2016 (7) TMI 54 - AT - Income Tax

Applicability of transfer pricing provisions - 100% EOU working under STP scheme - whether the transfer pricing provisions cannot be invoked in this case even though admittedly there is no, and there cannot be any, tax avoidance motive in such a situation. - Held that - the issue is covered against the assessee by the Special Bench decision in the case of AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD 2007 (7) TMI 50 - ITAT BANGALORE , yet he prays for constitution for an even larger bench of seven or more Members. Once the issue is covered by a binding judicial precedents, we see no reasons to take any other view of the matter than the view taken by the biding judicial precedents. - preliminary objection raised by the learned counsel rejected - Matter will be heard on merit - Decided against the assessee.

Summary

Issues:
Challenge to arm’s length price adjustment in assessment order under section 143(3) r.w.s. 144C for assessment year 2006-07. Preliminary objection raised regarding the invocation of transfer pricing provisions for a unit exempt from income tax under section 10A.

Analysis:
1. The appeal challenges the arm’s length price adjustment made by the Assessing Officer under the Income Tax Act, 1961. The preliminary objection raised questions the applicability of transfer pricing provisions to an assessee exempt from income tax under section 10A. The core issue is whether transfer pricing provisions can be invoked when there is no tax avoidance motive despite the income being tax-exempt.

2. The assessee provides IT-enabled services exclusively for its associated enterprise (AE) and operates as a 100% export-oriented unit under the software technology park scheme with a tax holiday under section 10A. The key contention is that transfer pricing provisions should not apply when income is exempt from tax, as it does not erode the Indian tax base. The counsel argues that the transfer pricing provisions deal with taxable income from international transactions, which is not applicable in tax-exempt scenarios.

3. The Departmental Representative cites a special bench decision and a recent tribunal ruling supporting the application of transfer pricing provisions, emphasizing the importance of consistency in judicial decisions. The tribunal is bound to follow higher judicial forums' decisions unless challenged or overruled. The counsel’s request for a larger bench does not alter the binding nature of existing precedents.

4. The Tribunal rejects the preliminary objection, stating that the constitutionality of statutory provisions is beyond its jurisdiction. The matter is scheduled for further hearing on its merits. The decision reaffirms the necessity to abide by binding judicial precedents and leaves the review of legal interpretations to higher courts.

In conclusion, the judgment upholds the application of transfer pricing provisions to tax-exempt incomes, emphasizing the importance of consistency in judicial decisions and the limitations of the tribunal in challenging statutory provisions' constitutionality.