Ingram Micro (India) Exports Pte. Ltd. Vs DCIT (ITAT Mumbai)
TPO Cannot Wear the AO’s Hat: Determination of PE Falls Outside the Limited Jurisdiction U/s 92CA
Summary: The Mumbai Bench of the ITAT has held that a Transfer Pricing Officer cannot determine the existence of a Permanent Establishment of a foreign enterprise in India. The jurisdiction of the TPO u/s 92CA is confined to determining the Arm’s Length Price of an identified international transaction. Questions concerning the existence of a PE under Article 5 of a tax treaty and the consequent taxation of business profits under Article 7 are matters falling within the jurisdiction of the AO.
Ingram Micro (India) Exports Pte. Ltd. was a company incorporated in Singapore and a wholly owned subsidiary of Ingram Micro India Pvt. Ltd. (“IMIPL”). The assessee was established for expanding the Ingram Micro group’s customer base in India, Bangladesh & Sri Lanka and for supplying products to certain Indian customers intending to avail customs-duty exemptions.
The assessee claimed that its management and day-to-day business operations were conducted from Singapore. It obtained certain sales-processing, marketing and bookkeeping support from IMIPL. According to the assessee, IMIPL was remunerated for these services through rebate incentives directly paid to it by third-party vendors.
The assessee did not initially file its return for AY 2008-09, contending that it did not have a PE in India and, therefore, its business profits were not taxable in India under Article 7 read with Article 5 of the India-Singapore DTAA. Pursuant to a notice u/s 142(1), it filed a return declaring nil income under protest.
In the original assessment proceedings, the AO held that IMIPL constituted the assessee’s PE in India and proposed to attribute the income represented by rebate incentives to the assessee. The matter travelled to the ITAT. By an order dated 07-02-2013, the Tribunal set aside the assessment and specifically directed the AO to provide the assessee an opportunity to cross-examine the persons whose statements had been relied upon during the search proceedings. The AO was also directed to undertake a fresh examination of whether the assessee had a PE in India.
During the remand proceedings, however, the AO referred the matter to the TPO u/s 92CA(1). The reference broadly stated that IMIPL was carrying on the actual business on behalf of the assessee and that the transactions required examination under the arm’s-length principle. Significantly, the reference did not identify the particular international transaction for which determination of ALP was sought.
The TPO proceeded beyond mere determination of ALP. He concluded that the assessee had a PE in India and proposed a transfer-pricing adjustment of ₹61.32 crore. Based upon the TPO’s conclusions, the AO proposed an income of ₹72.39 crore by attributing the relevant revenue to the Indian activities.
The DRP upheld the existence of PE and held that 95% of the profits arising from the Indian operations were attributable to the Indian PE. It, however, accepted that the adjustment could not exceed the assessee’s entire profit from Indian operations, quantified at ₹11.07 crore. Accordingly, the final assessment determined taxable income at approximately ₹10.52 crore, being 95% of ₹11.07 crore.
Before the ITAT, the assessee raised an additional legal ground challenging the jurisdiction of the TPO. It argued that the earlier remand was specifically to the AO for examining the existence of PE. Instead of carrying out that examination himself, the AO referred the matter to the TPO, who assumed jurisdiction over the treaty question and determined the existence of PE.
The Tribunal observed that a reference u/s 92CA must relate to the computation of ALP of a specific international transaction. The jurisdiction conferred upon the TPO is circumscribed by the statutory expression “computation of the arm’s length price in relation to the said international transaction.” It does not confer a general authority upon the TPO to determine an assessee’s total income, interpret the DTAA or decide whether a foreign enterprise has a PE in India.
The statutory scheme also maintains a clear division of functions. Under section 92CA(3), the TPO determines the ALP of the international transaction referred to him. Thereafter, u/s 92CA(4), the AO computes the total income in conformity with the ALP determined by the TPO. Merely because the TPO’s determination of ALP is binding upon the AO does not enlarge the TPO’s jurisdiction to decide questions of treaty entitlement, existence of PE or attribution of taxable business profits.
The Tribunal found two independent jurisdictional defects. First, the AO had been specifically directed in the earlier round to examine the existence of PE after allowing cross-examination and conducting the necessary inquiries. The AO could not transfer that responsibility to the TPO through a reference u/s 92CA. Such reference, insofar as it sought to entrust the PE determination to the TPO, was beyond the scope of the Tribunal’s remand directions.
