We
had earlier discuss in detail about the concepts of Transfer pricing along with
various case laws earlier in part –I & Part - II. In case you want to
refer, the part –I & II, please click on the link below:
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TP Part 1
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TP Part 2
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Over
a period of time, there are number of judgements comes from various levels of
courts from different locations of India and hence it is very important to know
the same for the correct treatment of Transfer pricing:
·
In the case of Delphi TVS Diesel Systems Ltd.
v. Assistant CIT, it was held that TNMM is not applicable when comparison of
transaction is possible.
·
In the case of Hindustan Unilever Ltd. v.
Additional CIT (Mumbai) it was held that benchmarking is required to be done
only for transactions with international related parties and not on entire
turnover.
·
In the case of Deputy CIT v. Hellosoft India
Pvt. Ltd, it was held that Loss-making companies and companies having super
normal profits not to be considered as comparables for TNMM.
·
Net profit margin realised from transaction
with associated enterprises cannot be taken as comparable. Refer, Tecnimont ICB
P. Ltd. v. Additional CIT.
·
Difference arose in calculation of cost due
to the fact that TPO took the cost relating to charter hire activity as 50
percent of total cost whereas the assessee took the actual cost relating to the
charter hire activity. Cost plus method can be applied only by taking the
actual cost of the activity. Once the figures used in the calculation made by
the TPO are replaced by actual figures, the payment made by the assessee is at
ALP and, therefore, no adjustment is called for. Refer, Reliance Industries Ltd
v. Addl. CIT.
·
Bangalore ITAT in the case of Trilogy
E-Business Software India v. DCIT, held that TPO is entitled to collect
information under section 133(6), however if it is used against the assessee,
assessee should be given an opportunity, since comparables cannot be ignored on
ground of abnormal profits/losses if they are functionally comparable.
·
Chennai ITAT in the case of Ascendas (India)
Pvt. Ltd v. DCIT (Chennai), explains the Law on valuation of shares of a closely held
company.
·
In the case of CIT v . CA Computer Associates
India P. Ltd, it was held that No reduction to be made because of failure of
customers to pay for product.
·
List of comparable companies relied on by
assessee rejected by Transfer Pricing Officer without stating any reason is not
allowed. Refer, Assistant CIT v. SRA Systems Ltd.
·
The “Bright Line test” can be applied to
determine whether AMP expenses incurred by assessee are excessive and for the
benefit of the brand owner- Adjustment in relation to advertisement, marketing,
and sale promotion expenses incurred by assessee for creating or improving,
marketing intangible for and on behalf of foreign AE is permissible. Expenses
in connection with sales which do not lead to brand promotion cannot be brought
within ambit of ‘advertisement, marketing and promotion expenses’. Correct
approach under TNMM is to consider operating profit from each international
transaction in relation to total cost or sales or capital employed ,etc of such
international transaction and not net profit , total costs sales , capital
employed of assessee as a whole on entity level. (S. 92B , Rule 10A, 10B ).
Refer, L.G. Electronics India Pvt. Ltd v. .ACIT.
·
Chennai ITAT in the case of ACIT v. Handy
Waterbase India (P.) Ltd held that the Assessee is engaged in sale and export
of pasteurized crab meat. The Assessee entered in to international transactions
with its associated enterprise and showed sale price at Rs 24 Crores. TPO on
reference made by the Assessing Officer , fixed arm’s length price of goods at
Rs 18 Crores. Assessing Officer opined that receipts of assessee from sales to
AE was in excess of arm’s length price and such excess was nothing but income
from other sources . The Assessing Officer relying on provisions of section
10B(7) read with section 80IA (8) and 80(IA)(10) added excessive receipts to
income of assessee. On appeal Commissioner (Appeals) deleted the addition. On
appeal by revenue , the Tribunal held that,where sale price realised from AE
was much higher than ALP fixed by TPO and there was no recommendation by TPO
for making any adjustment, Assessing Officer was not at all required to make
any adjustment in ALP. Accordingly the appeal of revenue was dismissed
·
Chennai ITAT in the case of SL Lumax Ltd. v.
ACIT, held that Assessee, engaged in auto components manufacturing and sale,
had international transactions with four Associated Enterprises (AE).
International transactions comprised of import of raw materials, import of
machinery and payment for royalty and technical assistance. The Assessing
officer divided total operating cost between material cost relatable to AEs and
cost relatable to non-AEs, which included both material cost as well as other
costs. Thus, Assessing officer deducted from operating cost, only material cost
relatable to purchases from AEs and not operating cost attributable to such
material cost. It was held that if along with material cost paid to AEs,
operational cost attributable to such cost was also considered, then amount
considered by TPO as ALP of AE purchases, would have gone up significantly, and
hence work out of ALP of purchases from non-AEs had been erroneously done.
