Transfer Pricing

The Central Board of Direct Taxes (“CBDT”) has notified the time duration for the repatriation of income, accruing as a result of a ‘secondary adjustment’ under Section 92CE, to India. Accordingly, the time limit for repatriation shall be on or before 90 days from;-

i.due date u/s 139(1), where a suo-motto adjustment has been made by the assessee;

ii.date of the order of the AO/appellate authority, where the adjustment is resulting from the aforesaid order, and accepted by the assessee;

iii.due date u/s 139(1), where agreement for advance pricing has been entered by the assessee;

iv.due date u/s 139(1), where option under safe harbour has been exercised by the assessee; 

v.due date u/s 139(1), where an agreement under mutual agreement procedure has been under the DTAA;

The imputed cost of interest shall be computed at:

a.at one year marginal cost of lending rate of SBI plus 325 basis points, as on 1st April of the previous year, where the international transaction is denominated in Indian currency; or

b.at 6 months LIBOR  plus 300 basis points as on 30th September of the relevant previous year, where the international transaction is denominated in foreign currency.

For further reading, refer the attachment.

For further reading, refer the attachment.

The assessee, M/s Max India Limited, had incurred expenditure to the tune of `1.25 Crores on account of legal and professional charges paid to M/s Max UK Ltd., the associated enterprise (“AE”) of the assessee, in pursuance of agreement dated 10.07.1999. Further in response to the queries raised by the assessing officer, the assessee contended that it had benefitted from the aforementioned services as it had realised an export sale in excess of `29 Crores and that it had also benefitted in the area of Health Care Services pursuant to the notification received from the AE.

The assessing officer and the commissioner of income tax (appeal) (“CITA(A)”) alleged that the assessee had not furnished any details to establish that the services were infact rendered and that there was no material on record to establish that the AE was involved in any manner in obtaining the export orders for the assessee or in facilitating the exports.

Aggrieved by the order of the CIT(A) the assessee preferred an appeal with the ITAT wherein the hon’ble tribunal observed that the nature of services provided by M/s Max UK Ltd. were such that it was difficult to provide evidence of the services having actually been rendered. The tribunal further accepted that assessee’s contention that the fact the assessee was able to achieve an export turnover of `29 Crores was sufficient to prima-facie demonstrate that the services were infact rendered by the AE. The tribunal’s observation was further upheld by the Hon’ble High Court wherein the court observed that services such as the nature mentioned in the agreement would not necessarily be recorded in writing and may well be communicated orally. Thereby, concluding that the tribunal has taken a possible view.

The Delhi High Court quashed the departments appeal in case of the assessee in whose premises search and seizure proceedings took place but no new material much less incriminating material were found.

The assessing officer based on the information obtained during the course of the search the assessing officer (“AO”) referred the case to the transfer pricing officer (“TPO”) to determine the arm’s length price of interest-free advance given by the assessee to its associated enterprise. The TPO accordingly concluded the assessment by determining the interest rate ought to be charged by the assessee on the said advances. On appeal against the draft order of the AO the assessee preferred an appeal with the dispute resolution panel (“DRP”). The DRP upheld the findings of the TPO however gave a partial relief by way of reduced interest rate.

The assessee further challenged the final order of the AO with the ITAT wherein the hon’ble tribunal quashed the assessment proceedings principally on the ground that in the absence of seizure of any incriminating material during the course of search, the rule enunciated by the apex court in CIT vs. Kabul Chawla, in case of search proceedings where no incriminating material is found the assessment proceedings under section 153A/153C shall reiterate the order issued under the original assessment, was applicable invalidating the proceedings under Section 153A. On further appeal, the High Court also validated the order of the tribunal stating that in view of the decision in case of Kabul Chawla the court’s opinion did not fall into error in quashing the proceedings.

·            In this case, the assessee-company was engaged in the business of providing information technology enabled services to its group companies.

·            The TPO computed the ALP making an upward adjustment in respect of IT enabled services. While making the TP adjustment so as to determine the ALP, the TPO considered five comparables.

·            With regard to one of the comparables, there was no dispute that the comparable was functionally comparable to the assessee's case.However, the accounting year adopted by the said comparable was different from assessee's accounting year. The said comparable adopted 1st January to 31st December as accounting year, as against the accounting year adopted by the assessee as 1st April to 31st March.

