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CIT vs. Agnity India Technologies (Delhi High Court)
» 157.5 KiB - 1,646 hits - July 10, 2013
Transfer Pricing: Companies with extreme turnover like Infosys are not comparable The assessee, a wholly owned subsidiary of Bay Packets Inc., USA, was engaged in the business of development of software for the parent company in the field of telecommunications. To determine the arms' length price, the TPO & DRP took Infosys Technologies as a comparable. On appeal by the assessee, the Tribunal (included in file) held that the assessee was not comparable with Infosys as Infosys was a large and bigger company in the area of development of software and the profits earned by it cannot be benchmarked or equated with the assessee's results. One of the aspects pointed out by the Tribunal was that Infosys' turnover was Rs. 9,028 crores while that of the assessee was only Rs. 16.09 crores. On appeal by the department to the High Court, HELD dismissing the appeal: The Tribunal's findings that Infosys should be excluded from the list of comparables for the reason that (i) Infosys was a giant company and it assumed all risks leading to higher profits, whereas the assessee was a captive unit of the parent company and assumed only a limited risk and (ii) that the financial data (turnover) was not comparable has not been controverted by the Revenue. The Tribunal has given valid and good reasons for excluding Infosys as a comparable. Note: This has a bearing on the question whether the turnover filter should be applied which is pending before the Special Bench in Giesecke & Devirent (ITA No.5924/Del/2012)
Vijai Electricals Ltd vs. ACIT (ITAT Hyderabad)
» 170.2 KiB - 1,518 hits - May 31, 2013
Transfer pricing provisions do not apply (i) to an investment in share capital of overseas companies & (ii) to transactions where no “income” has arisen The assessee invested Rs. 21 crores in the share capital of its overseas subsidiaries. The AO completed the assessment without making any transfer pricing adjustment. The CIT revised the assessment u/s 263 on the ground that the transaction was an “international transaction” u/s 92B and that the AO ought to have referred the matter to the TPO to determine whether the investments were made at arm’s length. The assessee filed an appeal before the Tribunal in which it argued (i) that an investment in the share capital of another company was not an “international transaction” u/s 92-B and (ii) as there was no “income“, the transfer pricing provisions did not apply. HELD by the Tribunal upholding the plea: An amount paid for investment in share capital of subsidiaries outside India is not in the nature of an “international transaction” as defined in s. 92-B. Transfer pricing provisions are not applicable to transactions where there is no income (Circular No. 14, dated 22/11/2011, Dana Corporation 321 ITR 178 (AAR) & Amiantit International 322 ITR 678 (AAR) referred) Note: On the point that transfer pricing provisions do not apply where there is no ‘income’ see the contrary view in Perot Systems 130 TTJ 685 (Del) & the series of judgements on “notional interest”
CIT vs. Stratex Net Works (India) Pvt. Ltd (Delhi High Court)
» 122.7 KiB - 1,055 hits - May 6, 2013
Transfer Pricing: All related transactions cannot be considered for PLI determination: The assessee’s parent company, Digital Microwave Corporation USA, supplied equipment to Indian customers for which the assessee received commission. The said equipment was covered by warranty and the service relating thereto was provided by the assessee. The assessee also undertook installation of the said equipment and provided annual maintenance. The assessee claimed that while the receipt of commission and the provision of warranty service were “international transactions” with the AE and subject to transfer pricing regulations, the installation & maintenance service was an independent transaction and could not be considered while computing the PLI for determining the ALP. The TPO rejected the claim and held that in computing the profit level indicator of the international transactions involving warranty services and commission income, the operating revenue and operating costs of the installation/commissioning and maintenance services had to be taken. The CIT(A) & Tribunal upheld the assessee’s claim. On appeal by the department to the High Court, HELD dismissing the appeal: The department’s argument that the installation, commissioning & maintenance services were intricately connected with the international transactions of warranty support services and commission income and that their operating cost and operating revenue had to be considered while computing the profit level indicator is not acceptable because the installation/ commissioning and maintenance agreements were independent agreements unconnected with the transactions of warranty support services and commission income. This is shown by the fact that while the equipment was supplied to 40 customers by the AE, only three of them availed of the installation services from the assessee. Also, a corroborative circumstance for construing the transactions of installation/commissioning and maintenance as domestic transactions was that the TPO had made no adjustment in respect of these transactions. The transactions pertaining to the installation/commissioning and maintenance services were also not deemed international transactions u/s 92B(2) because none of the conditions stipulated therein of a prior agreement existing between the customers of the assessee and the AE have been established as a fact. Moreover, there is no finding that the terms of the transaction of installation/commissioning as well as maintenance had been determined in substance between the customers and the assessee by the AE. In the absence of such finding, it cannot be deemed that the transaction of installation/commissioning as well as provision of maintenance services by the assessee to its domestic customers in India were international transactions falling within s. 92B(2). For more on “deemed international transaction” u/s 92B(2) see Kodak India (ITAT Mumbai)
IHG IT Services (India) Pvt. Ltd vs. ITO (ITAT Delhi Special Bench)
» 52.7 KiB - 4,324 hits - April 30, 2013
Transfer Pricing: Scope of +/- 5% tolerance adjustment to ALP explained. The Special Bench was constituted to consider whether prior to the insertion of the second proviso to s. 92C(2), the benefit of 5% tolerance margin as prescribed under proviso to s. 92C(2) for the purposes of determining the arm’s length price of an international transaction is allowable as a standard deduction in all cases, or is allowable only if the difference is less than 5%. In the meanwhile the second proviso to s. 92C(2) was amended by the Finance Act, 2012 with retrospective effect from 1.4.2002. The assessee claimed, relying on Piagio Vehicle P. Ltd. vs. DCIT that even after the retrospective amendment by the Finance Act, 2012, it was entitled to the benefit of adjustment of +/- 5% variation while computing the ALP. It was also argued that the amendment was unconstitutional. HELD by the Special Bench: There was a controversy on whether the +/- 5% tolerance adjustment was a standard deduction or not. After the retrospective amendment to the second proviso to s. 92C by the Finance Act, 2012 with retrospective effect from 1.4.2002, it is evident that if the variation between the arm’s length price and the price at which international transaction was actually undertaken does not exceed the specified percentage, then only the price at which the international transaction has actually been undertaken shall be deemed to be arm’s length price. Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there would be no benefit even up to tolerance margin. Then, the ALP as worked out under s. 92C(1) shall be taken as ALP without any benefit of tolerance margin. The view taken in Piagio Vehicle was without considering the amendment and is per incuriam and not good law. The challenge to the constitutional validity of the retrospective amendment cannot be made before the Tribunal as it is a creation of the Act and not a constitutional authority.
