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2017 (7) TMI 34 - AT - Income TaxTransfer pricing adjustments - ALP of the International transaction of provision of services and renting of equipments is determined at Nil - international transaction - Held that - The first international transaction with respect to services provided by SIS Outside Broadcast Ltd. which falls into the nature of transaction of provision of services u/s 92B(1) of the Act and as the condition of bearing on profit income and loss of the assessee applies to any other transaction only. Therefore, according to us this transaction is covered in the definition of international transaction . Availing of equipment on hire from M/s. Fatpipe Satcom Ltd transaction is with respect to rent of certain equipment to render broadcasting services. The assessee has admittedly not claimed the deduction of this sum. However, the availment of equipment on hire falls into the category the nature of the transaction as purchase, sale or lease of tangible or intangible property. Therefore, according to us irrespective of the fact whether the transaction impact profit, income, losses or asset of the assessee, these are international transaction. Transaction with respect to inter-company receivable from SIS Holding no interest has been charged by the assessee. Therefore, it was the contention of the assessee that in view of the cash basis of accounting no income has arisen to the assessee. We are of the view that as it is transaction of lending of borrowing money it falls into the definition of international transaction u/s 92B(1) of the Act. We dismiss ground of the appeal of the assessee holding that the transactions benchmarked by the ld TPO are international transaction u/s 92B of the Income Tax Act despite the method of accounting followed by the assessee and not claiming such expenditure as deduction. TPO empowered to question the commercial expediency of any alleged transaction - Held that - Transfer Pricing Officer as well as ld DRP did not appreciate the evidence produced by the assessee for receipt of services in proper perspective. Therefore, it is imperative for the ld Transfer Pricing Officer/ Assessing Officer to verify these evidences. In view of this we set aside the grounds of the appeal of the assessee on transfer pricing issues to the file of ld Transfer Pricing Officer/ ld Assessing Officer to examine the evidences produced and then determine ALP of the transactions.
Issues Involved:
1. Reference to Transfer Pricing Officer (TPO) and jurisdictional validity. 2. Applicability of Transfer Pricing provisions under Section 92B of the Income Tax Act. 3. Determination of Arm's Length Price (ALP) for international transactions. 4. Commercial expediency and benchmarking of transactions. 5. Rejection of cash basis accounting method for Transfer Pricing adjustments. Detailed Analysis: 1. Reference to Transfer Pricing Officer (TPO) and Jurisdictional Validity: The assessee contended that the reference made by the Assessing Officer (AO) to the TPO under Section 92CA(3) was bad in law and void ab initio as no international transaction was reported. The Tribunal noted that the AO must record his satisfaction that there is an income arising and/or being affected on determination of ALP of an international transaction before seeking approval of the Principal Commissioner of Income Tax. The Tribunal referred to the Delhi High Court's decision in Sony Ericsson Mobile Communications India Pvt. Ltd. and other relevant judgments, emphasizing that the TPO must justify and establish that there was an international transaction. The Tribunal held that the reference by the AO to the TPO was valid as the transactions had a bearing on the profits, income, losses, or assets of the enterprise. 2. Applicability of Transfer Pricing Provisions under Section 92B: The Tribunal examined whether the transactions entered into by the assessee were covered under the definition of "international transaction" as per Section 92B. The transactions included availing of technical services, reimbursement of expenses, hiring of equipment, and inter-company receivables. The Tribunal held that these transactions fell under the categories of provision of services, lease of tangible property, and lending or borrowing money, respectively, and thus were international transactions. The Tribunal rejected the assessee's argument that the provisions of Chapter X did not apply due to the cash basis of accounting and non-claiming of such expenditure as deduction. 3. Determination of Arm's Length Price (ALP) for International Transactions: The TPO had determined the ALP of the international transactions at Nil and proposed adjustments. The Tribunal noted that the TPO did not examine the details and evidence provided by the assessee, such as invoices, agreements, and details of services rendered. The Tribunal emphasized that the TPO must examine these evidences to determine whether the services were rendered and then derive the ALP of such transactions in accordance with the law. 4. Commercial Expediency and Benchmarking of Transactions: The assessee argued that the TPO was not competent to question the commercial expediency of the transactions and take the value of any international transaction at Nil. The Tribunal referred to the Delhi High Court's decision in CIT v. EKL Appliances Ltd., which held that the TPO's jurisdiction is limited to determining the ALP and not questioning the commercial expediency. The Tribunal set aside the TPO's determination of ALP at Nil and directed the TPO to re-examine the evidences provided by the assessee. 5. Rejection of Cash Basis Accounting Method for Transfer Pricing Adjustments: The Tribunal rejected the assessee's argument that the cash basis of accounting should be considered for benchmarking transactions. The Tribunal explained that the provisions of Section 92B(1) apply irrespective of the method of accounting followed by the assessee. The Tribunal provided an example to illustrate that international transactions must be benchmarked for the relevant previous year, regardless of whether the income or expenditure is recognized in the books of account. Conclusion: The Tribunal dismissed ground Nos. 16 to 20 of the appeal, holding that the transactions benchmarked by the TPO were international transactions under Section 92B of the Income Tax Act. However, the Tribunal set aside ground Nos. 21 to 23 and directed the TPO to re-examine the evidences provided by the assessee and determine the ALP of the transactions after granting a proper opportunity of hearing to the assessee. The appeal was allowed for statistical purposes.
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