Secondly, the reference itself did not identify any particular international transaction between the assessee and IMIPL whose ALP required determination. A broad or general reference, based merely upon the assertion that IMIPL performed additional functions in India, could not confer valid jurisdiction upon the TPO.
The TPO was required to remain within the boundaries of determining the ALP of a specified transaction. Instead, he decided whether the assessee had a PE under Article 5 of the India-Singapore DTAA and whether profits were taxable under Article 7. The ITAT held that these issues involved determination of the assessee’s treaty-based tax liability and were exclusively within the statutory responsibility of the AO.
More importantly, the AO had not independently examined the existence of PE. The draft assessment substantially reproduced and relied upon the TPO’s conclusions without independently applying the provisions of Article 5 or verifying the relevant facts. Since the addition rested solely upon findings recorded by an authority having no jurisdiction to decide the PE question, the assessment had “no legs to stand” in law.
The assessee’s additional legal ground was accordingly allowed, the assessment was struck down and the Revenue’s cross-objection concerning the quantum of profit attribution was dismissed.
Author’s Comments
The decision reinforces an important jurisdictional principle: transfer pricing begins only after an international transaction is identified and does not empower the TPO to determine the very foundation of taxability in India. The existence of PE, treaty interpretation & chargeability of business income must be independently decided by the AO. A TPO cannot become a parallel assessing authority merely because the case involves cross-border transactions.
The ruling is equally important on the discipline governing remand proceedings. Where the Tribunal restores a specific issue to the AO, the AO must comply with those directions in their letter & spirit. He cannot outsource the adjudicatory responsibility entrusted to him and thereafter mechanically adopt another authority’s conclusions. Jurisdiction is not a procedural formality; an addition founded entirely upon an order passed beyond jurisdiction cannot survive, however elaborate the underlying computation may be.
Cases Discussed
- National Thermal Power Co. Ltd. Vs. CIT (1998) 229 ITR 383 (SC)
- Jute Corporation of India Ltd. Vs. CIT (1991) 187 ITR 688 (SC)
- Indorama Synthetics (India) Ltd. v. ACIT (2016) 386 ITR 665 (Delhi High Court)
- Sava Healthcare Ltd. v. ACIT (2019) 107 taxmann.com 226 (Pune ITAT)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
Present cross appeals by assessee and revenue arise out of order dated 29/10/2016 passed by Ld.DCIT(Intl.tax) 2(2)(1), Mumbai [in short “Ld.AO”] for assessment year 2007-08 on following grounds of appeal:-
ITA 1746/MUM/2016; Assessee’s appeal
“The appellant objects to the order dated 28 January 2016 (received on 2 February 2016) passed by the Deputy Commissioner of Income-tax (International Tax) – 2(2)(1), Mumbai under section u/s. 144C (13) r.w.s. 143 (3) r.w.s 254 of the Income-tax Act, 1961 (‘the Act’).
Each of the following grounds of appeal is without prejudice to the other.
On the facts and in the circumstances of the case and in law,
1. Not following the specific directions of the Income-tax Appellate Tribunal (“ITAT”), Mumbai
1.1. The Learned Transfer pricing Officer (“TPO”)/ Learned Assessing Officer (“AO”) and the Hon’ble Dispute Resolution Panel (“DRP”) has erred in not following the specific directions of the ITAT, Mumbai given vide order dated 7th February, 2013, in entirety and spirit.
2. Holding that the Appellant has a Permanent Establishment (“PE”) in India:
2.1. The Learned TPO/ Learned AO/ Hon’ble DRP has erred in holding that the Appellant has a Permanent Establishment (“PE”) in India through which it carries out its sales in India.
2.2. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, it has no PE in India and the stand taken by the Learned TPO/ Learned AO/ Hon’ble DRP in this regard is erroneous, misconceived and not in accordance with law.
2.3. The Appellant submits that the Learned TPO/ Learned AO/ Hon’ble DRP has erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material to hold that the Appellant had a PE in India. Further he also failed to consider the contrary material and evidence adduced by the Appellant.
2.4. The Appellant submits that the Learned TPO/ Learned AO/ Hon’ble DRP be directed to re-compute its total income accordingly.
3. Attribution of profits:
3.1. The Learned TPO/ Learned AO/Hon’ble DRP has erred in attributing the profits made by the Appellant.
3.2. The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject and in particular considering the functions carried out by Ingram Micro India Limited it is apparent that the said Ingram Micro India Limited has been remunerated on an appropriate basis through the incentive mechanism and hence no further attribution of income is called for.
