In Transfer pricing associated enterprises can be selected as a tested party: Calcutta HC

PCIT Vs ITC Infotech India Limited (Calcutta High Court)

In the realm of transfer pricing, where multinational corporations often engage in cross-border transactions with related entities, determining the arm’s length price assumes paramount importance to prevent profit shifting and ensure fair taxation. A recent decision by the Calcutta High Court in the case of PCIT Vs ITC Infotech India Limited sheds light on a crucial aspect of transfer pricing methodology – the selection of the tested party. Let’s delve into the details of the case and the implications of the court’s ruling.

Background of the Case: The appeal filed by the revenue under Section 260A of the Income Tax Act, 1961, challenged the order passed by the Income Tax Appellate Tribunal (ITAT) in ITA No. 1816/Kol/2019 for the assessment year 2015-16. The revenue raised substantial questions of law regarding the selection of the tested party for transfer pricing analysis.

Key Issues Raised: The revenue contested the Tribunal’s decision, arguing that foreign associated enterprises (AEs) cannot be considered as the tested party under Indian transfer pricing regulations. Additionally, the revenue questioned the inclusion of segmental accounts not part of the audited financial statement for determining the arm’s length price.

Tribunal’s Rationale and Previous Precedents: The Tribunal, in its order, referenced previous decisions in favor of the assessee for earlier assessment years and highlighted the legal principle that the tested party should typically be the least complex entity in the controlled transaction. Moreover, the Tribunal noted that there is no prohibition in Indian transfer pricing guidelines or the OECD guidelines against selecting associated enterprises as the tested party.

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