The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that a Transfer Pricing Officer (TPO) cannot determine whether a foreign enterprise has a Permanent Establishment (PE) in India or decide the consequent taxability of its business profits under a Double Taxation Avoidance Agreement.
The bench of Beena Pillai (Judicial Member) and Arun Khodpia (Accountant Member) has ruled that the jurisdiction of a TPO under Section 92CA of the Income Tax Act, 1961 is confined to determining the arm’s-length price of a specific international transaction referred by the Assessing Officer.
BUY NOW:Think Before You Pay Cash: 50+ Landmark Rulings on Section 40A(3) Of The Income Tax Act, 1961
The appellant/assessee is a company incorporated in Singapore and a wholly owned subsidiary of Ingram Micro India Private Limited, an Indian company engaged in distributing information technology products.
The Singapore company commenced business in September 2001 to expand the Ingram Micro group’s customer base in India, Bangladesh and Sri Lanka. It also supplied products to certain Indian customers seeking to procure goods from outside India under a customs duty exemption scheme.
The assessee maintained that its management and day-to-day business operations were carried out from Singapore. It, however, obtained sales-processing, marketing and bookkeeping support from its Indian group entity.
According to the assessee, the Indian company was remunerated for these services through rebate incentives paid directly by third-party vendors on sales made in India.
The assessee did not initially file an income-tax return, claiming that its business income was not taxable in India under Article 7 read with Article 5 of the India-Singapore DTAA because it did not have a PE in India.
After receiving a notice under Section 142(1), the assessee filed its return declaring nil income. It stated that the return was being filed under protest.
The Assessing Officer treated assessee as the Singapore company’s PE in India. The officer proposed to tax the rebate incentives received by the Indian entity from third-party vendors.
The Dispute Resolution Panel rejected the assessee’s objections, following which a final assessment order was passed.
When the matter reached the ITAT, the Tribunal, by an order restored the assessment to the Assessing Officer.
The Assessing Officer was specifically directed to allow the assessee to cross-examine the individuals whose statements, recorded during search and seizure proceedings, had been relied upon by the Revenue. The officer was also directed to conduct a fresh examination of whether the Singapore company had a PE in India.
The Assessing Officer made a reference to the TPO under Section 92CA(1).
The reference was based on statements recorded during the search and information suggesting that the Indian company was allegedly carrying on the actual business of the Singapore company. The officer stated that the additional functions performed by the Indian entity required examination under the arm’s-length principle.
The TPO subsequently concluded that the assessee had a PE in India and proposed a transfer-pricing adjustment of ₹61.32 crore.
Based on the TPO’s order, the Assessing Officer issued a draft assessment order treating the Indian company as the Singapore entity’s PE. The officer proposed an income addition of ₹72.39 crore by attributing 100% of the revenue earned by the Indian company to the activities of the Singapore entity in India.
The DRP upheld the existence of the PE and held that 95% of the profits arising in India were attributable to it.
However, the DRP accepted that the transfer-pricing adjustment could not exceed the total profits from Indian operations, quantified at ₹11.07 crore. Consequently, the final assessment determined the Singapore company’s taxable income at ₹10.51 crore, representing 95% of ₹11.07 crore.
The assessee argued that the reference to the TPO during the remand proceedings was legally unsustainable.
It submitted that the Tribunal’s earlier order had specifically entrusted the Assessing Officer with the responsibility of examining whether the assessee had a PE in India. That responsibility could not be transferred to the TPO through a reference under Section 92CA.
The assessee further contended that the reference was vague because it did not identify the particular international transaction whose arm’s-length price was required to be determined.
It was argued that the TPO’s jurisdiction was restricted to determining the arm’s-length price of the transactions referred to him. The TPO could not decide the existence of a PE or the taxability of business profits under Articles 5 and 7 of the India-Singapore DTAA.
The assessee also submitted that the Assessing Officer had substantially reproduced and adopted the TPO’s findings without independently examining the requirements of Article 5 of the tax treaty.