3.3. The Appellant submits that the Learned AO be directed to delete the addition so made by him and to re-compute its total income accordingly.
4. Estimation of business income taxable in India:
4.1. The Learned AO/ Hon’ble DRP has erred in holding that 95% of the business income earned by the Appellant is attributable to its Indian PE.
4.2. The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject 95% of its business income cannot be attributed to the Indian PE and said to be its profits taxable in India and the stand taken by the Assessing Officer in respect thereof is erroneous, misconceived and illegal.
4.3. The Learned TPO/ Learned AO be directed to recompute its total income accordingly.
5. Levy of interest u/s. 234A and 234B of the Income-tax Act, 1961:
5.1. The Assessing Officer has erred in levying interest u/s. 234A and 234B of the Income-tax Act, 1961 on the Appellant.
5.2. The Appellant submits that considering the facts and circumstances of the case and in the particular the fact that the Appellant is a non-resident as also the law prevailing on the subject, no interest u/s. 234A and 234B of the Income-tax Act, 1961 should be levied on it.
5.3. With prejudice the ground 6.1 and 6.2 above, the Assessing officer has erred in levying interest under section 234B of the Act upto the date of passing the final assessment order under the remanded back proceedings by the Hon’ble Income Tax Appellate Tribunal.
5.4. The Appellant submits that the Assessing Officer be directed to delete the interest levied on it.
6. General:
6.1. The Appellant craves leave to add, alter, amend, substitute and / or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”
CO No. 70/MUM/2017; revenue’s cross-objection
1. Whether on the facts and in the circumstances of the case, the Ld. DRP has erred in providing relief to the assessee in respect of adjustment of income attributable to PE, made by the TPO to the tune of Rs.61,32,34,759/- based on Singapore database (or adjustment of Rs.29,78,91,272 made by TPO on alternative basis based on Indian comparables) based on arms length principles and the adjustment made by the TPO should be restored ?.”
2. Whether on the facts and in the circumstances of the case and in law, the Ld. DRP has erred in holding that combined profits of AEs cannot exceed Rs. Rs.11,07,20,280 as the combined profits of AEs have been estimated by the TPO as Rs. 61,32,34, 759/- (or adjustment of Rs. 29,78,91,272 made by TPO on alternative basis) on the basis of arm’s length principles and the same can exceed the PBT worked out by the assessee as no segmental accounts are maintained by the assessee for India related operations?”
3. Without prejudice to the above, if any relief is provided to the assessee in respect of income attribution to PE by the AO based on proportionate turnover related to Indian operations, the adjustment made by the TPO in respect of profit attributed to PE based on arms length principle should be restored.
4. The Appellant prays that the order of the Ld. DRP on the above grounds be set aside and that of the Assessing Officer restored.
5. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
2. Brief facts are as under:
The assessee, is a company incorporated in Singapore and is a wholly owned subsidiary of Ingram Micro India Private Limited (IMIPL), an Indian company engaged in the distribution of information technology products of leading vendors. The assessee commenced its business in September 2001 with the objective of expanding the Ingram Micro group’s customer base in India, Bangladesh and Sri Lanka, besides serving certain Indian customers who intended to procure products from outside India to avail the benefit of the customs duty exemption scheme.
2.1. Assessee submitted that its management and day-to-day business operations were conducted from Singapore. However, it procured certain sales processing, marketing and bookkeeping-related support services from IMIPL. The remuneration for such services was stated to have been received by IMIPL in the form of rebate incentives paid by third-party vendors on sales made in India by the assessee.
2.2. For the year under consideration, the assessee did not file Form No. 3CEB, as the rebate incentives for the services provided by IMIPL were paid directly by the vendors to IMIPL. The assessee also did not initially file its return of income for A.Y. 2008–09, claiming that its business income was not taxable in India under Article 7 read with Article 5 of the India-Singapore Double Taxation Avoidance Agreement, on the ground that it did not have a Permanent Establishment (PE) in India.
2.3. Accordingly, the Ld.AO issued notice under section 142(1) of the Act, dated 11/11/2009, which was duly served upon the assessee on the same date, requiring it to furnish its return of income on or before 18/11/2009. In response thereto, the assessee filed its return of income on 20/11/2009, declaring total income at Nil. In the notes forming part of the return, the assessee stated that the return was being filed under protest and in response to the notice issued under section 142(1) of the Act.
