Judgment summary
This appeal under Section 260A of the Income Tax Act, 1961 concerned a transfer pricing adjustment for AY 2008-09 made against Hewitt Associates (India) Pvt. Ltd., since merged with the appellant, AON Consulting Pvt. Ltd. The TP adjustment had two parts, one relating to US Transactions and another relating to Non-US Transactions (paragraph 2).
The US Transactions dispute was resolved through the Mutual Agreement Procedure (MAP) under Article 27 of the Indo-US DTAA, reducing the TP adjustment from ₹41,79,89,294/- to ₹10,64,22,259/- (paragraph 15). The dispute before the ITAT then remained confined to the Non-US Transactions, with a TP adjustment of ₹2,26,48,798/- (paragraph 2, 15).
The ITAT accepted the Revenue's contention, despite no formal cross objections being filed, and remanded the matter to the TPO to determine the TP adjustment for Non-US Transactions using the same framework agreed under MAP for US Transactions (paragraph 3, 23). The appellant challenged this on the basis that MAP is a consensual procedure between competent authorities that cannot be extended to transactions not subject to that negotiation (paragraph 4).
The High Court held that the ITAT's decision was not in accordance with law and could not be sustained (paragraph 37). The question of law was answered in favour of the Assessee and against the Revenue, and the appeal was restored to the ITAT for decision in accordance with the Act (paragraph 38).
Background
Hewitt Associates (India) Private Limited, a wholly owned subsidiary of Hewitt Associates LLC, was engaged in human resources consulting, payroll processing, business process outsourcing, and software development services during AY 2008-09, rendering services to both Associated Enterprises (AEs) and unrelated parties (paragraph 6, 16).
The Assessee filed its return of income on 30.09.2008 declaring total income of ₹9,46,63,523/- (paragraph 7). The return was selected for scrutiny, and given the international transactions exceeded the threshold figure, the AO referred the matter to the TPO under Section 92CA of the Act (paragraph 7).
The TPO passed an order dated 31.10.2011 under Section 92CA(3) making an upward TP adjustment of ₹44,06,38,092/-, comprising ₹41,79,89,294/- for US Transactions and ₹2,26,48,798/- for Non-US Transactions (paragraph 8).
The Assessee's transfer pricing analysis, which used TNMM as the most appropriate method with a set of sixteen comparables yielding a mean PLI of 13.06% against the Assessee's PLI of 15.69%, was rejected by the TPO for defects including inapposite filters and use of data not pertaining to the relevant financial year, contrary to Rule 10B(4) of the Rules (paragraph 17, 18).
The TPO applied different filters, arrived at an arithmetic mean PLI of 23.89% (after working capital adjustment) for software development services and 26.35% for IT enabled services, and directed an aggregate upward adjustment of ₹440,638,092/- (paragraph 19).
Following the draft assessment order and DRP directions under Section 144C(5), the AO passed the final assessment order under Section 144C/143(3) on 24.08.2012 (paragraph 10). The Assessee appealed to the ITAT (paragraph 11).
During the ITAT proceedings, the Assessee invoked MAP under Article 27 of the Indo-US DTAA via an application under Rule 44G of the Income Tax Rules, 1962, and the competent authorities of India and the US agreed a framework for resolving TP disputes relating to IT services and IT enabled services for AYs 2006-07 to 2010-11, reached on 15.01.2015/16.01.2015 (paragraph 11). The Assessee subsequently merged with AON Consulting Private Limited, approved by the High Court on 25.01.2017 (paragraph 12). The Assessee accepted the MAP framework by letter dated 26.12.2017 and withdrew its US Transactions grounds of appeal on 24.01.2018 (paragraph 13, 14). The AO thereafter reduced the US Transactions TP adjustment to ₹10,64,22,259/- by order dated 06.02.2019 (paragraph 15).
