2017 (7) TMI 34 - AT - Income Tax

Tribunal upholds Transfer Pricing Officer's role in international transactions affecting profits 'sLengthPrice

The Tribunal upheld the validity of the reference to the Transfer Pricing Officer (TPO) as the transactions affected the enterprise's profits. It ... International transaction - Arm's length price - Transfer pricing provisions (Chapter X) - Cash system of accounting and applicability of transfer pricing - Jurisdiction of the Transfer Pricing Officer - Determination of ALP at Nil - Duty to examine evidence before benchmarking - Remand for fresh verification of ALPInternational transaction - Cash system of accounting and applicability of transfer pricing - Transfer pricing provisions (Chapter X) - Transactions between the assessee and its associated enterprises were international transactions within the meaning of Section 92B despite the assessee following cash system of accounting and not claiming the payments as deductions in the relevant year. - HELD THAT: - The Tribunal examined the nature of the impugned dealings (provision of services, hire of equipment, reimbursement of expenses and inter company receivables) and held that each falls within the definition of an 'international transaction' because they are transactions of provision of services, lease/hire of tangible property or lending/borrowing money. The cash system of accounting and the fact that payments or deductions were not recorded in the relevant year do not prevent a transaction from being an international transaction; potential income or effects (for example interest on interest free advances) can arise irrespective of the accounting method. Reliance on authorities that turn on different factual categories (e.g., transactions affecting capital structure only) was held to be misplaced. On these foundations the Tribunal rejected the assessee's contention that Chapter X does not apply for the year in question and dismissed grounds 16-20. [Paras 15, 16, 17, 18, 19]Grounds 16 to 20 dismissed; the transactions are international transactions and Chapter X applies notwithstanding the cash method of accounting.Determination of ALP at Nil - Duty to examine evidence before benchmarking - Jurisdiction of the Transfer Pricing Officer - Remand for fresh verification of ALP - Whether the ALP determinations (including taking ALP as Nil and imputation of interest) could be sustained without examining the evidentiary material produced by the assessee. - HELD THAT: - The Tribunal found that the TPO and DRP had computed the ALP as Nil for certain service and hire transactions and imputed interest on inter company receivables without adequately examining the documentary evidence produced by the assessee (invoices, man day comparisons, agreements, passports, bank statements, etc.). The Tribunal held that the TPO cannot validly fix ALP at Nil or otherwise decide benchmarking without testing and verifying the evidence furnished and without affording the assessee an effective opportunity to be heard on those factual matters. Consequently the Tribunal set aside the impugned parts of the transfer pricing determination relating to these contentions and remitted grounds 21-23 to the file of the TPO/AO for fresh consideration, verification of the evidence and determination of ALP in accordance with law, after giving the assessee opportunity to be heard. [Paras 21]Grounds 21 to 23 are set aside and remitted to the TPO/AO for fresh adjudication and verification of evidence; ALP to be determined after proper examination and hearing.Final Conclusion: Appeal disposed: grounds 16-20 dismissed on merits (transactions held to be international transactions despite cash accounting); grounds 21-23 directed to be remanded to the TPO/AO for fresh adjudication and verification of evidentiary material and re determination of ALP in accordance with law. Issues Involved:1. Reference to Transfer Pricing Officer (TPO) and jurisdictional validity.2. Applicability of Transfer Pricing provisions under Section 92B of the Income Tax Act.3. Determination of Arm's Length Price (ALP) for international transactions.4. Commercial expediency and benchmarking of transactions.5. Rejection of cash basis accounting method for Transfer Pricing adjustments.Detailed Analysis:1. Reference to Transfer Pricing Officer (TPO) and Jurisdictional Validity:The assessee contended that the reference made by the Assessing Officer (AO) to the TPO under Section 92CA(3) was bad in law and void ab initio as no international transaction was reported. The Tribunal noted that the AO must record his satisfaction that there is an income arising and/or being affected on determination of ALP of an international transaction before seeking approval of the Principal Commissioner of Income Tax. The Tribunal referred to the Delhi High Court's decision in Sony Ericsson Mobile Communications India Pvt. Ltd. and other relevant judgments, emphasizing that the TPO must justify and establish that there was an international transaction. The Tribunal held that the reference by the AO to the TPO was valid as the transactions had a bearing on the profits, income, losses, or assets of the enterprise.2. Applicability of Transfer Pricing Provisions under Section 92B:The Tribunal examined whether the transactions entered into by the assessee were covered under the definition of 'international transaction' as per Section 92B. The transactions included availing of technical services, reimbursement of expenses, hiring of equipment, and inter-company receivables. The Tribunal held that these transactions fell under the categories of provision of services, lease of tangible property, and lending or borrowing money, respectively, and thus were international transactions. The Tribunal rejected the assessee's argument that the provisions of Chapter X did not apply due to the cash basis of accounting and non-claiming of such expenditure as deduction.3. Determination of Arm's Length Price (ALP) for International Transactions:The TPO had determined the ALP of the international transactions at Nil and proposed adjustments. The Tribunal noted that the TPO did not examine the details and evidence provided by the assessee, such as invoices, agreements, and details of services rendered. The Tribunal emphasized that the TPO must examine these evidences to determine whether the services were rendered and then derive the ALP of such transactions in accordance with the law.4. Commercial Expediency and Benchmarking of Transactions:The assessee argued that the TPO was not competent to question the commercial expediency of the transactions and take the value of any international transaction at Nil. The Tribunal referred to the Delhi High Court's decision in CIT v. EKL Appliances Ltd., which held that the TPO's jurisdiction is limited to determining the ALP and not questioning the commercial expediency. The Tribunal set aside the TPO's determination of ALP at Nil and directed the TPO to re-examine the evidences provided by the assessee.5. Rejection of Cash Basis Accounting Method for Transfer Pricing Adjustments:The Tribunal rejected the assessee's argument that the cash basis of accounting should be considered for benchmarking transactions. The Tribunal explained that the provisions of Section 92B(1) apply irrespective of the method of accounting followed by the assessee. The Tribunal provided an example to illustrate that international transactions must be benchmarked for the relevant previous year, regardless of whether the income or expenditure is recognized in the books of account.Conclusion:The Tribunal dismissed ground Nos. 16 to 20 of the appeal, holding that the transactions benchmarked by the TPO were international transactions under Section 92B of the Income Tax Act. However, the Tribunal set aside ground Nos. 21 to 23 and directed the TPO to re-examine the evidences provided by the assessee and determine the ALP of the transactions after granting a proper opportunity of hearing to the assessee. The appeal was allowed for statistical purposes.