2023 (7) TMI 139 - HC - Income Tax

TP adjustment - benchmarking technique - whether benchmarking should be done only on the associated enterprises transactions or for the entire turnover ? - HELD THAT - As decided in ALSTOM PROJECTS INDIA LIMITED 2016 (12) TMI 1408 - BOMBAY HIGH COURT M/S TARA JEWELS EXPORTS PVT. LTD. 2015 (12) TMI 1130 - BOMBAY HIGH COURT M/S. THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. 2015 (12) TMI 1076 - BOMBAY HIGH COURT M/S. HINDUSTAN UNILEVER LTD 2016 (7) TMI 1245 - BOMBAY HIGH COURT Courts have held that the benchmarking should be done only on the associated enterprises transactions and not for the entire turnover. ITAT was correct in holding that the TP adjustment should be proportionate to the value of international transaction. Proportionate adjustment claim even though the SLP on the similar filed by the Revenue has been admitted by the Hon ble Supreme Court in the case of Fire Stone International Pvt. Ltd. 2016 (8) TMI 1285 - SC ORDER - Appeal in case of Firestone International P. Ltd was part of the appeals that was considered in Essar Teleholdings Ltd. 2018 (2) TMI 115 - SUPREME COURT but what we find from the judgment of the Apex Court Essar Teleholdings Ltd. (supra) is that Revenue in its appeal in Firestone International P. Ltd (supra) has only raised the issue of disallowance under Section 14A and not regarding TP adjustment.2nd issue also cannot be considered as a substantial question of law.

Summary

Issues involved:
1. Interpretation of Transfer Pricing Regulations regarding proportionate adjustment.
2. Whether benchmarking should be done only on associated enterprises transactions or for the entire turnover.

Issue 1: Interpretation of Transfer Pricing Regulations regarding proportionate adjustment

The main contention was whether the ITAT was correct in holding that the Transfer Pricing (TP) adjustment should be proportionate to the value of international transaction, contrary to Rule 10B(1)(c). It was argued that the Indian Transfer Pricing Regulations do not allow such proportionate adjustments as it presupposes that any shortfall in margins must be on account of associated enterprises (AE) transactions only, not on a prorate basis. The crux of the matter was whether the arm's length principle should apply only to AE transactions or to the entire turnover.

The Court referred to various judgments, including Commissioner of Income Tax Vs. Alstom Projects India Ltd., Commissioner of Income Tax Vs. Tara Jewels Exports P. Ltd., and others, which held that benchmarking should be done only on the associated enterprises transactions, not for the entire turnover. Based on this precedent, the Court concluded that the ITAT was correct in holding that the TP adjustment should be proportionate to the value of international transactions.

Issue 2: Benchmarking on associated enterprises transactions or entire turnover

Regarding the second issue, the Court noted that the appeal in the case of Firestone International P. Ltd was considered by the Supreme Court in Essar Teleholdings Ltd. However, it was observed that the Revenue had raised the issue of disallowance under Section 14A in the Firestone International P. Ltd case, not regarding TP adjustment. Therefore, the Court held that the second issue cannot be considered a substantial question of law.

In conclusion, the appeal was dismissed, and it was highlighted that the Revenue's appeal against the judgment in Hindustan Unilever Ltd. was dismissed by the Supreme Court, further reinforcing the decision made in the present case.