Core dispute
The dispute concerned whether the framework agreed between the competent authorities of India and the US under MAP, in respect of the US Transactions, could be applied to determine the transfer pricing adjustment for Non-US Transactions, which were not subject to that MAP resolution (paragraph 3, 4, 24).
The Assessee argued that MAP is based on consensus between competent authorities of contracting states and that the basis for TP adjustments agreed under MAP cannot be applied to international transactions not subject to negotiations under the MAP (paragraph 4).
The Revenue contended before the ITAT, without filing formal cross objections, that the TP adjustments for Non-US Transactions should also be determined on the same basis as agreed by the competent authorities under MAP (paragraph 23).
Court findings
The court explained that MAP is a consensual dispute resolution process under DTAAs, triggered when a taxpayer considers that actions of one or both contracting states result in taxation not in accordance with the treaty, with the objective of eliminating double taxation through mutual consultation between competent authorities (paragraph 25, 27).
The court referred to the CBDT Circular No.F.No.500/09/2016-APA-I dated 07.08.2020, as modified on 10.06.2022, describing MAP as an alternate dispute resolution mechanism additional to domestic remedies, involving negotiation between competent authorities of India and treaty partners (paragraph 28, 31).
The court held that a multi-national group may accept an upward TP adjustment in one jurisdiction if it has a corresponding mitigating effect in another contracting state, even if considered incorrect, but this does not justify a TP adjustment for transactions which are disputed and not subject to MAP (paragraph 33).
The court found that imputing the framework agreed for US Transactions to Non-US Transactions would impose a consensual, negotiated settlement on a set of transactions where no such consensus existed, foreclosing the Assessee's right to dispute the TP adjustment (paragraph 34). It noted there was no agreement between tax authorities of Non-US countries regarding the ALP of Non-US Transactions, so the MAP-based adjustment under the Indo-US DTAA does not bind tax authorities of Non-US countries (paragraph 34).
The court held that resolution under MAP is by consent and negotiation and cannot be imposed in a contested case where there is no consensus (paragraph 35). An agreement under MAP cannot substitute the determination of ALP under Section 92C of the Act and Rule 10B of the Rules in cases not covered by the MAP; such ALP must be determined in accordance with those provisions (paragraph 36).
Accordingly, the court found that the ITAT's decision to direct determination of ALP for Non-US Transactions on the basis of the MAP framework agreed for US Transactions was not in accordance with law and could not be sustained (paragraph 37).
Outcome
The question of law was answered in favour of the Assessee and against the Revenue (paragraph 38).
The Assessee's appeal was restored to the ITAT for decision in accordance with the Act (paragraph 38).
Tp method highlighted
The Assessee had adopted the Transactional Net Margin Method (TNMM) as the most appropriate method, using a comparability analysis with various filters, yielding sixteen comparable entities with a mean PLI of 13.06%, against the Assessee's PLI of 15.69% (paragraph 17).
The TPO rejected this analysis for applying inapposite filters and using data not pertaining to the relevant financial year, contrary to Rule 10B(4) of the Rules, but accepted TNMM as the most appropriate method (paragraph 18).
The TPO selected different filters, rejecting some of the Assessee's comparables and adding others, arriving at an arithmetic mean PLI of 26.2% (23.89% after a working capital adjustment of 2.31%) for software development services, and 29.16% (26.35% after a working capital adjustment of 2.81%) for IT enabled services (paragraph 19).
Major issues / areas of contention
- Whether the ITAT's remand order, directing the TPO to apply the MAP framework agreed for US Transactions to determine the TP adjustment for Non-US Transactions, was in accordance with the mandate of the statute.
- Whether a consensual and negotiated MAP resolution between competent authorities of two contracting states can be extended to transactions not covered by that MAP agreement.
- Whether the TPO's rejection of the Assessee's TNMM-based comparability analysis, and substitution with different filters and comparables, was valid.
- Whether an agreement under MAP can substitute the determination of arm's length price under Section 92C of the Act and Rule 10B of the Rules for transactions not covered by that MAP agreement.