Citation : M/s Hinduja TMT Ltd. [2010-T11-18-ITAT-MUM-TP]
Court : Mumbai Bench of Income Tax Appellate Tribunal
The Mumbai Bench of Income-tax Appellate Tribunal (“the Tribunal”), in its recent ruling in the case of M/s Hinduja TMT Ltd. [2010-T11-18-ITAT-MUM-TP] , has held that the onus is on the assessee to prove the arm’s length nature of its international transactions with associated enterprises. In this regard, the uncontrolled comparable data as well as other relevant details submitted by the assessee must be examined by the Revenue. Arm’s length price (“ALP”) must eventually be established with reference to appropriate uncontrolled comparable data and other relevant details, and by applying the methods prescribed in the Indian Transfer Pricing Regulations.
In the same ruling, on a separate ground of appeal, the Tribunal considered whether the sale of investment made by the assessee was in the nature of capital gain or business income. Based on the facts, the Tribunal has, without giving any findings, restored the file back to the assessing officer (“AO”) so that the AO may take a view, consistent with those taken in earlier assessment years on identical issues, after considering the assessee’s contentions and having regard to the decision of the Bombay High Court in the case of Gopal Purohit (228 CTR 582; 188 Taxman 140).
The assessee had a wholly owned subsidiary in the USA, its associated enterprises (“the subsidiary” or “AE”). The subsidiary was engaged in providing certain outsourced services to the assessee. The subsidiary used to bill directly to the clients in the USA, and would retain 12% commission as a consideration for its services and remit the balance to the assessee. During the relevant assessment year 2003- 04, the assessee increased the commission percentage from 12% to 20% in January 2003 with retrospective effect from 1 April, 2002. The assessee used the Transactional Net Margin Method (“TNMM”) to establish the ALP of the commission.
During the course of assessment proceedings, the assessee submitted that the increase in commission was on account of an increase in the volume of business of the subsidiary. However, the Transfer Pricing Officer (“TPO”) restricted the commission to 12% and made an adjustment which was added back by the AO. With regard to the capital losses carried forward, the AO treated the shares as stock- in trade and rejected the claim of indexation made by the assessee. The AO went on to treat the resultant gains as business income.
The assessee appealed before the Commissioner of Income tax(Appeals) (“CIT(A)”), and justified the increase in commission on account of the following:
· The subsidiary had incurred substantial loss, the cost of which had to be absorbed by the assessee, being the holding company.
· The TPO did not consider the Transfer Pricing Report submitted by the assessee and instead applied a Direct Comparable Percentage Method (of earlier years), i.e., applied the commission percentage paid by the assessee in earlier years to determine ALP.
However, the CIT(A) confirmed the additions made by the TPO primarily for the reasons that, (a) the assessee had entered into the agreement (for increase in commission rate) only in January 2003, and, (b) the agreement did not justify the sharp increase in commission from 12% to 20%.
Appeal before the Tribunal
Before the Tribunal, the assessee appealed on the following grounds :
· The assessee referred to earlier correspondence with the AE, which was placed on record, in which it was agreed that the parent company would consider enhancing the rate of commission in the case of an increase in the business of the AE. The assessee argued that the business of the AE had grown by more than 150% and therefore the higher commission was justified.
· The TPO had neither rejected the assessee’s method nor followed any method prescribed under the Indian TP Regulations for determining ALP. The TPO had simply rejected the ALP determined by the assessee on the ground that the assessee himself had adopted a lower rate of commission in earlier years and therefore, the additional 8% commission was excess commission paid by the assessee.
The Departmental Representative (“DR”) raised the following grounds before the Tribunal:
· The assessee had used TNMM but had not provided any comparable for justifying the increase in the rate of commission. Nonetheless, DR agreed that an increase in the business volume would justify an increase in commission. At the same time DR referred back to the AO’s contention that the assessee had not provided any justification for increasing the commission rate from 12% to 20%.
· The onus was on the assessee to submit uncontrolled comparable transactions to determine ALP, which had not yet been provided.
The Tribunal made the following observations:
· The onus was on the assessee to provide details for justifying the increase in the commission rate and also to submit uncontrolled com parables data.
· Details and comparable data provided by the assessee have to be examined by the AO/TPO to arrive at the correct ALP using any of the prescribed methods. However, the AO and the TPO had not given any examination to whether the increase in commission rate was justified. Furthermore, the TPO had not discussed any of the methods prescribed in the Indian TP Regulations and had also not discussed why the TNMM method adopted by the assessee was inappropriate, but had simply applied the commission rate adopted by the assessee in earlier years.
· Therefore, the Tribunal restored the matter back to the AO for examining the case afresh and giving an opportunity to the assessee to provide proper justification.
Conclusion:- In this ruling, the Tribunal has reiterated that the onus for proving arm’s length lies with the assessee. The Tribunal has also re- emphasized the need for a transfer pricing analysis to be backed up by adequate uncontrolled com parables data and any other relevant business or commercial details which support the determination of ALP. Further, the Tribunal has directed that only the prescribed methods for establishing ALP may be used, and not any other methodology.