Bangalore Tribunal rules on the coverage of international transaction to even include an arrangement

In a recent ruling the Bangalore Bench of the Income-tax Appellate Tribunal (the Tribunal), following the findings made in taxpayer’s own case for assessment year 2009-10  has:

• Upheld that the transaction between the taxpayer/ A India and the Indian third party/ B Limited was ‘a concerted action or arrangement’ between the taxpayer and its foreign entity/ F Co which was apparently intended and framed in such a manner as not to attract the provisions of section 92B of the Income-tax Act, 1961;
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• Upheld that the transaction of the taxpayer and the Indian third party could not be subject to the provisions of transfer pricing (TP) regulations as this did not result in any base erosion. However, the transaction of import of raw materials by B Limited from F Co would be subject to the TP regulations as this transaction could possibly result in base erosion;
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• Upheld that the taxpayer in respect of the transaction of import of raw materials by B Limited from F Co was acting as a manufacturer and not a distributor as the Indian third party was like a contract manufacturer for the taxpayer as the taxpayer was in complete charge of overall manufacturing process;
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• Upheld that the subvention fee received by the taxpayer to ensure arm’s length operating margin should not be subjected to arm’s length price (ALP) determination and should be set-off against the TP adjustment; and
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• Directed the transfer pricing officer to determine the ALP for manufacturing and trading segment separately after evaluating the most appropriate method in the facts of the case.