2025 (8) TMI 1323 - HC - Income Tax

Transfer-pricing adjustment wrongly applied to entire turnover; recovery of Rs.11,55,90,71,049 stayed pending appeal to CIT(A)

Tech Mahindra Limited Versus Assistant Commissioner of Income Tax & Ors.

HC held the transfer-pricing adjustment was impermissibly applied to the petitioner's entire turnover/operating costs rather than being confined to ... TP Adjustment - Subcontracting charges and other aggregated transactions - adjustment is computed by applying the alleged reworked margins, (i.e., difference between 16.02% and 21.24%) to the entire revenue of the Petitioner so as to derive a reworked figure of the Petitioner’s Operating Costs, and then make adjustment of such reworked Operating Costs when compared to the actual Operating Costs of the Petitioner. Petitioner filed an application seeking rectification of the mistake apparent from the record. In this application, it was contended that irrefutably, the transfer pricing adjustment made was on an entity level, taking into account the entire value of the transactions, including third party (non-AE) transactions. This, according to the Petitioner, was contrary to law HELD THAT:- The adjustment made by the 1st Respondent is clearly not restricted to the international transactions alone, but is based upon and applied to the entire turnover/operating costs of the Petitioner. This is contrary to well settled law and several judgments passed by this Court including Alstom Projects [2016 (12) TMI 1408 - BOMBAY HIGH COURT] and Goldstar Jewellery [2016 (3) TMI 459 - BOMBAY HIGH COURT] - However, considering the fact that a statutory appeal has been filed by the Petitioner, and these contentions can be urged therein, and also the well settled principle that pending an appeal, recovery of demand by taking a view contrary to that of a jurisdictional High Court, is not appropriate, we deem it just and proper to dispose of the present petition with the following order:- (i) The Petitioner may urge all contentions available to it in law before the CIT(A) in the Appeal so filed by it, including those raised in the present Petition. (ii) We request the CIT(A) to dispose of the Appeal in accordance with law, as expeditiously as possible and preferably within a period of 12 months from the date of this order. (iii) Until this Appeal is disposed of, and for a period of four weeks thereafter, the Revenue shall not recover the taxes and interest arising as a result of the excess impugned transfer pricing adjustment of Rs. 11,55,90,71,049/- or such other figure as may be correctly computed. (iv) No further proceedings shall be taken against the Petitioner on the issue of the excess transfer pricing adjustment impugned in the present Petition until disposal of the Appeal filed by the Petitioner before the CIT(A) and for a period of 4 weeks thereafter. (v) Insofar as the demand arising from other additions made in the final assessment order dated 28th May 2025, the Petitioner’s stay application presently pending before the jurisdictional Principal Commissioner of Income Tax-2, Mumbai be disposed of by him in accordance with law. ISSUES PRESENTED AND CONSIDERED 1. Whether a transfer pricing adjustment made by the Transfer Pricing Officer (TPO) can be computed by applying reworked entity-level profit margins to the entire turnover/operating costs of the assessee, including transactions with non-associated enterprises (non-AEs), or must be confined to international transactions with associated enterprises (AEs) under section 92 of the Act. 2. Whether an order under section 154 (rectification of mistake apparent from record) can be used to rectify a TPO's adjustment that, it is contended, contradicts binding judicial precedent of the jurisdictional High Court. 3. Whether submission of post-proceedings computations (purported AE/non-AE segmental profitability) that were not verified during transfer pricing proceedings can constitute a 'mistake apparent from record' within the scope of section 154. 4. Ancillary relief issue: Whether recovery of demand arising from an alleged excessive transfer pricing adjustment should be restrained pending disposal of the statutory appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of transfer pricing adjustments: entity-level application versus restriction to international transactions Legal framework: Section 92 read with related provisions requires that transfer pricing adjustments relate to international transactions between the assessee and its AEs; the adjustment process under section 92CA pertains to determining arm's length price (ALP) for such international transactions. Precedent Treatment: The Court refers to binding decisions of the jurisdictional High Court which hold that transfer pricing adjustments must be confined to international transactions and cannot be applied to the assessee's entire turnover or costs that include non-AE transactions. These precedents were relied upon by the assessee before the TPO and in the petition. Interpretation and reasoning: The Court, prima facie, finds that the impugned TPO order reworked margins and applied the difference between reworked and original margins to the assessee's entire operating revenue/costs (entity-level) to arrive at the adjustment figure. The Court observes that this application to entire turnover/costs, inclusive of non-AE transactions, is contrary to the statutory mandate restricting transfer pricing adjustments to international transactions and inconsistent with the cited High Court jurisprudence. Ratio vs. Obiter: Ratio - The Court affirms the principle (as per jurisdictional precedent) that transfer pricing adjustments must be confined to international transactions and not applied to entire entity turnover/costs. Obiter - The Court's prima facie view on the exact computation mechanics underlying the TPO's reworked margins, subject to adjudication on appeal, is advisory. Conclusions: The Court holds that the TPO's methodology of applying reworked margins to the entire operating costs/turnover is impermissible