Brief Facts of the case-
Issue wise analysis
Issue 1– Whether the transactions between the head office in India and branch office in Canada can be considered as international transactions?
The assessee had entered into certain transaction with his branch office in Canada. The AO had taken these transactions also into sweep for the purposes of making the transfer pricing adjustment.
As per the definition of ‘international transaction’, for treating any transaction as an international transaction, there should be two or more separate AEs.
Further, neither any person can earn income nor suffer loss from self. It is called the principle of mutuality.
Reliance can be placed on the decisions of Hon’ble Apex Court and High Courts in the case of Sir Kikabhai Prem Chand vs CIT (1953) 24 ITR 506 (SC), Betts Hartley Huett & Co. Ltd. (1979) vs. CIT 116 ITR 425 (Cal) and Ram Lal Bechairam VS. CIT (1946) 14 ITR 1 (All).
Merely because the assessee took an inadvertent appreciation of the transactions with self as international transactions, that cannot prevent it from claiming before the authorities that the correct legal position should prevail.
Therefore, the TPO was not justified in determining the ALP by applying the average operating profit margin of the comparables to the cost base of transactions with its AE, which also included the transactions with the branch office in Canada.
Issue 2- TP adjustments on transactions with non-AEs also
The TPO made the adjustment by considering the total costs incurred by the assessee in respect of both the controlled and uncontrolled transactions with the AE and non- AEs.
Held: As the entire exercise under Chapter-X is confined to computing total income of the assessee from international transactions having regard to the arm’s length price, there is no scope for computing the income even from non-international transactions having regard to the ALP.
Issue 3– Whether the direction given by the DRP is mandatory or directory on the TPO/AO?
Held: As per section 144C(13), the AO has to complete the assessment in conformity with the directions so given. Further, section 253(2A) reaffirms this position. Accordingly, the directions given by DRP are binding on the assessee.
Issue 4– Treatment of hypothetical interest on security deposits
The assessee was found to have let out its property on receiving an interest-free security deposit of Rs.77,25,480/-. The AO determined interest rate of 15% and, finally, included a sum of Rs.11,58,822/- in the assessee’s total income towards notional interest on interest free deposit.
Held: Neither the ALV of the property can be increased u/s 23 with the notional interest nor section 28(iv) can be applied.