ITAT can entertain new transfer pricing grounds on tested party at appellate stage: Bombay HC ruling in PCIT Vs Nivea India Pvt Ltd

Background and context

The Bombay High Court in PCIT Vs Nivea India Pvt Ltd examined whether the Income Tax Appellate Tribunal (ITAT) was justified in allowing an assessee to raise, for the first time before the Tribunal, an additional ground in transfer pricing proceedings concerning the choice of “tested party”.

The core dispute was not about computation of the Arm’s Length Price (ALP) per se, but whether the assessee could, at the second appellate stage, contend that its overseas Associated Enterprises (AEs) were the least complex parties and should be treated as the tested party for benchmarking international transactions.

The Revenue argued that:

  • The additional ground was purely factual;
  • It had never been urged before the Assessing Officer (AO), Transfer Pricing Officer (TPO) or the first appellate authority;
  • It contradicted the assessee’s own Transfer Pricing (TP) study and Form 3CEB, where the assessee itself had been chosen as the tested party; and
  • No reasonable cause was furnished for not having raised this plea earlier.

The ITAT, however, admitted the additional ground and remanded the issue to the AO/TPO for fresh examination. The Revenue carried this order to the High Court under the Income-tax appellate jurisdiction, challenging the very admission of the additional ground.

The Bombay High Court dismissed the Revenue’s appeal and upheld the ITAT’s approach.

Facts leading to the appeal

Proceedings before the ITAT

In the TP documentation originally furnished:

  • The assessee had selected itself as the tested party for ALP determination.
  • The TP study and Form 3CEB did not propose the AEs as tested parties.

At the ITAT stage, the assessee moved an application raising an additional ground:

  • It asserted that its overseas AEs were the least complex entities;
  • It requested that such AEs be regarded as the tested party for benchmarking purposes.

The assessee relied on:

  • Existing FAR (Functions, Assets, Risks) analysis contained in the TP study;
  • Information on AEs already disclosed in Form 3CEB;
  • Judicial precedents allowing new legal grounds to be raised at the appellate stage, including:
    • National Thermal Power Corporation Ltd (229 ITR 383)
    • Jute Corporation of India (187 ITR 688)
    • GE Money Financial Services Pvt Ltd Vs PCIT (Delhi High Court, ITA No.662/2016)
    • Certain Mumbai Tribunal decisions and other case law referred in the ITAT’s order.

The assessee argued that:

  • The additional ground was legal in nature, concerning proper application of TP principles;
  • All relevant foundational facts were already on record in the TP study and Form 3CEB;
  • The Tribunal, as the final fact-finding body, ought to permit such a ground in the interest of correct determination of tax liability.

Revenue’s objections before the ITAT

The Departmental Representative opposed the admission of the additional ground on multiple fronts: