Today is blog 3rd Anniversary.
It seems that transfer pricing dispute
for taxation on international transactions
with associates enterprises (AES) is not going to end for the corporates and
further as TP extended its legs also on domestic specified transactions with
related parties, it is very important to tax payer to know more about this.
Given below few latest case laws judgments only in respect of international
transfer pricing which will enable
yourself with
more knowledge on transfer pricing.
(a)
Comparable :
(i)
Dispute
Resolution panel directed the TPO to make proportionate adjustment on the total
sales to the associated enterprise alone and not on the other sales. Tribunal
deleted the addition on the ground that unit compared by TPO was not comparable
to the assesee. On appeal by revenue the Court held that whether there was any
other comparable unit or any other method, might be a question to be considered
by TPO once the matter was remanded to him. It was not a proper exercise of
discretion on the part of the Tribunal to have given quietus to the matter
after deleting the addition. The matter was remanded to the TPO. Refer, CIT .v.
Manaksia Ltd, 362 ITR 56.
(ii)
Comparable
included in final list without including them in show cause notice and hence violation of principles of natural
justice. Companies having extraordinary merger and demerger, high volume of
on-site operational and difference on employee cost filter functionally dissimilar
and to be excluded. Further, Company providing services under knowledge process
outsourcing functionally dissimilar to assessee doing business process outsourcing
service and to be excluded and Companies having different cost structure,
extraordinarily high profit, huge turnover and which require highly
professionalised skills not comparable and to be excluded. Refer, C3 i Support
Services P. Ltd. v. Assistant CIT, VOL 33 PG 174.
(iii)
Where
assessee company provided marketing support services to its associated
enterprise, engineering companies providing end to end solutions the comparable
will not applicable due to functional incomparability. Appeal was partly
allowed. Tribunal directed to exclude Vapi and WAPCOS comparable. Refer, Actis
Advisers (P.) Ltd. v. Addl. CIT, 146 ITD 314.
(iv)
Companies having super normal profit, enormous
turnover, companies not qualifying employee cost filter and RPT filter and
functionally dissimilar cannot be treated as comparable. Refer, Sumtotal
Systems India P. Ltd. v. Assistant CIT, VOL 32 PG 446.
(v)
Assessee
had included two companies in its transfer pricing study, not being
functionally comparable. In the course of transfer pricing proceedings,
assessee cannot be prevented from pointing out cogent reasons and give proper
analysis as to why the comparables chosen are not correct . A comparable cannot
be included in the absence of proper segmental details for the working of the
margin and the operating expenses. Refer, Tata Power Solar Systems Ltd .v. Dy.
CIT, 98 DTR 250.
(vi)
Comparable
data which was not available to assessee at time of preparing TP documentation
can be used by TPO only if it is made available to assessee for its objections
. Further, Transfer pricing-Arms’ length price–Different segmental activities,
which are independent of each other-required to be analysed on
transaction-to-transaction basis and cannot be combined and Transfer
pricing-Arms’ length price–Companies having supernormal profit to be excluded. Refer, Avineon India (P.)
Ltd. .v. DCIT, 29 ITR 404.
(vii)
Diamonds
of similar description sold to both Aes and third party-price of transactions
with both AEs and third party can be compared-internal CUP method available [R.
10B(1)(a)]. Refer, Livingstones .v. DCIT, 29 ITR 362.
(viii)
Assessee
and the TPO accept a particular company as functionally comparable – assessee
did not agitate on such comparable before CIT(A) - the same cannot be excluded
from the list of comparables. Refer, IVY Comptech (P.) Ltd. .v. DCIT, 29 ITR
328.
(ix)
Contract
manufacturer of jewellery entitled for making charges–cannot be compared with
full-fledged independent manufacturers-availability of internal CUP method
would outwit TNMM. Refer, Twilight Jewellery (P.) Ltd. .v. DCIT, 29 ITR 296.