2.3.1. It was further submitted that the assessee did not have a PE in India within the meaning of Article 5 of the India-Singapore DTAA and, consequently, the profits arising from its Indian operations were not liable to tax in India under Article 7 of the said DTAA.
2.4. After considering the submissions of the assessee the Ld.AO passed draft assessment order dated 31/12/2009 making 100% addition of the rebate incentives received by IMIPL for the services provided by IMIPL that were paid directly by the vendors to IMIPL, by treating IMIPL to be PE of assessee in India.
Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP).
2.5. The DRP, disposed of the same vide its order dated 29/09/2010 by rejected the assessee’s contention and confirmed the proposed assessment order. Based on the DRP direction, the Ld.AO passed final assessment order dated 14/10/2010.
Aggrieved by the final assessment order, the assessee preferred appeal before this Tribunal.
3. This Tribunal, vide its order dated 7/02/2013, set aside the assessment order and restored the matter to the file of the Ld.AO with following directions:
- The Ld.AO was directed to provide the assessee an opportunity to cross-examine the individuals whose statements, recorded during the search and seizure proceedings, had been relied upon by the Revenue.
- The assessment proceedings were restored to the file of the Ld.AO for fresh adjudication, including examination and verification of the issue relating to the existence of a permanent establishment (PE) of the assessee in India.
3.1. In the remand proceedings, the Ld.AO referred the case to the Ld.TPO under section 92CA(1) of the Act for determination of the Arm’s Length Price (ALP). In the reference, the Ld.AO stated that, based on the information and statements recorded during the search proceedings, IMIPL was found to be carrying on the actual business on behalf of the assessee. The Ld.AO, therefore, observed that, in view of the additional functions performed by IMIPL, the transactions were required to be examined to determine whether they were at arm’s length.
3.2. Pursuant to the said reference, the Ld.TPO issued detailed questionnaires to the assessee on 01/05/2014, 25/09/2014 and on subsequent dates, seeking information and documents in support of the determination of the ALP of the international transactions. The Ld.TPO after considering the submissions of the assessee, vide its order dated 30/01/2015, concluded that, the assessee had PE in India and proposed an adjustment of Rs.61,32,34,759/-
3.3. On receipt of the order passed by the Ld.TPO under section 92CA(3), the Ld.AO in the draft assessment order dated 27/03/2015, held that the IMIPL constituted PE of the assessee in India and proposed to assessee income in the hands of the assessee at Rs.72,39,55,039 by attributing 100% of the revenue earned by IMIPL to the activities of the assessee in India.
On receipt of the draft assessment order, the assessee preferred objection before the DRP.
3.4. The DRP upheld the existence of a PE in India and held that 95% of the profits arising in India were attributable to the Indian PE. However, it accepted assessee’s contention that the transfer pricing adjustment could not exceed the entire profits of the assessee from its Indian operations, quantified at Rs.11,07,20,280.
3.4.1. On receipt of the DRP direction, the Ld.AO passed the impugned final assessment order dated 28/01/2016, by determining the income of assessee at Rs.10,51,84,266, being 95% of Rs.11,07,20,280.
Aggrieved by the order of the Ld.AO the assessee is in appeal before this Tribunal.
3.5. At the outset, the Ld.Sr.Counsel submitted before this Tribunal, that the assessee filed applications seeking admission of additional grounds dated 31/03/2023, 11/10/2022 and 28/03/2023. The Ld.Sr.Counsel submitted that, additional grounds raised vide applications dated 11/10/2021 and 28/03/2023 are challenging validity of the order passed by the Ld.TPO and Ld.AO to be passed beyond the period of limitation. He submitted that these application may be treated infructuous pursuant to the amendments brought in by the Finance Act 2025.
Accordingly, additional grounds raised vide applications dated 11/10/2022 and 28/03/2023 stands dismissed infructuous at this stage.
However, the Ld.Sr.Counsel submitted that additional ground raised by the assessee vide application dated 31/03/2021 goes to the root-cause of this case, that reads as under:
ADDITIONAL GROUNDS OF APPEAL
Without prejudice to the grounds of appeal No. 1 to 6 as originally raised
1:0 Re.: Assessment Order barred by limitation:
1:1 The impugned Order passed u/s. 143(3) r.w.s. 144C(13) r.w.s 254 of the Income-tax Act, 1961 is barred by limitation and hence, liable to be quashed.
