2025 (7) TMI 116 - AT - Income Tax

TP Adjustment - duration of the Associated Enterprise (AE) relationship - AE Relationship of AE existed only for 2 months OR more - procedural irregularities committed by the assessee such as filing the addendum to the Form 3CEB instead of filing an entire set of revised Form 3CEB for the fresh consideration - assessee submitted that only the international transactions for the two-month period should be considered rather than those for the entire period of 12 months - value of international transactions in the Audited Financial Statements of the subject AY in the Related Parties Transaction disclosure HELD THAT - We observe that there have been certain procedural irregularities committed by the assessee as rightly pointed out by the TPO and DRP such as filing the addendum to the Form 3CEB instead of filing an entire set of revised Form 3CEB for the fresh consideration (though in substance the addendum to Form 3CEB contained the amended quantum of international transactions). But it is settled law that such irregularities especially in audit reports should not lead to substantial justice being denied to the assessee Secondly the TPO DRP hold that there is no disclosure of business restructuring in the Form 3CEB. No merit in this argument because there is no business restructuring of the Indian assessee company itself. Merely a sale of shares by a Director s foreign company to a third party thereby causing a deemed AE relationship of assessee company with Medtech Pty from 01.06.2020 to no longer exist. We find that this does not constitute a business restructuring for the assessee company to be reported in Form 3CEB. Therefore the observation of the TPO / DRP in this regard is factually not correct. Thirdly we note that the assessee has submitted the TP Documentation and Segmented Profit and Loss Account only before the DRP on 15.07.2024 as additional evidence. DRP in its Directions initially rejected the same based on the finding that the procedure for filing an additional evidence before it had not been followed but has then without prejudice considered the evidence and rejected it on merits based on a remand report by TPO which seems to reiterate the very same earlier positions taken by the TPO in his Order dated 20.10.2023. Thus we are of the view that in the interests of justice the matter is sent back to the TPO for a proper re-look and adjudication with all the relevant documents in place in proper form. Hence we direct the TPO to provide an opportunity to the assessee to file a revised Form 3CEB along with the additional evidence filed (namely TP Documentation and Segmented Profit Loss Account) that were submitted by the Assessee before the DRP and decide the issue afresh in accordance with law after affording due opportunity of being heard to the assessee.

Summary

The core legal issues considered in this appeal pertain primarily to the determination of the international transaction value subject to transfer pricing provisions, the existence and duration of the Associated Enterprise (AE) relationship, the validity and effect of procedural compliance related to Form 3CEB filings, the applicability of transfer pricing methods, and the admissibility and consideration of additional evidence submitted during proceedings.

First, the Tribunal examined whether the AE relationship between the appellant and Medtech Global Ltd, Australia, existed for the entire financial year or only for a limited period of two months (April and May 2020). This issue directly impacts the quantum of international transactions to be considered under the transfer pricing provisions of the Income Tax Act, 1961 (the Act).

Second, the Tribunal addressed the procedural question of whether the appellant's failure to file a revised Form 3CEB, and instead submitting an addendum to the original Form 3CEB, barred the appellant from claiming that the international transaction value should be limited to the two-month period. This raised the question of the mandatory or directory nature of procedural compliance under the Act.

Third, the Tribunal considered the appropriateness of the transfer pricing method applied by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP), particularly the rejection of the Comparable Uncontrolled Price (CUP) method proposed by the appellant.

Fourth, the Tribunal evaluated the admissibility and consideration of additional evidence submitted by the appellant during the DRP proceedings, including the segmented profit and loss accounts and transfer pricing documentation.

Regarding the first issue, the relevant legal framework is found in Sections 92, 92A, 92B, 92C, 92CA, 144B, and 144C of the Act, which govern transfer pricing and the determination of the arm's length price (ALP) for international transactions between Associated Enterprises. Section 92A defines "Associated Enterprise," and Section 92B defines "international transaction" as a transaction between two or more Associated Enterprises. The appellant contended that since the common director resigned from Medtech Global Ltd on June 1, 2020, the AE relationship existed only for the two months prior to that date, and accordingly, only the transactions during that period (amounting to Rs. 1.86 Crores) should be subject to transfer pricing scrutiny. The appellant supported this with documentary evidence including organizational charts, resignation notices, ASIC reports, and a certified segmented profit and loss account.