(x)
TPO
cannot determine ALP under TNMM by relying upon multiple year data where
current year data of comparable companies are
available on public domain. [R.10B(4)]. Refer, ACIT .v. Infotech
Enterprises Ltd, 29 ITR 67.
(xi)
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. Refer, Maersk Global Center (India)
Pvt. Ltd. .v. ACIT, Mumbai ITAT.
(xii)
Foreign
associated enterprise can be tested party. TPO was not justified in rejecting
comparable companies outside his jurisdiction saying he could not call for
additional information or scrutinise books. Since Dispute Resolution Panel did
not consider in detail why associated enterprise should not be selected as
tested party, matter was remanded. Since DRP did not state why the comparables
selected by TPO were held to be comparable with those of the assessee, DRP’s
order was held to be bald and cryptic `/ Foreign associated enterprise can be
tested party. TPO was not justified in rejecting comparable companies outside
his jurisdiction saying he could not call for additional information or
scrutinise books. Since Dispute Resolution Panel did not consider in detail why
associated enterprise should not be selected as tested party, matter was
remanded. Refer, General Motors India P. Ltd. .v. DCIT, 27 ITR 373.
(xiii)
Company
in debt cannot be compared to company with sufficient capital base and differ
in product. Refer, Michael Aram Exports P. Ltd. .v. ITO, 27 ITR 528.
(xiv)
The
Tribunal held remanding the matter that unless and until there are specific
reasons and factors as provided under rule 10B, an entity cannot be excluded
from list of comparables solely on basis of high profit/ loss making entity,
because no such factor finds place either in Rule 10B(2) or Rule 10B(3). The
Profit or Loss arising from forward contracts entered for hedging of foreign
currency exposure on underlining trade receivable or payable has to be treated
as part and parcel of operating profit while determining ALP. Transfer Pricing
adjustment is required to be made only in respect of transactions between
assessee and AE. Refr
(b)
5% tolerance :
(i)
Arm’s
length price-Benefit of 5 per cent allowed as deduction under second proviso to
section 92C(2) was not sustainable as it is only a tolerance range and not a
standard deduction. [R.10B, 10D]. Refer, Advance Power Display Systems Ltd. .v.
ACIT, 146 ITD 761.
(c)
Notional Interest :
(i)
Addition
on the basis of notional interest was held to be not valid. Refer, Dy. CIT .v.
Cadila Healthcare Ltd., 146 ITD 502.
(ii)
TPO
made notional addition in respect of amount outstanding for more than year and
taking interest rate at 10%. Tribunal noted that that there was complete
uniformity in act of assessee in not charging interest from both associated
enterprises and non associated enterprise debtors for delay in realization of
export proceeds. Tribunal thus deleted the addition. On appeal by revenue the
Court dismissed the appeal holding that no substantial question of law. Refer, CIT
.v. Indo American Jewellery Ltd, 223 Taxman 8.
(iii)
Interest
charged by assessee from it AE on loan advanced in the foreign currency should
be benchmarked by interbank rate. Assessee charged interest from its AE at a
rate higher than LIBOR, therefore, transfer pricing adjustment is not
warranted. Refer, Hinduja Global Solutions Ltd. .v. ACIT, 98 DTR 266.
(d)
FAR Analysis :
(i)
Assessee
providing software development and related services to holding company
incorporated in U. S. A. from several units. Assessee employing internal
transactional net margin method. Finding that terms and conditions for
rendering services governed by one single agreement between assessee and
foreign holding company. Unity of business, administrative control and unity of
funds and Independent functions, assets and risk analysis of each unit with
existing comparables practically not possible and Software related services rendered from each
of its units to same two associated enterprises under a single agreement on
continuous basis. Services of similar nature which To be combined and evaluated
and Benchmarking of transactions to be aggregated at entity level and not at
unit level. Refer, Deputy CIT v. Birla
Soft India Ltd., VOL 32 PG 117.