·            The Hon’ble Tribunal was of the view that the data for the financial year, as that of the comparable, could be compiled from the audited accounts of the assessee company. Hence, the Hon’ble Tribunal directed the assessee to furnish data to the TPO, who after verification of the same, can determine the ALP.

·            The Hon’ble Tribunal, therefore, was of the view that a functionally comparable company ought not to be excluded from the list of comparables merely because it had a different accounting year.

For further reading, refer the attachment.

Woco Motherson Advanced Rubber Technologies Limited (“the assessee”) is a joint venture of Woco Franz Joseph Wolf Holding GmbH (“Woco Germany”) (66.67%) and Mothersons Sumi Systems Limited (“MSSL”) (33.33%). The assessee is a manufacturer of high quality rubber parts, rubber plastics parts, rubber metal parts and liquid silicon rubber parts. To undertake the manufacturing process, the assessee has licensed the manufacturing technology by Woco Germany at a NIL price and a technical service agreement with Woco Mothersons Sharjah ("Woco Sharjah") for achieving operational and technical competencies, relating to the know-how and technology transferred licensed to the assessee by Woco Germany.

During the year under consideration, the assessee has entered into several international transactions with its AEs including payment for technical service fees, amounting to INR 13,485,624/- paid to Woco Sharjah.

The transfer pricing officer in the course of assessment has determined the ALP of FTS as NIL owing to the following reasons:

Ø  Woco Germany is the owner of all intangibles associated with the manufacturing process adopted by the assessee and that Woco Sharjah does not provide any such services (rendition test) to any other AE;

Ø  The transaction has been routed through Sharjah albeit a tax-heaven to reduce overall tax base of the Woco group;

Ø  The services rendered by Woco Germany and Woco Sharjah are not distinct (duplicate service) and that Woco Sharjah does not possess requisite experience and expertise to provide for the technical services in the agreement;

Aggrieved by the draft order, the assessee preferred an appeal with the DRP. However, the DRP upheld the order of the TPO citing that same services were received by the assessee from Woco Germany, without any consideration and that the said transaction should have been benchmarked by adopting internal CUP. Thereby, rejecting TNMM adopted by the assessee.

Aggrieved by the same, the assessee filed an appeal with the ITAT.

The tribunal dismissed the approach adopted by the DRP contending the same to be unsustainable in law, as services rendered by an AE to another AE cannot be considered as an internal CUP. The tribunal further noted that while the agreement with Woco Germany was for “use of know how and inventions, the agreement with Woco Sharjah was for “provision for technical assistance required for the use of technology”. The ITAT observed that though the two agreements were interlinked and interconnected, their scope distinct and separate. The tribunal also noted that a lot of emphasis has been placed by the lower authorities on the ownership of intangibles, by way of manufacturing technology, what is essentially overlooked is that provision of technical assistance required for use of technology does not require that the technology, which is to be used in the manufacturing process, is not essentially required to be owned by the service provider for use of technology. Further, the ITAT held, In any event, once there was an agreement between Woco Sharjah and the assessee for rendition of technical services, it was immaterial as to whether the Woco Sharjah was in a position to render these services on its own or with the help of other group entities. 

Further in regards to the determination of ALP is concerned, the tribunal held that the ALP of the transaction is to be examined irrespective of the fact whether or not the person entering into transaction is in a high tax jurisdiction or a low tax jurisdiction. The tribunal noted that, base erosion, which is sought to be checked by the transfer pricing provisions in India, is the tax base in India, but then irrespective of whether the recipient is in UAE (Sharjah) or Germany, the withholding rate from fee for technical service is the same i.e. 10%. Also, the Indian transfer pricing cannot be, and is not, concerned with whether the Woco Group, as a whole, has been able to reduce tax burden by locating their units rendering technical services outside Germany. The ITAT also dismissed the revenue’s contention of treating the services rendered by Woco personnel as ‘shareholders activity’ stating the technical services can by no stretch of logic or by any convention, are treated as ‘shareholder services’. Thereby ruling that, the impugned ALP adjustment is devoid of any legally sustainable merits and must stand deleted. 

1. The appellant assessee made payment to its AE for the services on account of professional management fee for support services. The TPO proposed adjustment on account of arm’s length price in professional consultancy and management fee.

