TaxTMI 
TaxTMI 
2026 (8) TMI 1456
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....9;ble Dispute Resolution Panel - 2 ('Hon'ble DRP'), Mumbai, under section 144C(5) of the Act on the following grounds, which are independent of and without prejudice to each other: On the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequentially the learned AO have erred as under. 1. Time barred assessment liable to be quashed Erred in passing assessment order beyond the time limit prescribed u/s 153 of the Act and hence bad in law and liable to be quashed. Without prejudice to Ground No. 1 above 2. Inappropriate transfer pricing adjustment amounting to Rs 8,50,03,392 made even though the pricing of all international transactions of the Appellant was at arm's length. Erred on the facts and in circumstances of the case and in law by making/ confirming the transfer pricing adjustment of INR 8,50,03,392 to the international transactions of the Appellant pertaining to royalty payment for software distribution and compensatory payment transaction. 3. Inappropriate rejection of the transaction by transaction approach appropriately adopted by the Appellant in its transfer pr....
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....ertaining to payment of royalty (which is a software distribution activity) and compensatory payments. 8. Inappropriate rejection of the submission of the Appellant that losses are not on account of transfer price. Erred on the facts and circumstances of the case and in law by making transfer pricing adjustment without considering the commercial reasons for losses incurred by the Appellant i.e. due to non-AE factors/ external factors. 9. Inappropriate proposition to initiate penalty proceedings under section 271(1)(c) of the Act. Erred on facts and circumstances of the case and in law in initiating the penalty proceedings under Section 271(1)(c) of the Act for concealment/ furnishing inaccurate particulars of income. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide this appeal according to law." 2010-11 "Based on the facts and circumstances of the case, SAS Institute (India) Private Limited ('the Appellant') respectfully craves leave to prefer an appeal ag....
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....f the case and in law by inappropriately considering MIA Computers Limited, Israel as an AE u/s 92(A)(2)(g) of the Act by concluding that it is wholly dependent on the products which are owned by SAS Institute Inc. 6. Inappropriately mentioning that the terms and conditions specified in the agreements are not exactly same of the Appellant vis-à-vis MIA Computers Limited, Israel. Erred on the facts and in circumstances of the case and in law by inappropriately mentioning that the terms and conditions specified in the agreements are not exactly same viz Minimum sales requirement and compensatory payments of the Appellant vis-à-vis MIA Computers. 7. Without prejudice to the above grounds, the learned AO erred in inappropriately considering functionally different companies as comparable for benchmarking payment of royalty i.e. software distribution activity and compensatory payment transaction. Erred on the facts and in circumstances of the case and in law by inappropriately considering functionally different companies for benchmarking the international transactions pertaining to payment of royalty (which is a software distribution acti....
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....preferred an appeal before the Tribunal. 2.2. Vide order in ITA No. 6842/Mum/2012 dated 24/02/2016, the Tribunal restored the transfer pricing issue to the file of the Ld. AO/TPO for fresh adjudication. 2.3. Consequent to the directions of the Tribunal, the Ld.TPO passed an order u/s 92CA(3) dated 28/09/2018, determining the arm's length price adjustment at Rs. 8,50,03,392/-. 2.4. Based thereon, the Ld.AO passed the draft assessment order u/s 143(3) r.w.s. 144C(1) dated 22/10/2018, proposing the revised transfer pricing adjustment of Rs. 8,50,03,392/-. 2.5. The assessee filed objections before the DRP, which upheld the action of the Ld.TPO in its directions dated 31/07/2019. 2.6. Pursuant to the directions of the DRP, the Ld.AO passed the impugned final assessment order u/s 143(3) r.w.s. 144C(13) dated 23/08/2019, making a transfer pricing adjustment of Rs. 8,50,03,392/- and retaining the addition of Rs. 70,20,149/- in respect of provision for superannuation contribution while computing book profit u/s 115JB of the Act. Aggrieved by the said order, the assessee is in appeal before us. 3. The Ld.AR at the outset submitted that Ground No.1 challenging the val....
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....on the transfer pricing adjustment in respect of royalty paid for software distribution by submitting that, the assessee benchmarked the royalty transaction by adopting the Comparable Uncontrolled Price ("CUP") method on a transaction-by-transaction basis by comparing the royalty arrangement entered into by the assessee and its AE, with the distribution agreement entered into between SAS Institute Inc., USA and MIA Computers Ltd., Israel. 5.1. According to the Ld.AR, CUP method constituted the Most Appropriate Method, as both distributors performed substantially similar functions and operated under comparable distribution arrangements. 5.2. The Ld.AR submitted that in the first round of proceedings, the TPO rejected the CUP method and adopted the Transactional Net Margin Method ("TNMM"), which was affirmed by the DRP. However, in appeal, the Tribunal, in ITA No.6842/Mum/2012 vide order dated 24/02/2016, restored the issue to the file of the Ld.AO/TPO for fresh adjudication after recording proper reasons for accepting or rejecting CUP method. It is submitted that even in the remand proceedings, the Ld.TPO reiterated the earlier approach by rejecting the CUP analysis primari....
