Section 92C

Section 92C — the law in short

What the courts have decided on section 92C, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• SAP Labs India P Ltd v ITO Supreme CourtHelps department
  The Tribunal fixed my arm's length price and the department has gone to the High Court — can the High Court reopen the comparables, or is the Tribunal's finding final?
  No, the Tribunal's determination is not final. The Supreme Court held on 19 April 2023 that there is no absolute rule that an arm's length price fixed by the Tribunal cannot be examined under section 260A. Chapter X and Rules 10A to 10E lay down guidelines; a determination made in disregard of them is perverse, and perversity is itself a substantial question of law. The High Court may therefore examine comparability of companies, the selection of filters and whether non-comparable transactions were treated as comparable. The Karnataka High Court's contrary view in Softbrands India was rejected and the whole batch was remitted.
• DIT v Morgan Stanley & Co Inc Supreme CourtCuts both ways
  Our Indian affiliate is paid at arm's length. Can more profit still be attributed to a PE?
  No, provided the transfer pricing analysis takes into account all the risk-taking functions of the entity that also constitutes the permanent establishment. Anything further would tax the same profits twice. On the facts, back-office work was preparatory or auxiliary and created no fixed place or agency PE, but deputing employees to work in India created a service PE.
• PCIT v Softbrands India Pvt Ltd High CourtCuts both waysValidity unconfirmed
  The Tribunal excluded some comparables in my transfer pricing case. Can the department take that to the High Court as a question of law?
  Not without showing perversity. The Karnataka High Court dismissed the Revenue's appeal, holding that no substantial question of law arises where the dispute is about whether comparables were rightly picked or filters rightly applied. Following its own judgment of 25 June 2018 in the same assessee's case, it held that unless ex facie perversity in the Tribunal's findings is established, an appeal under section 260A does not lie, at the instance of either side. Mere dissatisfaction with the Tribunal's findings of fact is not a sufficient reason to invoke section 260A. The appeal was dismissed with no order as to costs.
• PCIT v Veer Gems High CourtHelps taxpayer
  The TPO says I control the foreign party in substance, so we are associated enterprises. Is de facto control enough under s.92A?
  No. s.92A(1) and s.92A(2) have to be read together. Sub-section (2) is not a list of examples of the participation described in sub-section (1) — it controls what counts as participation, so unless one of its clauses is actually satisfied, de facto or even de jure participation in the capital, management or control of the other enterprise does not make the two enterprises associated enterprises, and the transfer pricing machinery never starts.
• Indorama Synthetics (India) Ltd v Additional CIT High CourtHelps taxpayerHigh Courts differ
  The Assessing Officer referred my case to the TPO in a one-paragraph letter without dealing with my objection that there was no international transaction at all. Can I attack the reference itself?
  Yes. The Delhi High Court held that the Assessing Officer's satisfaction, even prima facie, that there IS an international transaction or specified domestic transaction is a sine qua non for a reference under s.92CA(1); where the assessee raises a threshold objection to jurisdiction, the officer must deal with it and must give a hearing before recording his satisfaction. The three references were set aside and the officer directed to decide afresh after hearing the assessee. The Court concurred with the Bombay High Court in Vodafone India Services and declined to follow the contrary Gujarat decision in Veer Gems, noting that CBDT Instruction No. 3 of 2016 has itself adopted the Bombay position.
• Bausch & Lomb Eyecare (India) Pvt Ltd v ACIT High CourtHelps taxpayerValidity unconfirmed
  The TPO says my advertising and marketing spend built my foreign parent's brand and has added a mark-up. There is no agreement with the parent about it. Can he do that?
  No. The Delhi High Court held that before Chapter X can be used at all, the Revenue must show an international transaction exists. For advertising, marketing and promotion spend that means showing an agreement, arrangement or understanding with the associated enterprise obliging the Indian company to spend excessively to promote the foreign brand. It cannot be inferred from shareholding, from the incidental benefit to the brand owner, or from the bright line test, which Sony Ericsson had already rejected. There is no machinery provision to identify or price such a transaction. The assessee's appeals were allowed and the Revenue's dismissed.
• CIT v Pentair Water India P Ltd High CourtHelps taxpayerValidity unconfirmed
  The TPO benchmarked my small captive unit against Infosys and Wipro. Can turnover be ignored?
  No. Turnover is obviously a relevant factor in judging comparability, because scale drives bargaining power, risk profile and margins. Companies with turnover 23 to 65 times that of the tested party were rightly excluded, and functional similarity alone does not conclude the enquiry.
• Rampgreen Solutions P Ltd v CIT High CourtHelps taxpayer
  My company runs voice-based call centres, but the Transfer Pricing Officer has benchmarked me against high-margin analytics companies because we are all called ITeS — can he do that?
