Not Permissible For TPO To Engage In Restructuring Of Transaction: Delhi High Court

The Delhi High Court has held that it is not permissible for the Transfer Pricing Officer (TPO) to engage in the restructuring of a transaction.

The bench of Justice Yashwant Varma and Justice Ravinder Dudeja has observed that it would also not be permissible for the TPO to engage in the restructuring of a transaction unless the economic substance of the transaction differed from its form, and if the form and substance of the transaction were the same but the arrangements relating to the transaction, when viewed in totality, differed from those that would have been adopted by independent enterprises acting in a commercially rational manner.

The respondent/assessee is a management consulting subsidiary engaged in providing consultancy services to industry, and its activities extend to consultancy and advisory services being provided to diverse multinational enterprises. It established a branch office in India in 1997, which, for the purposes of brevity, shall hereinafter be referred to as “ATK BO." ATK BO has two offices in India, in New Delhi and Mumbai, and a client base that spreads across a wide spectrum of sectors, including automotive, engineering, energy, real estate, and others. It is stated to also extend its services to public sector entities, government companies, and other industry organizations.

The Transfer Pricing Officer4 had made adjustments principally in three segments, namely Intra Group Services, Receivables, and Provision of Management Consultancy Services.

Although aggrieved by the additions that were originally proposed by the TPO, ATKBO chose not to file any objections before the Dispute Resolution Panel; it preferred an appeal before the CIT(A), which came to be partially allowed. It led to appeals being instituted before the Tribunal.

The tribunal held that since the assessee has received interest from its AE in France, applying the prime lending rate of the RBI is not proper. In any case, since the assessee is receiving interest on FD at 7.56%, interest received from AE at the rate of 8.46% can be considered at ALP. Therefore, no TP adjustment is called for.

The court noted that the TPO had also suggested adjustments in the Transfer Pricing Order based on the allegation that payment of invoices raised by AT KBO to its Associated Enterprises had not been received on time. It chose to treat those outstanding receivables as being liable to be recharacterized as unsecured loans.

The court, while upholding the Tribunal's order and dismissing the department's appeal, held that it was impermissible for the TPO to disregard the actual transaction unless it came to the conclusion that an unrelated party would not have undertaken the same in the usual course of business. More importantly, it is wholly impermissible for the TPO to doubt the commercial soundness of the expenditure that may be incurred.

Counsel For Appellant: Ruchir Bhatia

Counsel For Respondent: Ajay Vohra

Case Title: CIT Versus A.T. Kearney Ltd.

Citation: 2024 LiveLaw (Del) 813

Case No.: ITA 159/2023

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