India (P.) Ltd. v. ITO [2023] 149 Taxmann.com 327/293 Taxman 263 (SC)

Facts of the case

1. The issue arose out of judgments passed by the various High Courts, particularly the High Court of Karnataka in Principal CIT v. Softbrands India (P.) Ltd. ([2018] 94 Taxmann.com 426/406 ITR 513 (Kar.). This judgement is reincarnation of the basic principles of perversity, deeply embedded in the question of law.
2. The issue pertains to AY 2007-08. Assessee was an Indian company (subsidiary of a foreign parent) providing software services at cost + margin to AEs.
3. CUP method was applied by assessee; however the same was rejected by the TPO and TNMM applied As per TPO margin of 20.68% on cost was the ALP as against the Assessee’s claim of 8.33% on cost.
4. CIT(A) applied turnover filter and the list of comparable companies was reduced to three.
5. Both Revenue and Assessee filed appeals with ITAT. ITAT kept RPT filter @ 15% .  Turnover filter of CIT(A) was not changed as revenue had not challenged the same. Based on functional comparability, the list of comparable companies was changed deleting CIT(A)’s comparable companies and adding some of the TPO’s comparable companies.
6. The Kar. High Court rejected the contention of the revenue stating that it did not raise any substantial question of law.

Question Before SC

Whether the arm’s length price determined by the Tribunal in all cases is final and cannot be the subject matter of scrutiny by the High Court in an appeal under Section 260A of the IT Act?

1.3 PCIT v/s. SAP Labs India Pvt Ltd. [2023] 149 Taxmann.com 327 (SC)

Decision of the Supreme Court

1. Determination of the arm’s length price in which the Tribunal has not followed the guidelines stipulated under Chapter X of the IT Act, namely, Sections 92, 92A to 92CA, 92D, 92E and 92F of the Act and Rules 10A to 10E of the Rules can be considered as perverse and can be said to raise a substantial question of law.
2. There cannot be any absolute proposition of law that in all cases arm’s length price determined by the Tribunal is final and cannot be the subject matter of scrutiny by the HCs under Section 260A of the Act.
3. It is open for the High Court to examine whether guidelines laid down under the Act and the Rules are followed by the Tribunal while determining arm’s length price to determine whether the ruling is perverse or not.
4. High Court can also examine the question of comparability of two companies or selection of filters and examine whether the same is done judiciously and on the basis of the relevant material/evidence available on record.
5. Several HC Orders quashed and the matters remitted back to the HC to dispose the cases within 9 months from receipt of the copy of SC Order. SC did not examine merits of the cases.
6. Held, person filing appeal before the HC will have to demonstrate that Tribunal’s decision is perverse to get the appeal admitted.

1.4 DIT v/s Travelport Inc. [TS-218-SC-2023] [2023] 149 taxmann.com 470 (SC)

Facts of the case

1. The Taxpayer was in the business of providing electronic global distribution services to Airlines through “Computerized Reservation System” “CRS”.
2. The Taxpayer appointed Indian travel agents (distributors) and entered into distribution agreements with them.
3. The Taxpayer earned USD 3/EURO 3 per booking made in India. Out of this earnings, the Taxpayer paid USD/EURO 1 to USD/EURO 1.8 i.e. paid 33.33% to about 60% of its earning from India to its Indian travel agents – distributors.
4. The Assessing Officer found that the Taxpayer had PE in India in two forms: Fixed Place PE and Dependent Agent PE. On attribution of profits to the PE, the Assessing Officer held that the entire income of USD/EURO 3 is taxable in India, because the income was earned through the hardware installed by the Taxpayer in the premises of its travel agents. This addition was confirmed by CIT (Appeals).
5. The ITAT, however, held that the lion’s share of activity was processed in the host computers in USA/Europe and the activities in India were only minuscule in nature. The Tribunal held that 15% of the revenue is the profit attributable to the PE on the basis of the FAR undertaken the Taxpayer and its PE.
6. Delhi HC observed that the payment made to the travel agents was 33.33% to about 60%based on FAR Analysis examined by ITAT, Hence held that no further income was liable to tax in India and confirmed the Tribunal’s ruling.

Issue for consideration

The short question before the SC was that considering the fact that the computers placed in the premises of the travel agents and the nodes/leased lines formed a fixed place PE of the respondent in India. Whether the arm’s length price (15% in the present case) determined by the Tribunal in all cases is final and cannot be a subject matter of scrutiny by the HC under Section 260A of the IT Act?

Decision of the Supreme Court

1. The ITAT arrived at the quantum of revenue accruing to the Taxpayer from bookings in India on the basis of FAR analysis (Functions performed, Assets used and Risks undertaken).
2. As per Explanation 1(a), under clause (i) of Sub-Section (1) of Section 9 of the Income Tax Act 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income deemed to accrue or arise in India.
3. What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal has considered relevant factors. Hence, the order of ITAT cannot be considered to be perverse.
4. The Commission paid to the travel agents by the Taxpayer was more than twice the amount of income attribution and this has already been taxed. Therefore, the Tribunal rightly concluded that the same extinguished further assessment.
5. The concurrent orders of the Tribunal and the High Court do not call for any interference.
6. Our comments: SC & HC did not find any perversity in the order passed by ITAT and hence both declined to interfere.

2. Can an assessee switch over to a new most appropriate method (MAM) different from the one selected in Form 3CEB/the TP Study Report?

2.1 Star India (P.) Ltd. v. Asstt. CIT [2023] 151 taxmann.com 77 (Mum.-Trib.) (SB)

Facts of the case

1. This is a decision of Special Bench (3 Members) of the Mumbai ITAT.
2. The assessee company purchased Bundle of Sports Broadcasting Rights from its AE and applied Other Method in TP Study Report (TPSR). To support the ALP, the Assessee obtained Valuation Report for Bundle of Sports Broadcasting Rights from an independent valuer.
3. TPO made adjustment qua international transaction of acquiring Bundle of Sport Broadcasting Rights on the basis of deficiencies found in the valuation report submitted by the assessee.
4. Before the ITAT, the Assessee argued for application of CUP method for benchmarking of the purchase consideration for Bundle of Sports Broadcasting Rights, though in its TPSR, the Assessee itself applied “Other Method”.

Issue for consideration

Whether an Assessee is entitled to switch over to a new method, different from the one taken in TPSR, as the MAM?

Decision of the Mumbai ITAT (SB)

1. Noting that the Revenue was given full opportunity of hearing for the aspect of change in the method by the Assessee, ITAT, after referring to Rule 10AB of IT Rules and OECD TP Guidelines. held that “an assessee, in principle, can resile (change a decision made previously, stop doing something or supporting, etc.) from the most appropriate method as was adopted in its transfer pricing study report”.
2. The Learned Vice President, in a minority ruling, held CUP as MAM over ‘Other Method’ by opining that “… if the CUP method is pitted against the `other method’, then there is no prize for guessing that it is the former which will prevail over the latter provided the comparable uncontrolled data required for it is available … Though the statute does not give priority to any method for selection as the most appropriate method, but the ambit of the ‘other method’ in contrast to the specific methods makes it a method of last resort because of its relatively lesser exactitude and meticulousness”.
3. However, the Ld. Accountant Member rejected CUP method due to absence of comparable uncontrolled transaction prices, and upheld ‘Other Method’ being more appropriate to the ‘Unique Intangible Asset’ in the form of Bundle of Sports Broadcasting Rights.
4. The Ld. Judicial Member agreed with the Ld. Accountant Member and found that ‘Other Method’ is appropriate over CUP. Of course, the Ld. Judicial Member held that CUP Method when pitted against ‘Other Method’ would prevail, provided reliable CUP data is available, but in the facts of the present case, the ‘Other Method’ and not the ‘CUP Method’ was the MAM.

3. Whether advance pricing agreements executed for earlier years can form the basis for determination of the ALP for non APA years?

3.1 Springer India Pvt Ltd [TS-403-HC-2023(DEL)- TP]- Delhi HC

Facts of the case

1. The CBDT and the assessee had executed an APA for A.Yrs 2013-13 to 2021-22.
2. The ITAT decided that the impugned APA should form the basis for benchmarking similar transactions in AY 2012-13.
3. Hon. Delhi High Court upheld the ITAT’s decision noting that the ITAT’s decision is ring-fenced with the caveat that the TPO will have to determine whether the Functions, Assets and Risks (FAR) in the preceding AY are the same as those which are covered in the APA for the subsequent years.

Our Comments

• Hon. Delhi High Court’s judgement is welcome. High Court has ruled that if the FAR in a Non-APA year is the same as that in the APA years, then the Transfer Pricing Method (TPM) adopted for the APA years ought to be replicated in a Non-APA year.
• The CBDT has always held the view that if the FAR in a renewal application remains the same as that in the original APA, then the TPM should not be changed. This has been followed consistently and HC’s judgement is in sync with this principle.
• High Court’s judgement also reinforces the importance of FAR in transfer pricing analysis.

4. Whether Section 144C inserted by the Finance Act (No. 2) of 2009 w.e.f 1.04.2009 providing additional time can be applied to pending proceedings or apply only prospectively?

4.1 Vedanta Ltd. v. Asstt. CIT [2020] 114 taxmann.com 636 (Mad.)

Facts of the case

1. The issue pertains to AY 2007-08. The assessee’s case was covered under the provisions of Chapter X of ITA and the AO forwarded a Draft assessment order dated 30.12.2010 u/s 144C(1).
2. The provisions of Section 144C inserted by Finance Act (No. 2) of 2009 w.r.e.f 01.04.2009 provided substantial right to file objections before the DRP and therefore, additional time limit was available for passing assessment order.
3. The CBDT issued an Explanatory Circular immediately after its insertion clarifying that the provision would be operative with effect from FY 01.04.2009 i.e., A.Y.2010-11 only.
4. Subsequently in 2013, CBDT clarified that the earlier circular stating that the provisions of Section 144C are applicable only with effect from FY 2009-10 (A.Y.2010-11) was inadvertent and incorrect, and the correct position was that the provisions would be applicable to all proceedings pending as on 01.04.2009.
5. The assessee contended that the additional time limit for passing of assessment order under provisions of section 144C were applicable from AY 2010-11 onwards and therefore, filed a Writ petition before Hon’ble Madras High Court to quash the time barred draft assessment order passed by the AO by incorrectly resorting to section 144C of ITA.

Issue for consideration

Whether the provisions of Section 144C inserted by the Finance Act (No. 2) of 2009 which not only brings about a mere procedural change, but also a substantive change, shall be applied prospectively or retrospectively?

Decision of the High Court

1. Explanatory memorandum to Finance Bill clearly states that new scheme of assessment u/s 144C shall be made applicable in relation to AY 2010-11 and all subsequent years.
2. It is settled position that law applicable to all the matters of assessment would be the law that is in force as on the first date of the relevant assessment year – Hon’ble Supreme Court in Karimtharuvi Tea Estate Ltd. v State of Kerala ([1966] 60 ITR 262 (SC)) has afirmed this principle.
3. The procedure inserted is substantive, as it offers altogether a new scheme of assessment to specified class of assesses to carry out the assessment in a completely different forum.
4. Placed reliance upon its own decision in the case of CIT v. Prasad Productions (P.) Ltd. ([1989] 45 Taxman 95/179 ITR 147 (Mad.)) wherein a settled position was established that where a Circular has explained a provision to be applicable qua a particular assessment year, the benefit of such Circular cannot be withdrawn at a later date, so as to deny the assessee the benefit extended earlier.
5. Held, given the facts DAO passed by the AO was barred by the limitation.

5. Whether investment in preference shares can be considered as money lending transaction which could lead to attraction of the TP provisions?

5.1 Principal CIT v. Aegis Limited [2019] 102 taxmann.com 495 (Bom.)

Facts of the case

1. The assessee had subscribed to redeemable preferential shares of its AE which did not carry any dividend and had redeemed some of its shares at par.
2. The TPO held that the assessee has lent interest free loans in the garb of preference shares and accordingly, re-characterised the transaction and charged interest on notional basis.
3. Hon’ble Tribunal deleted the addition. Tribunal observed that the TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.

Issue for consideration

Whether investment in preference shares can be considered as money lending transaction which could lead to attraction of the TP provisions?

Decision of the High Court

The High Court rejected the issue as substantial question of law and concurred with the ITAT stating that:

1. TPO cannot disregard the apparent transaction without any material of exceptional circumstances which point out that the assessee has tried to conceal real transaction.
2. TPO cannot question the commercial expediency of the transaction entered into by the assessee.

6. Can assesse change its stand in relation to selection of the tested party before the DRP or appellate court?

Whether foreign AE can be selected as “tested party” being least complex of the transacting entities?