Kodak India Pvt. Ltd vs. ACIT (ITAT Mumbai)
» 338.2 KiB - 1,287 hits - April 30, 2013
Transfer Pricing: Domestic leg of cross-border deal, even if consequential to overseas deal by parent AE, not covered if terms not dictated by parent AE Eastman Kodak, USA, entered into an agreement with Onex Healthcare Holdings, USA, for the global sale by Eastman of the medical business to Onex for a consideration of USD 23.5 Billion. Pursuant to this, the assessee, the Indian subsidiary of Eastman Kodak, sold the Indian business to the Indian subsidiary of Onex for a consideration of USD 13.54 Million. The assessee claimed that as it was not an Associated Enterprise of the buyer and as both the seller and the buyer were residents, the transfer pricing provisions did not apply. However, the TPO invoked s. 92B(2) and held that though the transaction was with a person other than an AE, it attracted the transfer pricing provisions as there was a prior agreement in relation to the said transaction between such other person and the AE and/or the terms of the relevant transaction were determined in substance between such other person and the AE. The TPO computed the ALP by applying the “ratio of revenue” method and determined the ALP at USD 32.9 million and made an adjustment of Rs. 79.96 crores. This was upheld by the DRP. On appeal by the assessee to the Tribunal, HELD reversing the TPO & DRP: (i) Though s. 92B(2) provides for a situation where even a transaction between two non-associated enterprises can be subject to the transfer pricing provisions, it is essential that there should first be an “AE” with whom there exists an “international transaction” before it can be examined whether the international transaction with the “the non-AE” exists or not. On facts, the agreement between the two foreign companies was independent of the agreement between the two Indian domestic companies. The assessee had full authorization to perform and take its own decision with regard to the sale of the imaging segment to the buyer. Even if one accepts that the sale agreement by the assessee was as the result of prior agreement or was consequential upon the agreement between the two non resident companies, yet, as the holding company had not dictated the terms and conditions of the sale and the entire exercise of transfer of imaging segment was independently done on its own terms by the assessee and the buyer, the deeming provision of s. 92B(2) does not apply. The Department’s argument that the legal character of the assessee and the other enterprise be disregarded due to the influence of the agreement between the foreign holding companies is not acceptable (Vodafone vs. UOI 341 ITR 1 (SC) followed); (ii) Further, the TPO was not justified in adopting an alien method for arriving at the ALP. U/s 92C(1) read with Rule 10B, the ALP can be determined only by adopting one of the prescribed methods and by no other (LG Electronics (SB) followed).
Onward Technologies Limited vs. DCIT (ITAT Mumbai)
» 144.4 KiB - 1,010 hits - April 30, 2013
Transfer Pricing: Foreign AE cannot be the tested party. TP additions can exceed overall group profits The Tribunal had to consider the following important transfer pricing issues: (i) whether the foreign AE can be taken as as the tested party & if the sale price received by the foreign AEs from the services ultimately sold to customers is equal to that charged by the assessee from its AEs, it would show that the international transaction between the assessee and the AEs is at ALP? (ii) whether the transfer pricing additions can result in the overall profit of the group of AEs being breached? & (iii) whether if the assessee has consistently followed a method for determination of the ALP and the same has been accepted by the TPO in the past, he cannot reject that method for the current year? HELD by the Tribunal: (i) The argument that the foreign AE should be selected as the tested party and the profit earned by the foreign AE from outside comparables should be compared with the price charged by the assessee from the AE to determine whether they are at ALP is not acceptable because under the scheme of s. 92C, the profit actually realized by the Indian assessee from the transaction with its foreign AE has to be compared with that of the comparables. There is no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and its foreign AE. The contention that the profit earned by the foreign AE should be substituted for the profit of the comparables is patently unacceptable. The fact that this may be permissible under the US and UK transfer pricing regulations is irrelevant; (ii) The contention of the assessee that the authorities cannot go beyond the overall profit of the group of AEs in determining the ALP of the international transaction is also not acceptable because it will constitute a new method/ yardstick for determining the ALP. The transfer pricing adjustments made in India may result in the overall profit earned by all the AEs taken as one unit being breached; (iii) The contention that as the assessee consistently followed the same method for determination of the ALP and it was accepted by the TPO in the past, he cannot take a different view is not acceptable. A delicate balance needs to be maintained between the principle of consistency and the rule of res judicata. There is no estoppel against the provisions of the Act. As the method employed by the assessee for determining the ALP is contrary to the statutory provisions, the inadvertent acceptance of the wrong method by the TPO in an earlier year does not grant a license to the assessee to continue calculating the ALP in the grossly erroneous manner in perpetuity. It needs to be discontinued forthwith.
Vodafone India Services Pvt. Ltd vs. DCIT (ITAT Mumbai)
» 218.3 KiB - 1,326 hits - April 26, 2013
Transfer Pricing: “High End” Cos in ITES/BPO sector comparable to “Low End” ones The assessee raised three contentions in support of the contention that its charges were at ALP: (i) that the assessee was engaged in the “low end” activity of “voice based call centre” and that the comparables chosen by the TPO were not functionally comparable as they were engaged in the “high end” activity of “knowledge process outsourcing (KPO)“, “software development” etc, (ii) that the margin has to be computed on the basis of return on asset employed (ROA) or on capital employed (ROCE) and not on the basis of operating cost & (iii) that as its income was exempt u/s 10A, there was no ‘tax avoidance‘ and the transfer pricing provisions could not apply. HELD by the Tribunal: (i) The argument that the ITES/BPO industry has several segments starting from low end segment such ‘call centre’, ‘customer care’ to high end segments such as ‘KPO’, ‘content development’ etc. in which there is wide variation in the billing rates and that high end services are not comparable to the low end services is not acceptable because under Rule 10B(2) the comparability of an international transaction with an uncontrolled transaction has to be judged with the reference to the services provided, functions performed, asset employed and risk assumed. All companies which are in the ITES segment are providing similar services and difference is in the internal working which is reflected through difference in qualifications and skills of the employees. The difference in skill/ qualification of the employees and their payment structure and the difference in billing rate does not affect the comparability in any significant manner under TNMM; (ii) Though Rule 10B(1)(e) gives the option of computing the margin in relation to asset employed (ROA or ROCE), the OECD and the United Nations TP manual provide that ROCA/ROA are suitable only for manufacturing and other capital or asset intensive industries and not for the service sector. In the case of service companies, the main asset is employees which is not reflected in the balance sheet and, therefore, ROCA/ROA will not be an appropriate method for the purpose of computation of margin; (iii) The argument that as the assessee’s income is exempt u/s 10A, there was no tax avoidance in transferring profit to a low tax jurisdiction is not acceptable because the law has to be applied as enacted. There is no provision in the transfer pricing regulations that for applying the said provisions the revenue has to prove tax avoidance. Once there is a international transaction, the ALP has to be computed as per the prescribed methods.
