2024 (9) TMI 1688 - AT - Income Tax

TP Adjustment - overseas entities of the assessee treated as deemed Associated Enterprises (AEs) u/s 92A - HELD THAT -As observation that a sensible meaning deserves to be adopted to the expression influence which is integral in the scheme of transfer pricing provision has been found to be correct. As rightly held the meaning had to be a dominant influence leading to a de facto control over another enterprise rather than an influence simplicitor. Adoption of literal meaning of influence would lead to all the transactions on the negotiated prices being hit by section 92A(2)(i). Considering a small component of sales exports made to AE s out of its total sales exports the presumption of the AE being in a dominant position to exercise any influence cannot be made. Consequently in respectful compliance to the decision of this tribunal in 2016 (12) TMI 236 - ITAT CHENNAI we hold that the impugned overseas entities cannot be regarded as deemed AE s of the assesse. Accordingly grounds of appeal No.1 to 3 and 6 to 11 raised by the assessee are allowed. Upward TP adjustments made u/s 92CA(3) - determination of ALP by the Ld. TPO - method of ALP to be adopted i.e TNMM - aggregate of transactions with ALPs viz-a-viz individual transactions with AE s challenged - HELD THAT - We find that the OECD guidelines referred by the assessee comes to its rescue. We further note that a transaction defined in rule 10A(d) includes a number of closely linked transaction. Consequently for a comparability analysis a number of similar transaction may be required to be aggregated as Indian TP regulations do not have any guidelines for aggregation beyond the norm of closely linked transactions reliance is required to be made to OECD and American guidelines. According to s 482-1-1(f)(2)(i) of the US regulation the combined effect of two or more separate transactions may be considered if such transactions taken as a whole are interrelated. It thus postulates that transactions are to be aggregated when they involve related product / services. We have also noted that in the case of Mainetti India Pvt. Ltd. 2012 (7) TMI 117 - ITAT CHENNAI has ruling on nearly identical facts postulated that fairness requires that while determining ALP a TPO must consider all transaction i.e those where margins were lower as well as those where margins were higher to arrive at holistic picture. The argument of the Ld. CIT(A) that the said decision is distinguished on the basis of being relevant to CUP method only and not TNMM is misplaced. We hereby direct the TPO to recompute the ALP following the ratio laid down in 2012 (7) TMI 117 - ITAT CHENNAI - TPO would be required to give all opportunities of being heard to the assessee who shall comply with all the notices issued to him in this regard. Accordingly the ground of appeal raised by the assessee are allowed for statistical purposes only. Appeals of the assessee are partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the overseas entities of the assessee can be treated as deemed Associated Enterprises (AEs) under Section 92A of the Income Tax Act.
• The appropriateness of the Transfer Pricing Officer's (TPO) adjustments based on the Transactional Net Margin Method (TNMM) and whether the aggregation of transactions for determining the Arm's Length Price (ALP) is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Overseas Entities as Deemed AEs

• Relevant legal framework and precedents: The determination of AEs is governed by Section 92A of the Income Tax Act, which outlines the conditions under which entities are considered associated. The tribunal referenced its own decision in the assessee's case for AY-2011-12, which had previously addressed similar issues.
• Court's interpretation and reasoning: The tribunal emphasized the need for a "dominant influence" that leads to de facto control over another enterprise rather than a mere influence simplicitor. The tribunal found that the literal interpretation of "influence" would lead to incongruous results.
• Key evidence and findings: The tribunal noted that the scale of inter se business relations between the entities was insignificant, constituting less than 5% of total sales, thus not satisfying the control requirement under Section 92A(1).
• Application of law to facts: The tribunal applied the principle that both subsections of Section 92A must be satisfied for entities to be deemed associated. The tribunal concluded that the overseas entities did not meet these criteria.
• Treatment of competing arguments: The tribunal dismissed the revenue's reliance on the Settlement Commission's decision, reiterating that such decisions do not constitute binding precedents.
• Conclusions: The tribunal held that the overseas entities could not be regarded as deemed AEs of the assessee, allowing grounds of appeal No.1 to 3 and 6 to 11.

Issue 2: Transfer Pricing Adjustments and Aggregation of Transactions

• Relevant legal framework and precedents: The TNMM is used for determining ALP, and the tribunal referenced the OECD guidelines and the decision in Mainetti India Pvt. Ltd., which emphasized fairness in considering all transactions.
• Court's interpretation and reasoning: The tribunal criticized the TPO's selective approach of only considering transactions with lower margins. It emphasized the need for a holistic view that includes all transactions.
• Key evidence and findings: The tribunal noted that the assessee's margin was higher than the comparable companies, and the value of sales to AEs was only 5.3% of total sales.
• Application of law to facts: The tribunal directed the TPO to recompute the ALP by considering all transactions, both those with lower and higher margins, following the principle of aggregation.
• Treatment of competing arguments: The tribunal rejected the CIT(A)'s distinction between methods (CUP vs. TNMM) as irrelevant to the principle of aggregation.
• Conclusions: The tribunal allowed the grounds of appeal No.4 & 5 for statistical purposes, directing a recomputation of the ALP.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "A sensible meaning deserves to be adopted to the expression 'influence' which is integral in the scheme of transfer pricing provision... Adoption of literal meaning of influence would lead to all the transactions on the negotiated prices being hit by section 92A(2)(i)."
• Core principles established: The tribunal reinforced the principle that both subsections of Section 92A must be satisfied to deem entities as AEs. It also established that ALP should be determined by considering all transactions collectively rather than selectively.
• Final determinations on each issue: The tribunal concluded that the overseas entities are not deemed AEs and that the TPO must recompute the ALP considering all transactions.

This summary provides a structured analysis of the legal judgment, focusing on the issues presented, detailed analysis, and significant holdings, while maintaining the original legal terminology and significant phrases.