6.1 Principal CIT v. Almatis Alumina (P.) Ltd. [2022] 137 taxmann.com 202/286 Taxmann 378/445 ITR 632 (Cal.)

Facts of the case before ITAT

1. The assessee company was engaged in manufacturing of alumina based refractory and ceramic raw materials for which company imported raw materials from its AEs.
2. The assessee benchmarked international transaction on the entity level by applying TNMM as MAM and operating profit on sales as the profit level indicator (PLI). The assessee has taken itself as tested party in the TPSR and during the TP proceeding.
3. However before the DRP, assessee submitted that its foreign AE should be taken as the tested party as it is the least complex entity.
4. The department objected that the assessee cannot change its stand at a later stage for selection of the tested party as per its wish and the Transfer Pricing regulation does not permit to change the tested party at a later stage because it leads to tax evasion.

Issue for consideration for ITAT

Whether foreign associated enterprise can be considered as a tested party being least complex of the transacting entities and whether the assessee can change its stand in relation to selection of the tested party before the DRP or appellate court?

Decision of the Tribunal dated 12.08.2022- Appeal No. 726 and 2361 of 2017

1. Based on the FAR assumed by both the parties, the assessee is engaged in operation that entails entrepreneurial function and related risks. The AE being a manufacturer of products as per the orders placed by the assessee performed simpler functions and did not assume significant risks.
2. On the basis of FAR, the assessee company was more complex entity as compared to the FAR assumed by its AE.
3. Relied on the decision of Landis + Gyr Ltd. v. Dy. CIT [ITA No. 37 (Kol) of 2012, dated 03-08- 2016] & Ranbaxy Laboratories Ltd. v. Addl. CIT [2008] 167 Taxman 30 (Delhi) and also referred to TP guidelines issued by ICAI, the OECD and the UN manual of TP and held that foreign AE can be taken as the tested party.
4. With regard to change of assessee’s stand before DRP, ITAT held that the TPO can substantiate why assessee should be considered as the tested party or the assessee can substantiate why AE should be taken as the tested party, but merely because assesse himself had considered itself as the tested party cannot preclude the assessee from raising a different contention.
5. The ultimate aim of the TPO/DRP is to examine whether the price or the margin arising from an international transaction with a related party is at ALP or not. The determination of the ALP is the key factor for which the least complex tested party is to be selected.

Decision of the High Court

1. Guidance note by ICAI and transfer pricing guidelines issued by OECD do not prohibit foreign AE to be a tested party.
2. Held, where on consideration of FAR profile of both assessee company and AE, Tribunal has held that assessee company was a more complex entity when compared to its foreign AE, said foreign AE could be selected as a tested party. Order of Tribunal is affirmed.
3. Court also held that, where segmental results are available, adjustment can be made only on basis of individual transaction and not on aggregation basis.

7. Whether the transaction entered in to before entering into or after the exit from joint venture with a foreign company (Erstwhile AE) could be regarded as international transaction within the meaning of section 92B?

7.1 Hero Motor Corp Vs. Dy. CIT [2020] 117 taxmann.com 101 (Delhi-Trib.)

Facts of the case

1. The assessee company was incorporated as a joint venture company between ‘Munjal’ group and HM Co. Japan (HMC) and on basis of technology provided by HMC, had been manufacturing and selling two wheelers in Indian Market since 1985.
2. During FY 2010-11, HMC decided to exit joint venture and thus, HMC transferred its entire shareholding of 26% in the assessee company to Indian promoters i.e. ‘Munjal’ Group.
3. At the time of transfer, the assessee entered into a license agreement with HMC, whereby it gained rights to use technology, drawings and design (ownership rights or exclusive rights) with respect to manufacture and sale of 18 specific models (License A Products) of motorcycle till perpetuity for a lumpsum consideration.
4. The assessee also entered into license agreement (License B Products) for right to manufacture 4 motorcycle model. Assessee was required to make payment on account of model fee and royalty to HMC. 94.64% of the revenue was derived from sale of License A products and 5.36% from sale of License B products.
5. The assessee had reported the said transaction in Form 3CEB for AY 2012-13 as an abundant caution but contented that in absence of any shareholding or participation in the management, capital or control of the applicant, HMC could not be regarded as an AE of HM in terms of section 92A.
6. TPO held that as per clause (g) of section 92A(2), the business of the assessee was wholly dependent on the technology, drawings and design of HMC and therefore, made upward adjustment to assessee’s ALP.

Issue under consideration

Whether the transaction entered after HMC’s exit from joint venture could be regarded as international transaction within the meaning of section 92B?