in law as it extends beyond international transactions and contradicts binding High Court authority. The matter is to be examined and urged in the statutory appeal (CIT(A)). (Cross-reference: Issues 2 & 4 concerning rectification and stay.) Issue 2 - Availability of rectification under section 154 for orders contrary to jurisdictional High Court decisions Legal framework: Section 154 permits rectification of 'mistakes apparent from the record' and is intended for correcting clear, glaring arithmetical or clerical errors or obvious legal errors demonstrable on the face of the record; it is not a substitute for appeal or revision when the claim requires examination and verification. Precedent Treatment: The Court notes reliance by the assessee on jurisdictional High Court judgments to contend that an order inconsistent with such precedents is a mistake apparent on the record and hence rectifiable under section 154. The TPO rejected rectification on the ground that reliance on case law and legal argument does not constitute a mistake apparent from the record. Interpretation and reasoning: The Court examines the scope of section 154 and recognizes the distinction between (a) a genuine mistake apparent on the face of the record (e.g., arithmetical errors, obvious clerical mistakes) and (b) a legal contention requiring adjudication, verification, and possibly factual inquiries. The TPO's rejection is premised on the proposition that the assessee's claim relied on unaudited computations and legal arguments not placed or verified during TP proceedings; such matters cannot be corrected under section 154 because they are not pure arithmetical or clerical mistakes apparent on the record. Ratio vs. Obiter: Ratio - An order contrary to jurisdictional High Court authority may, in principle, constitute a challengeable error, but rectification under section 154 is not appropriate where the contention requires verification, factual inquiry, or re-examination of issues that are properly the subject of appeal. Obiter - The Court's observation that an order ignoring jurisdictional High Court authority can amount to a mistake apparent on the record is noted as persuasive but not applied to mandate rectification without the statutory appeal process. Conclusions: The TPO correctly refused rectification on the ground that the assessee's post-proceedings computations and reliance on case law do not constitute a mistake apparent from the record amenable to correction under section 154. The proper remedy is to pursue the statutory appeal (CIT(A)), where these issues can be fully adjudicated. Issue 3 - Effect of post-proceedings unaudited computations and requirement of verification Legal framework: Transfer pricing proceedings require evidence and computations to be placed on record and subjected to verification during the proceedings; rectification cannot be used to admit and rely upon material not presented/verified in the original proceedings. Precedent Treatment: The TPO relied on the absence of separate, verifiable computations in the TP proceedings showing AE and non-AE segmental profitability, thereby treating the assessee's later-provided computation as unverified and hence inadmissible for rectification. Interpretation and reasoning: The Court accepts the TPO's rationale that a computation submitted after completion of proceedings, which was not available for verification in the course of the TP proceedings, cannot be treated as a mere arithmetical mistake. Determination of segmental profitability involves factual scrutiny and verification, which falls outside the narrow ambit of section 154. Ratio vs. Obiter: Ratio - Post-proceedings unaudited computations that require verification are not rectifiable under section 154 as mistakes apparent on the record; they must be considered through the appellate process. Obiter - The Court's acceptance that had such computations been placed and verified during TP proceedings, the outcome might differ, but this is not determinative here. Conclusions: The TPO's rejection of rectification on this ground is sustained; the assessee must present and seek adjudication of such computations in the appeal forum (CIT(A)). (Cross-reference: Issue 2.) Issue 4 - Interim relief: restraint on recovery pending appeal Legal framework: Courts possess jurisdiction to grant interim relief, including restraining recovery of disputed demands, particularly where a view contrary to jurisdictional High Court precedent is taken and a statutory appeal is pending. Precedent Treatment: The Court notes established principle that pending appeal, recovery of disputed tax amounts based on a view inconsistent with jurisdictional High Court law is inappropriate. Interpretation and reasoning: While recognizing that the assessee has filed the statutory appeal, the Court, finding prima facie merit in the contention that the TPO's adjustment was applied to entity-level turnover contrary to law, deems it just to protect the assessee from immediate recovery of the portion of demand attributable to the alleged excess transfer pricing adjustment until the appellate authority disposes of the appeal. Ratio vs. Obiter: Ratio - Interim restraint on recovery of the portion of demand attributable to the excess transfer pricing adjustment is appropriate where there is prima facie infirmity and an appeal is pending; such restraint should be time-bound and linked to the appellate disposal process. Obiter - The Court's direction on the precise quantum subject to restraint is provisional and requires recalculation in appeal. Conclusions: The Court grants interim relief: the Revenue shall not recover taxes and interest arising from the excess transfer pricing adjustment (specified figure indicated by petitioner) until disposal of the appeal by the CIT(A) and for four weeks thereafter; no further proceedings shall be taken on that issue until disposal of the appeal and for four weeks thereafter. The CIT(A) is requested to decide the appeal expeditiously (preferably within 12 months). (Cross-reference: Issues 1-3.)