The transfer pricing regulations accompanied by ever changing and increased enforcement activities worldwide for rising volume and variety of intercompany transactions have made transfer pricing a leading risk management issue for global businesses. In continuation to our endeavor to keep our clients updated on the various mind boggling issues, we summarize below the list of strategic picks decided in the current fiscal for ready reference
- Mumbai – 21ITR (Trib) 1-Wills Processing Services (India) P. Ltd. v. Deputy Commissioner of Income-tax
Where the information relied upon by the Transfer Pricing Officer is not available in public domain, it is incumbent on the Transfer Pricing Officer to furnish the relevant information to the assessee. In a case where the information is not furnished to the assesseeit becomes secret information which cannot be used against the assessee.
In this case the Transfer Pricing Officer selected new comparables after obtaining information under section 133(6) which was not made available to the assessee so as to analyse and accept or reject a company as comparable and it is for this reason it is held that in this case the principles of natural justice had not been complied with by authorities in selection of comparables and determining the arm’s length price.
- Mumbai – 21ITR (Trib) 267 – Tecnimont ICB P. Ltd.
When it comes to OECD Transfer Pricing Guidelines issued on July 22, 2010, that recommend the use of internal comparable data for benchmarking analysis one cannot lose sight of this decision in which while holding that that preference shall be given to internal comparable uncontrolled transactions vis-a-vis externally comparable uncontrolled transactions yet it held that the net profit margin realized from a transaction with an associated enterprises cannot be taken as a comparable being an internal comparable for computation of the arm’s length price of an international transaction with another associated enterprise even though the net margin from a transaction with associated enterprises is found and accepted at the arm’s length price. In this case the assessee builds up its argument of internal comparable on the basis of the transaction between its subsidiary and their associated enterprise which is found to be at arm’s length. The bench said that the subsidiary’s transactions whether controlled or uncontrolled are no comparables.
- Delhi -354ITR549-Commissioner of Income-tax v. Cheil Communications India Pvt. Ltd.
No reassessment is possible for arm’s length price determination unless a fault is found in the assessee’s course of price determination. According to the Delhi High Court even in the course of a regular assessment, the TPO would have to have some material, information or document in his possession on the basis of which he could come to any one of the four opinions indicated in section92C (3) viz. defects in form 3CEB filing, methodology, documents keeping and data usage in price determination. All said and done the TPO must have tangible material to form such opinion. In other words, the TPO could proceed to determine the arm’s length price only if there was a fault found with the determination of the arm’s length price by the assessee on such four stratums.
The test of “tangible material”has been enunciated in a judgment of the Supreme Court in CIT v. Kelvinator of India Ltd.  320 ITR 561. On the basis of these rulings the assesseemay challenge the action u/s 92C(3) and claim that the TPO possessed no tangible material to describe as faulty the TP report of the assessee.
- Mumbai-93DTR (Trib) 249- Vodafone India Services (P) Ltd. v. Dy CIT
It is in this decision that the Mumbai bench held that no dissection of ITES services will be proper in the selection of comparables. The bench took the stand that high end or low end segment of ITES could not be ground for exclusion or inclusion of a comparable. Thus the plea that supernormal profit companies be excluded as not comparable is a past as far as ITES/BPO companies.
The Delhi bench in American Express Services India Ltd. v. Dy CIT (151TTJ743) also stressed that there is no merit in the law to exclude supernormal making comparables unless the business module/model adopted by such companies are materially at variance to the tested party i.e. if two companies are functionally different.
- Mumbai- 95DTR (Trib) 57- Tecnimont ICB (P) Ltd. v. Dy CIT
The bench confirmed a an adjusted rate of 3 % for corporate/counter guarantees on the basis of indicator data gathered from SBI for rate charged on bank guarantee.
- Mumbai- 95DTR (Trib) 100- Mattel Toys (I) (P) Ltd. v Dy CIT
As per the bench even if the asessee had adopted TNMM as the most appropriate method in the transfer pricing report , then also the assessee is not precluded from raising the contentions/objections before the TPO or the appellate courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and that some other method should be resorted. In this case the assessee during TP proceedings came with a plea that gross profit margin should be compared instead of operating profit for its distribution activities and the most appropriate method for bench marking the ALP should be done through RPM . Originally it made out its case on TNMM.
In other words the assessee does not lose it choice and it can revise its selection of pricing method during TP assessment.
- Mumbai- 151TTJ1- Evonik Degussa India (P) Ltd. v. Asstt CIT
While dealing with the subject of notional interest on alleged delayed payment in collection of receivables from AEs the Mumbai bench held that the TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under-charging of real income. In this case the assessee is found to be a zero debt company and it had no borrowings from external sources so that it was inferred that it had no interest cost in its accounts. Further in the absence of anything suggesting in the agreement whereby any interest is to be charged the bench held that the adjustment for notional interest is uncalled for.
- Delhi-151TTJ177- Transwitch India (P) Ltd. v. Dy CIT
By the Delhi bench decision the assessee can resort to adjustments to the existing TPO study which can improve the operating margin over the operating margin of comparable companies. The bench in this regard recounted the age old principle laid down by the SC in Commissioner of Income-tax v. Parakh (C.) and Co. (India) Ltd.( 1956) 29ITR661 by which whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights. That was a case where in the assessee erroneously allocated a part of commission towards the profits earned in Karachi thus losing deduction. In the present TP case the TP study failed to exclude the abnormal cost debited in the profit and loss account.
Thus, under the law there is no estoppel from revising the TP document at the time of TP assessment to make legitimate adjustments or corrections or selection of comparables. It is thus always better to revisit the TP study before presenting to the TPO.
- Chennai bench -Ascendas (India) (P) Ltd vs. DCIT – 152TTJ57
It is in this case, discounted cash flow method (viz. fixing enterprise value based on discounted value of future profits or cash flows) was taken as the most appropriate method for ascertaining the ALP of the transaction of sale of shareholding in the private companies by the assessee company/joint venture partner company to its AE as none of the prescribed methods mentioned in sec.92C appeared to the bench to be appropriate for transfer pricing analysis. Cutting across lines the bench held that the interpretation of the word “shall” in sec. 92C(1) need not always be mandatory; it can also be read as “may”; therefore in their viewpoint a water tight attitude of interpretation of the prescribed methods would defeat the very purpose of enactment of transfer pricing rules & regulations and also detrimentally affect the effective and fair administration of an international tax regime.
- Chennai- 22ITR (Trib) 205- Assistant Commissioner of Income-tax v. SRA Systems Ltd.
The arbitrary selection of comparables by the TPO while rejecting those selected by the assessee without assigning reasons can lead to dismissal of appeal.
Here is a case where the TPO acted exactly in opposite of what is included or excluded as comparable by the assessee in its TP report analysis without assigning any reasons. The following finding is worth noting:
“ It is seen that the Assessing Officer has rejected the cases of comparison provided by the assessee-company without stating any reason. In the case of M/s. AntarixEapplication Ltd., the assessee-company has not relied upon the same for the reason that the area of comparability is not the same. But the Transfer Pricing Officer took the opposite view without stating any reason. Likewise, in the case of M/s. E.StarInfotech Ltd., the assessee-company opted it out for the reason that the said firm was providing more of information technology services rather than software services. This is also turned down by the Transfer Pricing Officer without stating any reason. This is the case with many other comparables like M/s. Fortune Informatics Ltd., M/s. Four Soft Ltd., M/s. National Informatics Centre Services Inc., M/s. Zen Technologies Ltd., etc.
In these circumstances, we find that even though the Transfer Pricing Officer has adopted the transactional net margin method to compute the arm’s length price, he has overruled the objections of the assessee without stating any reason. The arbitrary selection of comparables has in fact inflated the operating profit in the computation made by the Transfer Pricing Officer. Therefore, we find that there is no factual basis for the addition of the differential amount of Rs. 4.58 crores worked out by the Transfer Pricing Officer and adopted by the Assessing Officer.”
Similarly the list of comparable companies relied upon by the assesseecompany has been rejected by the Transfer Pricing Officer without stating any reason.
The bench recorded the following findings this case:
- That the Transfer Pricing Officer has no case that the assessee-company has not maintained proper information and documentation relating to the international transactions;
- That there is no dispute for the Transfer Pricing Officer on the information and data used in the computation of the arm’s length price, which related to the relevant financial year.
- Li and Fung India Private Limited- ITA No. 306/2012 dated 16th December 2013(DHC)- Recent
The assessee company who represented interests of Hong Kong associate stayed in India for the exclusive purpose of buying/sourcing high volume, time sensitive consumer goods viz. garments, handicrafts, leather products etc for its holding company in Honk Kong/ retail chains overseas viz. AE’s customers. This is a kind of outsourcing or sub-contracting arrangement for which the Indian entity was remunerated at cost plus a markup of 5% for the services rendered. Cost meaning under the arrangement is the operating cost of assessee’s outfit borne by it when the assessee claimed that it was a low risk captive sourcing service provider performing limited functions with minimal risk. For the TP study it adopted the cost based transactional net margin method (TNMM) and computed the PLI at operating profit margin/total cost at 5.17% which exceeded the weighted average operating margin of 4.07 % of 26 other comparable companies so that it claimed that its remuneration was at arms’ length.
The TPO who did not dispute the TNMM or the comparables held that the cost base should be the value of cost of sales/value of exports by the manufacturers who sole goods through the assessee. The TPO/CIT (A) /Tribunal unanimously held that the assessee ought to have received 5% on the FOB value of the goods sourced through the assessee (i.e. the exports made by the Indian manufacturers to overseas third party customers). In their opinion the assessee was a risk bearing entity and an independent entrepreneur and it could not be said that the assessee is a risk-free entity.
Dismissing revenue appeal the Delhi High Court held that to apply the TNMM, the assessee’s net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE especially when the assessee acts as an agent or intermediary in the provision of the buying/outsourcing/sub-contracting service with no or little risks. That according the High Court is a lawful tax planning measure and any attempt to disregard such method would not be in compliance with the IT Act and Rules of Income Tax.
The High Court held that to regard the assessee as a risk bearing entity should be based on tangible material which is not borne out from the TPO order. For instance the Court found that the assessee company’s costs towards establishment, transportation, salaries, etc. were fully reimbursed, and it was insulated from any economic or financial downside to any particular transaction. It found that its remuneration was based entirely on the costs borne by it so that in essence, it is a low risk contract service provider exclusively rendering sourcing support to the AE. Also it did not bear any significant operational risks either for its functions, rendered to the third party vendor/customers. Rather, it is the AE that undertakes substantial functions and in fact assumes enterprise risks, such as market risk, credit risk etc. It also bears the letter of credit associated charges and other expenses.
CA Gopal Nathani