Decision of Tribunal

1. By virtue of License A Agreement, the assessee gained ownership rights with respect to manufacture and sale of 18 models of motorcycle and during the relevant previous year 94.64% of the revenue was derived by the assessee from sale of products with respect to which rights are owned by the assessee. Therefore, the assessee is not depend on HMC for technology.
2. Since in the year under consideration, HMC does not have any shareholding or participation in the management, capital or control of the assessee company, it cannot be regarded as an “AE” in terms of Section 92A (1).
3. Thus, the transaction of payment of model fee and royalty to HMC during the relevant assessment year did not constitute an international transaction within the meaning of section 92B, and cannot attract provisions of Chapter X of the ITA.

8. Whether an ALP adjustment can be made in respect of interest free loan granted by a foreign AE to its WOS in India?

8.1 Instrumentarium Corporation Ltd. v. Asstt. DIT [2016] 71 taxmann.com 193/160 ITD 1 (Kol.-Trib.) (SB)

Facts of the case

1. The assessee company (‘ICL-Finland’) was incorporated in Finland and engaged in the business of manufacturing and selling medical equipments.
2. ICL-Finland has a WOS in India – Datex India, which acts as marketing arm for its products in India. On 26th August 2002, the assessee entered into an agreement, which was duly approved by the RBI, to advance an interest free loan of Rs 36 crores to Datex India.
3. The AO noted that Datex India is a loss making concern and it has huge accumulated business losses and unabsorbed depreciation. Therefore, AO concluded that non application of ALP interest will result in a real loss to Indian tax revenue and determined the ALP interest income of the ICL-Finland @10.87% as per SBI PLR.
4. AO levied tax @ 10% (as per India Finland DTAA) on the interest adjustment. CIT(A) confirmed and upheld the adjustment made by AO.

Issue under consideration

Whether ALP adjustment is required to be made in respect of interest free loan granted by ICL-Finland to to its WOS in India?

Decision of Tribunal

• The transactions is an international transactions between the AEs, hence the income arising from these transactions is required to be computed at ALP.
• With regard to assessee’s argument that provisions of s 92(3) shall not apply in a case where the computation of income u/s 92(1) has the effect of reducing income chargeable to tax or increase in loss, the ITAT held that as per section 92(3), the impact of profit or losses needs to be seen for the year under consideration and qua the taxpayer and any transfer pricing adjustment made with respect to the income of the ICL-Finland would not be available as deduction in the hands of Datex India because there is no provision enabling deduction for ALP adjustments.
• In view of this, there is no base erosion in the hands of Indian AE for the ALP adjustments in the hands of the non-resident company in respect of transactions with the Indian AEs.
• If the non-payment of interest is accepted at ALP, Indian Tax Administration will lose the taxability of interest in the hands of the non resident assessee at the rate of 10%.
• Tax shield to Indian AE of accumulated losses is wholly academic inasmuch as the deduction has not been claimed, nor can it be claimed at this stage. The exclusion clause in section 92(3) does not come into play on the facts of the case at all.
• The question of commercial expediency of a loan to subsidiary is irrelevant in ascertaining arm’s length interest on such a loan.
• There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are international transactions between the AE, section 92 mandates that the income from such transactions is to be computed on the basis of arm’s length price.
• With regard to the assessee’s argument that the loan being extended free of interest was in the nature of shareholder service, ITAT held that this plea is being taken up for the first time and the assessee has not even furnished basic evidences for the factual elements embedded in this proposition hence rejected this proposition.
• Accordingly, ITATupheld the order of the TPO/CIT(A) and confirmed the addition.

9. Whether it is mandatory for the AO to make reference to TPO for determination of ALP in respect of international transaction entered into by assessee?

Whether appellate authorities can allow a matter to be restored back to the file of the Ld. AO where administrative default is made?

9.1 Principal CIT vs. SG Asia Holdings (India) (P.) Ltd. [2019] 108 taxmann.com 213/266 Taxman 451 (SC)

Facts of the case

• During the year under consideration, the assessee had earned brokerage income from its Foreign AE. During the course of assessment, the Ld. AO asked the assessee to establish whether the rate charged by it to its foreign AE is at ALP.
• Thereafter, considering materials available on record the AO passed assessment order by making an upward adjustment u/s 92 of the Act, w.r.t ALP of brokerage income earned from Foreign AE, without making reference to the TPO. The CIT-(A) also upheld the assessment order passed by the Ld. AO.
• On further appeal, Hon’ble Tribunal set aside findings of the lower authorities by relying on CBDT instruction no. 3/2003 dated 20.05.2003 which stipulates that reference to TPO is mandatory. The ITAT also refused to restore the matter back to the file of AO on the ground that Tribunal is an appellate authority and therefore cannot interfere in administrative matters which are mandatory.
• The view so taken by the Tribunal was also affirmed by the Hon’ble High Court. Aggrieved, the department preferred an appeal by special leave before the Hon’ble Supreme Court.

