SAS Institute (India) Pvt. Ltd. Vs ACIT (ITAT Mumbai)
Mumbai ITAT: Commercial Dependence Alone Does Not Create an Associated Enterprise Relationship Under Section 92A
Summary: The Mumbai ITAT held that commercial dependence or exclusivity in a distribution arrangement, by itself, does not establish an Associated Enterprise relationship under Section 92A of the Income-tax Act, 1961. In appeals for A.Ys. 2008-09 and 2010-11, the dispute principally concerned transfer pricing adjustments relating to royalty paid for software distribution and compensatory payment transactions. The Tribunal held that Section 92A(1) lays down the foundational requirement of participation in management, control or capital, while Section 92A(2) specifies circumstances relevant for determining such participation and cannot be read wholly independently. Since the Revenue had not demonstrated ownership, voting rights, management participation, appointment of directors or financial control over MIA Computers Ltd., Israel, it could not be treated as an AE merely under Section 92A(2)(g). Consequently, its distribution agreement could not be rejected as an uncontrolled transaction on that ground alone. However, the Tribunal directed the TPO to examine CUP comparability under Rule 10B(3), including contractual differences and reasonably accurate adjustments. The appeals were allowed for statistical purposes.
The Mumbai Bench of the Income Tax Appellate Tribunal, Bench H, comprising Smt. Beena Pillai, Judicial Member, and Shri Jagadish, Accountant Member, heard ITA Nos. 6671 & 6672/MUM/2019 concerning Assessment Years 2008-09 and 2010-11. The hearing concluded on 29.06.2026 and the order was pronounced on 17.08.2026. The appeals arose from final assessment orders dated 23.08.2019 passed by the ACIT-1(3)(1), Mumbai.
The principal dispute concerned transfer pricing adjustments relating to royalty paid for software distribution and compensatory payment transactions. For A.Y. 2008-09, the impugned assessment order made a transfer pricing adjustment of Rs. 8,50,03,392/- and retained an addition of Rs. 70,20,149/- relating to provision for superannuation contribution while computing book profit under Section 115JB of the Income-tax Act, 1961. For A.Y. 2010-11, the assessee challenged, among other matters, a transfer pricing adjustment of Rs. 7,62,41,370/-.
Procedural Background
For A.Y. 2008-09, the assessee had filed its return on 30.09.2008 declaring total income of Rs. 1,66,62,103/-. The case was selected for scrutiny and the Assessing Officer referred the international transactions to the Transfer Pricing Officer under Section 92CA(1). The TPO initially proposed an adjustment of Rs. 25,34,35,434/-. A draft assessment order under Sections 143(3) read with 144C(1) was thereafter passed proposing the transfer pricing adjustment and an addition of Rs. 70,20,149/- towards provision for superannuation contribution for computation of book profit under Section 115JB.
Following the DRP’s directions dated 22.08.2012, the Assessing Officer passed the final assessment order under Sections 143(3) read with 144C(13), determining total income at Rs. 27,00,97,540/- after the transfer pricing adjustment. The assessee appealed to the Tribunal. By order in ITA No. 6842/Mum/2012 dated 24.02.2016, the Tribunal restored the transfer pricing issue to the Assessing Officer/TPO for fresh adjudication.
In the remand proceedings, the TPO determined the arm’s length price adjustment at Rs. 8,50,03,392/- by order dated 28.09.2018. The Assessing Officer subsequently passed a draft assessment order dated 22.10.2018. The DRP upheld the TPO’s action on 31.07.2019, following which the impugned final assessment order dated 23.08.2019 was passed.
Limitation and Additional Grounds
The assessee challenged the assessment as being barred by limitation under Section 153 and also raised similar legal pleas through applications dated 30.06.2021 and 09.06.2026. The Tribunal held that, in view of a subsequent amendment in the statutory provisions governing the issue, the plea had become infructuous and dismissed Ground No. 1 and the corresponding additional ground as infructuous.
The assessee also sought admission of additional grounds on the merits of the case. The Tribunal noted that the additional grounds were connected with the validity of the reassessment proceedings and did not require investigation of new facts. Following National Thermal Power Co. Ltd. Vs. CIT and Jute Corporation of India Ltd. Vs. CIT, the Tribunal admitted the additional grounds.
Transfer Pricing Dispute and CUP Method
The assessee had benchmarked the royalty transaction for software distribution by adopting the Comparable Uncontrolled Price (CUP) method on a transaction-by-transaction basis. It compared its royalty arrangement with the distribution agreement between SAS Institute Inc., USA and MIA Computers Ltd., Israel. The assessee submitted that CUP was the Most Appropriate Method because the distributors performed substantially similar functions under comparable distribution arrangements.
The TPO had rejected CUP and adopted the Transactional Net Margin Method (TNMM). According to the assessee’s submissions, the TPO continued to reject the CUP analysis in the remand proceedings principally on the grounds that the agreements contained material differences and that MIA Computers Ltd., Israel was an Associated Enterprise of SAS Institute Inc. under Section 92A(2)(g).
The assessee contended that the differences concerning minimum sales commitments and compensatory payment clauses could be addressed through reasonable economic adjustments. It also relied upon the fact that, in its own case for A.Ys. 2013-14 and 2014-15, the DRP had accepted the internal CUP method and the MIA agreement as an appropriate comparable. A TaxGuru publication explaining the Comparable Uncontrolled Price (CUP) method is also relevant to the method expressly discussed in the supplied order.
Associated Enterprise Under Section 92A
The assessee argued that Section 92A(1) contains the substantive requirement for determining an Associated Enterprise relationship, namely participation, directly or indirectly, in management, control or capital, while Section 92A(2) specifies circumstances relevant for determining such participation. It submitted that Section 92A(2), including clause (g), could not operate independently of Section 92A(1).
The assessee further submitted that MIA Computers Ltd., Israel was an independent third-party distributor. It relied on the SAS Group organisational structure, extracts from the MIA Computers website, distribution agreements and a certificate issued by SAS Institute Inc. stating that MIA Computers functioned as an independent distributor. The assessee contended that there was no material demonstrating participation by SAS Institute Inc. in the management, control or capital of MIA Computers.
The Revenue, on the other hand, submitted that the agreements contained material differences and that Section 92A(2) operated as an independent deeming provision. It contended that fulfilment of Section 92A(2)(g) was sufficient to establish an Associated Enterprise relationship. The Revenue relied, among other things, on State of Tamil Nadu v. M.K. Kandaswami [1975] 36 STC 191 (SC) and Calcutta Jute Manufacturing Co. v. CTO [1997] 106 STC 433 (SC) in support of its approach to statutory construction.
The Tribunal held that Section 92A(1) lays down the basic statutory test and Section 92A(2) identifies specified circumstances in which participation is deemed for purposes of Section 92A(1). It held that Section 92A(2) could not be read as an altogether independent provision dispensing with the foundational requirement under Section 92A(1). According to the Tribunal, the two sub-sections were required to be read harmoniously.
The Tribunal further observed that commercial dependence or exclusivity in a distribution arrangement could not, by itself, be equated with participation in management, control or capital. It noted that the Revenue had not brought on record material demonstrating ownership, voting rights, participation in management, appointment of directors, financial control or another circumstance evidencing such participation.
The Tribunal therefore held that MIA Computers Ltd., Israel could not be treated as an Associated Enterprise of SAS Institute Inc., USA merely by invoking Section 92A(2)(g). Consequently, the MIA distribution agreement could not be rejected as an uncontrolled transaction solely on that ground.
Further Examination of CUP Comparability
The Tribunal clarified that treating MIA Computers as an uncontrolled enterprise did not, by itself, conclude the CUP comparability exercise. The requirements of Rule 10B(3) continued to apply. The Tribunal noted that contractual differences would have to be examined to determine whether they materially affected the royalty price and whether reasonably accurate adjustments could be made. Rule 10C was also referred to concerning availability and reliability of data and the extent to which reliable and accurate adjustments could be made in selecting the most appropriate method.
The Tribunal set aside the transfer pricing adjustment made by rejecting the CUP method on the ground that MIA Computers was an Associated Enterprise. It directed the TPO, in the remand proceedings, first to identify the precise differences between the two agreements and then examine whether those differences materially affected the royalty rate and could be eliminated through reasonably accurate and objectively verifiable adjustments. Where such adjustments could reliably be quantified, they were to be made and the adjusted price considered under CUP. If the differences could not be eliminated through such adjustments, the MIA agreement was not to be used as a comparable under CUP.
The Tribunal also made clear that failure of the MIA agreement as a CUP comparable would not, by itself, validate the TNMM adopted by the TPO in the original proceedings. If CUP could not be reliably applied, the TPO was required to independently determine, in accordance with law, the appropriate prescribed method.
Assessment Year 2010-11 and Final Ruling
For A.Y. 2010-11, the Tribunal recorded that the facts and issues on merits were identical to those considered for A.Y. 2008-09 and directed that the findings recorded for A.Y. 2008-09 would apply mutatis mutandis. Grounds 4-6 were accordingly disposed of in the same terms. Grounds 7-8 became academic at that stage, while Ground 9 concerning penalty proceedings was consequential and did not require adjudication.
The order records that the appeals filed by the assessee for A.Ys. 2008-09 and 2010-11 stand allowed for statistical purposes. The supplied order itself contains the expression “2020-11” in its concluding paragraph while the assessment year stated throughout the order is 2010-11; this has not been silently corrected. The order was pronounced in the open court on 17.08.2026.
Cases Discussed
- National Thermal Power Co. Ltd. Vs. CIT, (1998) 229 ITR 383 (SC)
- Jute Corporation of India Ltd. Vs. CIT, 187 ITR 688
- Page Industries Ltd. v. DCIT, [2016] 71 taxmann.com 172 (Bang. Trib.)
- Kaybee (P.) Ltd, [2020] 118 taxmann.com 640
- Orchid Pharma Ltd, [2016] 162 ITD 303
- Veer Gems, 77 taxmann.com 127
- State of Tamil Nadu v M.K. Kandaswami, [1975] 36 STC 191 (SC)
- Calcutta Jute Manufacturing Co. v. CTO, [1997] 106 STC 433 (SC)
