Executive Summary
The Chennai bench of the Income Tax Appellate Tribunal (“the Tribunal”) recently pronounced its ruling in case of
Greenland Exports Private Ltd (“the taxpayer”), wherein the Tribunal held the following:
The fact that a taxpayer with international transaction exceeding Rs. 15 crores has not been subjected to compulsory scrutiny, in accordance with internal guidelines of Income Tax Department, cannot in any way be deemed as a reason to believe that there was escapement of income.
Allocation of indirect costs between Associated Enterprises (“AE”) and non-Associated Enterprises (“Non-AE”) adopting turnover as a basis cannot be considered as a reason for rejection of the method adopted by the taxpayer.
The benchmarking carried out under Transactional Net Margin Method ( “TNMM”) can be either with an external party or based on the segmental result of the taxpayer itself.
Unless more than one price is determined, safe harbour rule of + 5% cannot be applied.
Facts
The taxpayer is engaged in export of unbranded readymade garments to AE and Non-AE. The taxpayer entered into international transaction for sale of traded goods and adopted Comparable Uncontrolled Price (“CUP”) as the Most Appropriate Method (“MAM”) to benchmark its international transaction.
The taxpayer filed its return of income for the assessment year (“AY”) 2006-07 admitting an income of Rs. 80,35,860. The said return was processed without any scrutiny proceeding. Thereafter, the Assessing Officer (“AO”) reopened the assessment proceedings stating that since the value of international transactions exceeded Rs.15 crores the case was to be compulsorily scrutinised. A reference was made by AO to the Transfer Pricing Officer (“TPO”) for determination of Arm’s Length Price (“ALP”).
During the re-assessment proceedings, the taxpayer relied on the TNMM as the MAM, for justifying the value of its international transactions stating that CUP method was not appropriate since it did not deal in similar goods or services with Non-AE. For the TNMM analysis, the taxpayer segregated its transaction between AE and Non-AE for comparison and concluded that Profit Level Indicator (“PLI”) with respect to AE transaction is 3.68% and is within safe harbour of +/-5% with that of Non-AE transactions which is at 4.23%. For segregating the transactions between AE and Non-AE the taxpayer identified the direct expenses towards the AE and Non-AE and apportioned the indirect expenses between AEs and Non-AE in proportion to their turnover.
As the taxpayer had apportioned indirect costs to AE and Non-AE based on turnover, the TNMM was rejected by the TPO. She proceeded to examine the ALP based on external comparable companies and considered two comparable companies, the average PLI of which was worked out at 11.29%.
Aggrieved by the order of the TPO / AO the taxpayer filed an appeal before the Dispute resolution Panel (“DRP”). The taxpayer contented the rejection of the TNMM analysis based on internal comparables. The DRP observed that margin of Non-AE transaction of the taxpayer itself could not be taken as a proper one for a comparison, but on the other hand, it had to be tested against independent uncontrolled transaction of other enterprises. However, the DRP found merit in the argument of the taxpayer and rejected one comparable company as it was not in the business of export of readymade garments and reworked the PLI of the lone comparable at 9.52%.
Aggrieved by order passed by the DRP, taxpayer filed a plea before the Tribunal.
Ruling of the Tribual
The reason cited by the AO for reopening the assessment of the taxpayer cannot in any way be deemed as a reason to believe that there was escapement of income. There was no relevance of the reason cited, with the reopening done.
In every transfer pricing analysis, an element of estimation will step in, at some stage of the working. Turnover based apportionment, in the absence of other better yardsticks cannot be considered as subjective or non-scientific. The Tribunal relied on its co-ordinate bench ruling in Birlasoft (India) Ltd. v. DCIT [I.T.A. No. 4776/D/2011] to support internal benchmarking.
Transfer pricing adjustment based on the TNMM are to be applied on transaction levels and not at enterprise level and therefore the taxpayer can adopt internal TNMM study, for justifying the value of its international transactions, as long as it can demonstrate that it had sufficiently uncontrolled transaction with Non-AEs which could give a meaningful analysis.
Since the TNMM based on internal comparable is adopted, there is only one price that can be determined and hence the safe harbour provision of +/-5% cannot be applied.
Conclusion
This decision highlights the fact that internal comparables can be used while applying the TNMM and it’s improper to conclude that the TNMM should be based only on external comparables. Further, that a case cannot be reopened unless the AO has reason to believe that there was escapement of income.
Source: M/s. Greenland Exports Pvt. Ltd vs. Assistant Commissioner of Income Tax for AY 2006-07 [I.T.A. No. 2107/Mds/2011]
The Chennai bench of the Income Tax Appellate Tribunal (“the Tribunal”) recently pronounced its ruling in case of
Greenland Exports Private Ltd (“the taxpayer”), wherein the Tribunal held the following:
The fact that a taxpayer with international transaction exceeding Rs. 15 crores has not been subjected to compulsory scrutiny, in accordance with internal guidelines of Income Tax Department, cannot in any way be deemed as a reason to believe that there was escapement of income.
Allocation of indirect costs between Associated Enterprises (“AE”) and non-Associated Enterprises (“Non-AE”) adopting turnover as a basis cannot be considered as a reason for rejection of the method adopted by the taxpayer.
The benchmarking carried out under Transactional Net Margin Method ( “TNMM”) can be either with an external party or based on the segmental result of the taxpayer itself.
Unless more than one price is determined, safe harbour rule of + 5% cannot be applied.
Facts
The taxpayer is engaged in export of unbranded readymade garments to AE and Non-AE. The taxpayer entered into international transaction for sale of traded goods and adopted Comparable Uncontrolled Price (“CUP”) as the Most Appropriate Method (“MAM”) to benchmark its international transaction.
The taxpayer filed its return of income for the assessment year (“AY”) 2006-07 admitting an income of Rs. 80,35,860. The said return was processed without any scrutiny proceeding. Thereafter, the Assessing Officer (“AO”) reopened the assessment proceedings stating that since the value of international transactions exceeded Rs.15 crores the case was to be compulsorily scrutinised. A reference was made by AO to the Transfer Pricing Officer (“TPO”) for determination of Arm’s Length Price (“ALP”).
During the re-assessment proceedings, the taxpayer relied on the TNMM as the MAM, for justifying the value of its international transactions stating that CUP method was not appropriate since it did not deal in similar goods or services with Non-AE. For the TNMM analysis, the taxpayer segregated its transaction between AE and Non-AE for comparison and concluded that Profit Level Indicator (“PLI”) with respect to AE transaction is 3.68% and is within safe harbour of +/-5% with that of Non-AE transactions which is at 4.23%. For segregating the transactions between AE and Non-AE the taxpayer identified the direct expenses towards the AE and Non-AE and apportioned the indirect expenses between AEs and Non-AE in proportion to their turnover.
As the taxpayer had apportioned indirect costs to AE and Non-AE based on turnover, the TNMM was rejected by the TPO. She proceeded to examine the ALP based on external comparable companies and considered two comparable companies, the average PLI of which was worked out at 11.29%.
Aggrieved by the order of the TPO / AO the taxpayer filed an appeal before the Dispute resolution Panel (“DRP”). The taxpayer contented the rejection of the TNMM analysis based on internal comparables. The DRP observed that margin of Non-AE transaction of the taxpayer itself could not be taken as a proper one for a comparison, but on the other hand, it had to be tested against independent uncontrolled transaction of other enterprises. However, the DRP found merit in the argument of the taxpayer and rejected one comparable company as it was not in the business of export of readymade garments and reworked the PLI of the lone comparable at 9.52%.
Aggrieved by order passed by the DRP, taxpayer filed a plea before the Tribunal.
Ruling of the Tribual
The reason cited by the AO for reopening the assessment of the taxpayer cannot in any way be deemed as a reason to believe that there was escapement of income. There was no relevance of the reason cited, with the reopening done.
In every transfer pricing analysis, an element of estimation will step in, at some stage of the working. Turnover based apportionment, in the absence of other better yardsticks cannot be considered as subjective or non-scientific. The Tribunal relied on its co-ordinate bench ruling in Birlasoft (India) Ltd. v. DCIT [I.T.A. No. 4776/D/2011] to support internal benchmarking.
Transfer pricing adjustment based on the TNMM are to be applied on transaction levels and not at enterprise level and therefore the taxpayer can adopt internal TNMM study, for justifying the value of its international transactions, as long as it can demonstrate that it had sufficiently uncontrolled transaction with Non-AEs which could give a meaningful analysis.
Since the TNMM based on internal comparable is adopted, there is only one price that can be determined and hence the safe harbour provision of +/-5% cannot be applied.
Conclusion
This decision highlights the fact that internal comparables can be used while applying the TNMM and it’s improper to conclude that the TNMM should be based only on external comparables. Further, that a case cannot be reopened unless the AO has reason to believe that there was escapement of income.
Source: M/s. Greenland Exports Pvt. Ltd vs. Assistant Commissioner of Income Tax for AY 2006-07 [I.T.A. No. 2107/Mds/2011]
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