  No. The Delhi High Court held on 10 August 2015 that where the tested party is not a knowledge process outsourcing provider, a KPO cannot be used as a comparable. The broad label of information technology enabled services covers services of completely different content and value, and Rule 10B(2)(a) requires comparability to be judged by reference to service characteristics. eClerx and Vishal Information Technologies were both excluded — eClerx as a KPO doing data analytics and financial services work, Vishal because it outsourced most of its work and so had a wholly different cost structure. The Tribunal's order and the final assessment order were set aside.
• ChrysCapital Investment Advisors v DCIT High CourtCuts both ways
  The TPO kept a comparable with an abnormal profit margin. Can I get it excluded just for that?
  No, not on the margin alone. A company that otherwise satisfies Rule 10B(2) is not excluded merely because it presents a peculiar feature such as a huge profit or a huge turnover. What the high margin does is trigger an enquiry: the officer must ask whether it flows from a comparability defect that materially affects price or profit, and if it does, attempt to eliminate the difference under Rule 10B(3) — exclusion follows only if that cannot be done.
• CIT v Cotton Naturals (I) P Ltd High CourtHelps taxpayer
  I lent dollars to my overseas subsidiary — must the arm's length interest be benchmarked against Indian lending rates because I am the Indian lender?
  No. The Delhi High Court held on 27 March 2015 that the arm's length interest on a loan to an associated enterprise is the market determined rate for the currency in which the loan is to be repaid, not the rate prevailing in the country of residence of either party. The loan here was advanced and repayable in US dollars, so Indian prime lending rates were irrelevant; interest rates on rupee loans reflect the Reserve Bank's policy and say nothing about a dollar debt. The 4 per cent charged by the assessee was upheld, the adjustment to 12.20 per cent set aside, and the same parameters were held to apply to inbound and outbound loans alike.
• Sony Ericsson Mobile Communications India P Ltd v CIT High CourtCuts both waysUnder appeal
  The TPO says my advertising spend is higher than comparables and has added the excess as brand building for my foreign parent. Can he do that?
  Not by that route. The bright line test — treating advertising, marketing and promotion spend above a comparable's level as a separate transaction of brand building for the foreign associated enterprise — has no statutory mandate, and the parameters the Special Bench laid down in L.G. Electronics do not bind either side. The Delhi High Court set the Tribunal's approach aside as based on an erroneous legal standard and sent the matters back for fresh consideration.
• CIT v Cushman and Wakefield (India) P Ltd High CourtCuts both waysValidity unconfirmed
  The Transfer Pricing Officer says my group companies gave me no benefit and has put the arm's length price at nil. Can he decide that, and can the Assessing Officer still disallow the payment after the reference?
  It depends on who is deciding what. The Delhi High Court held that the jurisdictions are distinct. The Transfer Pricing Officer determines the arm's length price of the referred transaction, and may find it to be nil if a comparable independent entity would pay nothing, but he cannot decide whether services were rendered or whether a benefit accrued - that is disallowance, and it belongs to the Assessing Officer under section 37. Equally, a reference to the Transfer Pricing Officer does not concede the deduction: the Assessing Officer can still verify whether the transactions are real, though he is bound by the arm's length price the Transfer Pricing Officer has approved. Both findings of the Tribunal were set aside and the matter remanded.
• Li & Fung India Pvt Ltd v CIT High CourtHelps taxpayerValidity unconfirmed
  I run a captive sourcing arm paid cost plus 5 per cent. The TPO has ignored my cost base and applied a mark-up to the FOB value of the goods my group company sources through me. Can he do that?
  No. The Delhi High Court held that broad-basing the profit determining denominator to the entire free-on-board value of contracts entered into by the associated enterprise is contrary to the Act and the Rules. The exercise finds no mention in either. The Transfer Pricing Officer had not disturbed the comparables or the method, and had shown neither how the Indian company bore significant risk nor what locational advantage the associated enterprise enjoyed. Findings of "significant risk" and "functional risk" cannot rest on vague generalities. The addition of Rs.57.65 crore was deleted and the Tribunal's order set aside.
• CIT v Agnity India Technologies P Ltd High CourtHelps taxpayer
  The Transfer Pricing Officer has put Infosys into my comparables. I am a small captive software unit working only for my parent - can I get it thrown out?
  Yes. The Delhi High Court upheld the Tribunal's exclusion of Infosys Technologies Ltd from the comparable set of a captive software developer. Infosys was a giant with Rs.9,028 crore of revenue against the assessee's Rs.16.09 crore, it bore full entrepreneurial risk, owned branded products, spent heavily on advertising and research, and delivered half its work onsite. The assessee was a risk-free captive doing only offshore contract development for its parent. With Infosys and Satyam out, the one surviving comparable gave 11.11%, below the assessee's own 17% margin. No substantial question of law arose and the Revenue's appeal was dismissed.
