2025 (7) TMI 1682 - AT - Income Tax

Head Office and Indian PE Deemed Associated Enterprises Under Section 92A(2)(g) with Transfer Pricing Adjustments

ITAT Ahmedabad held that the head office and its Indian PE qualify as associated enterprises under Section 92A(2)(g) of the Income Tax Act. The PE is not ... TP Adjustment - invocation of transfer pricing provision in the present case as provided in chapter X of the Income Tax Act - Meaning of associated enterprise u/s 92A - whether or not the transactions between a foreign enterprise outside India and its Indian PE can be considered as international transactions for the purpose of Section 92B of the Act, and accordingly can be subjected to the ALP adjustment? - HELD THAT:- We hold that the head office and its Indian PE are associated in terms of a clause (g) of Section 92A(2) of the Act. Coupled with the above is the fact that the assessee undisputedly being the “Permanent Establishment”(PE) of TBEA, which term has been defined by section 92F(iiia) to include a fixed place of business through which the business of the enterprise (TBEA in the case before us) is carried out, undoubtedly there is no separation as such of capital, management or control between TBEA and the assessee its PE, though for purposes of Transfer Pricing it is treated as a separate enterprise. The assessee PE is only a place of business through which the business of TBEA is carried on, leaving no question of entire capital, control and management of the PE resting with its HO, TBEA. There is no doubt at all of the HO, TBEA, being associated enterprise of the assessee. Adjustment made to the income earned by the assessee project office from the execution of onshore contract by determining the ALP in terms of provision of Section 92CA - applicability of the most appropriate method applied for determining the ALP for the transaction - TNMM method or CUP method - HELD THAT:- When considering the original onshore agreement entered into by the head office with PGCIL, it was found that the assessee was not adequately compensated for the activities carried out, there is no question at all for treating that agreement as a comparable for applying CUP method for determining ALP for the transaction. The onshore agreement surely was not at arms length since no independent entity would agree to carry out work at losses/ without being adequately compensated for it. The argument of the assessee in this regard is, therefore, rejected. The decision of Shandong [2018 (4) TMI 2018 - ITAT AHMEDABAD] is of no assistance to the assessee since in the facts of the said case there was no finding of the assessee not being adequately compensated in terms of the original sub contract. Therefore, as rightly pointed out by the Ld.DR the said decision is rendered in different facts and circumstances and has no applicability to the facts of the present case before us. TP adjustment - international transaction of offshore contracts alleged to be executed by the PE/project office TBEA China in India resulting in an adjustment to the same - TPO has not identified Mr. Jagdish Lal alone as constituting PE of TBEA China. He had noted that even office of Shri Jagdish Lal constituted fixed place of business of TBEA, China in India since Shri Jagdish Lal was undisputedly involved in day-to-day bid relating activity of TBEA. He has also noted that even Mr. Chen Zhijin constituted service PE of TBEA in India since the assessee had not proved that his stay in India did not exceeded 183 days. Argument of assessee that Shri Jagdish Lal did not constitute PE in India, we find, has no merits because besides being found to be involved as country representative of TBEA, China, in the day to day activities of prebid discussion and being privy to all information relating to the same, even his office was also identified as PE of TBEA China and Mr. Chen Zhijin was also identified to have constituted service PE of TBEA, China in India. We have noted the assessee had not countered the same before us. In the light of the above therefore, the contention of the Ld. Counsel for the assessee in this regard is found to be without any merit and dismissed. TBEA Energy India Ltd. had entered into an agreement with TBEA China to execute its contract with PGCIL and agreed to act as an agent of the foreign company in this regard. The TBEA Energy India Ltd. was also noted as a matter of fact to have incurred expenses for the project executed by TBEA China with PGCIL and had charged those expenses to the head office of TBEA China. Thus, the fact remains that TBEA Energy India Ltd. constituted business connection/PE of TBEA China in India. The contention of the Ld. Counsel for the assessee is accordingly rejected. TPO has noted VEL to have entered into an agreement with TBEA China to carry out its repairs and maintenance activity agreed as part of offshore contract entered into with PGCIL - No reason to disagree with the TPO that VEL constituted PE of the TBEA China in India. In any case, we have noted that the TPO has only identified VEL as constituting PE of TBEA China in India for the offshore activity of defect liability and functional and equipment performance guarantees for which it has also identified the project office of TBEA China (the assessee before us) as the PE of TBEA China. For the said reason therefore, even if VEL did