Not Permissible for TPO to Engage in Restructuring of Transaction: Delhi HC dismisses Appeal [Read Order]

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 that which would have been adopted by independent enterprises acting in a commercially rational manner.

The court founds that the entire focus of the Assessing Officer was on just one assessment year and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterized the transaction.

As the court had held in EKL Appliances, it was clearly impermissible for the TPO to disregard the actual transaction unless it comes 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 commercial soundness of the expenditure that may be incurred.

Furthermore, it would also not be permissible for the TPO to engage in the restructuring of a transaction, unless the economic substance of a 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 that which would have been adopted by independent enterprises acting in a commercially rational manner. This position has been duly affirmed by the decision rendered by this Court in Sony Ericsson Mobile Communication India P. Ltd. v. Commissioner of Income-tax

The division bench found that no ground to interfere with the view ultimately taken by the Tribunal. The appeals consequently fail and shall stand dismissed.

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