Matter remanded back.
·
Bangalore ITAT in the case of Lenovo India P.
Ltd. v. ACIT, held that Where similar transactions with associated enterprises
for subsequent years have been accepted by TPO without any ALP adjustment, he
should adopt TP analysis conducted by assessee for relevant assessment year
also to be at ALP. Revenue could not be permitted to take a different approach
in the relevant assessment year. Matter Remanded back..
·
In the case of Wills Processing Services
(India) P. Ltd. It was held that Information relied upon by Transfer Pricing
Officer is not available in public domain. Secret information not to be used
against assessee. No uniformity in rejection of assessee’s comparables and
selection of comparables by Transfer Pricing Officer. Proper and appropriate
functions, assets and risk analysis required to be done. Transfer Pricing
Officer and Dispute Resolution Panel to deal with assessee’s objections and
discuss them in order. Matter remanded.
·
Mumbai ITAT in the case of Dresser- Rand
India (P.) v. Addl.CIT, held that assessee rendered similar service to both
domestic customers and AEs abroad, but granted discount of 10% only to AE
abroad. According to TPO price of services rendered was not at ALP and thus, he
made upward adjustment in ALP to the extent of discount allowed. It was held
that in independent business situation granting of discount is a normal
occurrence and unless AO demonstrates that discount so allowed would not have
been allowed in an arm’s length situation, ALP adjustment could not be made in
respect of the same. It was therefore held that since there was nothing on
record to show to even suggest that discount in question was not arm’s length
discount, or that discount had not been allowed under any other situations,
adjustment made by revenue was set aside.
·
Petitioner participated in the proceedings
before TPO and has remedy to move before the DRP as well as appeal before the
Tribunal hence writ petition was held to
be not maintainable . (Art 226, Constitution of India). Refer, Hindalco
Industries Ltd v. Add.CIT.
·
While computing Arms length price profit should be considered without deduction
of depreciation. Refer, Qual Core Logic Ltd
v. Dy.CIT
·
Mumbai ITAT held that A “controlled
transaction” can never be regarded as “comparable” even if at ALP. Refer, Tecnimont
ICB Private Limited v. ACIT.
·
Mumbai
ITAT in the case of Deloitte Consulting India (P.) Ltd.v. DCIT held that reference
to TPO does not give presumption that the payment is allowable under section
37.
·
Average of percentage of expenditure incurred
by 17 pharmaceutical companies on advertisement and marketing and no analysis
as to type of drug, nature of market, period of advertisement. Mumbai ITAT held
not to be TNMM as per provisions of the Act. Refer, ACIT v. Genom Biotech (P.)
Ltd.
·
In the case of Tata Autocomp Systems Ltd v.
ACIT, it was held that interest free loan to international sister concern comes
under the ambit of transfer pricing.
·
Mumbai High court in the case of CIT v. CA
Computer Associates India Pvt. Ltd, held that Royalty allowable even in respect
of unpaid sales.
·
Operating margin being within the range of 5%
of the arithmetic mean of the operating margin of such comparable companies,
same has to be accepted as ALP. Refer, Caryle India Advisors (P) Ltd. v. ACIT.
·
TPO has no authority to disallow the payment
for the purpose of business, on the ground that the assessee has suffered
continuous losses. [S. 37(I)]. Refer, CIT v. EKL Appliances Ltd.
·
Bangalore ITAT held that Expression “shall”
used in Rule 10B(4), makes it clear that only current year’s data is to be
used. Refer, Dy. CIT v. Deloitte Consulting India P. Ltd.
·
Bangalore ITAT in the case of Kodiak Networks
(India) Pvt. Ltd v. ACIT, held that Information cannot be used against the
assessee without giving an opportunity.
·
AO has made a reference to the TPO for
determination of ALP, adoption of ALP suggested is sufficient compliance.
Refer, Tevapharm Pvt. Ltd. v. Addl. CIT.
·
While Computing of Arm’s Length Price the
data is to be restricted to AEP. Refer, Genesys Intergrating Systems (I) Pvt.
Ltd. v. Dy. CIT.
·
Arm’s length price is to be done in
accordance with Rule 10B. Refer, Trigent Software Ltd. v. Asst. CIT.