The Appellant submits that considering the facts and circumstances of the case, the Assessing Officer has erred in referring the case to the Transfer Pricing Officer which was not required as per the direction of the Tribunal, and, therefore the impugned Final Order passed u/s. 143(3) r.w.S. 144C(13)r.w.s254 is barred by limitation and accordingly, illegal, ab-initio void and deserves to be struck down.
1: 3 The Appellant submits that the impugned Order be struck down void ab initio and bad in law.
2:0 Re.: General:
2:1 The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”
4. The Ld.Sr.Counsel submitted that the issue raised in the additional grounds goes to the root of the matter and that its adjudication does not require examination of any fresh material or verification of new facts. It was submitted that the additional grounds challenge the validity of the order passed under section 92CA(3) of the Act on the ground that the same was without jurisdiction. The Ld.Sr.Counsel further submitted that the issue raised is purely legal in nature and can be adjudicated on the basis of the material already available on record. The Ld.Sr.Counsel, therefore, prayed that the additional grounds raised by the assessee be admitted for adjudication.
4.1. On the contrary, the Ld.DR though opposed admission of the additional grounds, could not bring anything on record which would challenge such a right available to assessee under the Act.
We have perused the submissions advanced by both sides in the light of records placed before us.
5. We note that the issue raised by the assessee in the additional ground is a pure question of law, which goes to the root of the matter. We further note that adjudication of the said issue does not require consideration of any fresh facts or examination of any new material. Respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we admit the additional ground raised by the assessee. Accordingly, the additional ground raised vide application dated 31/03/2023 filed by assessee stand admitted.
The legal issue raised in the additional ground goes to the root cause of the assessment, it is necessary to consider this ground first.
5.1. The Ld. Sr.Counsel submitted that the reference made by the Ld.AO to the Ld.TPO during the set-aside proceedings was legally unsustainable. It was submitted that the scope of the remand was governed by paragraphs 9 and 10 of the Tribunal’s order dated 7/02/2013. He further submitted that, section 92CA(1), read with sections 92(1) and 92B(1) of the Act, requires the Ld.AO to refer the relevant international transactions to the Ld.TPO for determination of its ALP. In the present case, according to the Ld.Sr.Counsel, the reference made by the Ld.AO was vague and did not specify international transactions in respect of which the ALP was required to be determined. It was further submitted that, even the Ld.TPO’s order did not identify the transaction referred to him or the precise international transaction examined. Accordingly, the Ld.Sr.Cousel contended that the Ld.TPO proceeded without valid and properly defined reference.
5.1.1. The Ld.Sr.Counsel submitted that, the assessee had not furnished Form No.3CEB and that in such circumstances, the Ld.AO was required to record his satisfaction that the assessee had entered into an international transaction with an associated enterprise and provide an opportunity of being heard to the assessee before making a reference to the Ld.TPO. In support he relied on CBDT instruction No.3/2003 dated 20/05/2003, instruction No.15/2015 dated 16/10/2015 and instruction No.3/2016 dated 10/03/2016. The Ld.Sr.Counsel contended that the subsequent instructions were clarificatory and procedural in nature and, therefore, ought to receive retrospective application. Reliance in this regard was also placed by him on the decision of Hon’ble Delhi High Court in Indorama Synthetics (India) Ltd. v. ACIT, reported in (2016) 386 ITR 665.
5.2. On the contrary, the Ld. DR, vide submission dated 27/05/2026 contended as under:
5.3. The Ld.DR submitted that the assessee had not denied having entered into an international transaction with its associated enterprise. Therefore, the AO was justified in making a reference to the Ld.TPO for determination of the arm’s length price of the relevant transactions. The mere fact that Form No. 3CEB had not been furnished by the assessee could not, by itself, invalidate the reference made under section 92CA of the Act.
5.4. The Ld.DR further submitted that the assessee had not raised any objection before the Ld.AO at the stage when the reference under section 92CA was made. Having participated in the proceedings before the Ld.TPO and having failed to object to the reference at the appropriate stage, the assessee could not subsequently challenge the validity of the reference before the DRP or the Tribunal.
5.5. As regards the reliance placed by the Ld.Sr.Counsel on CBDT Instruction No. 3/2003, the Ld.DR submitted that the said instruction did not contemplate or prescribe any requirement of providing an opportunity of being heard to the assessee before making a reference to the Ld.TPO under section 92CA. Therefore, the assessee could not rely upon the said instruction to contend that the reference was invalid for want of a prior hearing.
