2021 (2) TMI 378 - HC - Income Tax

TP Adjustment - tested party for the purpose of determination of Arm's Length Price - whether the assessee Company has to be taken as tested party for the purpose of determination of Arm's Length Price or by applying the least complex theory, the AE outside the Country has to be taken as the tested party? - HELD THAT - Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables - when the TPO himself has not attached any sanctity to the TP documentation as submitted by the assessee, could not have foreclosed the assessee from canvassing the issue that the subsidiaries are least complex entities which should be taken note of. Revenue seeks to pin the assessee based upon the auditor's certification as filed in Form 3CED. As could be seen from the statutory form, it pertains only to the transactional claims and has got nothing to do with a tested party. The revenue cannot compare the case of the assessee with that of the assessee who fails to claim in his return of income a deduction or a benefit which he would be otherwise entitled to. In fact the TPO was rightly aware of his role when he has made an observation in paragraph 17.2 of the order dated 29.01.2015, wherein he would state that his office is responsible to ensure sufficiency of information/data and accordingly cannot be precluded to conduct a fresh search - When such is the legal position, as rightly understood by the TPO, the assessee should not have been foreclosed. Therefore, we are of the clear view that the findings rendered by the TPO, DRP and the Tribunal foreclosing the assessee's claim to refer to the foreign AEs as tested party is legally not sustainable. Tax case appeal is allowed, the orders passed by the Tribunal, DRP and the TPO are set aside. The issue regarding the assessee's plea to consider foreign AE as tested party to determine the Arm's Length nature of the underlying international transaction stands remanded to the Transfer Pricing Officer for a fresh decision on merits and in accordance with law having due regard to the orders passed by the Transfer Pricing Officer in the assessee's own case for the subsequent assessment years.

Issues Involved:
1. Selection of the tested party for determining the Arm's Length Price (ALP).
2. Allocation of overhead costs to the subsidiary segment.
3. Rejection of detailed transfer pricing analysis by the Transfer Pricing Officer (TPO).
4. Business model adopted by the appellant with its subsidiaries.
5. Re-computation of deduction claimed under Section 10A and 10AA of the Income Tax Act.
6. Disallowance under Section 14A of the Income Tax Act.
7. Tax on dividends distributed under Section 115O of the Income Tax Act.

Detailed Analysis:

1. Selection of the Tested Party for Determining the Arm's Length Price (ALP):
The primary issue was whether the overseas subsidiaries, being the least complex entities, should be considered as the tested party for benchmarking international transactions. The Tribunal rejected this approach, stating that the Indian transfer pricing provisions do not allow selecting foreign AEs as the tested party. The Tribunal emphasized that the assessee failed to produce sufficient material evidence to establish the functional profile and risks assumed by the overseas AEs. The Tribunal's decision was largely guided by the Mumbai Tribunal's ruling in Aurionpro Solutions Limited, which held that the tested party should always be the assessee and not the AE. However, the High Court found this reasoning flawed, noting that the assessee had indeed provided sufficient documentation and that the Tribunal had incorrectly distinguished the decision in Ranbaxy Laboratories Limited, which supported the assessee's position.

2. Allocation of Overhead Costs to the Subsidiary Segment:
The assessee contested the TPO's method of allocating overhead costs, arguing that it disproportionately allocated 27.75% of the selling, administrative, and other general overheads to the AE segment, compared to 12.81% to the Citi and third-party segments. The High Court noted that this allocation mechanism led to a clear anomaly and required reconsideration by the Tribunal.

3. Rejection of Detailed Transfer Pricing Analysis by the TPO:
The TPO rejected the assessee's transfer pricing analysis, which showed that the margins earned by the assessee in the subsidiary segment (20.25%) were higher than those earned by the third-party comparables (18.94%). The High Court found that the TPO's rejection was not justified and required the Tribunal to re-evaluate the detailed transfer pricing analysis prepared by the assessee.

4. Business Model Adopted by the Appellant with its Subsidiaries:
The assessee argued that the entire revenue and cost of the overseas subsidiaries were pulled back into its books through a back-to-back arrangement, leaving only an arm's length profit for the on-site support services provided by the overseas subsidiaries. The High Court directed the Tribunal to consider this business model and its implications on the transfer pricing analysis.

5. Re-computation of Deduction Claimed under Section 10A and 10AA of the Income Tax Act:
The assessee contended that the AO and the DRP erred in restricting the exemption claimed for 10A and 10AA units, failing to understand the profitability computation of these units. The High Court noted that the Tribunal should re-examine the profitability computation and the consistency in profitability for the past two years, considering the specific circumstances of the SEZ unit's operation.

6. Disallowance under Section 14A of the Income Tax Act:
The AO and the DRP disallowed an amount under Section 14A, arguing that no expenditure had been incurred towards earning the dividend income. The High Court directed the Tribunal to reconsider this disallowance and the assessee's claim for deduction under Section 10A on the enhanced income due to the disallowance.

7. Tax on Dividends Distributed under Section 115O of the Income Tax Act:
The Tribunal was also directed to address the issue of tax on dividends distributed under Section 115O, which was raised by the assessee but not adjudicated.

Conclusion:
The High Court allowed the appeal, set aside the orders of the Tribunal, DRP, and TPO, and remanded the matter to the Tribunal to adjudicate the specific grounds raised by the assessee. The Tribunal was instructed to re-evaluate the selection of the tested party, allocation of overhead costs, detailed transfer pricing analysis, business model, re-computation of deductions under Sections 10A and 10AA, disallowance under Section 14A, and tax on dividends under Section 115O. The issue regarding the selection of the foreign AE as the tested party was remanded to the TPO for fresh consideration in light of the orders passed for subsequent assessment years.

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