Marubeni India Pvt. Ltd vs. DIT (Delhi High Court)
» 253.4 KiB - 995 hits - April 25, 2013
Transfer Pricing: In computing ALP, interest & abnormal costs to be excluded The assessee rendered marketing support services to its foreign AE for which it earned a commission. The assessee claimed that in determining the ALP, the interest earned by it on short-term deposits arose from a core treasury function and had to be included in the operating profit and the expenses incurred by it on closure of business were ‘abnormal’ and had to be excluded from the operating profit. The TPO, CIT(A) and Tribunal (144 TTJ 474) rejected the assessee’s contention. On appeal by the assessee to the High Court, HELD: (i) The question whether a particular activity of the assessee such as the interest generating activity should be taken into consideration in the determination of the ALP is a question which needs to be decided considering the nature of the business of the assessee and its’ “business model”. The Tribunal rightly held that as the earning of interest income was only the result of investment of surplus funds and was not a primary income-generating activity, the interest income had to be excluded from the “operating profit” for purposes of determination of ALP; (ii) It is not possible to lay down a formula that would be applicable universally to determine whether a particular expenditure or cost incurred by the assessee is a normal or abnormal item of expense in cases relating to transfer pricing. If the assessee is compensated for its service on the basis of cost plus 10%, the question may arise as to whether the compensation paid for closure of the Indian units can be considered to be normal or abnormal cost, because the compensation would directly depend or vary according to the quantum of the costs. But if the assessee is being compensated by a fee or commission which has no connection with the costs incurred, such costs would be treated as abnormal. On facts, as the assessee was being compensated by way of a commission of fees by the AE and not on cost plus basis, the compensation paid in connection with the closure of the Indian units represents abnormal costs which have to be excluded for determining the ALP.
Aurionpro Solutions Ltd vs. ACIT (ITAT Mumbai)
» 181.5 KiB - 1,069 hits - April 12, 2013
Transfer Pricing: Even business advances have to be benchmarked on Libor ALP The assessee, an Indian company, gave loans of Rs. 15.65 crores to its AEs in USA, Singapore and Bahrain. It claimed that the said loans were “working capital advances” given for commercial consideration to secure business and that no interest was recoverable on it. The TPO applied the CUP method and determined the ALP of the advances at LIBOR plus 3% mark up. The DRP held that only inbound loans (ECBs) taken by the Indian entities from outside India could be benchmarked with LIBOR and that outbound loans had to be benchmarked on the interest rate prevailing in India on corporate bonds. It treated the advance as an unrated bond having very high risk and enhanced the assessment by directing the TPO to adopt 14% as the ALP rate. On appeal by the assessee, HELD reversing the DRP: The assessee’s argument that the non-charging of interest on the working capital advances to AEs from whom the assessee was getting good business was justified by commercial considerations and that no transfer pricing adjustment is warranted is not acceptable because the existence or non-existence of commercial consideration between the assessee and the AEs is not a required condition for applicability of the TP regulations Further, the advance was not the credit period extended to the AEs in respect of business transactions but was a transaction of advancing loans to the AEs which falls under the ambit of “international transaction” u/s 92B. In principle, the DRP is justified in its view that the ALP should be determined on the basis of the interest rate that would have been earned by the assessee by advancing loans to an unrelated third party (in India) such as a Fixed Deposit with the Bank. However, since LIBOR has been accepted by the Tribunal in other cases, the ALP should be determined on the basis of LIBOR + 2% (Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) referred). See also Cotton Naturals (ITAT Del) & contrast with Evonik Degussa, Nimbus Communication 139 TTJ 214 (Mum) & Patni 141 TTJ 190 (Pune)
Sandoz Private Limited vs. DCIT (ITAT Mumbai)
» 175.0 KiB - 1,094 hits - April 5, 2013
Transfer Pricing: ALP should be determined on segment-wise profits & not at an entity level. Adjustment cannot be made to the entire entity turnover/ profits: The assessee entered into several international transactions with its AE and claimed that there were at arm’s length on the basis of a segment-wise TNMM analysis for each of them. The TPO rejected the claim on the ground that the segment-wise accounts were not audited. He adopted an entity method approach for purposes of determining the ALP. However, while rejecting the segmental analysis undertaken by the assessee, the TPO accepted 4 segments of the assessee’s operations and identified comparables. He arrived at different arithmetical means of appropriate profit level indicators by taking operating profit by cost of various identified comparables in each segment. He thereafter gave weighted average to the assessee’s percentage of turnover out of the total turnover and determined the weighted average of the arithmetic mean in each segments and arrived at the operating profit at 18.09% at entity level. This was taken as the arm’s length profit margin and as the assessee’s operating margin of 4.78% operating cost was less than the ALP so determined, an adjustment of Rs. 82 crore was made to the assessee’s income. Before the DRP, the assessee furnished audited segmental accounts though these were ignored by it. On appeal by the assessee to the Tribunal, HELD: As the assessee’s operates in four different & independent segments and it submitted segmental accounts for each of its operation, the correct approach under TNMM should be to determine the ALP of each of the segments by comparing with the corresponding comparables involved in similar lines of functioning after proper FAR analysis. As the TPO had details of each segment-wise profit margin of the comparables, he ought to have compared the relevant profit margins with that of the assessee’s profit margins in each segment. His approach of taking the weighted average method of arriving at entity based profit margin is not correct. Also, his approach of making the adjustment on the entire turnover of the assessee including transactions with non-AEs instead of restricting it to the AEs’ transactions is not supported by the transfer pricing provisions. Further, in arriving at the segment-wise profit margin, the TPO should carry out an analysis of each company’s business activity, why they are selected as comparable and what are the functions of the company, operating margins, etc. He should adopt proper parameters/filters in respect of each segment. If the assessee opposes the selection of comparables by the TPO, it is the responsibility of the TPO to furnish necessary details. The onus cannot be shifted to the assessee when it is contending that proper data is not available in public domain in this regard.