Issue under consideration

• Whether it was mandatory for the AO to make reference to TPO for determination of ALP in respect of international transaction entered into by assessee?
• Whether appellate authorities can allow a matter to be restored back to the file of the Ld. AO even where administrative default is made ?

Decision of Supreme Court

• Rejected department’s plea for literally construing the phrase “may” used u/s 92CA(1) as signifying that discretion was vested in the hands of the AO and it is not mandatory to refer each case to the TPO.
• Relied upon CBDT instruction no. 3/2003 dated 20.05.2003 and concluded that the effect of aforementioned circular is mandatory in nature and the Ld. AO erred in breaching such mandate issued by the CBDT.
• Supreme Court accepted department’s alternate plea that Tribunal ought to have restored the matter back to the file of AO so that administrative lapse can be made good by making necessary reference to the TPO.
• Accordingly, Supreme Court has restored the matter to the AO to decide the matter afresh.

10. Whether an independent third party quotation be taken as a valid CUP for benchmarking an international transaction?

10.1 Adani Enterprise Ltd. vs Addl. CIT [2019] 111 taxmann.com 196 (Ahd.-Trib.)

Facts of the case

• During the year, the assessee had entered into an international transaction of export of Maize to its foreign AE. The assessee benchmarked the aforesaid transaction using External CUP method as the MAM.
• The comparable transaction as stated by assessee for applying CUP, inter alia included an independent quotation from a third party for a similar transaction.
• The Ld. TPO rejected assessee’s independent quotation used for comparability analysis on the grounds that “actual independent transaction” can be taken as valid CUP input for benchmarking and not an “independent quotation” from third party with respect to similar transaction.
• CIT-(A) upheld the order of AO made in accordance with TPO’s order. Aggrieved, the assessee was in appeal before Hon’ble Tribunal.

Issue under consideration

• Whether an independent third party quotation can be taken as a valid CUP for benchmarking an international transaction?

Decision of Tribunal

• An independent third party quotation on standalone basis cannot be used as a valid CUP input for benchmarking analysis without anything to demonstrate it’s contemporaneous nature and sufficient parity with the actual transaction.
• Even if it is ought to be considered as a valid CUP input, there has to be material on records to establish its bonafide nature, lacking which the same cannot be acceptable.
• If no parity between “independent third party quotation” and “actual independent transactions” is established, the same cannot be taken as valid CUP input for benchmarking analysis.

11. Whether the transfer pricing adjustment made by AO/TPO for sham transactions is sustainable under provisions of section 92(F) of the Act?

11.1 Mitchell Drilling India (P.) Ltd. vs. Dy. CIT [2018] 93 taxmann.com 458 (Delhi-Trib.)

Facts of the case

• The assessee is engaged in the development of burgeoning CBM industry, directional drilling and innovative turnkey management projects within the Oil & Gas industry.
• During the year, assessee had made payment for Purchase of components and accessories, Interest under Hire Purchase Agreement, Payment of installments of principal under hire purchase agreement and ‘Repossession of Rig’ revolved around the assessee purchasing a drilling Rig from Mitchell Drilling Operations Pty. Ltd. on hire purchase under an agreement executed on 1.4.2004.
• AO noticed that assessee was in possession of the Rig from 01.04.2004 to 30.06.2005 (1 year 3 months) and later it was repossessed by the seller. Referring to the Hire Purchase agreement, AO noticed that there was no clause of penal payment or any compensation in case of default in payment of hire purchase charges.
• Hence, AO concluded that the hire purchase agreement was a sham transaction purposefully designed to avoid not charging/withholding any tax on rental of Rig and also by claiming depreciation on Rig, which was actually not owned by it.
• Hence addition was made u/s 40(a)(i) for non-deduction of TDS for payment to foreign parties, depreciation claimed on the rigs was disallowed and transfer pricing adjustments were made for the payments determining ALP as NIL.

Issue under consideration

Whether the transfer pricing adjustments made by AO/TPO for sham transactions relating to Hire purchase transaction are sustainable as per provisions of section 92(F) of the Act?