·
ITAT Kolkata held that Law on taxability of “turnkey
contracts”
for offshore & onshore supply explained and matter set‐a‐side
for redetermination. Refer, Dongfang Electric Corporation v. DDIT.
·
Chandigarh ITAT in the case of GlaxoSmithkline
Consumer Healthcare Ltd v. Addl. CIT, held that reference by the AO under
section 92CA(1) is transaction based and not entity based. There may be several
international transactions with the same entity, but reference made by the AO
is each transaction specific i.e. only the international transaction which have
been referred to by the AO after taking the approval of the Commissioner can be
looked into by the TPO.
·
In the case of Nimbus Communications Ltd. v.
Asst. CIT (Mumbai), it was held that AO cannot make addition of notional
interest on overdue payments from AE.
·
The assessee has followed a scientific system
of providing for depreciation on a more real time basis. The assessee is not
providing technical depreciation influenced by Income Tax Rules. The assessee
provides for more or less actual depreciation. This actual depreciation is more
relevant in working out the operating profit of the assessee. Thus, no
adjustment is called for in the quantum of depreciation provided by the
assessee in its operating account so as to work out its operating profit for
the purpose of determining the Arm’s Length Price. Refer, Lason India (P.) Ltd.
v. Asst. CIT.
·
Where TPO rejected the filters adopted by the
assessee and adopted untenable filters for arriving at the comparables. The
assessee in his detailed submissions before the TPO as well as the Tribunal,
brought out various factors that would justify adopting of comparables by the
assessee. On appeal, the Tribunal following the decision of Genesis Integrating
System India P. Ltd. (Bangalore) set- aside the matter back to the file of AO
directing the TPO to allow assessee to cross examine the comparables whose
replies were sought to be used against the assessee if the assessee so desires.
Refer, Genesis Microchip (I) (P.) Ltd. v. Dy. CIT.
·
The extension of credit to the AE beyond a
stipulated credit period cannot be construed as an ‘international transaction’
for the purpose of section 92B(1) so as to require adjustment for ascertaining
the ALP. Therefore, the consequential addition is untenable and liable to be
deleted. Refer, Patni Computer Systems Ltd. v. Dy. CIT.
·
ITAT Delhi in the case of Ericsson India Pvt.
Ltd v. DCIT held that TPO has no power to question business purpose of
transaction, rule 10B(1)(a), does not authorize disallowance of any expenditure
on the ground that it was not necessary.
·
Chennai ITAT in the case of Siva Industries
& Holdings Ltd. v. Asst. CIT held that in case of grant of loan by the
assessee to its foreign subsidiary in foreign currency out of its own funds,
for determining ALP, it is the international LIBOR rate that would apply and
not the domestic prime lending rate, and assessee charging interest at a rate
higher than the LIBOR rate, no addition can be made on this account.
·
Corporate guarantee provided by assessee to
subsidiary does not fall within international transaction. Refer, Four Soft
Ltd. v. Deputy CIT.
·
The Assessee in its TP study observed that as
no external CUP was available for bench marking the transaction applied the
TNMM and concluded that transaction was at arms’s length .The TPO rejected the
assessee’s method considered a risk free return from the subsidiary , a
notional interest at 10 percent on loan as ALP amounting to Rs 31, 51, 259. On
appeal Commissioner (Appeals) also confirmed the addition. On appeal to the
Tribunal , the tribunal held that neither the assessee nor TPO having examined
applicability of CUP method in order to determine the ALP of the international
transaction of interest –free currency loan to its subsidiary by assessee , the
Tribunal restored the matter to Assessing Officer for fresh adjudication
following CUP method. Refer, Aithent Technologies (P) Ltd v. ITO.
·
The assessee had international transactions
with related and unrelated parties . The TPO has selected only four comparables
and also denied the benefit of+ 5 percent sought by assessee. The adjustment
made by the TPO was confirmed by the DRP. On appeal to the Tribunal , it was
contended that the (1) Party having substantial related party transactions
should be excluded as comparable .(2) Allocation of advertisement and sale
promotion expenses based on turn over of manufacturing and trading is held to
be not proper. (3) The benefit of standard deduction of plus or minus 5 percent
is not taken in to consideration. (4)The adjustment can be made only in respect
of transaction with Associated Enterprises instead of entire turn over ,(5)
While working out the operating profit to sales margin , accurate figures as
per the annual accounts of the concerned comparables should be taken .The
Tribunal held that the TPO having flawed on five issues as contended by the
assessee matter remanded to the Assessing Officer for deciding the matter
afresh after taking in to consideration the propositions put forth by the
assessee. Refer, Huntman Adavnced Materials (India) (P) Ltd v. DY.CIT.
·
The assessee is engaged in the business of
manufacturing of several products . It had three overseas subsidiaries , namely
Vega UK, Vega US and Vega UAE. The assessee sold its products to domestic
market where as marketing and distribution of its products in international
markets was undertaken by Vega entities of in their specified jurisdiction. The
TPO made adjustment in respect of sales made to Vega UAE on ground that Vega
UAE was neither bearing any inventory risk nor credit risk and therefore it was
not a distributor but only market service provider .The TPO adopted the
transfer pricing on basis of operating cost /operating profit percentage of
Vega UAE, Vega UK and Vega US as base. The Tribunal held that operating cost
/operating profit margin depend on level of operating expenses incurred by
respective Vega entities and also making business earning by respective Vega
entities , if operating cost is higher in US it could not be said that profit
margin of other Vega entities in different countries should be at par with
profit margin of Vega US . Accordingly once the it was accepted that Vega UAE
as distributor and carrying on both inventory or credit risk , TP adjustment
made of the TP officer was deleted .Refer, AIA Engineering Ltd v. Addl. CIT.
·
The
assessee is 100 % subsidiary of a foreign company and is engaged in the
business of BPO/ITES. The assessee has adopted TNMM method as the most
appropriate method and computed the PLI(OP/TC) at the rate of 15.76 percent on
the operating cost . The TPO has determined PLI at 25.78 percent on the basis
of eight comparable. Before Commissioner (Appeals) the assessee has furnished
eight additional comparables . On the basis of 16 comparables the average PLI
was computed at 11.01 percentage which was less than PLI shown by assessee .
The Commissioner (Appeals) had excluded the results of loss making companies
for the purpose of determining the average profit margin. On appeal to Tribunal
,by assessee the Tribunal held that order of Commissioner (Appeals), held to be
justified . Refer, Knooh Solutions (P) Ltd v. ITO.
·
Price paid by assessee to its associated
enterprise was higher than price paid by unrelated parties for purchase of
similar goods hence adjustment made by TPO held to be justified. Refer, Vipin
Enterprises v. Addl.CIT.
·
Assessee company which is in the business of
providing buying services to associated enterprises for sourcing of garments,
handicrafts, leather products etc. in India. Assessee determined ALP on
‘transaction by transaction’ basis using most appropriate method having regard
to functional analysis and availability of comparable uncontrolled bench mark.
TPO determined ALP by combining all transactions undertaken by assessee.
Tribunal held that in assessee’s case, there were different segmental
activities, which were independent of each other, they are required to be analyzed
on transaction to transaction basis and not by combining all activities, hence
the method adopted by the assessee is correct and up held the computation of
assessee. Refer, Benetton India (P) Ltd. v. ITO.
·
Assessee has reimbursed only cost of one
employee who is sitting in Singapore. Assessee has produced evidence in the
form of e‐mails
to substantiate its case that it has actually obtained services from its group
companies and justified the commercial expediency of reimbursement of cost to
said concerns by relating the payment to revenue earned by it from such
services, the Tribunal held that there is no justification for adjustment to
the ALP in respect of the payments made by the assessee to its group concerns.
The Tribunal also held that once an international transaction has been made
subject of determination of ALP by the TPO, and he has found that transaction
is at arm’s
length, then it is not permissible for the Assessing Officer to re‐examine
that transaction and make disallowance under the normal provisions of the Act.
Refer, Cushman & Wakefield India (P) Ltd v. ACIT.
·
Assessee has paid 3% of the net sales price,
which was approved by RBI. The Tribunal has found that the assessee had sold
only part of goods manufactured to its Associated enterprise and bulk sales
were made to uncontrolled parties, and the Assessing Officer had failed to
bring any material on record to show that payment of royalty @ 3% was not at
arm’s
length, hence disallowance of royalty was not justified. Refer, SonaOkegawa
Precision Forgings Ltd. v. Addl. CIT.
