Onward Technologies Ltd v.Dy.CIT (Mum.)(Trib.)

S.92C:Avoidance of tax-Transfer pricing: Foreign AE cannot be the tested party. TP additions

can exceed overall group profits.

The Tribunal had to consider the following important transfer pricing issues: (i) whether the foreign AE

can be taken as the tested party & if the sale price received by the foreign AEs from the services

ultimately sold to customers is equal to that charged by the assessee from its AEs, it would show that

the international transaction between the assessee and the AEs is at ALP? (ii) whether the transfer

pricing additions can result in the overall profit of the group of AEs being breached? & (iii) whether if

the assessee has consistently followed a method for determination of the ALP and the same has been

accepted by the TPO in the past, he cannot reject that method for the current year? HELD by the

Tribunal:

(i) The argument that the foreign AE should be selected as the tested party and the profit earned by the

foreign AE from outside comparables should be compared with the price charged by the assessee from

the AE to determine whether they are at ALP is not acceptable because under the scheme of s. 92C, the

profit actually realized by the Indian assessee from the transaction with its foreign AE has to be

compared with that of the comparables. There is no question of substituting the profit realized by the

Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate

customers for the purposes of determining the ALP of the international transaction of the Indian

enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to

transaction between the assessee and its foreign AE. The contention that the profit earned by the

foreign AE should be substituted for the profit of the comparables is patently unacceptable. The fact

that this may be permissible under the US and UK transfer pricing regulations is irrelevant;

(ii) The contention of the assessee that the authorities cannot go beyond the overall profit of the group

of AEs in determining the ALP of the international transaction is also not acceptable because it will

constitute a new method/ yardstick for determining the ALP. The transfer pricing adjustments made in

India may result in the overall profit earned by all the AEs taken as one unit being breached;

(iii) The contention that as the assessee consistently followed the same method for determination of the

ALP and it was accepted by the TPO in the past, he cannot take a different view is not acceptable. A

delicate balance needs to be maintained between the principle of consistency and the rule of res judicata.

There is no estoppel against the provisions of the Act. As the method employed by the assessee for

determining the ALP is contrary to the statutory provisions, the inadvertent acceptance of the wrong

method by the TPO in an earlier year does not grant a license to the assessee to continue calculating the

ALP in the grossly erroneous manner in perpetuity. It needs to be discontinued forthwith. (A. Y. 2006-

07)