2021 (9) TMI 206 - HC - Income Tax

Validity of order passed by the Income Tax Settlement Commission ITSC u/s 245D(4) - selective challenge on one issue of Transfer pricing issue - whether such course can be adopted when the Settlement Commission adjudicated the issues and granted relief on several other issues except one issue, which is under challenge by the way of writ petition. - HELD THAT - Settlement Commission has passed a detailed order on 27 issues. The petitioner herein is challenging the order of the Settlement Commission in respect of one issue only, which means that the petitioner is dissecting the order of the Settlement Commission. The petitioner cannot selectively accept the portion of the order passed by the Settlement Commission and dispute corrections of the other portions of the order, which in the opinion of the petitioner is not favourable. The petitioner cannot be permitted to dissect the Settlement Commission's order with a view to accept what is favourable to them and reject what is not. Therefore, the writ petition is to be rejected as not maintainable. In the present case, the application submitted by the petitioner has been took up for adjudication and the issues were adjudicated. Undoubtedly, the parties to the Settlement were co-operated and the Settlement Commission arrived a conclusion. Under the provisions of the Act, once the Settlement Commission passed an order, the same became final. As rightly pointed out, a decision of Settlement Commission could be interfered only on certain circumstances, if grave procedural defect such as violation of the mandatory procedural requirements are not followed and if there is no nexus or reasons given at the decision taken by the Settlement Commission. The petitioner cannot adjudicate in respect of the said issue and the issue was left open for further adjudication by the competent authority. If the entire order passed by the Settlement Commission is under challenge, then it is different. However, in the present case, the petitioner has challenged one issue, which was not decided in favour of the petitioner. This being the factum, this Court cannot consider the said issue on merits in the present writ petition. WP dismissed.

Issues Involved:
1. Validity of the Income Tax Settlement Commission's (ITSC) decision on Transfer Pricing.
2. Jurisdiction and authority of the ITSC and the Fourth Respondent in determining the Arm's Length Price (ALP).
3. Applicability of Section 92A(1) and 92A(2) in defining Associated Enterprises (AEs).
4. Use of Profit Split Method (PSM) versus Comparable Uncontrolled Price Method (CUP) in Transfer Pricing.
5. Judicial review and maintainability of the writ petition challenging the ITSC order.

Detailed Analysis:

1. Validity of the ITSC's Decision on Transfer Pricing:
The petitioner, a Public Limited Company engaged in the manufacture and trading of pharmaceutical bulk drugs and formulations, challenged the ITSC's order dated 28.03.2012 concerning Transfer Pricing. The petitioner argued that the ITSC’s findings on Transfer Pricing, particularly on sales to Distribution Partners (DPs), were illegal and without jurisdiction. The ITSC had adjudicated that the petitioner and its DPs were "Deemed Associated Enterprises" under Section 92A(2)(i), and adopted the Profit Split Method (PSM) as the Most Appropriate Method (MAM) for determining the ALP, contrary to the petitioner’s use of the Comparable Uncontrolled Price Method (CUP).

2. Jurisdiction and Authority of the ITSC and the Fourth Respondent:
The petitioner contended that the Fourth Respondent had overstepped its jurisdiction by determining the ALP, a task that should have been performed by the ITSC. The ITSC had treated the Fourth Respondent's determination as a report rather than an order. The ITSC held that an enterprise could be deemed an AE under Section 92A(2) even if not covered by Section 92A(1), a conclusion the petitioner argued was contrary to the provisions of the Act and established legal precedents.

3. Applicability of Section 92A(1) and 92A(2) in Defining AEs:
The petitioner argued that for Section 92A(2) to apply, the conditions of Section 92A(1) must first be met. The petitioner cited case law to support this interpretation, asserting that the legal fictions under Section 92A(2) are meant to operate within the scope of Section 92A(1) and not independently. The ITSC’s interpretation was deemed erroneous and contrary to the Double Taxation Avoidance Agreement (DTAA) between India and the USA, which should provide a narrower definition of AEs.

4. Use of Profit Split Method (PSM) versus Comparable Uncontrolled Price Method (CUP) in Transfer Pricing:
The petitioner maintained that the CUP method was more appropriate for determining the ALP, given that identical products were sold to independent third parties. The ITSC’s adoption of the PSM, which divided profits on a 70:30 ratio between the petitioner and the DPs, was contested. The petitioner argued that the PSM was inappropriate for their transactions, which did not involve unique intangibles or multiple interrelated transactions. The ITSC’s decision was seen as arbitrary and disregarding the material evidence and the petitioner’s transfer pricing study.

5. Judicial Review and Maintainability of the Writ Petition:
The respondents argued that the writ petition was not maintainable, as the ITSC’s order is deemed conclusive under Section 245-I of the Act. Judicial review of the ITSC’s decisions is limited to instances of grave procedural defects or lack of nexus between reasons and decisions. The petitioner’s selective challenge to one issue out of 27 decided by the ITSC was also questioned. The court emphasized that the petitioner could not dissect the ITSC’s order to accept favorable parts while challenging unfavorable ones.

Conclusion:
The court dismissed the writ petition, holding that the petitioner could not selectively challenge parts of the ITSC’s order. The ITSC had the authority to adjudicate the issues within the scope of the provisions of the Income Tax Act, but could not usurp the powers of the Assessing Officer. The court found no procedural defects or lack of nexus in the ITSC’s decision-making process and upheld the ITSC’s comprehensive adjudication of the issues.

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