Foreign Associated Enterprises to be evaluated separately in Transfer Pricing – Top 5 Key Takeaways.

 Mumbai Tax Tribunal in the case of Norway    resident company deriving source income from India, which highlighted certain key fundamental principles on transfer pricing when it is undertaken in the case of a foreign enterprise

 

1.      The concept of Mirroring the arm’s length price (‘ALP’) does not exist: The concluded transfer pricing assessment proceedings of the Indian Resident entity, which was the Associated enterprise of the non-resident taxpayer in this case, cannot be used to conclude the same international transaction is at ALP while the non- resident taxpayer is being assessed. In short, the same international transaction can be separately assessed in the hands of both parties involved in the transaction;

 

2.      No tested party concept in case the most appropriate method used is Comparable Uncontrolled Price (‘CUP’) Method: The concept of the tested party is applicable only in the case of profit-based methods and not a price-based method, i.e., CUP;

 

3.      Comparable instruments to be identical: The interest rates on compulsory convertible debentures (‘CCD’) cannot be compared with bank lending rates or any other channel credit financing/working capital facilities owing to the differences in the nature/characteristics of a CCD with any other plain vanilla financial instrument;

 

4.      Reliance on judicial precedents may not always help: Just a reliance on judicial proceedings during the course of the proceedings of the case cannot be placed for the purpose of arriving at the ALP. This is because every case is unique, and the timing factors, economic factors and commercial considerations of the international transaction/parties involved in the international transaction in every case might be different;

 

5.      Bank guarantee rates cannot be compared with corporate guarantee rates: Bank guarantee rates cannot be considered for benchmarking corporate guarantee fees owing to differences in the nature of both financial instruments. Corporate guarantee fees could be benchmarked by adopting any of the following approaches:

 

1.  Interest Savings approach (the interest element saved by the borrowing entity due to the corporate guarantee provided);

2.  Comparable Corporate Guarantee Rates (comparable fee on identical instruments);

3.  Cost of Providing the Corporate Guarantee (if any incurred by the Guarantor).