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Following the order of the Bombay High Court in the case of Vodafone India [361 ITR 531 (Bom.)], the Mumbai Tribunal has held that no adjustment can be made in the case of an international transaction where the tax rate of the country of the Associated Enterprise is higher than the tax rate in India. 

The Tribunal further held that where the assessee is enjoying a tax holiday such as those under Sec. 10A or Sec. 80HHE, there can not be a motive for avoidance of tax and hence transfer pricing adjustment cannot be made.

The Tribunal held that the judgement passed by the jurisdictional High Court in the case of Vodafone India shall supercede the order passed by the Special Bench of the Bangalore ITAT. 

Delhi ITAT in the case of American Express India Pvt Ltd has held that comparables on grounds of extraordinary activities such as amalgamation, merger, etc. should be excluded. The Tribunal has allowed exclusion of comparables outsourcing majority of functions. The Tribunal allowed selection of functionally comparable companies where limited segmental information is available.

Rejecting the arguments of the TPO/DRP, the Delhi Tribunal has held that working capital adjustment should be allowedin the case of sevice industry. The Tribunal opined that where a company carries high trade receivables, it will lead to higher interest cost and lower net profit. Similary would be the case where the company has high trade payables, where it will benefit from lower interest cost and higher net profits. In order to neutralise the difference on account of such high trade receivables and/or inventory, it is important to allow working capital adjustment so as to bring the company at par with its comparables.

ITAT Bangalore holds that Internal TNMM should be preferred over External TNMM. The Tribunal relied on the Third Member ruling in the case of Technimont ICB Pvt Ltd holding that internal comparable is always preferable over external comparable when relevant data is available. [Agila Specialities Pvt. Ltd. v. DCIT

Bombay High Court dismisses Revenues appeal holding Transfer pricing adjustments can only be limited to transactions with Associated Enterprises (AE) and not on transactions with non-AE. [Tara Jewels Exports Pvt Ltd] Hence, where TNMM is used to determine ALP, the margin is only to be applied on sales/purchases with AE and not on the complete turnover of the assessee.

The Central Board for Direct Taxes (“CBDT”) have issued vide notification dated 19^th October 2015, the rules to compute the arm’s length price (“ALP”) where more than one comparable data is obtained by selecting the most appropriate method (“MAM”).

New rule 10CA has been introduced in order to determine the ALP of an international transaction or specified domestic transaction, where the selected of MAM results in more than one comparable data.

According to the rule 10CA, if the assessee has entered into similar comparable uncontrolled transaction in either of the two financial years immediately preceding the current year, then the MAM used to determine the ALP shall be similar to that adopted in such years by adopting the weighted average price[1] for the results of the years in consideration.

Further, according to the notification if the MAM adopted by the assessee is any method other than the profit split method (“PSM”) or other method as provided in rule 10AB and the resulting set consists of six or more comparables, then the ALP shall be deemed to fall within the range of the thirty-fifth percentile and sixty-fifth percentile[2] of the comparables results. However, if the result of the assessee falls outside the range, then the ALP shall be determined as the median[3] of the range of results.

However, if the resulting set of comparables consists of less than six comparable then the ALP shall be determined by using the arithmetic mean of the results with a tolerance limit of +3%.

Further, As per the notification, for any international transaction or specified domestic transaction entered on or after 1^st April 2014, where the MAM selected is either resale price method (“RPM”), cost plus method (“CPM”) or the transactional net margin method (“TNMM”), then the data to be used for comparability shall be the data for current year or data for the financial year immediately preceding the current year if the data for the current year is not available. The CBDT in its attempt to validate the authenticity of the data has substituted the use of such financial year in proviso to sub-rule (4) with current year. The notification further provides that if the data for current year is not available at the time of filing the return but the same is available at the time of assessment, then such data shall be used to compute the arm’s length return irrespective of the fact that the data was not available at the time of filing of the return[4].

Key takeaways

1.    By preferring the use of current year data, the CBDT has rendered the preparation if the transfer pricing reports, based on previous year data, a redundant exercise. The assessee and transfer pricing practitioners shall now prepare the data at the time when the current year data of comparables are available.

2.    The use of range concept by substituting the arithmetic mean was amongst the long standing demands of the transfer pricing practitioners. By allowing the use of range, the CBDT has incorporated the practice similar to that of its overseas counterparts where the ALP is determined using the interquartile range. However, the CBDT has allowed the benefit of only the middle thirty percentile instead of the middle fifty percentile used internationally.

Ministry of Corporate Affairs through General Circular 27/2014 has extended the date of filling of form DPT-4 (Return of Deposit received from persons other than Directors) under the Provision of Companies Act, 2013 for the period of 2 Months i.e up to 31-08-2014 without any additional fees in terms of section 403.

Bombay HC has nullified the notification of new rules by MCA as the same have not been published in the official gazette.The court held that publication in gazette is not an idle formality and cannot be fulfilled by simply uploading a scanned pdf on the website. The court has held that till the time the rules are published in gazette,they cannot be said to be in force.

The Delhi ITAT in the recent judgement of Tilda Riceland Pvt Ltd. V. ACIT has accepted the use of Private Database while applying CUP method. The Tribunal held that the Rule 10D does not bar databases compiled by private entities. 

The Assessee in the given case had selected CUP method as the most appropriate method and had relied on 'daily export port data' generated from Tips Software, a database compiled from public data obtained from Customs Authority by a private entity. 

The TPO rejected the data stating that private databases were not covered in Rule 10D(3) as authentic documents. The ITAT rejected the TPO's logic stating that Rule 10D(3) states only an illustrative list and does not preclude any other databases. It further held that the data is public data maintained by the customs department at various ports and it was also open to the TPO to call for further information from this database supplier and examine authenticity of the data so furnished.

The argument, based on BMW India Pvt. Ltd. vs. ACIT (Del) that as the assessee was a full fledged distributor and as such the benefit of AMP expenses did not spill over to the foreign AE is not acceptable because the Special Bench order in LG Electronics is applicable with full force on all the classes of the assessees, whether they are licensed manufacturers or distributors. The Bench in BMW did not have any occasion to bestow its attention to the correctness of the application by the TPO of the aforesaid parameters laid down in the special bench order as these were naturally not considered by the Officer since he passed his order much before the advent of the special bench order. There is no prize for guessing that Special Bench order has more force and binding effect over the Division Bench order on the same issue