5.6. The Ld.DR further submitted that CBDT Instruction No. 15/2015, which, according to the assessee, required an opportunity of being heard before making a reference to the Ld.TPO, was issued subsequently and was prospective in operation. The Ld.AO, while making the reference during the relevant proceedings, could not be expected to comply with a procedural requirement which had not been prescribed or introduced at the relevant point of time. The subsequent instruction, therefore, could not be invoked retrospectively to invalidate a reference which was otherwise validly made under section 92CA of the Act.
5.7. In response to the Revenue’s submission, the Ld.Sr.Counsel submitted that CBDT Instruction No. 3/2003 did not contemplate an opportunity of hearing before making a reference to the Ld.TPO, the Ld.Sr.Counsel relied upon the decision in Indorama Synthetics (India) Ltd.(supra), particularly paragraphs 16, 17, 20 and 21, and contended that the instruction envisaged an opportunity of being heard before making the reference. Similarly, in response to the Revenue’s contention that Instruction No. 15/2015 was prospective and that the Ld.AO could not have complied with a requirement which did not exist at the relevant time, the Ld. Sr.Counsel submitted, relying upon Indorama Synthetics (India) Ltd., that the requirement was procedural in nature and intended to safeguard the assessee’s rights. It was further submitted that the requirement of providing an opportunity of being heard was implicit in section 92CA(1) itself. On the above basis, the Ld.Sr.Counsel submitted that the reference made by the Ld.AO to the Ld.TPO during the remand proceedings be declared ab initio void and bad in law.
5.8. In response to the Ld.DR’s contention that the assessee had not denied entering into an international transaction, the Ld.Sr.Counsel submitted that the assessee consistently had brought to the notice of the authorities that the it had not filed Form No. 3CEB and that no reference to the Ld.TPO had been made in the first round of proceedings. Regarding the contention of the Ld.DR that, no objection was raised by the Ld.AO at the stage of reference under section 92CA, the Ld.Sr.Counsel submitted that the objection to the reference was raised before the DRP, as reflected at pages 12 and 13 of the DRP’s directions dated 28/12/2015.
5.9. Without prejudice to the challenge to the validity of the reference, the Ld.Sr.Counsel submitted that the jurisdiction of the Ld.TPO under section 92CA was confined to determination of the arm’s length price of the international transactions referred to him. It was contended that the Ld.TPO exceeded his statutory jurisdiction by determining that the assessee had a PE in India and had further proceeded to conclude that the profits of the assessee were taxable in India.
5.10. Ld.Sr.Counsel, thus submitted that the determination of existence of a PE and consequent taxability of business profits under the India-Singapore tax treaty were matters falling within the jurisdiction of the Ld.AO and not the Ld.TPO. It was further submitted that, in the draft assessment order, the Ld.AO substantially reproduced and relied upon the conclusions of the Ld.TPO without independently examining the relevant provisions of Article 5 of the tax treaty.
5.11. Reliance was placed on the decision of the Hon’ble Pune Bench of the Tribunal in Sava Healthcare Ltd. v. ACIT, reported in (2019) 107 taxmann.com 226, particularly paragraphs 103 to 107, wherein, according to the Ld.Sr.Counsel, it was held that the Ld.TPO could not perform functions entrusted to the Ld.AO. In response to the Revenue’s submission that an appeal against the decision in Sava Healthcare Ltd.(supra) was pending before Hon’ble Bombay High Court, the Ld.Sr.Counsel submitted that the mere filing of an appeal did not dilute the relevance of the decision of the Tribunal unless a contrary view had been expressed by Hon’ble High Court. The Ld.Sr.Counsel, thus submitted that order dated 30/01/2015 passed by the Ld.TPO be quashed on the ground that the Ld.TPO acted beyond the scope of his jurisdiction.
We have perused the submissions advanced by both sides in light of records placed before us.
6. The principal controversy arising for our consideration is whether, the reference made by the Ld.AO to the Ld.TPO during the set-aside proceedings was valid in law and, consequently, whether the Ld.TPO was competent to determine the existence of a PE of the assessee in India and the taxability of the profits attributable thereto.
