This article delves into the details of the income tax appeal case ITA No. 907/DEL/2021, where Ikea Services India Pvt. Ltd. faced significant transfer pricing adjustments by the Income Tax Department. The appeal addresses critical aspects of international transactions and arm’s length principles under the Indian Income Tax Act, 1961.
The case involves Ikea Services India Pvt. Ltd., a subsidiary of Ingka Pro Holding BV Netherlands, engaged in sourcing support services. For the assessment year 2016-17, the company contested the enhancements made to its income by the Deputy Commissioner of Income Tax – Income Tax & Transfer Pricing Delhi 2(1)(2), which were based on the premise that the company’s transactions with its associated enterprises did not satisfy the arm’s length principle.
The main issues contested in the appeal included the incorrect characterization of Ikea Services as a trader rather than a service provider, the inclusion of Free on Board (FOB) costs of goods sourced directly by associated enterprises in the cost base, and the selection of inappropriate comparables for determining the arm’s length price.
The appeal was heard by the Income Tax Appellate Tribunal, Delhi ‘I-1’ Bench. The tribunal considered various aspects of the case, including the company’s functional profile and the benchmarking analysis presented in its transfer pricing documentation. The Tribunal noted several discrepancies in the approach taken by the Tax Department and ultimately decided in favor of the appellant, directing the deletion of the added income adjustment of INR 43,01,97,828.
The decision is significant as it clarifies the application of transfer pricing rules and the importance of accurate functional characterization in determining arm’s length transactions. It emphasizes the necessity for tax authorities to adhere to judicial precedents and established guidelines while making transfer pricing adjustments.
This case serves as an essential reference for multinational companies operating in India, providing insights into dealing with transfer pricing disputes and the importance of maintaining robust documentation to support the arm’s length nature of international transactions.
Detailed Analysis of ITA 907/DEL/2021: Ikea Services India Pvt. Ltd. vs ACIT, New Delhi
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