CIT vs. Mentor Graphics (Noida) Pvt. Ltd (Delhi High Court)
» 171.6 KiB - 650 hits - April 4, 2013
Transfer Pricing: If more than one price is determined by the most appropriate method, the ALP has to be the arithmetical mean of such prices The assessee was engaged in providing “software development support services” by which it developed software upon the instructions of its parent associated enterprise (IKOS Systems Inc). The entire software developed by the assessee was used by the parent AE captively for integrating the same with other software components developed by it. The assessee adopted the TNMM and claimed that its transactions were at ALP. The TPO rejected the assessee’s comparables on general grounds and selected his own comparables and used figures for a subsequent year. He determined the ALP at a much higher figure and made an adjustment. On appeal by the assessee, the Tribunal (109 ITD 101) held that the criteria adopted by the TPO for searching comparables was not correct. It held that the TPO was wrong in selecting his own comparables without first rejecting the assessee’s comparables. It also held that where one of the prices determined by the most appropriate method is less than the price as indicated by the assessee, that may be selected and there would be no need to adopt the process of taking the arithmetical mean of all the prices arrived at through the employment of the most appropriate method. On appeal by the department to the High Court, HELD: The Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, is lower than the profit level indicator of the taxpayer, then the transaction reported by the taxpayer is at an arm’s length price and there is no need to take the arithmetical mean. The proviso to s. 92C(2) is explicit that where more than one price is determined by most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. The Tribunal was also wrong in the finding that unless and until the comparables drawn by the taxpayer were rejected, a fresh search by the TPO could not be conducted because s. 92C (3) which stipulates four situations where under the AO/ TPO may proceed to determine the ALP in relation to an international transaction. If any one of those four conditions is satisfied, it would be open to the AO/ TPO to proceed to determine the ALP price. Also, the question of applying OECD guidelines does not arise at all because there are specific provisions of Rule 10B (2) & (3) and the first proviso to s. 92C(2) which apply. The Tribunal was also not right in reducing the list of comparables to merely four. Having held that the comparables given by the assessee were to be accepted and those searched by the TPO were to be rejected, the only option then left to the Tribunal was to derive the arithmetical mean of the profit level indicators of the comparables which were accepted by it. It erred in selecting only one profit level indicator out of a set of profit level indicators. However, on facts this make no difference because even if the arithmetical mean of the comparables as accepted by the Tribunal are taken into account, the profit level indicator would be less than 6.99 % which is the profit level indicator of the assessee.
Capgemini India Private Limited vs. ACIT (ITAT Mumbai)
» 191.7 KiB - 532 hits - February 28, 2013
Transfer Pricing: Important principles on “turnover filter” & comparison explained The Tribunal had to consider the following important transfer pricing issues: (i) whether a one-time and extraordinary item of expenditure (ESOP cost) debited to the assessee’s P&L A/c has to be excluded while comparing the margins, (ii) whether for the purpose of comparison of margins, the consolidated results of comparables having profit from different overseas markets can be considered? (iii) whether extreme profit and loss cases should be excluded or in case extreme profit cases are included, the case of losses should also be included? (iv) whether a turnover filter can be adopted to exclude companies with extremely high turnover? (v) whether the assessee can seek to exclude its own comparables? (vi) whether an adjustment for working capital is permissible? (vii) whether if the assessee can show that because the AE is in a high tax jurisdiction and that there is no transfer of profit to a low tax jurisdiction, a transfer pricing adjustment need not be made? HELD by the Tribunal: (i) A comparison of margin between the assessee and the comparables has to be made under identical conditions. As the comparables had not claimed any extraordinary item of expenditure on account of ESOP cost, for the purpose of making proper comparison of the margin, onetime ESOP cost incurred by the assessee has to be excluded. There is nothing in the Rules that prohibits adjustment in the margin of the assessee to remove impact of any extraordinary factors (Skoda 30 SOT 319 (Pune), Demag Cranes 49 SOT 610 (Pune), Transwitch, Toyota Kirloskar Motors followed); (ii) Under Rule 10B(2)(d), the comparability of transactions has to be considered after taking into account the prevailing market conditions including geographical locations, size of market and cost of capital and labour etc. Therefore, consolidated results which include profit from different overseas jurisdictions having different geographical and marketing conditions will not be comparable. Only standalone results should be adopted for the purpose of comparison of margins (American Express followed); (iii) Comparable cases cannot be rejected only on the ground of extremely high profit or loss. In case the companies satisfy the comparability criteria, and do not involve any abnormal business conditions, the same cannot be rejected only on the ground of loss or high profit. The OECD guidelines also provide that loss making uncontrolled transactions should be further investigated and it should be rejected only when the loss does not reflect the normal business conditions; (iva) In certain Tribunal decisions, various reasons have been given for applying the turnover filter for comparison of margins such as economy of scale, greater bargaining power, more skilled employees and higher risk taking capabilities in cases of high turnover companies, which increase the margins with rise in turnover. However, in these decisions, no detailed examination has been made as to how these factors increase the profitability with rising turnover. The concept of economy of scale is relevant to manufacturing concerns, which have high fixed assets and, therefore, with the rise in volume, cost per unit of the product decreases, which is the reason of increase in margin as scale of operations goes up because with the same fixed cost there is more output when the turnover is high. The same is not true in case of service companies, which do not require high fixed assets. In these cases employees are the main assets, who in the case of the assessee are software engineers, who are recruited from project to project depending upon the requirement. The revenue in these cases is directly related to manpower utilized. With rise in volume cost goes up proportionately. Therefore, the concept of economy of scale cannot be applied to service oriented companies. On facts, it is shown by the department that in the case of the comparables selected by the assessee, there is no linear relationship between margin and turnover and that that the margin has come down with the rise in turnover in some cases. Such detailed study was not available before the various Benches of the Tribunal which have applied the turnover filter and consequently those decisions cannot be followed; (ivb) Under Rule 10B(2), comparability of international transactions with uncontrolled transactions