Facts of the Case

The present appeal was filed by the Revenue against the order of the Income Tax Appellate Tribunal concerning AY 2012–13. The Tribunal had passed the impugned order pursuant to remand directions issued earlier by the High Court.

Initially, the Tribunal had remanded the matter to the Transfer Pricing Officer (TPO) to determine whether the “other method” would be the most appropriate method for benchmarking international transactions.

Subsequently, an Advance Pricing Agreement (APA) was executed on 06.08.2019 between the assessee and CBDT covering AY 2013–14 to 2021–22 and 18 transactions. Out of these, 16 transactions were benchmarked using the “other method,” while 2 used TNMM and Resale Price Method.

 Issues Involved

  1. Whether APA principles can be applied for benchmarking international transactions for a year prior to its statutory introduction (AY 2012–13).
  2. Whether the Tribunal erred in directing adoption of APA methodology for the relevant assessment year.
  3. Whether benchmarking based on APA is permissible when Functions, Assets, and Risks (FAR) remain consistent.

 Petitioner’s Arguments (Revenue)

  • The Revenue contended that the Tribunal committed an error in law by directing that APA should form the basis of benchmarking.
  • It was argued that APA provisions were introduced only from AY 2013–14, and therefore, cannot be applied retrospectively to AY 2012–13.
  • Hence, APA could not legally be used as a benchmark for the year under consideration.

Respondent’s Arguments (Assessee)

  • The assessee argued that even prior to APA introduction, it had benchmarked transactions using the “other method”, which became permissible in AY 2012–13.
  • It was submitted that the Tribunal merely directed application of principles encapsulated in the APA, not its retrospective enforcement.
  • The assessee emphasized that:
    • It operates as a global database entity with multiple affiliates.
    • Allocation of cost and revenue requires consistency.
    • APA provides a reliable and scientific benchmark framework.
  • It was further argued that such application is subject to verification of FAR analysis by the TPO.

Court Findings / Order

  • The Delhi High Court upheld the Tribunal’s approach and dismissed the Revenue’s appeal.
  • The Court held:
    • The Tribunal’s approach was reasonable and pragmatic, considering the complexity of transactions.
    • APA principles can be used for benchmarking even for prior years if FAR remains comparable.
    • The direction is safeguarded by requiring the TPO to verify FAR consistency.
  • The Court also noted that similar views have been taken in multiple Tribunal decisions.
  • It concluded that no substantial question of law arises, and therefore, the appeal was dismissed.

 Important Clarification

  • APA cannot be applied retrospectively as law, but its principles can be used as guidance for benchmarking.
  • The key condition is FAR similarity between the APA years and the disputed year.
  • The ruling reinforces consistency in transfer pricing and reduces litigation where comparable frameworks exist.

 Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/59015032023ITA4512022_120245.pdf

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