2019 (7) TMI 173 - AT - Income Tax

Tribunal Invalidates Transfer Pricing Orders, Emphasizes Procedural Fairness

M/s. Sava Healthcare Ltd. (earlier known as Anagha Pharma Pvt. Ltd.) Versus The Asst. Commissioner of Income Tax, Central Circle 2 (1), Pune

M/s. Sava Healthcare Ltd. (earlier known as Anagha Pharma Pvt. Ltd.) Versus The Asst. Commissioner of Income Tax, Central Circle 2 (1), Pune - TMI Issues Involved:1. Jurisdiction of the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).2. Requirement of satisfaction and opportunity of hearing by the Assessing Officer (AO) before making a reference to the TPO.3. Benchmarking of international transactions and the scope of TPO's powers.4. Determination of control and management of the assessee's affairs.5. Application of the Profit Split Method (PSM) by the TPO and DRP.6. Enhancement powers of the DRP.Issue-wise Detailed Analysis:1. Jurisdiction of the TPO and DRP:The TPO's jurisdiction was challenged on the grounds that he exceeded his powers by determining the control and management of the assessee's affairs. The TPO concluded that the entire control and management of the assessee group were situated in India, which was beyond the scope of his jurisdiction. The DRP, while modifying the TPO's order, held that the AEs were not sham entities and attributed part of the global profits to the assessee. The Tribunal held that the TPO's exercise was beyond his jurisdiction, and the DRP's modifications were also beyond its scope.2. Requirement of Satisfaction and Opportunity of Hearing by the AO:The Tribunal emphasized the importance of the AO providing an opportunity of hearing to the assessee before making a reference to the TPO. The AO should form a prima facie opinion about the necessity and expediency of referring the matter to the TPO. The Tribunal relied on the jurisdictional High Court's decision in Vodafone India Services Pvt. Ltd., which mandates that the AO must consider the assessee's objections to the applicability of Chapter X before making a reference to the TPO.3. Benchmarking of International Transactions and Scope of TPO's Powers:The TPO's role is to determine the arm's length price (ALP) of international transactions reported by the assessee. In this case, the TPO went beyond his jurisdiction by determining the control and management of the assessee's affairs and applying the Profit Split Method (PSM) without considering external comparables. The Tribunal held that the TPO's exercise was invalid and beyond his powers under section 92CA(1) of the Act.4. Determination of Control and Management of the Assessee's Affairs:The TPO's determination that the control and management of the assessee's affairs were situated wholly in India was beyond his jurisdiction. The Tribunal held that such a determination is within the domain of the AO under section 6(3) of the Act. The TPO's findings on this issue were invalid and beyond his scope of authority.5. Application of the Profit Split Method (PSM) by the TPO and DRP:The TPO applied the PSM to benchmark the international transactions, attributing 97% of the global profits to the assessee. The DRP modified the TPO's order and attributed part of the global profits to the AEs. The Tribunal held that the TPO's application of the PSM was beyond his jurisdiction, and the DRP's modifications were also beyond its scope. The Tribunal emphasized the need for external comparables while applying the PSM, which was not done in this case.6. Enhancement Powers of the DRP:The DRP's powers are limited to confirming, reducing, or enhancing the variations proposed in the draft order. The DRP cannot introduce new sources of income or benchmark new transactions not considered by the TPO. The Tribunal held that the DRP exceeded its jurisdiction by benchmarking new transactions and attributing part of the global profits to the assessee. The DRP's exercise of powers was beyond its scope, and the consequent order was invalid.Conclusion:The Tribunal quashed the orders passed by the TPO and DRP, holding that the entire exercise carried out by the TPO was beyond his jurisdiction, and the DRP's modifications were also beyond its scope. The assessment order passed in the case was held to be invalid and bad in law. The Tribunal emphasized the importance of the AO providing an opportunity of hearing to the assessee before making a reference to the TPO and the need for the TPO to stay within his jurisdiction while determining the ALP of international transactions.