has to be judged with reference to functions performed, asset employed and risk assumed. The functions performed by all comparable companies are same as it is because of same functions they have been selected by the assessee as comparables. The asset employed has two dimensions i.e. quantity and quality. More employees would mean more turnover but there is no linear relationship between margin and turnover. As regards quality of employees, this will depend upon the nature of projects and since the comparables are operating in the same field having similar nature of work, and employee cost being more in case of more skilled manpower, it will not have much impact on the margins. As for the bargaining power, the assessee is part of a multinational group and well established in the field and, therefore, it can not be accepted that it has less bargaining power than any of the Indian Companies, however big it may be. Therefore, it would not be appropriate to apply turnover filter for the purpose of comparison of margins. However, for the purpose of comparison, the turnover would be relevant only from the limited purpose to ensure that the comparable selected is an established player capable of executing all types of work relating to software development as the assessee is also an established company in the field (Genesis Integrating System not followed); (v) The assessee had selected Infosys and Wipro as comparables on the basis of its own transfer pricing study after being fully aware of its work profile. The assessee raised no plea either before the TPO or DRP for excluding these comparables though it had added some more comparables. The assessee, therefore, cannot raise any grievance before the Tribunal to exclude these comparables, without giving any cogent and convincing reason. The reasons given by the assessee (turnover filter) are not found convincing and so it cannot be permitted to exclude Infosys and Wipro (Kansai Nerolac Paint followed) (vi) Working capital adjustments are required to be made because these do impact the profitability of the company. Rule 10B(2)(d) also provides that the comparability has to be judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover the debt promptly. The average of opening and closing balance in the account receivable/payable for the relevant year may be adopted which may broadly give the representative level of working capital over the year. Even if there is some difference with respect to the representative level, it will not effect the comparability as the same method will be applied to all cases. Working capital adjustment can not be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment. Working capital adjustment will improve the comparability. (vii) The argument that no adjustment need be made because the parent company is situated in US where tax rate is high and that there was no reason for the assessee to transfer profit to the parent company is not acceptable. The arm’s length price of an international transaction has to be calculated with respect to similar transaction with an unrelated party as per the method prescribed and the revenue is not required to prove tax avoidance due to transfer of profit to lower tax jurisdiction. Arguments such as that the parent company was incurring loss or had shown lower margin are not relevant (Aztek Software 107 ITD 141 (SB) & 24/7 Customers.com followed)
ThyssenKrupp Industries India Pvt. Ltd vs. ACIT (ITAT Mumbai)
» 161.1 KiB - 796 hits - February 27, 2013
Transfer Pricing: Automatic RBI approval means transaction is at Arms Length Price The ITAT had two consider two legal issues in the context of transfer pricing (i) whether if a royalty agreement falls within the ‘automatic approval scheme’ and is approved/ deemed to be approved by the RBI, the royalty can be treated to be at arms’ length just because it is approved/ deemed approved and (ii) what are the parameters to be applied while applying “Internal TNMM”. HELD by the Tribunal: (i) The assessee’s collaboration agreement with its AE for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty falls under the “automatic approval scheme” of the RBI. When the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP; (ii) Rule 10B(1)(e)(i) requires the profit margin realised by the enterprise from an international transaction entered into with an AE to be ascertained for determining as to whether or not it is at arm’s length. The margin with which such margin earned by the assessee is compared with for determining the ALP, can be internally available from comparable transaction(s) or from externally available cases. If the enterprise has entered into similar transactions with third parties as are under consideration with the AE, then the profit realized from such transactions with third parties is a good measure to benchmark the margin from international transaction. Thus, on one hand we need to have profit margin which is to be compared from transactions with the AEs and on the other hand, we need to find out the profit margin from similar transactions with non-AEs with which comparison is to be made. Both these figures should come from separate watertight compartments. No overlapping is permissible in the composition of such compartments. In other words, neither the first compartment of profit margin from AE transactions should include profit margin from the transactions with non-AEs, nor the second compartment should have profit margin from the transactions with the AEs. If such an overlapping takes place, then the entire working is vitiated, thereby obliterating the finer line of distinction of the profit margin to be compared and the profit margin to be compared with. On facts, as the assessee had not maintained segment-wise accounts and as the figures of AE and Non-AE transactions were segregated from the common pool of figures, the margins derived therefrom were not reliable and the claim of internal TNMM was not acceptable.
Cotton Naturals (I) Pvt. Ltd vs. DCIT (ITAT Delhi)
» 137.8 KiB - 610 hits - February 8, 2013
The assessee, an Indian company, gave a loan of $ 10,50,000 to its USA based Associated Enterprise (AE) at 4% rate of interest. The TPO adopted the Indian company as the tested party and held that the comparable rates for benchmarking the interest had to be selected from the Indian domain and the rate that the assessee would have earned by giving loans in the Indian market had to be taken as the ALP. It was also held that an addition to the interest rate had to be made for the risk factor. The interest rate was determined at 17.25%. On objection by the assessee, the DRP held that the ALP had to be taken at the PLR of RBI being 13.25%. On appeal by the assessee to the Tribunal, HELD reversing the TPO & DRP: (i) CUP is the most appropriate method for ascertaining the arms length price of an international transaction of lending money. Where the transaction is of lending money in foreign currency to its foreign subsidiaries, the comparable transactions have to be of foreign currency lent by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for international transactions. On facts, the assessee had an arrangement for loan with CitiBank for less than 4% and on the loan provided to its AE’s it had charged 4% interest. Hence, the adjustment made by the TPO was not warranted (Siva Industries 59 DTR 182 (Che), Four Soft 62 DTR 308 (Hyd), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) followed); (ii) Further, the assessee’s profits are exempt u/s 10B and so there was not a case where the assessee would benefit by shifting profits outside India (Philips Software Centre 26 SOT 226 (Bang) & Zydus Altana Health Care 44 SOT 132 (Mum) followed).