(ii)
In
the selection of comparable companies, functions, assets and risks should be
similar. Comparables selected by assessee were accepted in preceding and
succeeding years. Hence, rejection of the same without reasons in year in
question was not sustainable. Refer, Temasek Holdings Advisors (I) P. Ltd. .v.
DCIT, 27 ITR 125.
(e)
Reimbursement of Management fees
:
(i)
Assessee
bound to adopt one of prescribed methods - Holding company providing support
services which benefitted assessee and group companies and for Allocation of costs the Transfer Pricing
Officer not entitled to take arm’s length price of transaction at nil and add
entire payment made by assessee to its associated enterprise as adjustment to
arm’s length price. Assessee not choosing any method prescribed under rules
for benchmarking payment of management fee on ground it was only cost
allocation and the Reference by Transfer Pricing Officer and Dispute Resolution
Panel to services not rendered by assessee to its associated enterprise is No
proper application of mind to documentation and evidence filed by assesse and Evidence
to be linked with invoices to show nature of services rendered. Order of
Assessing Officer set aside and determination of arm’s length price remanded
to Transfer Pricing Officer for fresh consideration. Refer, Quintiles Research
(India) P. Ltd. v. Deputy CIT, VOL 32 PG
73.
(f)
Most Appropriate Method :
(i)
DRP
found that the prices paid by the assessee for import of LPG from its AE in
respect of two shipments were in excess of the ALP by computing the freight
charges on the basis of distance between the port of origin and port of
destination as suggested by the assessee itself. The finding of the DRP was
based on the most appropriate method under the given circumstances and
warranted no interference. Refer, SHV Energy (P) Ltd .v. Dy. CIT.
(g)
Foreign Exchange Fluctuation:
(i) Forex
Fluctuation to be considered as operative income . refer, Premier Exploration
Services (P.) Ltd. .v. ITO, 29 ITR 427.
(h)
Segmental Results :
(i) –Segmental
results–to be accepted even if not included in audited accounts. Refer, Honeywell Electrical Devices and
Systems India Ltd. .v. ACIT, 29 ITR 347.
(i)
Corporate Guarantee :
(i) Adjustment of guarantee fee is at same rate
as applied in the earlier year was to be applied as there were no change in
facts and circumstances and for Adjustment
on notional interest - AO to decide on the basis of LIBOR prevalent at the relevant
point of time. Refer, Mahindra & Mahindra Ltd. .v. ACIT, 29 ITR 95.
(ii) 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. Refer, Bharti Airtel Limited. .v. ACIT, Delhi ITAT.
(j)
Misc:
(i)
Where
TPO made adjustment to ALP by merely following order passed in earlier year
without going into merits of case, order was not sustainable and Prior to the
amendment to S. 92CA(4) w.e.f. 1-6- 2007, AO was not bound to accept ALP as
determined by TPO -TPO cannot make adjustment to the ALP by merely following
order passed in earlier year.. Refer, Abacus Distribution Systems (India) (P.)
Ltd. .v. DCIT, 29 ITR 1. C
(ii)
The
assessee was on notice as to the nature of the enquiry which was being pursued
by the TPO. The TPO addressed a communication detailing the information that
was required on the basis of which disclosure was sought. The assessee also
adduced detailed submissions by its letter. There was no breach of the
principles of natural justice which would warrant the interference of the court
under article 226 of the Constitution. Assessee had alternative remedy. Refer, Hindalco
Industries Ltd. .v. Addl. CIT, 359 ITR 46.
(k)
Advertisement, Marketing &
Publicity (AMP) Expenses :
(i)
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). Refer, Whirlpool of India Ltd. .v. DCIT, Delhi ITAT.
We
had earlier also discuss in detail about the concepts of Transfer pricing along with various case laws earlier in part
–I. 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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3
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TP Part 3
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4
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TP Part 4.
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In case you have any further
clarification, feel free to contact me at taxbymanish@yahoo.com or else you can view more articles & news related to Indian tax
& finance at http://taxbymanish.blogspot.in/.
Thank you.
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