2024 (8) TMI 1435 - HC - Income Tax

Applicability of provisions of section 92(3) to prohibit the determination of the arm's length price of intra-group services - whether ITAT is legally justified in holding that adjustment on account of determination of arm's length price of intra-group services has to be reduced from the cost base of the assessee - ITAT justification in holding that in case of deternunation of arm's length price of several categories of international transactions separately the transfer pricing adjustment in respect of one transaction will require adjustment to second category of transaction resulting in reduced profit HELD THAT - The fact that if the challenge as raised by the appellant were to be accepted, it would result in a reduction of the income chargeable to tax is not questioned or disputed before us. In view of the aforesaid, we find that no exception can possibly be taken to the view as expressed by the ITAT. No substantial question of law arises. The appeal is thoroughly misconceived and shall consequently stand dismissed.

Summary

Issues:
1. Interpretation of section 92(3) of the Income Tax Act regarding determination of arm's length price for intra-group services.
2. Adjustment of arm's length price for intra-group services in relation to the cost base of the assessee.
3. Aggregation of international transactions reported in a segregated manner.
4. Application of transfer pricing provisions leading to erosion of tax base.

Analysis:
1. The Commissioner challenged the ITAT judgment on the interpretation of section 92(3) of the Income Tax Act. The ITAT held that the ALP adjustment for intra-group services would result in lowering the profits of the assessee, affecting revenue from IT-enabled services. The ITAT emphasized that section 92(3) prohibits the application of arm's length principle in situations where it would erode the tax base. The ITAT concluded that the transfer pricing provisions cannot be invoked for intra-group services that form part of the cost base, as it would lead to a reduction in the assessee's income. The court agreed with the ITAT's interpretation and dismissed the appeal.

2. Regarding the adjustment of arm's length price for intra-group services in relation to the cost base, the ITAT explained that any reduction in the ALP of intra-group services would result in under-realization of revenue for IT-enabled services. The court noted that the challenge raised by the appellant would indeed reduce the income chargeable to tax. The ITAT's reasoning was accepted, emphasizing that the ALP adjustment would erode the tax base, in line with the provisions of section 92(3).

3. The ITAT addressed the aggregation of international transactions reported in a segregated manner by the assessee. It was observed that adjustments in one category of transaction would impact another category, even though no such adjustment was permitted under transfer pricing provisions. The ITAT's decision to aggregate the transactions was upheld, as it aligned with the overall impact on the assessee's income and tax base.

4. The application of transfer pricing provisions and the potential erosion of the tax base were central to the judgment. The ITAT's analysis focused on how ALP adjustments for intra-group services could impact the overall income of the assessee. The court concurred with the ITAT's reasoning that invoking transfer pricing provisions in such scenarios would lead to a reduction in the tax base, contrary to the legislative intent outlined in section 92(3). The appeal was deemed misconceived and dismissed accordingly.