L.G.Electronics India Pvt. Ltd vs. ACIT (ITAT Delhi Special Bench)
» 1.2 MiB - 1,149 hits - January 23, 2013
Transfer Pricing: The “Bright Line test” can be applied to disallow the excessive AMP expenses incurred by the assessee for the benefit of the brand owner L.G. Electronics Inc, a Korean company, set up a wholly owned subsidiary in India (the assessee) to which it provided technical assistance. The assessee agreed to pay royalty at the rate of 1% as consideration for the use of technical know how etc. The Korean company also permitted the assessee to use its brand name and trade marks to products manufactured in India on a royalty-free basis. The AO, TPO & DRP held that as the Advertising, Marketing and Promotion (“AMP expenses”) expenses incurred by the assessee were 3.85% of its sales and such percentage was higher than the expenses incurred by comparable companies (Videocon & Whirlpool), the assessee was promoting the LG brand owned by its foreign AE and hence should have been adequately compensated by the foreign AE. Applying the Bright Line Test, it was held that the expenses up to 1.39% of the sales should be considered as having been incurred for the assessee‘s own business and the remaining part which is in excess of such percentage on brand promotion of the foreign AE. The excess, after adding a markup of 13%, was computed at Rs. 182 crores. On appeal by the assessee, the Special Bench had to consider the following issues: (i) whether the TPO had jurisdiction to process an international transaction in the absence of any reference made to him by the AO? (ii) whether in the absence of any verbal or written agreement between the assessee and the AE for promoting the brand, there can be said to be a “transaction“? (iii) whether a distinction can be made between the “economic ownership” and “legal ownership” of a brand and the expenses for the former cannot be treated as being for the benefit of the owner? (iv) whether such a “transaction“, if any, can be treated as an “international transaction“? (v) whether the “Bright Line Test” which is a part of U. S. legislation can be applied for making the transfer pricing adjustment? (vi) whether as the entire AMP expenses were deductible u/s 37(1) despite benefit to the brand owner, a transfer pricing adjustment so as to disallow the said expenditure could be made? (vii) what are the factors to be considered while choosing the comparable cases & determining the cost/value of the international transaction of AMP expenses? (viii) whether, if as per TNMM, the assessee’s profit is found to be as good as the comparables, a separate adjustment for AMP expenses can still be made? (ix) whether the verdict in Maruti Suzuki 328 ITR 210 (Del) has been over-ruled/ merged into the order of the Supreme Court so as to cease to have binding effect? By the Majority (Hari Om Marathe, JM, dissenting) (i) Though s. 92CA (2A), inserted w.e.f. 1.6.2011, which permits the AO to consider international transactions not specifically referred to him does not apply as the TPO’s order was passed before that date, sub-sec (2B) to s. 92CA inserted by the Finance Act 2012 w.r.e.f. 1.6.2002 (which provides that the TPO can consider an international transaction if the assessee has not furnished the s. 92E report) cures the defect in the otherwise invalid jurisdiction at the time of its original exercise. The assessee’s argument that jurisdiction has to be tested on the basis of the law existing at the time of assuming jurisdiction and that s. 92CA (2B) cannot regularize the otherwise invalid action of the TPO is farfetched and not acceptable because it will render s. 92CA(2B) redundant. The argument that s. 92CA(2B) should be confined only to such transactions which the assessee perceives as international transactions but fails to report is also not acceptable; (ii) The assessee’s contention that in the absence of any mutual agreement between the assessee and its foreign AE, there is no “transaction” is not acceptable in view of the definition of that term in s. 92F(v) which includes an “arrangement or understanding“. An informal or oral agreement, which is latent, can be inferred from the attending facts and circumstances and the conduct of the parties. As long as there exists some sort of understanding between two AEs on a particular point, the same shall have to be considered as a “transaction“, whether or not it has been reduced to writing. However, the department’s contention that the mere fact that the assessee spent proportionately higher amount on advertisement in comparison with other entities shows an understanding is also not acceptable. On facts, as it was seen that the assessee not only promoted its name and products through advertisements, but also the foreign brand simultaneously, and the fact that the assessee‘s AMP expenses were proportionately much higher than those incurred by other comparable cases, lent due credence to the inference of the transaction between the assessee and the foreign AE for creating marketing intangible on behalf of the latter; (iii) The assessee’s contention that a distinction should be made between the “economic ownership” of a brand and its “legal ownership” and that AMP expenses towards the “economic ownership” of the brand, which are routine in nature, cannot be allocated as being for the benefit of the brand owner is not acceptable as it will lead to incongruous results. While the concept of economic ownership of a brand is relevant in a commercial sense, it is not recognized for the purposes of the Act; (iv) The assessee’s argument that there is no “international transaction” is not acceptable because the definition of that term in s. 92B(1) is inclusive. Under clause (i) of the Explanation to s. 92B, a transaction of brand building is in the nature of “provision of service” by the assessee to the AE. Clause (ii) of the Explanation defines “intangible property” to include “marketing related intangible assets, such as, trademarks, trade names, brand names, logos“. Consequently, brand building is a “provision of service”. The fact that no consideration is paid by the foreign AE is irrelevant; (v) While a provision from a foreign legislation cannot be imported into the Indian legislation, there is an inherent in the assessee’s argument that the bright line test cannot be adopted to determine the ALP of the international transaction as it is not one of the recognized methods u/s 92C. The bright line test is a way of finding out the cost/value of the international transaction, which is the first variable under the TP provisions and not the second variable, being the ALP of the international transaction. Bright line is a line drawn within the overall amount of AMP expense. The amount on one side of the bright line is the amount of AMP expense incurred for normal business of the assessee and the remaining amount on the other side is the cost/value of the international transaction representing the amount of AMP expense incurred for and on behalf of the foreign AE towards creating or maintaining its marketing intangible. If the assessee fails to give any basis for drawing this line by not supplying the cost/value of the international transaction, and further by not showing any other more cogent way of determining the cost/value of such international transaction, then the onus comes upon the TPO to find out the cost/value of such international transaction in some rational manner. On facts, the cost/value of the international transaction was determined at Rs. 161.21 crore while its ALP (after the 13% markup) was Rs. 182.71 crore. The assessee was not entitled to claim a deduction for Rs. 161.21 crore and it was liable to be taxed on the markup of Rs. 21.50 crore; (vi) The assessee’s contention that once the entire AMP expense is found to be deductible u/s 37(1), then, no part of it can be attributed to the brand building for the foreign AE notwithstanding