Can a TPO question the commercial expediency of a business transaction?
1. The Transfer Pricing Officer’s (TPO) role is confined to determining whether the price of international transactions between related parties (associated enterprises) adheres to the arm’s length principle under Section 92C of the Income Tax Act.
2. The TPO does not have the jurisdiction to question whether the expenditure incurred by the taxpayer was commercially expedient. This is because the concept of commercial expediency falls under the domain of the taxpayer and is guided by business prudence, which is subjective and varies across different business operations.
3. Relevant Case Laws:
4. CIT vs. EKL Appliances Ltd. TS-206-HC-2012 (Del.)-TP, Delhi HC ruled that it is not within the TPO’s jurisdiction to question the commercial wisdom of the taxpayer’s decision to incur certain expenditures. The TPO can only examine the reasonableness of the pricing of the transaction.
5. ITAT Mumbai in Dresser-Rand India (P.) Ltd. Vs. ACIT Range – 6(2), Mumbai, IT APPEAL NO. 8753 (MUM.) OF 2010 has held that it is irrelevant to analyse the benefit derived by the Assessee from the CCA rather the TPO should determine the ALP of the service, when an independent enterprise would have paid for the same and it is left to the wisdom of the Assessee to decide on the business.
The copy of the order is as under:
