2025 (10) TMI 476 - AT - Income Tax

Assessment upheld under s.143(3) read with s.144C(13); s.92CA(1) reference valid; s.9 and Article 7 applied, CUP rejected

M/s. TBEA Shenyang Transformer Group Company Limited Versus DCIT, International Taxation Vadodara.

ITAT AHMEDABAD - AT upheld the assessment under s.143(3) read with s.144C(13), finding the reference under s.92CA(1) valid and the TPO acted within ... Validity of Assessment, Jurisdiction of AO/TPO, Invocation of Chapter X - validity of the assessment order passed under section 143(3) read with section 144C(13), contending that the AO erred in invoking section 92CA(1) and that the TPO exceeded his jurisdiction by attributing profits to the Permanent Establishment - Foundation of the assessee’s case is that transactions between its Head Office in China and its Indian Project Office are not “international transactions” within the meaning of section 92B, since these are dealings between the same legal entity, and therefore Chapter X is not attracted - HELD THAT:- We hold that the reference under section 92CA(1) was valid, the TPO acted within his authority, and the order passed under section 143(3) r.w.s. 144C(13) cannot be held void. Accordingly, Grounds 1, 2, and 3 are dismissed. Adjustment relating to Onshore Contracts - TP adjustment made in respect of onshore services rendered by its Project Office to Power Grid Corporation of India Ltd. (PGCIL) - assessee’s plea is that the Indian Project Office was adequately remunerated for the functions it performed and, therefore, no further attribution of profits was warranted - HELD THAT:- Project Office continues to be merely an executing arm of the Head Office; the terms and pricing were settled between the Head Office and PGCIL; and the assessee has failed to demonstrate that it was adequately compensated at arm’s length. Respectfully following the order of the DB for AY 2012-13, we see no reason to interfere with the adjustment sustained by the lower authorities for the current year. Offshore Supply Contracts - adjustment made by the TPO in respect of offshore supply of equipment under the contract with PGCIL, contending that such supplies were made outside India, title passed outside India, and therefore no portion of the contract value was taxable in India or subject to TP adjustment - It recorded the assessee’s Project Office in India was entrusted with various obligations relating to offshore supplies, including ensuring satisfactory performance of equipment, after-sales support, warranty services, and establishment of a repair and maintenance facility in India. It concluded that these activities gave rise to a taxable nexus in India and justified attribution of income under section 9 of the Act and Article 7 of the India–China DTAA. Rejection of CUP Method as the Most Appropriate Method (MAM) for benchmarking the transactions, particularly with respect to both onshore and offshore activities - This very plea was examined in AY 2012-13. The DB held that CUP requires strict comparability and that even minor differences can materially affect the price. It observed that the conditions of the PGCIL contract and the controlled transaction were not comparable in material terms. On this basis, CUP was rejected as the most appropriate method and the ground was dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether transactions between a foreign enterprise's Head Office (HO) and its Indian Project Office (treated as a Permanent Establishment (PE)) constitute 'international transactions' under section 92B such that Chapter X (transfer pricing) is attracted and a reference under section 92CA(1) is valid. 2. Whether the Transfer Pricing Officer (TPO) exceeded jurisdiction by attributing profits to the Indian PE (i.e., performing profit attribution) rather than confining himself to determination of arm's length price of international transactions. 3. Whether an upward transfer pricing adjustment in respect of onshore services rendered by the Project Office is justified on the facts (adequacy of remuneration to the PE and appropriateness of the Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM)). 4. Whether a portion of offshore supply contract value (supplies made outside India) is taxable in India / attributable to the PE on account of after-sales support, warranty and related activities carried out in India. 5. Whether the CUP method was rightly rejected as the Most Appropriate Method (MAM) for benchmarking the relevant transactions. 6. Whether interest under sections 234B and 234C is chargeable consequentially on sustained substantive adjustments. 7. Whether initiation of penalty proceedings under section 271(1)(c) and section 271BA was prematurely challengeable in the assessment appeal. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Chapter X; whether HO-PE transactions are 'international transactions' under section 92B Legal framework: Section 92B defines 'international transaction' and section 92F(v) defines 'transaction' to include arrangements, understandings or actions in concert; Chapter X empowers determination of arm's length price for international transactions. Article 7(2) of the relevant DTAA provides for attribution of profits to a PE as if it were a distinct and separate enterprise. Precedent treatment: A Coordinate Special Bench and subsequent Division Bench in the immediately preceding assessment year examined whether transactions between a foreign enterprise and its Indian PE fall within section 92B and answered affirmatively. The Special Bench applied Article 7(2) and the definition in section 92F(v), holding PE is to be treated as a distinct and separate enterprise. Interpretation and reasoning: The Court reasoned that transfer pricing applies to transactions between enterprises, and when a PE is regarded as a distinct enterprise (by treaty and domestic law), arrangements between HO and PE fall within the broad definition of 'transaction' under section 92F(v). The mere fact that HO and PE are part of the same legal entity does not preclude application of transfer pricing, because the statutory scheme and treaty treat PE as separate for attribution and arm's length assessment. Ratio vs. Obiter: The Special Bench's finding that HO-PE arrangements can be 'international transactions' and fall within the ambit of Chapter X constitutes binding ratio for the tribunal in the subsequent year; the present decision respectfully follows that ratio. Conclusion: Reference under section 92CA(1) was valid; Chapter X applies; the TPO's involvement did not render the assessment void. Grounds attacking validity of assessment on non-applicability of Chapter X are dismissed. Issue 2: Jurisdiction of the TPO - attribution of profits to PE vs. determination of ALP Legal framework: Section 92CA empowers TPO to determine arm's length price of international transactions referred to him by AO. Article 7(2) (DTAA) and domestic provisions require profits attributable to PE to be determined on distinct-enterprise principles. Precedent treatment: The Special Bench held that where PE is treated as a distinct enterprise, transactions between HO and PE can be subject to ALP adjustment; profit attribution considerations are integral to such an exercise. Interpretation and reasoning: The Tribunal accepted that determination of arm's length price in the context of HO-PE arrangements necessarily involves considering profits attributable to the PE because the arrangement between HO and PE is the subject matter of transfer pricing. The TPO's exercise in attributing additional profit to the PE was within the scope of his mandate when PE is treated as a separate enterprise for transfer pricing purposes. Ratio vs. Obiter: The conclusion that TPO did not exceed jurisdiction is applied as ratio derived from the Special Bench/DB decisions followed in the present year. Conclusion: The TPO acted within authority; the objection that profit attribution to PE was beyond TPO's remit is dismissed. Issue 3: Validity of upward adjustment for onshore services - adequacy of remuneration and method selection Legal framework: ALP determination under Chapter X; methods under section 92C and Rule 10B (MAM selection principles); standards of comparability and reliance on functions, assets and risks analysis. Precedent treatment: The Division Bench for the preceding year applied TNMM and sustained a substantial upward adjustment after rejecting the assessee's CUP argument, on grounds of non-comparability (absence of arm's length pricing, differences in terms, lack of one-to-one correspondence between revenues and expenses, unexplained losses). Interpretation and reasoning: The Tribunal assessed factual matrix - PE as executing arm; HO negotiated terms with the third party; evidence of sub-contracting, transportation/installation arrangements, unexplained losses, and discrepancy between HO contract and subcontract rates. Given these factual findings, the onshore contract could not be treated as an independent uncontrolled comparable, as no independent party would undertake work at persistent loss. CUP was therefore unreliable; TNMM was appropriate to benchmark the PE's remuneration. Ratio vs. Obiter: The DB's affirmation that CUP was unsuitable and TNMM appropriate in these circumstances forms the binding ratio for the identical factual scenario in the appeal year. Conclusion: The upward adjustment in respect of onshore services is sustainable; challenge to adequacy of remuneration and to method selection (CUP) is dismissed. Issue 4: Taxability/attribution of portion of offshore supply contract to activities carried out in India Legal framework: Section 9 (income deemed to accrue or arise in India), Article 7 (DTAA) concerning profits attributable to PE; attribution principles for after-sales, warranty, and performance guarantees. Precedent treatment: The DB for the prior year found that obligations relating to ensuring satisfactory performance, guarantees, establishment of repair/maintenance facility, training and contingent payment release tied to satisfactory performance created a taxable nexus for activities carried out by PE; thus a portion of offshore contract value attributable to after-sales and warranty services was taxable and subject to ALP adjustment. Interpretation and reasoning: The Tribunal relied on factual findings that the Project Office performed or supervised after-sales support, warranty services, and had obligations tied to equipment performance in India; payments under offshore contract were contingent on such performance and on establishment of local facilities. These functions generate income attributable to the PE under domestic law and treaty, justifying allocation of part of offshore contract value to Indian activities. Ratio vs. Obiter: The DB's determination that after-sales and warranty obligations performed by the PE give rise to taxable income attributable to the PE is treated as the operative ratio for like facts. Conclusion: Portion of offshore supply contract value attributable to activities performed by the PE in India is taxable and the ALP adjustment is sustained; ground seeking deletion of such adjustment is dismissed. Issue 5: Rejection of CUP as Most Appropriate Method Legal framework: Rule-based selection of MAM requires highest degree of comparability; CUP method demands strict comparability and one-to-one matching of material terms. Precedent treatment: The DB rejected CUP where the purported comparable (HO contract with third party) was not at arm's length, showed substantive differences in scope/terms, and where the PE's losses contradicted comparability assumptions. Interpretation and reasoning: The Tribunal found material differences between controlled and uncontrolled transactions; minor differences in conditions can materially affect price and CUP was unreliable. Given these factual disparities and absence of truly comparable uncontrolled transactions, CUP could not be the MAM and TNMM was more appropriate. Ratio vs. Obiter: The DB's conclusion on suitability of methods in these facts is applied as binding reasoning. Conclusion: CUP rejection is justified; challenge to method selection is dismissed. Issue 6: Levy of interest under sections 234B and 234C Legal framework: Interest under sections 234B/234C is consequential on tax demand and shortfalls in advance tax payments. Precedent treatment: The DB treated interest as consequential and not requiring separate adjudication once substantive additions are sustained. Interpretation and reasoning: With substantive transfer pricing additions sustained, interest computation follows statutory provisions; no separate merits inquiry necessary in the appeal once additions stand. Ratio vs. Obiter: The approach that interest is consequential forms an applied principle rather than new law. Conclusion: Levy of interest under sections 234B & 234C is sustained as consequential; related ground dismissed. Issue 7: Challenge to initiation of penalty proceedings under section 271(1)(c) and 271BA Legal framework: Penal provisions are separate proceedings with their own adjudicatory stage; assessment appeal stage may be premature for adjudication of penalty initiation/grant of relief on penalty. Precedent treatment: The DB held that challenges to initiation of penalty are premature at the assessment appeal stage. Interpretation and reasoning: The Tribunal followed precedent that initiation of penalty proceedings is not ripe for determination within the assessment appeal and dismissal of such grounds without prejudice to separate penalty adjudication was appropriate. Ratio vs. Obiter: The prematurity principle is applied as procedural ratio. Conclusion: Grounds challenging initiation of penalty proceedings are dismissed as premature in the assessment appeal; substantive penalty issues remain for separate proceedings. Overall Disposition The Tribunal, following the binding determinations of the Coordinate Special Bench and Division Bench in the immediately preceding assessment year on identical questions of law and fact, dismissed the appeal in its entirety and upheld the transfer pricing adjustments, method selection and consequential interest; challenges to initiation of penalty proceedings were held premature.