The tax court upholds that the Assessing Officer (‘AO’) having not referred the matter to the Transfer Pricing Officer (‘TPO’) to determine the arm’s length price (‘ALP’) of the international transaction undertaken by the taxpayer with its Associated Enterprise (‘AE’), was in direct contravention to the Board Instruction, which necessitates that such reference be made to the TPO, irrespective of whether the case of the taxpayer has been selected on a TP or non-TP risk parameter. Therefore, non-compliance with the Board Instruction by the AO renders the order passed by the AO, erroneous and prejudicial to the interest of the revenue, and as a result, the appeal of the taxpayer was dismissed.
The tax court on perusal of the definition of international transaction defined under the Act deduced that, for a transaction to fall within the ambit of the definition, the transaction should be between two or more AEs, out of which at least one should be a non-resident. The provision does not envisage that if two resident AEs are subsidiaries of a foreign holding company, the transaction between such Indian subsidiaries would fall within the definition of an international transaction as defined in the Act. Thus, the transaction of slump sale between the taxpayer and its Indian sister concern shall not fall under the definition of an international transaction.
The lower-level tax authority in the present case alleged that on account of huge commission payments made by the taxpayer, the taxpayer had created marketing intangibles for its counterpart, consequent to which the taxpayer ought to have been compensated. It was however observed by the tax court that two comparables were rejected based on surmises and conjectures, despite the fact that such comparables had passed the required filters of the lower-level tax authority. The lower-level tax authority conceded to this fact and further acknowledged that a transfer pricing adjustment shall not be necessitated on consideration of such comparables. As a result, the appeal was dismissed as no substantial question of law arose for consideration.
The tax court rejected the appeal by lower tax authorities, towards payment availed from provision of management services. There payments were on account of management services received by the taxpayer from various group companies.
It was observed that the service agreement mentioned that the management services could be rendered by all or any of the group companies & such operations would be on behalf of holding company.