The case of AON Consulting Pvt. Ltd. vs Principal Commissioner of Income Tax, decided by the Delhi High Court on February 6, 2025, is a milestone in interpreting the scope of agreements under the Mutual Agreement Procedure (MAP) regarding Transfer Pricing. This technical analysis sets out the key facts, legal basis, international tax implications, and lessons for multinationals.
Background
AON Consulting Pvt. Ltd., the legal successor to Hewitt Associates (India) Pvt. Ltd., is an Irish-based wholly owned subsidiary of AON PLC. The company operates in human resources consulting services, payroll outsourcing, and business process management, activities subject to strict Transfer Pricing rules under Indian and international law.
During the fiscal year in question, the Transfer Pricing Officer (TPO) made a Transfer Pricing Adjustment amounting to ₹44,06,38,092, detailed into:
- ₹41,79,89,294 for transactions with the U.S., which were settled through an agreement under Article 27 of the DTAA between India and the U.S. through the MAP procedure.
- ₹2,26,48,798 for transactions with countries unrelated to the U.S., on which no applicable MAP agreement
Central Controversy
The dispute arises when the Income Tax Appeals Tribunal (ITAT) orders the application of the same MAP framework employed to resolve transactions with the U.S. to those with other jurisdictions not involved in the agreement.
AON challenged this decision before the High Court, arguing that “The MAP is a bilateral, voluntary, and specific mechanism for resolving disputes between tax authorities of two Contracting States and cannot be extended unilaterally to transactions beyond its scope.”
Legal Grounds of the Ruling
The High Court ruled in favor of AON Consulting, establishing key legal principles:
- MAP limitation: The court stated that MAP can only apply to transactions expressly covered by the bilateral agreement among the competent authorities of the contracting countries.
- Infringement of the Legality Principle: The extensive application of MAP to non-covered transactions lacks legal support and contravenes Article 92C of the Income Tax Act 1961, which requires independent assessment of transfer prices according to the Arm’s Length Principle.
- Non-precedent: Resolutions under the MAP cannot serve as a binding precedent for other jurisdictions if there is no bilateral agreement with those jurisdictions.
The court recalled that Transfer Pricing adjustments must be under Rule 10B of the Income Tax Rules 1962, respecting the particularities of each jurisdiction and each set of transactions.
Tax and Practical Implications
For Multinationals:
- Segregation of jurisdictions: Companies should separately assess Transfer Pricing risks according to the jurisdiction of each related counterparty.
- MAP strategy: The MAP should be part of a coordinated dispute resolution strategy, not a blanket tool.
For Tax Authorities:
- Respect for the bilateral MAP scope: The ruling sets a precedent for tax authorities to refrain from extending a MAP outcome to situations not included in the original agreement.
Conclusion
This ruling consolidates the principle that Transfer Pricing should be assessed based on independent legal and economic criteria, not by analogy or administrative convenience. It reiterates the need for taxpayers and authorities to respect the limits of international dispute resolution mechanisms.
In an increasingly global audit environment, the AON Consulting case reaffirms the importance of a consistent Transfer Pricing policy, along with detailed documentation and thorough defense strategies.
How can TPC Group help?
At TPC Group, we have a team of Transfer Pricing and International Taxation specialists who can advise you on business restructuring processes, ensuring regulatory compliance and optimizing your tax position. Contact us for a personalized consultation.
Source: Academy of Tax Law