• CIT v EKL Appliances Ltd High CourtHelps taxpayerValidity unconfirmed
  The Transfer Pricing Officer says our royalty to the parent is worth nil because we have been making losses for years — can he wipe out the whole payment?
  No. The Delhi High Court held on 29 March 2012 that a Transfer Pricing Officer must price the transaction the associated enterprises actually entered into, not decide whether they should have entered into it. Rule 10B(1)(a) does not authorise disallowance because the expenditure was unnecessary, imprudent or unremunerative, or because the assessee kept making losses. The quantum can be examined, but wholesale disallowance on that reasoning is not contemplated. The OECD guidelines allow a transaction to be recharacterised only in two exceptional cases, and neither applied. Brand fee of Rs.3,42,97,940 and Rs.3,99,51,000 for the two years was restored to the assessee.
• Noida Towers Private Limited v DCIT ITATHelps taxpayerValidity unconfirmed
  I already disallowed the whole of the interest paid to my associated enterprise under s.94B in my own computation. The TPO has still made a transfer pricing adjustment on the same interest. Can he?
  Not on these facts. Where the assessee had itself added back the entire interest paid to its associated enterprises on non-convertible debentures under s.94B in its computation of income and paid tax on it, the Tribunal held that a further disallowance out of the same interest by way of a transfer pricing adjustment would amount to double taxation of the same income and was not permissible, and it directed the adjustment to be deleted.
• Beauty Etoile Private Limited v Assessment Unit ITATHelps taxpayerValidity unconfirmed
  The TPO has used the 30 per cent EBITDA cap in s.94B as his benchmarking method and has applied it to interest I capitalised to work in progress rather than claimed. Can he do either?
  Neither. Section 94B is a restriction on the deduction of interest, not a method of determining an arm's length price, and it cannot be imported into the 'other method' under Rule 10AB, which requires a price charged or paid in an uncontrolled transaction with or between non-associated enterprises. And s.94B bites only on interest which is deductible in computing business income, so interest capitalised to work in progress and not claimed as a deduction in the year cannot be brought into the disallowance at all.
• SP Imperial Star Private Limited v National Faceless Assessment Centre ITATCuts both waysValidity unconfirmed
  The Transfer Pricing Officer has treated all the lenders named in my Form 3CEB as associated enterprises and applied section 94B to the whole interest. Can I still show that two of them are not associated enterprises?
  Yes. The Tribunal held that the first and foremost criterion for invoking section 94B is to identify whether the enterprise is an associated enterprise or a deemed associated enterprise, and that question must be settled before any arm's length or thin capitalisation computation is made. It remanded the matter for the disallowance to be recomputed on the basis of the revised Form 3CEB, holding that the statute prescribes no time limit for filing that form.
• STEAG Energy Services (India) P Ltd v ACIT ITATHelps taxpayerValidity unconfirmed
  Only a small adjustment survived my appeal. Does the tolerance band wipe it out completely?
  Yes, if the surviving variation is within the notified percentage of the transaction value. The proviso to s.92C(2) is a deeming provision: once the variation is inside the band, the price actually charged is taken to be the arm's length price and there is nothing left to adjust.
• Barracuda Networks India Pvt Ltd v DCIT ITATHelps taxpayerValidity unconfirmed
  The TPO has taken a three-year weighted average margin for a comparable under Rule 10CA, but the company fails my turnover filter in the two earlier years. Must those years still go into the weighted average?
  No. The Tribunal held that the provisos to Rule 10CA(2) must be read harmoniously with Rule 10B(3) and the proviso to Rule 10B(4), and that where a filter makes an enterprise non-comparable in the earlier two years, the data for those years can have no influence on the determination of transfer prices for the current year and must be ignored. On the facts, if R.S. Software (India) Ltd. was to be a comparable at all, its margins for the two earlier years had to be dropped, because in those years its turnover exceeded Rs 200 crores and it was not comparable.
• In re Morgan Stanley and Co. Inc. Advance RulingCuts both waysPartly overruled — read this first
  Our Indian subsidiary does back-office work for us and we pay it cost plus a mark-up, and we send some of our own people over. Is the subsidiary our permanent establishment, and can the Revenue attribute anything more to us once the subsidiary has been paid an arm's length price?
  It depends on which limb. The Authority ruled that Morgan Stanley Advantage Services was not a fixed-place permanent establishment of Morgan Stanley & Co. Inc., because the US company did not carry on its business through MSAS's premises, and not an agency permanent establishment, because MSAS could not conclude contracts, held no stock and secured no orders. But it would be a service permanent establishment under article 5(2)(l) if employees were sent to India for more than 90 days, whether for stewardship or on deputation. On attribution, once MSAS was remunerated at arm's length no further income could be attributed to the permanent establishment. The ruling binds only that applicant.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.