Few Points on Transfer pricing.

Ø   Jurisdictional requirement for applicability of TP provisions to be established, if raised by a taxpayer, before considering the issue of valuation. Vodafone India Services Pvt. Ltd. Vs. Union of India (through the secretary, Ministry of Finance), Addl. Commissioner of Income tax Transfer Pricing –II(6), Dy. Commissioner of Income tax, Circle 3 (3) (writ petition no. 1877 of 2013)

Ø  Compliance Requirements› Computation of income/ allowance of expenses having regard to the Arm’s length price [Section 92]› Maintenance of prescribed Documentation (Section 92D & Rule 10D)› Obtaining of Accountant’s report (under Form 3CEB) (Section 92E)› To ensure compliance with the arm’s length principle, stiff Penalties have been prescribed (Sections 271AA, 271BA, 271G, 271(1)(c))

Ø  A transaction (such as a corporate guarantee) which has no bearing on profits, incomes, losses or assets of the enterprise is not an ‘international transaction’ u/s 92B(1) and not subject to transfer pricing – Bharti Airtel Limited – ITAT Delhi. The same also covered intra group loans & advances & contribution of share capital.

http://taxbymanish.blogspot.in/2014/03/delhi-tribunal-rules-on-transfer.html 

Ø  After TPO determines the AMP expenditure incurred for benefit of AE, balance is deemed to be incurred for assessee’s business & is automatically allowable u/s 37(1). Whirlpool of India Ltd vs. DCIT (ITAT Delhi) 

Ø  Companies in ITES cannot be classified into low-end BPO services and high-end KPO services for comparability analysis but have to be classified based on the functions performed. Comparables with abnormal profit margins cannot be discarded per se but must be examined to determine whether the high margins are due to normal business conditions or not. Maersk Global Centres (India) Pvt. Ltd vs. ACIT (ITAT Mumbai Special Bench)

Ø  Avoidance of tax-Transfer pricing-Arms’ length price-TNMM under Rule 10B(1)(e) contemplates ALP determination with reference to the relevant factors (cost, assets, sales etc.) of the assessee and not those of the AE or third party. Assessee’s study report cannot be discarded without showing how it is wrong. Finding that assessee is a risk bearing entity should be based on tangible material. [S.92CA] Li And Fung India Pvt. Ltd .v. CIT (2014) 97 DTR 70 (Delhi)(HC).  

Ø  Transfer Pricing provisions do not apply if the AE is assessed in India & there is no chance of shifting of profits outside India or erosion of tax base .  IJM (India) Infrastructure Ltd vs. ACIT (ITAT Hyderabad)

Ø  No bar on reliance of private database u/R 10D(3). Nuances of the CUP Method under Rule 10B(1)(a)(i) explained. Tilda Riceland Pvt Ltd vs. ACIT (ITAT Delhi)

 

Ø  Adjustment to profit margin for “capacity underutilization” can be made. In choosing comparables, there cannot be a cherry picking for deciding parameters of rejection. All comparables must face the same test DCIT vs. Panasonic AVC Networks India Co Ltd (ITAT Delhi)

Ø  Unaudited segmental accounts can be relied upon for comparing profitability of controlled transactions with uncontrolled transactions. While size is relevant in entity level comparison, it is not relevant in transaction level comparison within the same entity.   Lummus Technology Heat Transfer BV vs. DCIT (ITAT Delhi)

 

Ø  TPO cannot sit in judgement on commercial expediency. RBI approval means the payment is at ALP. If overall TNMM analysis done, royalty cannot be analyzed separately.  DCIT vs. Air Liquide Engineering India (ITAT Hyderabad) 

Ø  CIT cannot revise the TPO’s transfer pricing order passed u/s 92CA(3). CIT also cannot revise s. 143(3) order because such order is not erroneous if it follows binding order of TPO. Tata Communications Limited vs. DCIT (ITAT Mumbai)

Ø  Transfer pricing provisions do not apply (i) to an investment in share capital of overseas companies & (ii) to transactions where there no “income” has arisen.