Case Law Update
A. T. Kearney India Pvt. Ltd. vs. ACIT [TS-593-ITAT-2019(Del)-TP]
The Assessee had made a voluntary transfer pricing adjustment and thereafter claimed a deduction of the same under Section 10A of the Act while filing the return of income. The Assessing Officer (‘AO’) was of the opinion that suo moto transfer pricing adjustment could not be included as part of the ‘total turnover’ of the undertaking and resultantly could also not form part of deduction under Section 10A of the Act. Apart from this, the Transfer Pricing Officer (‘TPO’) also made a transfer pricing adjustment with respect to interest on delayed receivables by applying the SBI prime lending rate. The DRP upholding the approach of the AO observed that suo moto adjustment in the computation of income represented a notional figure and not the real income of the Assessee and accordingly could not be considered as being ‘derived from’ activity of IT enabled services eligible for deduction under Section 10A of the Act. DRP also upheld the transfer pricing adjustment in respect of interest on delayed payment of receivables.
The ITAT relying on the Bangalore ITAT ruling in case of I-Gate Global Solutions Ltd. upheld by Hon’ble Karnataka High Court in ITA 453/ 2008, observed that the Assessee was entitled to deduction under Section 10A of the Act on suo moto transfer pricing adjustment and the provisions of Section 92C(4) of the Act were not attracted. The ITAT noted that the first proviso to Section 92C(4) of the Act is applicable only to situations where adjustment to the ALP is made by the AO/TPO / DRP. ITAT further observed that “If the legislative intent was to treat the adjustments made by the Assessing Officer at par with the voluntary adjustment made by the assessee, the legislative intent would have been expressed in different words.” ITAT rejected department’s reliance on Mumbai Tribunal ruling in case of Deloitte Consulting [(2012) 22 taxmann.com 107 (Mumbai)], in view of Karnataka High Court decision and observed that non-jurisdictional High Court decision is binding on ITAT in absence of contrary decision by jurisdictional High Court.
With regard second issue of notional interest on delayed receipt, ITAT remanded the matter to the file of TPO duly appreciating following arguments of Assessee – (a) Assessee has allowed 90 days credit period whereas the adjustment was based on credit period of 30 days; (b) TP adjustment, if any has to be made on net outstanding receivables after adjusting the payables; and (c) adjustment should be made on LIBOR plus basis point instead of SBI prime lending rate plus basis point.
M/s. India Trimmings Pvt. Ltd. vs. The Deputy Commissioner of Income-tax [TS-598-HC-2019(Mad)-TP]
The DRP in its direction, directed that TPO to include one of the comparable company and compute percentage of risk adjustment based on the details submitted by the Assessee for the purpose of transfer pricing adjustment. Aggrieved by these directions, Revenue department filed an appeal before ITAT.
ITAT setting aside the directions of DRP held that DRP exceeded its jurisdiction under Section 144C of the Act. ITAT in its order referring to Section 144C(8) held that DRP has no authority to direct the AO / TPO to make further enquiry and decide the matter. The DRP at best can call for remand report from the TPO / AO and decide the issue by itself.
Aggrieved by ITAT order setting aside the issue and not adjudicating on merit, Assessee filed an appeal before Hon’ble High Court. Hon’ble High Court on perusal of grounds before the ITAT noted that Revenue has not questioned the jurisdiction of DRP in its appeal. Hon’ble High Court on the facts observed that the DRP has reduced TP adjustment proposed in draft AO order and it was correctness of this relief granted by the DRP which was questioned by the Revenue before ITAT. Accordingly, High Court remanding the matter to the file of ITAT opined that “The Tribunal has faulted the DRP by holding that it has exceeded its jurisdiction as circumscribed under Section 144C…. the Tribunal was required to consider on merits whether the said assessment order was justified or not…. In the light of the above, we hold that the Tribunal should decide the matter rather than allowing the appeal filed by the Revenue in its entirety.”
The Dy. Commissioner of Income-tax vs. Blue Star Diamond Pvt. Ltd. [TS-586-ITAT-2019(Mum)-TP]
The Assessee is engaged in manufacturing and trading of diamonds. During the TP assessment proceedings, the TPO asked the Assessee to submit segmental profitability for AE transactions and non-AE transactions. Assessee expressed its inability to furnish details in manner sought be the TPO since it did not maintain separate books of accounts for AE and non-AE segments. The TPO levied a penalty under Section 271G of the Act citing that non-submission of segmental details prevented him from benchmarking the various transactions. The CIT(A) deleted the penalty by following the decision of Hon’ble Delhi High court in the case of CIT vs. Leroy Somer & Controls (India) Pvt. Ltd.  360 ITR 532 (Delhi).
ITAT upholding the order of CIT(A) deleted the penalty under Section 271G of the Act for non-submission of segmental profitability for AE and non-AE transactions. ITAT appreciated the practical difficulties faced by diamond trade industry for maintaining segmental details as required by the TPO and held that there was a reasonable cause within the ambit of Section 273B of the Act. ITAT relies on co-ordinate bench ruling in case of ACIT vs. Dilipkumar V. Lakhi (ITA No. 2142/Mum/ 2017.
Budget 2019 changes in Transfer Pricing
I. Country by Country reporting
Section 286 is proposed to be amended to clarify that the accounting year in case of the alternate reporting entity of an international group shall be the one applicable to its parent entity.
II. Advance Pricing Agreement
It is proposed to amend section 92CD(3) to substitute the words “ pass an order modifying the total income” in place of “proceed to assess or reassess or recompute the total income”. This would mean that in cases where assessment or reassessment has already been completed, the role of the AO shall be restricted to give effect to the modified return of income filed pursuant to the APA and not to assess/reassess the total income of the assessee.
III. Secondary Adjustment
Secondary adjustment’ means actual allocation of profits consistent with the primary Transfer Pricing adjustment by way of a constructive transaction or a secondary transaction.
To address some of the concerns such as interest imputation till perpetuity etc of the taxpayers, the following amendments are proposed:
1. It is proposed to substitute “and” with “or” so as to clarify that the conditions of threshold of INR one crore and of the primary adjustment made upto AY 2016-17 are alternate conditions and not cumulative.
2. Optional one-time tax: An option is now available to the taxpayer to pay a one-time additional tax @ 18% (plus surcharge of 12%) on the un-repatriated amount. Neither any credit shall be allowed in respect of the amount of such tax nor deduction shall be allowed under any other provision of the Act in respect of amount on which the tax is paid. Where the taxpayer exercises this option, interest imputation on the said amount will cease on the date of payment of the additional tax. It is also proposed that where this additional one-time tax is paid, the assessee shall not be required to make secondary adjustment under sub-section (1) of section 92CE of the Act.
3. Single AE Repatriation to suffice: It is now proposed that the excess money may now be repatriated from any of the AEs (and not necessarily all of the AEs), which is not resident in India where primary adjustment pertains to international transactions with multiple AEs.