the fact that the foreign AE also got benefited out of such expense is not acceptable because the whole purpose of transfer pricing is to provide a statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India in the case of multinational enterprises. The TP provisions prevail over the general provisions. The exercise of separating the amount spent by the assessee in relation to international transaction of building brand for its foreign AE for separately processing as per s. 92 cannot be considered as a case of disallowance of AMP expenses u/s 37(1)/ 40A(2). s. 37(1)/40A(2) & s. 92 operate in different fields; (vii) In principle, it is necessary that properly comparable cases should be chosen before making comparison of the AMP expenses incurred by them. However, the argument that only such comparable cases should be chosen as are using the foreign brand is not acceptable. The correct way to make a meaningful comparison is to choose comparable domestic cases not using any foreign brand. Also, several factors have to be considered for determining the cost/value of the international transaction of brand/logo promotion through AMP expenses (14 illustrative issues set out). On facts, the TPO restricted the comparable cases to only two without discussing as to how other cases cited by the assessee were not comparable. Also, a bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors cannot produce correct result (matter remanded); (viii) There is a basic fallacy in the assessee’s contention that if the TNMM is adopted and the net profit is at ALP, there is no scope for making an adjustment for AMP expenses. TNMM is applied only on a transactional level and not on entity level though it can be correctly applied on entity level if all the international transactions are of sale by the assessee to its foreign AE and there is no other transaction of sale to any outsider and also there is no other international transaction. Where there are unrelated international transactions, it is wrong to apply TNMM at an entity level. Further, even assuming that in applying the TNMM on entity level for the transaction of import of raw material the overall net profit is better than other comparables, an adjustment can still be made by subjecting the AMP expenses to the TP provisions. There is no bar on the power of the TPO in processing all international transactions under the TP provisions even when the overall net profit earned by the assessee is better than others. Earning an overall higher profit rate in comparison with other comparable cases cannot be considered as a licence to the assessee to record other expenses in international transactions without considering the benefit, service or facility out of such expenses at arm‘s length. All the transactions are to be separately viewed. Also, the contention fails if any of the other methods (CUP etc) are adopted instead of TNMM; (ix) Maruti Suzuki 328 ITR 210 (Del) lays down the law that (a) brand promotion expenses are an “international transaction”, (b) AMP expenses incurred by a domestic entity which is an AE of a foreign entity are required to be compensated by the foreign entity in respect of the brand building advantage obtained by it & (c) the factors required to be considered by the TPO. This verdict has not be overruled by the Supreme Court except to the extent that directions were given to the TPO to proceed in a particular manner. The verdict has also not merged into that of the Supreme Court because the principles of law laid down by the High Court have not at all been considered and decided by the Supreme Court. Consequently, the law laid down therein continues to have binding force. Per Hari Om Maratha, JM (dissenting): (i) Before making any transfer pricing adjustments, it is a pre-condition that there must exist an ‘international transaction’ between the assessee and its foreign AE. The Department has proceeded on a presumption that because the AMP expenses are supposedly higher than that incurred by other entities, there is an ‘international transaction’ discernible and a part of these expenses have to be treated towards building of the LG Brand owned by the foreign AE. It is not permissible to proceed on such presumption in the absence of a written agreement or evidence to suggest any oral agreement between the parties; (ii) Further, the assessee had not paid any ‘brand-royalty’ to the foreign AE though it got the benefit of the brand and earned revenue there from which has been taxed. The AMP expenses have been paid to an unrelated entity in India which has in turn paid tax thereon. As there is no shifting of income to a different jurisdiction, neither Chapter X not the bright line method has any application; (iii) Also, the concept of commercial ownership of a brand is a reality in modern global business realm and it is as good as a legal ownership in so far as its effects on sale of products in India is concerned. Any advertisement which is product-centric and even entirely brand-centric will only enhance the sales of the products of that brand in India. In no way is the brand owner benefited. Consequently, the AMP expenses is not a case of brand-building/ promotion and no ‘covert transaction’ between the Indian entity and its foreign AE can be presumed or inferred. The Revenue has no power to re-characterize the AMP expenditure as routine and non-routine expenditure; (iv) Maruti Suziki India Ltd 328 ITR 210 (Del) cannot be regarded as a binding precedent after the verdict of the Supreme Court in 335 ITR 121 (SC). The fact that a reference was made to the Special Bench itself shows that because a covered issue cannot be referred to a Special Bench.
SKOL Breweries Ltd vs. ACIT (ITAT Mumbai)
» 297.2 KiB - 600 hits - January 18, 2013
Transfer Pricing: RBI approval has no relevance on issue of Arms Length Price: The assessee was engaged in the manufacturing and marketing of beer using technical know-how provided by SAB Miller. The assessee paid royalty for the technical know-how and the question arose whether the same was at arms’ length. One of the arguments advanced by the assessee was that as under Press Note no. 9 of 2000 issued by the Ministry of Commerce and Industry in relation to FDI policy, remittance of royalty not exceed 5% of domestic sales and 8% of export sales was permitted, the royalty paid by it which was within those limits should be considered as being at arms’ length for transfer pricing purposes. HELD by the Tribunal rejecting the plea: Press Note no.9 of 2000 issued by the Ministry of Commerce and Industry in respect of FDI policy and prescribing the percentage of royalty to the sales allowed under automatic route cannot substitute as ALP to be determined under the provisions of the Act and Rules. FDI policy permitting certain percentage of payment of royalty is only for remittance of the amount in foreign exchange and therefore, such permission given in an entirely different context and purpose cannot be considered as relevant for determination of the ALP under I. T. Act. The RBI is only concerned with the foreign exchange and, therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the I T Act and that is the function of the income tax authorities and, cannot be validly go into such an issue. When a proper mechanism is provided under the provisions of the I. T. Act and Rules for determination of the ALP, then the approval by other than the I. T. Authorities, for the purpose of remittance/outflow of the foreign exchange, does not ipso facto, partake the character of ALP, which has to be determined as per TP regulations (Nestle India Ltd 337 ITR 103 (Del) followed). Contrast with ThyssenKrupp Industries India Pvt. Ltd vs. ACIT (ITAT Mumbai)
Welspun Zucchi Textiles Ltd vs. ACIT (ITAT Mumbai)
» 93.8 KiB - 828 hits - January 11, 2013