The TPO and DRP, however, rejected this contention primarily on the basis that the appellant had not filed a revised Form 3CEB reflecting the reduced international transaction value, and that the original Form 3CEB disclosed transactions with Medtech Global Ltd for the entire year (Rs. 11.20 Crores). The TPO emphasized the statutory significance of Form 3CEB as a verified disclosure under Section 92E, holding that such disclosure is "sacrosanct" and must be accepted as true unless disproved. The DRP upheld this view, noting that the appellant failed to file a revised Form 3CEB with an affidavit from the original accountant, and therefore the facts stated in the original Form 3CEB could not be denied.

In its analysis, the Tribunal acknowledged the procedural irregularity in the appellant submitting an addendum instead of a revised Form 3CEB but emphasized the settled legal principle that procedural requirements, especially regarding audit reports, are directory and should not defeat substantial justice. The Tribunal cited authoritative precedents including the Supreme Court's ruling in Sambhaji and Others v. Gangabai and Others, which held that "procedure cannot be a tyrant but only a servant," and the principle that procedural laws are aids to justice rather than obstructions. The Tribunal also referred to High Court decisions affirming that audit reports and similar documents can be filed at later stages without invalidating the claim or submission.

Further, the Tribunal found the TPO and DRP's reliance on the absence of disclosure of business restructuring in Form 3CEB misplaced, since the resignation of the common director and change in shareholding at the AE level did not amount to business restructuring of the appellant company itself. Therefore, the appellant was not required to report it as such in Form 3CEB.

On the issue of the transfer pricing method, the appellant proposed the CUP method as the most appropriate method, arguing that it consistently charged an hourly rate of AUD 20 to Medtech Global Ltd throughout the year, regardless of the AE status. The TPO and DRP rejected this method on the ground that the AE relationship was considered to exist for the entire year, and no breakup or segmentation was provided in the Form 3CEB to distinguish AE and non-AE transactions. The Tribunal noted that the rejection of the CUP method was tied to the TPO and DRP's stance on the AE relationship duration and the procedural non-compliance regarding Form 3CEB.

Regarding the additional evidence submitted during DRP proceedings, including the segmented profit and loss accounts and transfer pricing documentation, the DRP initially rejected these on procedural grounds for non-compliance with DRP Rules but considered them on a without prejudice basis and ultimately rejected them on merits, relying on the TPO's remand report which reiterated the original findings. The Tribunal observed that the DRP's procedural rejection was not in accordance with principles of natural justice and that the evidence should have been considered substantively.

Applying the law to the facts, the Tribunal found that the AE relationship legally existed only for the two months during which the common director was associated with both companies. The transactions outside this period did not qualify as international transactions under the Act, and thus were not subject to transfer pricing adjustments. The Tribunal held that procedural lapses in filing the revised Form 3CEB should not bar the appellant from claiming the correct quantum of international transactions. It directed the TPO to allow the appellant to file a revised Form 3CEB and consider all relevant evidence, including the segmented accounts and transfer pricing documentation, to adjudicate the issue afresh in accordance with law.

The Tribunal did not separately adjudicate the other grounds raised by the appellant, deeming them academic in light of the primary findings.

Significant holdings from the judgment include the following verbatim legal reasoning:

"That procedure cannot be a tyrant but only a servant. It is not an obstruction in the implementation of the provisions of the Act, but an aid. The procedures are handmaid and not the mistress. It is a lubricant and not a resistance. A procedural law should not ordinarily be construed as mandatory; the procedural law is always subservient to and is in aid to justice."

"Form 3CEB being an audit report, is directory in nature and can always be filed at a later stage."

Core principles established include that the existence of an AE relationship is fact-specific and time-bound, and only transactions during the period of such relationship qualify as international transactions subject to transfer pricing provisions. Procedural non-compliance, such as failure to file a revised Form 3CEB, should not defeat substantive rights or claims, especially when the appellant has made bona fide attempts to comply and submit relevant evidence. The Tribunal underscored the importance of natural justice and the need for authorities to consider relevant evidence on merits rather than dismissing on procedural technicalities.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, setting aside the impugned orders to the extent of directing the TPO to reconsider the issue with the revised Form 3CEB and additional evidence, and to determine the ALP only for the two-month period during which the AE relationship existed, affording the appellant a fair opportunity to be heard.