6.1. We find that, in the first round of proceedings, the Tribunal set aside the assessment and restored the proceedings to the file of the Ld.AO with specific directions, inter alia, to provide the assessee an opportunity to cross-examine the persons whose statements were relied on by the revenue to undertake fresh examination of the issue relating to the existence of a PE. The Tribunal in this context permitted the assessee to furnish relevant documents and contentions and directed the Ld.AO to make necessary inquiries before finalising the draft assessment order. Thus, in our view, the scope of the remand was required to be examined in the context of the specific directions contained in the Tribunal’s order which is categorically reproduced herein above.
6.2. It is noted that during the remand proceedings, the Ld.AO made reference under section 92CA(1) to the Ld.TPO. From the contents of the reference, it is seen that the Ld.AO proceeded on the basis of the statements recorded during the search and the alleged functions performed by IMIPL and stated that the transactions were required to be examined to determine whether they were at arm’s length. However, it is also noted that the reference did not identify the particular international transaction or transactions in respect of which determination of the ALP was sought. It is further noted that the Ld.TPO thereafter proceeded to examine the matter and, in his order dated 30/01/2015, concluded that the assessee had a PE in India and proposed an adjustment of Rs.61,32,34,759/-.
6.3. In our view, the determination of the existence of a PE in India is fundamentally distinct from the determination of ALP of an international transaction. The jurisdiction conferred upon the Ld. TPO under section 92CA(1) of the Act is circumscribed by the statutory expression “computation of the arm’s length price in relation to the said international transaction”. The provision contemplates a reference by the Ld. AO of a specific international transaction for determination of its ALP under section 92C. Thus, the reference under section 92CA(1) is transaction-specific and does not confer upon the Ld. TPO a general jurisdiction to determine the assessee’s taxable income or the applicability of the provisions of a Double Taxation Avoidance Agreement.
6.4. Section 92C(1) prescribes the methods for determining the ALP of an international transaction, while section 92C(2) provides for the manner in which the most appropriate method is to be applied. The statutory function of the Ld.TPO under section 92CA(3) is to determine, after considering the evidence produced by the assessee and the relevant material gathered by him, the ALP in relation to the international transaction referred to him, in accordance with section 92C(3). The expression “in relation to” cannot be construed as conferring an unrestricted power to adjudicate matters falling outside the statutory function of determining the ALP.
6.5. The scheme of section 92CA further reinforces this position. Under section 92CA(2), the notice issued by the Ld.TPO requires the assessee to produce evidence in support of the computation of the ALP in relation to the international transaction referred to him. Even where an additional international transaction comes to the notice of the Ld.TPO during the proceedings, sections 92CA(2A) and 92CA(2B), as applicable to the relevant assessment year, specifically provide the statutory basis for bringing such transaction within the transfer-pricing framework. These provisions do not authorise the Ld.TPO to determine an issue which is not directed towards the computation of the ALP of an international transaction.
6.6. Further, section 92CA(4) requires the Ld.AO, on receipt of the order under section 92CA(3), to compute the total income of the assessee under section 92C(4) in conformity with the ALP determined by the Ld.TPO. The statutory scheme, therefore, distinguishes between the determination of the ALP by the Ld.TPO and the computation of the assessee’s total income by the Ld.AO. The binding nature of the ALP determination under section 92CA(4) cannot be construed as enlarging the jurisdiction of the Ld.TPO to decide questions relating to the existence of a PE or the consequent taxability of business profits.
6.7. In the first round of proceedings, the Tribunal, vide its order dated 7/02/2013, restored the assessment proceedings to the file of the Ld.AO for fresh adjudication. This Tribunal specifically directed the Ld.AO to provide the assessee an opportunity to cross-examine the persons whose statements were relied by the authorities below to undertake necessary inquiries in relation to the existence of a PE. The Tribunal also permitted the assessee to furnish relevant documents and contentions before finalisation of the draft assessment order.
6.8. It is, therefore, evident that the issue relating to the existence of a PE was specifically restored to the file of the Ld.AO for examination in accordance with the directions of the Tribunal. However, during the set-aside proceedings, the Ld.AO referred the matter to the Ld.TPO under section 92CA of the Act. The question that arises is whether the Ld.AO could, in the course of giving effect to the Tribunal’s directions, transfer the examination of the existence of a PE to the Ld.TPO under the provisions of section 92CA.
