Facts of the Case

The appellant, AON Consulting Pvt. Ltd. (successor entity of Hewitt Associates (India) Pvt. Ltd.), filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 20.12.2023 passed by the Income Tax Appellate Tribunal in ITA No. 5418/Del/2012 for Assessment Year 2008-09.

The assessee was engaged in providing human resource consulting, payroll processing, business process outsourcing, software development and IT-enabled services to its Associated Enterprises as well as unrelated parties. During the relevant assessment year, the Assessing Officer referred the matter to the Transfer Pricing Officer under Section 92CA.

The TPO proposed an aggregate transfer pricing adjustment of ₹44,06,38,092, comprising ₹41,79,89,294 relating to US transactions and ₹2,26,48,798 relating to non-US transactions. The assessee invoked the Mutual Agreement Procedure under Article 27 of the Indo-US DTAA in respect of US transactions, which were subsequently resolved through consensus between the competent authorities of India and the USA. The adjustment relating to US transactions was accordingly reduced.

The dispute before the ITAT thereafter survived only in respect of non-US transactions. However, the ITAT remanded the matter to the TPO directing that the transfer pricing adjustment for non-US transactions be determined on the same framework as adopted under MAP for US transactions.

Issues Involved

Whether the framework agreed between competent authorities under the Mutual Agreement Procedure for US transactions could be applied to determine the arm’s length price of non-US transactions not covered under MAP, and whether such a direction was in accordance with Section 92C of the Income-tax Act and Rule 10B of the Income-tax Rules.

Appellant’s Arguments

The assessee contended that MAP is a consensual dispute resolution mechanism confined to transactions covered under the applicable DTAA and cannot be extrapolated to transactions not subject to MAP. It was argued that the arm’s length price of non-US transactions must be determined strictly in accordance with Section 92C and Rule 10B and not on the basis of a negotiated settlement applicable only to US transactions.

Respondents’ Arguments

The Revenue supported the order of the ITAT and argued that since a framework for determining transfer pricing adjustments had been agreed under MAP for US transactions, the same approach ought to be adopted for non-US transactions as well, to maintain consistency in benchmarking.

Court Order / Findings

The Delhi High Court examined the scope and nature of the Mutual Agreement Procedure under Article 27 of the Indo-US DTAA and relevant CBDT Circulars. The Court held that MAP is a consensual process aimed at resolving disputes resulting in taxation not in accordance with the DTAA and is based on negotiations and agreement between competent authorities of contracting states.

The Court observed that MAP resolutions are transaction-specific and country-specific, and cannot be imposed on transactions or jurisdictions that are not parties to such agreement. The Court held that applying a MAP-based framework to non-US transactions would amount to imposing a negotiated settlement on contested transactions, thereby curtailing the assessee’s statutory right to contest the transfer pricing adjustment.

The Court further held that the arm’s length price of international transactions not covered under MAP must necessarily be determined in accordance with Section 92C of the Act and Rule 10B of the Rules. The ITAT’s direction to apply the MAP framework to non-US transactions was therefore held to be contrary to law.

Important Clarification

The Court clarified that a resolution arrived at under MAP, being a product of bilateral consensus, cannot substitute statutory determination of arm’s length price under domestic law for transactions not covered by the MAP. MAP outcomes are binding only to the extent of transactions and jurisdictions expressly covered under the agreement.

Final Outcome

The appeal was allowed. The Delhi High Court set aside the direction of the Income Tax Appellate Tribunal to apply the MAP framework to non-US transactions, answered the question of law in favour of the assessee and against the Revenue, and restored the assessee’s appeal to the ITAT for fresh adjudication of the transfer pricing adjustment relating to non-US transactions strictly in accordance with the Income-tax Act and the Income-tax Rules.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770016546_AONCONSULTINGPVTLTDVsPRINCIPALCOMMISSIONEROFINCOMETAX1ORS..pdf

 

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