2. The claim of the appellant assessee was that the service charges were paid in respect of services availed from the AE which were the actual expenditure incurred by the AE and no element of profit was involved in the said payment. Assessee company, in this regard, furnished various details relating to segmental account, details of recovery of expenses, valuation of capital assets purchased from the AE, justification of technical assistance service, management and other service and professional consultancy services.

3. The Hon’ble Tribunal considered the fact that the export of the assessee increased by 59% during the year under consideration. The Tribunal further observed the fact that the ratio of increase in the export was much higher than the amount of services availed by the assessee from its AE.

4. The Tribunal further held that the transfer pricing provisions can be inferred only if there is a related party payment, but in the present case, the expenses incurred by the assessee were paid to the third party employees, although those employees were the employees of the AE. In the instant case, the assessee was in need of employees which were provided by its AEs, without any charge of profit accruing to the AE itself.In the present case, the TPO was unable to provide any cogent reason for the determination of arm’s length value of professional consultancy at Nil. On the contrary, the assessee explained the benefits received by it on account of the services received from AE.

5. As regards the applicability of TNMM, the Tribunal observed that the assessee rightly applied the TNMM method as most appropriate method because it was difficult to apply the CUP method or the cost plus method. Therefore, the TNMM was the most appropriate method in the absence of a CUP which is applicable where the nature of the activities involved, assets used, and risk assumed are comparable to those undertaken by an independent enterprise.

 For further reading, refer the attachment.

·         In this case, during the previous year 2009-10, the assessee entered into transactions of import of raw material from Indorama Petrochem Limited (IPL). The assessee’s case was, thereafter, picked up for scrutiny, which was required to be completed by the AO by 31^st March 2013.

·         In February 2013, the AO required the assessee to explain as to why the TP provisions should not be made applicable to the assessee company in respect of the transactions of import. However, the assessee, vide its reply, pointed out that IPL was not an AE of the assessee, and thus, the provisions of TP will not be attracted in assessee’s case.

·         Thereafter, no further query was raised by the AO, and the assessee, vide notice dated 31^st March 2013 was informed that the case has been referred to the TPO for determination of ALP.

·         In this regard, the Hon’ble Court has held that what is referred to the TPO is the determination of the ALP. Therefore, the satisfaction to be arrived at by the AO regarding the existence of international transaction, even prima facie, is a sin qua non for making the reference to the TPO.

·         The Court further made reference to the CBDT’s Instruction No. 2 of 2003, which categorically states that in order to make a reference to the TPO, the AO has to satisfy itself that the assessee has entered into an international transaction with its AE. Similar Instructions have been notified by the CBDT again vide its Instruction No. 3 of 2016 dated 10.03.2016.

·         The Hon’ble Court further clarified that the CBDT’s Instruction No. 3 of 2016 clarifies the correct legal position, is a procedural aspect and is intended to the benefit of the assessee, and thus, it requires to be applied even in the case of the assessee, where a reference was made by the AO to the TPO on 31.03.2013 and thereafter.

For further reading, refer the attachment.

The principle/conditions for using the Berry Ratio as a PLI are as follows:

1.      Rule 10B(1)(e) does not disregard use of Berry Ratio as a Profit Level Indicator (“PLI”) , since as per the rule, the net profit released by an enterprise is computed in relation to cost incurred or sales affected or assets employed or to be employed or any having regard to any other relevant base. Therefore, if operating cost is considered as an appropriate base, there would be no difficulty in using Berry Ratio as the PLI in terms of the said rule;

2.      Berry Ratio can be useful in situations where the value of goods have no role to play in the profits earned by an enterprise and that the profits so earned are directly linked with the operating expenditure incurred by the assessee.

3.      Berry Ratio is most suitable in case of stripped down distributors , wherein the distributors have no financial exposure and risk in respect of the goods distributed by them;

4.      Further, for Berry Ratio to be an effective PLI, the product mix of the assessee shall be similar to the product mix of the comparables.

5.      Berry Ratio would not be appropriate in case where the assessee uses intangibles as a part of its business. In these cases the value of such intangibles would not be captured under the operating expenses of the assessee;

6.      Berry Ratio would also not be appropriate to apply in cases where the assessee has made substantial investments in fixed assets since value added by such fixed assets does not get captured under operating expenses.