not constitute PE of TBEA China in India, the fact remains that project office constituted PE of the head office in India for the offshore activity and, therefore, there is no infirmity in the order of the authorities below treating the identified offshore activities as international transaction for the purpose of transfer pricing adjustment, determining the ALP of the same at Rs. 22 Crores. ISSUES: Whether transactions between a foreign enterprise and its Indian Permanent Establishment (PE) qualify as international transactions under Section 92B of the Income Tax Act, 1961, subject to arm's length price (ALP) adjustment.Whether the Transfer Pricing Officer (TPO) has jurisdiction under Section 92CA to determine profits attributable to the Indian PE or is limited to determining ALP of international transactions referred by the Assessing Officer (AO).Whether the Comparable Uncontrolled Price (CUP) method or the Transactional Net Margin Method (TNMM) is the most appropriate method (MAM) for determining ALP of onshore service transactions executed by the Indian PE.Whether the onshore service contracts executed by the Indian PE were adequately remunerated and whether the TPO's upward adjustment under Section 92CA is justified.Whether a portion of offshore supply contract activities carried out in India by the PE constitute taxable income in India and whether the TPO's transfer pricing adjustment on offshore transactions is sustainable.Whether certain persons and entities identified as constituting PE of the foreign enterprise in India (including the country representative, a subsidiary company, and a third-party repair facility) legitimately constitute PE under Section 9 of the Act and Article 5(2) of the India-China DTAA. RULINGS / HOLDINGS: The transactions between the foreign enterprise and its Indian PE qualify as 'international transactions' under Section 92B and are subject to ALP adjustment, as held by the Special Bench and affirmed by the Tribunal.The TPO's jurisdiction under Section 92CA includes determination of ALP of international transactions referred by the AO; however, the attribution of profits to PE is integral to the ALP determination and not a separate exercise beyond TPO's powers, consistent with Article 7(2) of the India-China DTAA.The CUP method was not the most appropriate method for determining ALP of onshore service transactions because the original contract between the foreign head office and the unrelated Indian party failed the strict comparability test due to differences in terms and inadequate compensation to the PE; therefore, TNMM was correctly applied by the TPO as the method of last resort.The TPO's upward adjustment of Rs. 8,81,45,099/- under Section 92CA for onshore service transactions was justified due to the PE not being adequately compensated, supported by factual findings on subcontracting arrangements, discrepancies in revenue and expenses, and lack of detailed project reports.The portion of offshore supply contract activities carried out in India by the PE, including pre-sales and post-sales warranty and guarantee functions, constitute taxable income in India attributable to the PE under Section 9 and Article 7 of the DTAA; the TPO's transfer pricing adjustment of Rs. 20,69,41,033/- was upheld.The country representative, the subsidiary company incorporated in India, and the third-party repair facility were correctly held to constitute PE of the foreign enterprise in India, based on their involvement in pre-sales, project execution, and after-sales activities respectively. RATIONALE: The legal framework relied upon includes Sections 9, 92A, 92B, 92CA, 143(3), and 144C of the Income Tax Act, 1961, and Articles 5 and 7 of the India-China Double Taxation Avoidance Agreement (DTAA).The Special Bench's authoritative interpretation clarified that a PE is to be treated as a distinct and separate enterprise under Article 7(2) of the DTAA and that transactions between the foreign enterprise and its PE constitute international transactions under Section 92B, subject to ALP adjustment.Section 92A(2)(g) was pivotal in holding that the PE and head office are associated enterprises because the PE's business is wholly dependent on the use of know-how, documentation, and other exclusive rights of the head office.The Tribunal applied the strict comparability standards required for CUP method under Rule 10C of the Income Tax Rules and OECD Transfer Pricing Guidelines, finding the original contract unsuitable as a comparable due to differences in terms, subcontracting at higher rates, and lack of one-to-one correspondence between revenue and expenses.The TNMM was applied as the method of last resort, bundling similar onshore activities, consistent with judicial precedents permitting aggregation of controlled transactions when separate benchmarking is not feasible.The TPO's findings on the involvement of the country representative and subsidiary company in pre-sales and project execution activities, and the repair facility's role in warranty services, were accepted as constituting fixed places of business or service PE under Section 9 and Article 5(2) of the DTAA.The Tribunal rejected the contention that attribution of profits under Article 7(2) is separate from ALP determination, holding instead that both reflect the arm's length principle and are congruent exercises.