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.... was invited to the organisational structure of the SAS Group, website extracts, distribution agreements and the certificate issued by SAS Institute Inc. confirming that MIA Computers Ltd. functioned as an independent distributor. It was submitted that there was no material on record demonstrating any participation by SAS Institute Inc. in the management, control or capital of MIA Computers Ltd. so as to satisfy the conditions prescribed under section 92A(1) of the Act. 5.8. The Ld.AR also addressed the report subsequently filed by the Ld.DR before the Bench, wherein it was contended that section 92A(2) constitutes an independent deeming provision and satisfaction of any of the conditions contained therein is sufficient to establish an Associated Enterprise relationship. Rebutting the said contention, the Ld.AR submitted that such an interpretation would render section 92A(1) otiose and is contrary to the statutory framework, the Explanatory Memorandum to the Finance Act, 2002 and the judicial precedents interpreting sections 92A(1) and 92A(2) harmoniously. It was, therefore, submitted that the transfer pricing adjustment sustained by the authorities below deserved to be deleted....
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....its workability and efficacy is to be preferred to the one which would render it otiose or sterile. In that view of the matter, courts should not adopt construction which would upset or even impair the purpose in introducing a particular provision in the statute [Calcutta Jute Manufacturing Co. v. CTO [1997] 106 STC 433 (SC) 3. Therefore, SAS Inc. USA and Mia Computers, Israel are Associated Enterprises by virtue of the deeming provisions in Section 92A(2) and Section 92A(2)(g). Existence of any situation in Section 92A(2) deems that one enterprise has participated in the management, control or capital of another. Hence, the transaction between SAS Inc. USA and Mia Computers Israel is a transaction between associated enterprises and cannot be taken as a comparable transaction for the purpose of CUP. In such situation, the benchmarking of the transaction done by the assessee has been rightly rejected by the TPO and the benchmarking done by the TPO, as per TNMM, is as per the provisions of law. 4 It is further be stated that the Explanatory Memorandum to Finance Act 2002 dealing with the above provisions states as follows- "It is proposed to amend sub-sec. ....
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....of the enterprises in the other enterprise, it does not result in the related enterprises being treated as 'associated enterprises. Section 92A(1) and (2), in that sense, are required to be read together, even though Section 92A(2) does provide several deeming fictions which prima facie stretch the basic rule in Section 92A(1) quite considerably on the basis of, what appears to be, manner of participation in "control" of the other enterprise." (Emphasis supplied). In the instant case, the business carried out by Mia Computers, Israel, is wholly dependent on SAS Inc., as Mia Computers has the exclusive right to sub-license and distribute the SAS software for the benefit of customers. It is to be noted that Mia Computers has business of distributing software provided by SAS Inc., only. 5.2 Therefore, provisions of Section 92A(2)(g) in the case of assessee, increase and widen the ambit of the provisions in Section 92A(1) and deem that SAS Inc. has participated in the management and control of Mia Computers, Israel as per the above discussion. This has been further affirmed by the above judgement of ITAT in the case of Veer Gems (supra) which has been affirmed by ....
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....tal of one enterprise by another enterprise, or by the same persons in both enterprises Section 92A(2), in contrast, is a deeming provision which specifies certain statutory circumstances that are relevant for determining the existence of such participation for the purposes of section 92A(1). The deeming circumstances prescribed under section 92A(2) must necessarily be applied in the context of and for the purposes of the substantive requirement contained in section 92A(1). Therefore, fulfilment of any condition prescribed under section 92A(2) cannot, by itself, dispense with the requirement of participation in management, control or capital contemplated under section 92A(1) Explanatory Memorandum and Judicial Precedents Support a Harmonious Interpretation of Sections 92A(1) and 92A(2) 17 The learned DR in Para 4 has placed reliance on Explanatory Memorandum to the Finance Act, 2002 to substantiate its contention. The relevant extracts are as follows: 4 It is further be stated that the Explanatory Memorandum to Finance Act 2002 dealing with the above provisions states as follows- "It is proposed to amend sub-sec. (2) of the said section to clarif....
