2024 (1) TMI 1400 - HC - Income Tax

TP Adjustment - foreign AES be taken as tested party or not? - HELD THAT - Tribunal noted that the issues which arise for consideration had been decided in favour of the assessee in the assessee s own case for the assessment years 2005-06, 2006-07, 2010-11, 2011-12, 2012-13 and 2013-14. The orders passed in favour of the assessee for the assessment years 2005-06 and 2006-07 2015 (1) TMI 870 - ITAT KOLKATA have been affirmed by this Court in the judgment 2016 (2) TMI 406 - CALCUTTA HIGH COURT Apart from that, the law and the subject is in favour of the respondent assessee in the light of the decision of this Court in the case of Principal Commissioner of Income Tax vs. Almatis Alumina Pvt. Ltd. 2022 (2) TMI 1063 - CALCUTTA HIGH COURT held Indian Transfer Pricing guidelines issued by the Institute of Chartered Accountants of India vide guidance note on report under Section 92E by Institute of Chartered Accountants of India and transfer pricing guidelines issued by OECD does not prohibit associated enterprises to be a tested party. The Tribunal accepted the stand taken by the assessee that the associated enterprises can be selected as a tested party. In the light of the decision in the case of Virtusa Consulting Services (P) Ltd. as well as on the factual aspect which has been noted by the Tribunal with regard to the function, asset and risk profile of both the assessee-company and the associated enterprises, we are of the considered view that the finding rendered by the Tribunal is just, proper and legally valid - Decided against the revenue.

Summary

Issues:
1. Consideration of foreign AES as the tested party for Indian Transfer Pricing Regulation.
2. Inclusion of segmental accounts in determining arm's length price.
3. Justification of accounts prepared without proper basis and expense breakup.

Analysis:

Issue A:
The appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal (the Tribunal) regarding the selection of the tested party for transfer pricing analysis. The Tribunal had ruled in favor of the assessee, citing previous decisions in the assessee's favor for various assessment years. The Court referred to the decision in the case of Principal Commissioner of Income Tax vs. Almatis Alumina Pvt. Ltd. to establish that the selection of the tested party, whether local or foreign, is not restricted by the Act or transfer pricing guidelines. The Court upheld the Tribunal's decision, emphasizing that the selection of the tested party should simplify the comparability analysis, and there is no prohibition on choosing associated enterprises as the tested party. The Court dismissed the revenue's appeal, affirming the Tribunal's decision in favor of the respondent assessee.

Issue B:
The second substantial question of law raised in the appeal pertained to the inclusion of segmental accounts in determining the arm's length price. The revenue contended that segmental accounts not forming part of the audited financial statement should not be considered without proper verification at the level of Transfer Pricing Officer (TPO). However, the Court did not delve into this issue specifically in the judgment, as the primary focus was on the selection of the tested party for transfer pricing analysis. The Court's decision to dismiss the appeal indicates that the issue of segmental accounts did not significantly impact the outcome of the case.

Issue C:
The third substantial question of law raised in the appeal questioned the justification of accounts prepared by the assessee without a proper basis and breakup of expenses allocated to its segments. While this issue was raised by the revenue, the Court did not provide a detailed analysis or ruling on it in the judgment. The Court's decision to dismiss the appeal without addressing this specific issue directly implies that the Court found the selection of the tested party and related transfer pricing considerations to be the primary determinants in this case.

In conclusion, the judgment by the Calcutta High Court in the appeal filed by the revenue under Section 260A of the Income Tax Act, 1961, primarily focused on the selection of the tested party for transfer pricing analysis. The Court's decision to uphold the Tribunal's ruling in favor of the respondent assessee, based on legal principles and previous case law, indicates a broader acceptance of the flexibility in choosing the tested party for transfer pricing purposes, regardless of whether it is a local or foreign entity. The issues related to segmental accounts and the justification of accounts prepared by the assessee without proper basis were not extensively discussed in the judgment, suggesting that these aspects did not significantly impact the Court's decision.