AO Is Not Clothed With Powers To Ascertain ALP Of Any International Transaction: Delhi High Court

The Delhi High Court has held that AO is not clothed with the powers to ascertain the Arm's Length Price (ALP) of any international transaction.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that the AO is not clothed with the powers to ascertain the ALP of any international transaction that is selected based on the transfer pricing risk parameters. Furthermore, Section 92CA(4) of the Income Tax Act evidently mandates that the AO cannot deviate itself from the TPO order while computing the total income of the assessee.

The assessee or appellant is engaged in providing software and information technology-enabled services. The assessee's mobile security division got demerged into Giesecke & Devrient MS India on a going concern basis. Both the assessee and Giesecke & Devrient MS India are the wholly owned subsidiaries of Giesecke & Devrient MS GmbH, a company incorporated in Germany. The assessee filed its Income Tax Return for assessment year 2017-18, declaring an income to the tune of INR 18,15,98,120. Thereafter, the assessee's case was picked up for scrutiny, and notices under Sections 143(2) and 142(1) were issued to the assessee.

Since the assessee had entered into international transactions during the relevant AY, which is also duly reflected in Form 3CEB filled by the assessee in accordance with Section 92E, a reference was made by the AO to the Transfer Pricing Officer (TPO) for the determination of the arm's length price (ALP) of the international transactions.

Upon considering the reply of the assessee, the TPO passed an order under Section 92CA(3) on January 31, 2021, and the TPO determined a transfer pricing adjustment. However, on an even date, the TPO passed a rectified order and adjusted the ALP. In the rectified order, while determining the ALP, the TPO also suggested the AO examine the taxability of the value of the “demerged business” of the assessee.

The AO passed the draft assessment order under Section 144C and computed the total adjustment of INR 25,58,68,79,196, which included the ALP of INR 16,84,51,531 and INR 25,41,84,27,665.

Aggrieved by the order, the assessee approached the court by way of the present writ petition. The assessee assailed the order on the ground that the AO proceeded to make a transfer pricing adjustment without considering the TPO order and donned the cap of the TPO itself while determining the ALP of the international transactions.

The assessee contended that the order was liable to be set aside in light of the mandate of Section 92CA of the Act. While referring to the rectified order of the TPO, the TPO has never determined the ALP of the international transactions by incorporating the demerger of the mobile security division of the assessee. Despite the order of the TPO, the AO, while passing the impugned order under Section 144C(1) read with Sections 143(3) and 144B of the Act, proceeded to make a transfer pricing adjustment by computing the ALP of the value of the demerged business. The order suffers from a jurisdictional error as, in the instant case, AO determined the ALP of the international transactions without bearing in mind the TPO order.

The department contended that the order does not suffer from any infirmity on the basis of the assumption of the wrong jurisdiction. He submitted that, as per the mandate of Section 92CA, the AO referred the matter to the TPO for determination of the ALP, and the TPO examined the international transaction related to the demerger. The TPO computed the ALP of the international transactions, and the AO computed the total income of the assessee in conformity with the ALP ascertained by the TPO.

The court noted that the TPO order solely reflects the transfer pricing adjustment to the tune of INR 16,84,51,531. However, the AO, without affording an opportunity of hearing to the assessee, proceeded to add an amount of INR 25,41,84,27,665 to the total income of the assessee, whose addition was neither determined nor directed by the TPO, as the ALP of the international transaction related to the demerger of the business. The course of action was not available to the AO, and it is a clear case of excess.

The court held that the order clearly breaches the legislative mandate of Section 92CA of the Income Tax Act.

Counsel For Petitioner: Deepak Chopra

Counsel For Respondent: Shlok Chandra

Case Title: M/S. Giesecke And Devrient India Pvt. Ltd.Versus DCIT

Citation: 2024 LiveLaw (Del) 425

Case No.: W.P.(C) 5429/2021 & CM APPL. 16909/2021 (Stay)

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