Decision of Tribunal

• Tribunal laid emphasis on the definition of “International transaction” defined u/s 92B. The term “transaction” is defined u/s 92F(v) – include an arrangement, understanding or action in concert. It shows that the ALP is always determined for an international transaction, which is genuine, but may be formal or in writing and whether or not intended to be enforceable by the legal proceeding.
• Tribunal observed that if the transaction is not genuine, there can be no question of invoking transfer pricing provisions. In such an eventuality of a supposed genuine transaction turning out to be non-genuine, all the consequences which would have flowed for a real transaction are reversed.

12. Whether the provision of Section 92 can be invoked in a situation where income of the assessee is exempt and not chargeable to tax in India?

12.1 Doshi Accounting Services (P.) Ltd. v. Dy. CIT [2020] 113 taxmann.com 521/181 ITD 49 (Ahd.-Trib.)

Facts of the case

• The assessee-company was engaged in the business of business process outsourcing (BPO). During the year, the assessee has provided certain services to its AE. The assessee provided these services from the unit which was an STPI unit eligible for exemption u/s 10A.
• The assessee benchmarked its transaction with the AE by applying internal CUP method and claimed that its transactions with the AE were at arm length price. However, the TPO rejected the CUP method and adopted TNMM as the most appropriate method.

DRP Proceedings

• Before the DRP, assessee objected rejection of CUP method and selection of TNMM as the most appropriate method, comparable selected by the TPO and the comparable rejected by the TPO.
• Before the DRP, the assessee also argued that since it was enjoying the benefit of deduction under section 10A, therefore, there was no reason to charge a lower price from the AE.
• Assesse also contended that the effective tax rate in the UK would be higher than the effective tax rate in India, which as a result of section 10A was 0 per cent. As such, there was no motive and incentive in shifting the profits from India to the UK, where the tax rate
  was higher.
• However, DRP after relying upon the order of Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 162 Taxman 119/15 SOT 49/107 ITD 141 (Bang.-Trib.) (SB) and ITAT Mumbai in case of Gharda Chemicals Ltd. v. Dy. CIT [2010] 35 SOT 406 (Mum.-Trib.), rejected the contention of the assessee and upheld the order of the TPO.

Issue under consideration

• Whether the provisions of Section 92 can be invoked in a situation in which income of the assessee is eligible for tax exemption and not actually chargeable to tax in India?

Decision of Tribunal

• With regard to assessee’s contention that intention of the legislature for inserting TP provision to be looked into, ITAT held that It is cardinal rule of interpretation that where the language used by the legislature is clear and unambiguous then plain and natural meaning of those words should be applied to the language and resort to any rule of interpretation to unfold intentions is permissible where the language is ambiguous.
• It is very clear that the purpose behind the provision of transfer pricing is to determine true profits/income as if such international transaction has been entered with an unrelated party or non-AE, irrespective of the fact that the income of the assessee was eligible for exemption.
• There is no express provision under the Act restricting the application of section 92C of the Act for determining the income at arm’s length where such income is eligible for deduction u/s 10A of the Act. On the contrary, proviso to section 92C(4) prohibits the deduction u/s 10A of the Act on the income to the extent enhanced as an effect of a determination of ALP.
• The proviso to section 92C(4) itself clearly reflects the intent of lawmakers that the provisions of chapter X of the Act shall prevail in all the cases of international transactions falling under the umbrella of section 92 of the Act including the income-qualified for exemption under section 10A of the Act.

Without prejudice to above, Tribunal observed as under

• If the purposive interpretation is to be applied while invoking provisions of chapter X of the Act, the same interpretation should also be extended in the context of the provision of section 10A of the Act. It is because one cannot see the provision of chapter X in isolation as the issue on hand has direct nexus with the provision of section 10A of the Act.
• Spirit behind introducing section 10A was to bring foreign exchange in India. Granting exemption from Tax under section 10A of the Act was incidental and not the main object.
• Where transaction by the Indian AE does not correspond to an ALP, the same will adversely affect the inflow of foreign exchange in India. Perhaps this was the reason to insert the proviso in section 92C(4) of the Act.
• Accordingly, even if purposive interpretation is applied in respect to the provisions of chapter X along with provisions of section 10A of the Act, provision of chapter X is to be applied even though assessee is eligible for 10A deduction.
• In the result, question framed before the Special Bench was answered against the assessee.