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....2A(2) are required to be read together. Accordingly, the said decision does not support the proposition that section 92A(2) operates independently of section 92A(1). Rather, it supports the Appellant's contention that both provisions must be construed harmoniously. 21. The above interpretation also finds support from the decision of the Page Industries Ltd. v. DCIT [2016] 71 taxmann.com 172 (Bang. Trib) (refer legal paperbook ('LPB') page nos. 610-621) wherein the Tribunal held that section 92A(1) is the substantive provision governing determination of an Associated Enterprise relationship and section 92A(2) is merely a deeming provision specifying particular circumstances in which such relationship may be inferred. It was held that the conditions prescribed in both sub-sections must coexist and that section 92A(2) cannot be interpreted in a manner that renders section 92A(1) otiose. Subsequently, the said decision was affirmed by the Hon'ble Karnataka High Court. The above interpretation of the Appellant has also been upheld by various Tribunals, such as Hon'ble Mumbai ITAT in case of Kaybee (P) Ltd [2020] 118 taxmann.com 640 (refer L....
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....bution agreement entered into between SAS Inc. USA and MIA Computers. Israel is a transaction between two foreign entities situated outside India. Accordingly, the provisions of section 92A(2)(g) contained in Chapter X of the Act cannot be applied for the purpose of characterising such foreign-to-foreign transaction as a transaction between Associated Enterprises under the Indian transfer pricing provisions. Accordingly, the Learned DR's contention that satisfaction of section 92A(2)(g), by itself, establishes an Associated Enterprise relationship between SAS Inc USA and MIA Computers, Israel cannot be accepted. As discussed above, the requirements of section 92A(1) are not satisfied in the present case. Consequently, section 92A(2)(g) cannot be applied independently to conclude that SAS Inc., USA and MIA Computers, Israel are Associated Enterprises. We have perused the submissions advanced by both sides in light of records placed before us. 6. The dispute primarily centres around the reliance placed by the assessee on the distribution agreement between SAS Institute Inc., USA and MIA Computers Ltd., Israel for benchmarking the royalty paid by the assessee to SAS....
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....ressly emphasizes that sections 92A(1) and 92A(2) are required to be read together. 6.5. The same interpretation finds support from the decision relied upon by the assessee in Page Industries Ltd.(supra), by Hon'ble Karnataka High Court, wherein section 92A(1) was regarded as the substantive provision governing the determination of an Associated Enterprise relationship and section 92A(2) as prescribing specified circumstances for such determination. The decision of coordinate bench of this Tribunal in case of Kaybee (P.) Ltd.(supra) and Orchid Pharma Ltd.(supra) have also been relied upon by the assessee in support of the same proposition. 6.6. The Explanatory Memorandum to the Finance Act, 2002, relied by both sides, also needs to be understood in its proper context. The Memorandum explains that mere participation in management, control or capital would not, by itself, make two enterprises Associated Enterprises unless the criteria specified in section 92A(2) are fulfilled. This, in our view, does not mean that section 92A(2) completely substitutes the requirement of section 92A(1). Rather, it reinforces the legislative intent that the circumstances specified in sub-section ....
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....evenue for invoking section 92A(2)(g), the same cannot, in our considered opinion, be treated as sufficient to conclude that the two enterprises are Associated Enterprises without establishing the foundational requirement under section 92A(1). 7.1. Accordingly, we are unable to sustain the finding of the Ld.TPO that MIA Computers Ltd., Israel constituted an Associated Enterprise of SAS Institute Inc., USA merely by invoking section 92A(2)(g). Consequently, the distribution agreement between SAS Institute Inc. and MIA Computers cannot be rejected as an uncontrolled transaction solely on the ground that the parties thereto were Associated Enterprises. 7.2. The Ld.DR has also challenged the comparability of the MIA agreement on the ground that there were material differences between the terms of the agreement entered into by MIA Computers and those governing the assessee's arrangement with SAS Inc. In this regard, the mere fact that the MIA agreement is not identical in every contractual term to the assessee's agreement would not, by itself, render the transaction incapable of being used as a CUP. The relevant question is whether the differences are material to the pr....
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....A Computers was an Associated Enterprise of SAS Inc. under section 92A(2)(g), cannot be sustained. The remaining question as to whether the contractual differences identified by the Ld.TPO materially affect comparability, and whether appropriate adjustments can be reliably quantified, is required to be examined in accordance with the CUP methodology. Subject to such examination, the MIA agreement cannot be excluded from consideration merely on the ground that MIA Computers and SAS Inc. were Associated Enterprises. 7.8. Accordingly, the transfer pricing adjustment made by rejecting the CUP method on the aforesaid basis is set aside. However whether reasonably accurate adjustments, is to be made in case there is any material differences between the two agreements is to be looked into. 8. We hereby clarify that merely holding MIA Computers Ltd. to be an uncontrolled enterprise would not, by itself, conclude the exercise of comparability under the CUP method. The requirements of Rule 10B(3) have still to be satisfied. In terms of the said provision, an uncontrolled transaction can be regarded as comparable only where either the differences between the transactions or the enter....