DEPB benefit received during the year under consideration should be considered as part of the turnover of the assessee for working out the profit margin to make the comparison of like to like and similar to similar. Since the profit margin of the assessee after taking into consideration the DEPB benefit as part of its turnover comes to 12.30% as against the average net profit margin of 13.05% of the comparables which is within the safe limit of 5%
Ascendas (India) Pvt. Ltd vs. DCIT (ITAT Chennai)
» 143.6 KiB - 911 hits - January 2, 2013
Transfer Pricing: Law on valuation of shares of a closely held company explained The assessee held 50% of the shares in L&T Infocity Asendas Ltd (“LTIAL”) while the rest were held by L&T Infocity Ltd. The assessee and L&T Infocity agreed to sell their entire holding in LTIAL to Ascendas Property Fund India (“APFI”), an AE of the assessee for a consolidated price of Rs. 79 crores. The assessee also held shares in Ascendas (India) IT Park Ltd (“AITPL”) which was also separately sold to APFI. The assessee claimed that the shares were sold at arms’ length price on the basis that (a) with regard to LTIAL, a third party (L&T Infocity) had sold its holding at the same price as that of the assessee and so the price was supported by “internal CUP” and (b) with regard to AITPL, the valuation was determined by a CA in accordance with the Controller of Capital Issues (CCI) Valuation guidelines. The TPO/AO & DRP held that the transfer of shares in LTIAL by L&T Infocity to APFI was not an “uncontrolled comparable transaction” and so the argument of “internal CUP” was not available. With regard to the transfer of shares in AITPL, it was held that the valuation based on CCI guidelines was not acceptable. Instead, the valuation of both sets of shareholdings was determined on the basis of the “Discounted Cash Flow (DCF)” method for valuation of an enterprise and an addition of Rs. 239 crores was made. On appeal by the assessee to the Tribunal, HELD: (i) Though s. 92C(1) provides that the arm’s length price in relation to an international transaction “shall” be determined by any of the methods set out therein, the selection of the method cannot be done with a water-tight attitude as such an interpretation will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime. There may be difficulties in ascertaining the fair market value, but such difficulties should not be a reason for not adapting the prescribed methods. Some subtle adjustments in the methodology prescribed for evaluation of an international transaction are required to be done; (ii) To a transaction of sale of shares in a closely held company, none of the six methods prescribed in s. 92C & Rule 10B apply. Accordingly, while determining the most appropriate method, the modern valuation methods fitting the type of underlying service or commodities cannot be ignored. Fixing enterprise value based on discounted value of future profits or cash flow is a method used worldwide. The endeavor is only to arrive at a value which would give a comparable uncontrolled price for the shares sold. Viewed from this angle, the discounted cash flow method adopted by the TPO is in accordance with s. 92C(1); (iii) The assessee’s argument, with regard to the sale of shares in LTIAL, that the price is at ALP as per the CUP method as a third party (L&T Infocity) sold the same shares at the same price to the same buyer is not acceptable because the sale of shares by L&T Infocity to APFI cannot be said to be uncontrolled. The fact that a common agreement for sale of the shares for a consolidated sum was entered into by the assessee with L&T Infocity shows that the transaction was not independent but was a joint effort; (iv) The assessee’s argument, with regard to the sale of shares in AITPL, that the TPO was bound by the CCI guidelines on valuation of shares is also not acceptable because the CCI guidelines were issued for a totally different purpose and cannot be transported into a pricing methodology prescribed for fixing ALP. Instead, the Discounted Cash Flow method for valuation is an accepted international methodology for valuing enterprises and for determining the value of the holding of an investor. Investors are interested in ascertaining the present value of their investments, considering the future earning potential of the underlying asset. Ascertaining the net present value of future earnings is more appropriate where market value of an investment is not readily ascertainable by conventional methods; (v) The value of equity can be obtained in two methods under the Discounted Cash Flow method. The first method is to discount the cash flow expected from the equity investment and the second method is to ascertain the value of the enterprise by applying DCF on its future earnings and then dividing it with the number of shares. The most important aspect in the application of DCF is the discounting factor used for working out the net present value (NPV). The factor generally used is the Weighted Average Cost of capital. The difficult parts are (i) determining the future cash flows, (ii) determining the cost of equity, (iii) determining the cost of debt and (iv) determining the period of discounting. For a valuation to have some amount of objectivity the variables must be considered within a reasonable limit so that acceptable values can be arrived at. Even a slight change in the discounting ratio will result in substantial change in the valuation of the company. If the ALP of the shares are worked out without considering a reasonable value for the enterprise, it will result in injustice. (Matter remanded to the TPO for a reworking). See also Tally Solutions 130 TTJ 234 (Bang) where the “Excess Earning Method” was upheld as the method for determining the ALP of IPRs
Hindustan Unilever Limited vs. ACIT (ITAT Mumbai)
» 422.5 KiB - 1,265 hits - December 10, 2012
Provisions of section 92 provides that “any income arising from an international transaction shall be computed having regard to the ALP”. Thus, the ALP has to be on international transaction and not in relation to assessee’s entire sales or turnover. The second proviso to section 92C, though brought in statute by the Finance Act, 2009, w.e.f. 1st October 2009, provides that “if the variation between ALP so determined and the price at which international transaction has actually been undertaken shall be deemed to be the ALP”, however, the same is indicative of the preposition that the ALP is to be determined only on international transaction. This, inter–alia, means that the statute itself provides that the adjustment arising out of ALP should be with regard to international
Trilogy E-Business Software India vs. DCIT (ITAT Bangalore)
» 325.9 KiB - 1,149 hits - November 28, 2012
U/s 92C & Rule 10B(2), there is no bar to considering companies with either abnormal profits or abnormal losses as comparable to the tested party, as long as they are functionally comparable. This issue does not arise in the OECD guidelines and the US TP regulations because they advocate the quartile method for determining ALP under which companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartiles are reckoned for comparability. Cases of either abnormal profits or losses (referred to as outliners) get automatically excluded. However, Indian regulations specifically deviate from OECD guidelines and provide Arithmetic Mean method for determining ALP. In the arithmetic mean method, all companies that are in the sample are considered, without exception and the average of all the companies is considered as the ALP. Hence, while the general rule that companies with abnormal profits should be excluded may be in tune with the OECD guidelines, it is not in tune with Indian TP regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the Assessee to demonstrate existence of abnormal factors. On facts, as the assessee has not shown any factors for abnormal profits, no comparable can be excluded for that reason (contra view in Quark Systems & Sap Labs noted)