Reliance was placed on the Pune ITAT’s decision in Sava Healthcare Ltd. v. ACIT, in which it was held that a TPO cannot perform functions statutorily entrusted to the Assessing Officer.
The department opposed the assessee’s jurisdictional challenge and argued that the assessee had not denied entering into international transactions with its associated enterprise.
It contended that the Assessing Officer was, therefore, justified in referring the matter to the TPO. The non-filing of Form No. 3CEB could not, by itself, invalidate the reference.
The Revenue also submitted that the assessee had participated in the transfer-pricing proceedings without objecting to the reference at the appropriate stage.
The Tribunal observed that determining the existence of a PE is fundamentally different from determining the arm’s-length price of an international transaction.
Section 92CA(1), it explained, restricts the TPO’s jurisdiction to the computation of the arm’s-length price of the international transaction referred by the Assessing Officer.
The provision does not confer a general authority on the TPO to determine an assessee’s taxable income or decide whether a tax treaty applies.
“The reference under section 92CA(1) is transaction-specific and does not confer upon the TPO a general jurisdiction to determine the assessee’s taxable income or the applicability of the provisions of a Double Taxation Avoidance Agreement,” the Tribunal observed.
The Bench noted that Section 92C prescribes the methods for determining the arm’s-length price, while Section 92CA specifies the TPO’s role in examining the transaction referred to him.
Even where an additional international transaction is noticed during transfer-pricing proceedings, Sections 92CA(2A) and 92CA(2B) provide the statutory mechanism for bringing that transaction within the transfer-pricing framework. These provisions do not authorise a TPO to decide issues unrelated to computing the arm’s-length price.
The Tribunal emphasised that the Income Tax Act maintains a clear distinction between the functions of the Assessing Officer and those of the TPO.
While the TPO determines the arm’s-length price, the Assessing Officer is responsible for computing the assessee’s total income. The binding nature of a TPO’s arm’s-length determination does not enlarge the officer’s jurisdiction to rule on the existence of a PE or the taxability of business profits.
The Bench held that questions concerning the existence of a PE under Article 5 of the India-Singapore DTAA and the attribution of business profits under Article 7 involve the determination of the assessee’s substantive tax liability. These issues fall within the Assessing Officer’s jurisdiction.
The Tribunal found an independent defect in the reference made by the Assessing Officer.
The reference did not identify any specific international transaction between the Singapore company and its Indian associated enterprise for which an arm’s-length determination was sought.
It merely stated that the Indian company was allegedly carrying on the actual business of the foreign entity and performing additional functions. According to the Tribunal, such a general reference could not constitute a valid reference for determining the arm’s-length price.
The TPO also did not restrict his inquiry to the pricing of an identified transaction. Instead, he determined that the foreign company had a PE in India and that its profits were taxable in the country.
The Tribunal held that this exercise travelled beyond the statutory limits of Section 92CA.
The ITAT further held that the reference to the TPO was inconsistent with the scope of its earlier remand order.
The earlier order had specifically directed the Assessing Officer to examine the PE issue afresh after permitting cross-examination and considering the relevant documents and contentions.
The Assessing Officer was, therefore, required to independently discharge the responsibility entrusted to him. He could not use a reference under Section 92CA to confer jurisdiction on the TPO over the very issue remanded to him for fresh adjudication.
The Tribunal said the Assessing Officer could not transfer the examination of the PE issue merely by referring the matter to the TPO.
The Bench also found that the Assessing Officer did not independently examine the existence of the alleged PE under Article 5 of the India-Singapore DTAA.
Instead, the proposed addition was founded on the TPO’s findings under Section 92CA(3).
Since the TPO’s conclusions on the PE issue were beyond his jurisdiction and the Assessing Officer had failed to undertake an independent examination, the Tribunal held that the assessment proceedings had “no legs to stand in the eyes of law.”
The Tribunal consequently allowed the assessee’s jurisdictional ground and dismissed the Revenue’s cross-objection.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
