Case Law Details
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.
The Tribunal also cited the decision in the case of Virtusa Consulting Services (P) Ltd., which upheld the selection of associated enterprises as the tested party. The court, while affirming the Tribunal’s decision, emphasized that the selection of the tested party aims to simplify the comparability analysis and requires fewer adjustments.
Calcutta HC’s Decision: After careful consideration of the arguments presented and the precedents cited, the Calcutta High Court dismissed the revenue’s appeal. The court upheld the Tribunal’s decision, emphasizing that associated enterprises can indeed be selected as the tested party for transfer pricing analysis. The court’s ruling reaffirmed the principle that the choice of the tested party should facilitate a less complex and more accurate comparison, promoting the objectives of transfer pricing regulations.
Conclusion: The decision by the Calcutta High Court in PCIT Vs ITC Infotech India Limited provides clarity on the selection of the tested party in transfer pricing assessments. By allowing associated enterprises to be considered as the tested party, the ruling acknowledges the practicalities of multinational business operations while ensuring the integrity of transfer pricing regulations. This decision serves as a significant precedent, guiding future transfer pricing analyses and fostering fairness and transparency in international tax matters.
FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT
The Court:- This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order dated 18th October, 2022 passed by the Income Tax Appellate Tribunal, “C” Bench, Kolkata (the Tribunal) in ITA No.1816/Kol/2019 for the assessment year 2015-16.
The revenue has raised the following substantial questions of law for consideration :-
A. Whether the Learned Tribunal was justified in law in not considering the fact that foreign AES cannot be taken as ‘tested party’ as per Indian Transfer Pricing Regulation in as much as the tested party should be an Indian entity and the level of margin has to be considered for the purpose of establishing arm’s length comparability?
B. Whether the Learned Tribunal was justified in law in not considering the issue that segmental accounts which do not form part of the audited financial statement can at all be taken into account for determination of arm’s length price wherein necessary verification is warranted at the level of TPO regarding use of proper allocation keys/ basis while preparing segmented accounts and acceptability thereof?
C. Whether the Learned Tribunal was justified in law in not considering that the accounts prepared by the assessee without any basis and breakup of expenses allocated to its segments is not justified and not acceptable as per law?
We have heard Ms. Smita Das De, learned standing counsel along with Mr. Soumen Bhattacharjee, learned standing counsel for the appellant and Mr. J.P. Khaitan, learned senior standing counsel appearing for the respondent assessee.
As could be seen from the impugned order passed by the learned Tribunal, the Tribunal noted that the issues which arise for consideration had been decided in favour of the assessee in the assessee’s own case for the assessment years 2005-06, 2006-07, 2010-11, 2011-12, 2012-13 and 2013-14. The orders passed in favour of the assessee for the assessment years 2005-06 and 2006-07 have been affirmed by this Court in the judgment reported in (2016) 384 ITR 380 (Cal). Apart from that, the law and the subject is in favour of the respondent assessee in the light of the decision of this Court in the case of Principal Commissioner of Income Tax vs. Almatis Alumina Pvt. Ltd. (2022) 445 ITS 632 Cal and the operative portion of the judgment reads as follows:-
“6. In the above decision several other decisions have been referred to and legal principle that can be culled out is that the tested party normally should be the least complex party to the controlled transaction and there is no bar for selection of tested party either local or foreign party and neither the Act nor the guidelines on transfer pricing provides so and the selection of the tested party is to further the object of the comparability analysis by making it less complex and requiring fewer adjustment. This legal principle has been rightly noted by the Tribunal. In fact, this issue had arisen only for the assessment year 2012-13 and for the assessment year 2013-14, even in the transfer pricing study (TP study) the assessee had taken the associated enterprises as a tested party. However, the Assessing Officer did not agree with the assessee for the said assessment year by referring to the decision in the case of Aurionpro Solutions Limited v. Addl. CIT [2013] 27 ITR (Trib) 276 (Mumbai); [2013] 33 taxmann.com 187 (Mum-Trib). The decision in Aurionpro Solutions Ltd was taken note of in Virtusa Consulting Services (P) Ltd. and the decision was distinguished by taking note of the issue which was involved in the said case and the discussion is in paragraph 26 of the judgment quoted above. After noting several decisions, it was held that the Indian Transfer Pricing guidelines issued by the Institute of Chartered Accountants of India vide guidance note on report under Section 92E by Institute of Chartered Accountants of India and transfer pricing guidelines issued by OECD does not prohibit associated enterprises to be a tested party. The Tribunal accepted the stand taken by the assessee that the associated enterprises can be selected as a tested party. In the light of the decision in the case of Virtusa Consulting Services (P) Ltd. as well as on the factual aspect which has been noted by the Tribunal with regard to the function, asset and risk profile of both the assessee-company and the associated enterprises, we are of the considered view that the finding rendered by the Tribunal is just, proper and legally valid.”
In the light of the above, the appeal filed by the revenue is dismissed and the substantial questions of law are answered against the revenue.
Consequently, the application stands closed.
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