·
Pune ITAT in the case of Demag Cranes &
Components (India) v. Dy. CIT held that In a Transfer Pricing matter, the
Tribunal had to consider whether for purposes of making adjustment under Rule
10B(1)(e)(iii) ‘working capital’ constituted a ‘difference between the
international transactions and the comparable uncontrolled transactions of
between the nterprises entering into such transactions’ and if so whether the
said difference ‘could materially affect’ the amount of net profit margin of
relevant transactions in the open market. Held by the Tribunal: Rule
10B(1)(e)(iii) provides that “the profit margin arising in comparable
uncontrolled transactions has to be adjusted to take into account the
differences, if any between the international transaction and the comparable
uncontrolled transactions, or between the enterprises entering into such
transactions, which could materially affect the amount of net profit margin in
the open market“. While the “differences” are not specified, it covers “any
differences” which could materially affect the amount of net profit margin. The
litmus test to be applied is if the ‘difference, if any, is capable of
affecting the NPM in open market? If yes, then the TPO is under statutory
obligation to eliminate such differences. The revenue cannot say that
difference is likely to exist in all accounts and so the demands of the
assessee should be ignored. The revenue’s stand that the assessee is ineligible
for any adjustments if he provides the set of comparable is not correct because
under Rule 10(3) it is the duty of the AO/TPO/DRP to minimize/eliminate the
difference which is likely to materially affect the price. It is the settled
proposition that ‘working capital’ adjustment is an adjustment that is required
to be made in TNMM. The revenue’s contention that the ‘differences’ specified
should refer to only (i) the factor of demand and supply; (ii) existence of
marketable intangibles i.e. brand name etc; (iii) geographical location and the
like is not acceptable. Further, as the difference in the Arm’s length
Operating Margin of the Comparables before and after making the adjustment for working capital was
up to 3.77%, it was “material” and
had to be eliminated (Mentor Graphics(2007) 109 ITD 101 (Delhi), E‐gain
Communication(2008) 118 ITD 243 (Pune) Sony India( 2008) 114 ITD 448 (Delhi)
&TNT India followed).
·
In a transfer pricing appeal, the Tribunal
had to consider two issues: (a) what is the data to be considered by the TPO at
the time of determining ALP? & (b) whether the assessee should be given an
opportunity to refute the material sought to be utilized by the TPO? HELD by
the Tribunal: (i) Under Rule 10D(4) the information and documents should as far
as possible be contemporaneous and should exists latest by the ‘specified date’
specified in section 92F(4) i.e. the due date for filing the ROI. There is no
cut‐off
date upto which only the information available in public domain can be taken
into consideration by the TPO while making the transfer pricing adjustments and
arriving at the ALP. The assessee’s argument that section 92D and Rule 10D
is defeated if the TPO takes the data which is available in the public domain
after the specified date is not acceptable. (ii) While the TPO is empowered by
section 131(1) & 133(6) to call for information without informing the
assessee about the process, he cannot use such information against the assessee
without giving the assessee a reasonable opportunity of hearing. If the
assessee seeks an opportunity to cross‐examine third parties, it
has to be given the opportunity (Genisys Integrating Systems followed). Refer, Kodiak
Networks (India) Pvt. Ltd. v. ACIT.
·
Assessee was a wholly owned subsidiary of
U.S. based company MTC. It entered into a support agreement with assessee for
research services and corporate support services which was an international
transaction. For bench marking assessee’s international transactions TPO took
various companies and made additions. Before Commissioner (Appeals) the
assessee submitted that comparable cases identified by TPO were not engaged in
similar activities as that of assessee. It was also contended that the TPO has
ignored the comparable of another subsidiary where in the business is identical.
The Commissioner(Appeals) held that the TPO arbitrarily selected ‘S’ Ltd. as
comparable and ignored ‘C’ Ltd as comparable. Commissioner (Appeals) further
held that had ‘C’ had been considered as comparable then arithmetic mean all
comparable selected by TPO and assessee would be only 11.71 percentage and
applying safe harbor rules in terms of second proviso below section 92C(2),
difference in price between one adopted by TPO and ALP determined by including ‘C’ Ltd
would be within + or ‐5 percent range calling for no
adjustment to price adopted by assessee in respect of international
transaction, accordingly the Commissioner (Appeals) deleted the addition made
by the TPO. Tribunal confirmed the view of Commissioner . Refer, Dy. CIT v.
Monsanto Holdings (P) Ltd.
·
Assessee was a British company and was part
of BBC group. It had appointed an Indian company, BWIPL as its authorized agent
in India under an airtime sales agreement to solicit orders for sale of
advertisement airtime on channel at rates and on terms and advertising provided
by assessee and pass on such orders to assessee for acceptance and
confirmation. In consideration of service provided by BWIPL, it was to receive
15 percent marketing commission of advertisement revenues received by assessee
from Indian advertisers. Assessee claimed that since BWIPL had been remunerated
from arm’s length price no further income was taxable in India. Tribunal has
accepted the contention of assessee and allowed the appeal. On appeal the High
Court upheld the order of Tribunal.
Refer, Director of Income Tax v. BBC World wide.
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