6.9. In our considered view, the directions of the Tribunal required the Ld.AO to undertake a fresh examination of the existence of a PE, after complying with the directions relating to cross-examination and consideration of the relevant material. The reference made to the Ld.TPO, insofar as it sought to transfer the determination of the existence of a PE to the Ld.TPO, was not in conformity with the specific scope of the remand. The Ld.AO was required to discharge the responsibility entrusted to him by the Tribunal and could not, merely by making a reference under section 92CA, confer upon the Ld.TPO jurisdiction over the very issue which had been restored to the Ld.AO for fresh adjudication.
6.10. There is, however, an additional and independent infirmity in the proceedings. Even assuming that a reference to the Ld.TPO could validly be made is a set-aside proceedings, section 92CA(1) authorises the Ld.AO to refer the computation of ALP in relation to an international transaction to the Ld.TPO. The jurisdiction of the Ld.TPO is strictly confined to determining the ALP of the international transaction referred to him by the Ld.AO in accordance with section 92C.
6.11. However, in the present case, we note that the reference made by the Ld.AO did not identify any international transaction between the assessee and IMIPL(Indian company) in respect of which the determination of the ALP was sought. The reference proceeded on the general observation that IMIPL was carrying on the actual business on behalf of the assessee and that, in view of the additional functions allegedly performed by IMIPL, the transactions required examination from the perspective of the arm’s length principle. Such a general reference, without identifying the international transaction, cannot be treated as a valid reference for determination of ALP.
6.12. It is also noted that the Ld.TPO did not confine his examination to the determination of ALP of any identified international transaction. He proceeded to determine whether the assessee had a PE in India and, on that basis, concluded that the assessee’s profits were taxable in India. The determination of the existence of a PE under Article 5 of the India-Singapore DTAA and the consequent taxability and attribution of business profits under Article 7 involve adjudication of the assessee’s tax liability under the applicable treaty provisions. In the facts of the present case, these matters were specifically restored by the Tribunal to the Ld.AO and did not fall within the statutory function of the Ld.TPO under section 92CA.
6.13. We also find considerable force in the contention of the Ld.Sr.Counsel that the Ld.AO while passing the draft assessment order, relied on the conclusions recorded by the Ld.TPO regarding the existence of the PE, without independently examining the issue in the context of Article 5 of the India-Singapore DTAA. The statutory responsibility of determining the assessee’s tax liability, including the applicability of the treaty provisions and the existence or otherwise of a PE, remained with the Ld.AO.
6.14. As regards the challenge to the validity of the reference itself, the assessee has relied upon the absence of Form No. 3CEB and the CBDT Instructions referred to before us. However, having regard to the conclusion reached by us on the jurisdictional issue discussed above, we do not consider it necessary to enter into the wider controversy as to the applicability or retrospective operation of the subsequent CBDT Instructions or the precise consequence of the assessee not having raised an objection before the Ld.AO at the stage of reference. The appeal can be appropriately adjudicated on the narrower issue of the scope of the Ld.TPO’s jurisdiction.
6.15. We also taken note of the decision relied upon by the Ld.Sr.Counsel in Sava Healthcare Ltd. v. ACIT (supra). The principle emerging therefrom is that, the Ld.TPO cannot assume functions which are statutorily entrusted to the Ld.AO. The mere fact that an appeal against the said decision is stated to be pending would not, by itself, render the decision inapplicable, in the absence of any contrary decision of the Hon’ble Bombay High Court.
7. We, therefore, hold that the reference made by the Ld. AO, insofar as it sought to transfer the determination of the existence of a PE to the Ld. TPO, was beyond the scope of the Tribunal’s remand directions. Independently, the Ld. TPO exceeded the jurisdiction conferred upon him under section 92CA by determining the existence of a PE and the consequent taxability of the assessee’s profits, without confining himself to the determination of the ALP of a specific international transaction referred to him. The findings recorded by the Ld. TPO on the existence of a PE and the consequent taxability of profits, therefore, cannot be sustained.
Accordingly, Additional Ground raised by the assessee vide application dated 31/03/2021 stands allowed.
7.1. The Ld. AO did not independently verify the issue, and the addition was proposed merely on the basis of the order passed under section 92CA(3). In such circumstances, the assessment proceedings, being founded solely on the said order without any independent verification or application of mind by the Ld. AO, have no legs to stand in the eyes of law.
As a consequence, the cross objection raised by the revenue stands dismissed.
In the result the appeal filed by the assessee stands allowed on the legal ground raised vide application dated 31/03/2023, and cross objection filed by the revenue stands dismissed.
Order pronounced in the open Court on 15/09/2026
