2022 (2) TMI 1063 - HC - Income Tax

TP Adjustment - ALP determination - whether the Associated Enterprises (AE) of the respondent/assessee could have been accepted as a tested party for the purpose of determining the Arms Length Price (ALP) and whether there is a bar from doing so under the Indian Transfer Pricing Regulations? - HELD THAT - After noting several decisions, it was held that the Indian Transfer Pricing guidelines issued by the Institute of Chartered Accountants of India vide guidance note on report under Section 92E by ICAI and transfer pricing guidelines issued by OECD does not prohibit AE to be a tested party. The Tribunal accepted the stand taken by the assessee that the AE can be selected as a tested party. In the light of the decision in the case of Virtusa Consulting Services (P.) Ltd. 2021 (2) TMI 378 - MADRAS HIGH COURT as well as on the factual aspect which has been noted by the Tribunal with regard to the FAR profile of both the assessee company and the AE, we are of the considered view that the finding rendered by the Tribunal is just, proper and legally valid. Whether the Tribunal was right in directing the assessing officer to accept the segmental analysis for the transaction of purchase of finished goods, receipt of commission and sale of finished goods by the assessee from the AE? - DRP, on noting that such issue was raised by the assessee before it for the first time, forwarded the contention to the TPO for his consideration and submit a remand report. The TPO in his remand report held that the segmentation of profitability provided by the assessee has no basis and is far fetched and not audited. Upon consideration of the remand report submitted by the TPO, the DRP accepted the same and denied relief to the assessee for the assessment year 2012-13. However, for the assessment year 2013-14 and the subsequent assessment year 2014-15 the DRP has accepted the stand of the assessee with regard to the segmentation of the profitability. These factors were taken into consideration by the Tribunal and on facts it was noted that the adjustment can be made only on the basis of the transaction and not on aggregation and, accordingly, accepted the segmentation analysis of the assessee. Noting that the facts are same for the assessment year 2013-14 as well as 2014-15, hence, we find that the conclusion arrived at by the Tribunal cannot be faulted. Whether the administrative support services and IT support services received by the assessee from the AE could have been treated as stewardship functions? - When the matter was dealt with by the Tribunal, it noted the decision of the Tribunal in the assessee s own case for the assessment year 2011-12 and accepted the case of the assessee. In paragraph 39 of the impugned order the order passed by the Tribunal 2019 (4) TMI 1304 - ITAT KOLKATA for the assessment year 2011-12 has been quoted from which we find that a thorough factual analysis was done by the Tribunal for the said year held that the assessee has established the nature of services including the quantum of services received from the AE and such services were provided in order to meet specific need of the assessee for such services, economic and commercial benefit derived by the assessee. Thus, we find that the third issue raised by the revenue is entirely factual and no substantial question of law arises for consideration.

Summary

Issues Involved:
1. Whether the Associated Enterprises (AE) of the respondent/assessee could have been accepted as a tested party for determining the Arms Length Price (ALP) under Indian Transfer Pricing Regulations.
2. Whether the Tribunal was right in directing the assessing officer to accept the segmental analysis for the transaction of purchase of finished goods, receipt of commission, and sale of finished goods by the assessee from the AE.
3. Whether the administrative support services and IT support services received by the assessee from the AE could have been treated as stewardship functions.

Issue-wise Detailed Analysis:

1. Acceptance of AE as Tested Party:
The Tribunal elaborately discussed the Function, Asset, and Risk (FAR) profile of the assessee, highlighting that the assessee bore substantial risk and was thus a complex entity compared to its AE. The Tribunal referenced the case of Deputy Commissioner of Income Tax Vs. Quark Systems (P) Ltd., which emphasized that substantial justice should be preferred over technical considerations. The United Nations Practical Manual of Transfer Pricing for Developing Countries, 2013, and the Indian Transfer Pricing Administration guidelines were also cited, noting that the Indian regulations do not prohibit considering a foreign AE as a tested party if it is less complex and sufficient information is available. The Tribunal also referred to Virtusa Consulting Services (P.) Ltd. Vs. Deputy Commissioner of Income Tax, which supported the notion that the tested party should be the least complex entity. The Tribunal concluded that the AE could be selected as a tested party, aligning with the legal principle that neither the Act nor the guidelines prohibit this practice.

2. Consideration of Segmental Accounts:
The assessee purchased goods from AE for sale to third parties, received commission for facilitating direct sales by AE to third parties in India, and made ad hoc sales of traded finished goods to AE. The TPO initially rejected the segmentation of profitability provided by the assessee, deeming it unaudited and baseless. However, the DRP accepted the segmentation analysis for the subsequent assessment years 2013-14 and 2014-15. The Tribunal noted that adjustments should be made based on transactions rather than aggregation and accepted the segmentation analysis of the assessee. The Tribunal's conclusion was based on consistent facts across the assessment years, making the decision legally valid.

3. Treatment of Administrative and IT Support Services:
The Tribunal referenced its earlier decision for the assessment year 2011-12, where it conducted a thorough factual analysis and concluded that the services received by the assessee were essential for its operations and not merely stewardship activities. The Tribunal noted that the services provided by Almatis-Germany were crucial for the assessee's efficiency and cost-effectiveness, and the assessee would have otherwise needed to perform these services in-house or hire third-party providers. The Tribunal found that the nature and quantum of services received were adequately established, and the economic and commercial benefits derived justified the services. Consequently, no substantial question of law arose from this issue.

Conclusion:
The appeal filed by the revenue was dismissed. The substantial questions of law (a) and (b) were answered against the revenue, and for question (c), no substantial question of law was found. The stay application was also closed.