Live Webcast – ICAI Committee on International Taxation Current Issues in Transfer Pricing 21st November,2014 PVSS Prasad, FCA pvsatya.prasad@gmail.com AGENDA Basic Principles & Key Concepts Methodologies & Issues Safeharbour Rules Important Judicial Perspective Latest Case Law Page 2 2 Basic Principles Arms Length Principle (ALP) Authoritative statement of the ALP is found in paragraph 1 of article 9 of the OECD MC which reads as under: “[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.” Page 3 3 Maintaining the Arm’s Length Principle as the International Consensus “While recognizing the foregoing considerations, the view of OECD member countries continues to be that the arm’s length principle should govern the evaluation of transfer prices among associated enterprises. The arm’s length principle is sound in theory since it provides the closest approximation of the workings of the open market in cases where property (such as goods, other types of tangible assets, or intangible assets) is transferred or services are rendered between associated enterprises. While it may not always be straightforward to apply in practice, it does generally produce appropriate levels of income between members of MNE groups, acceptable to tax administrations. This reflects the economic realities of the controlled taxpayer’s particular facts and circumstances and adopts as a benchmark the normal operation of the market.” Source : OECD Transfer Pricing Guidelines – OECD 2010 Page 4 4 Arms Length Principle (ALP) In other words, the transactions between two related parties must be based on the arm’s length principle (ALP). The term arm’s length principle itself is not a term specifically used in Article 9, but is well accepted by countries as encapsulating the approach taken in Article 9, with some differing interpretations as to what this means in practice. The principle laid out above in the UN Model has also been reiterated in the OECD Model Tax Convention and the OECD Guidelines as supplemented and amended. Thus, the arm’s length principle is the accepted guiding principle in establishing an acceptable transfer price under Article 9 of the UN Model. The arm’s length principle by itself is not new; it has its origins in contract law to arrange an equitable agreement that will stand up to legal scrutiny, even though the parties involved may have shared interests. Source: UN Transfer Pricing Manual Page 5 5 Sharing the Pie The reason why governments and multinationals care so much about transfer pricing is that it determines how the profits of a multinational are split between the jurisdictions in which it operates. This in turn determines which country gets to tax those profits, and this may affect the global tax burden of the multinational. Source : Gareth Green Page 6 6 Economic Double Taxation Article 9(2) “Where a Contracting State includes in the profits of an enterprise of that State — and taxes accordingly — profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the firstmentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.” – Corresponding adjustments Page 7 7 Real Income Theory Global Profits – Global Vantedge (P.) Ltd v. DCIT [2010] 37 SOT 1 (Delhi – Trib) – “the total adjustment made in the hands of the appellant together with the ALP already reported by it cannot exceed the total revenue earned by the appellant and its associated enterprise from third party independent clients” – Apollo Health Street v. DCIT [2014] 45 taxmann.com 507 (Hyderabad - Trib.) – “TP adjustments shall not exceed the global profits earned by the assessee company” Page 8 8 Key Concepts Associated Enterprise (AE) International Transaction (IT) FAR Analysis Comparability Analysis Adjustments Most Appropriate Method (MAM) Documentation Page 9 9 International Transaction-S.92B S. 92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. S. 92B (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. [where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not]. Page 10 10 Deemed International Transactions TPOs treating transactions between two residents as deemed international transactions. – Circular No.14/2001 clearly explained that one of the parties must be a non-resident in an International transaction. – Transaction between two residents would not shift any profit outside India – Morgan Stanley’s case. First ruling against the revenue: – Genisys Integrating Systems [2012] 20 taxmann.com 715 (Bang.) – Kodak India Pvt Ltd vs. ACIT [2013] 37 taxmann.com 233 (Mumbai - Trib.) – Tellabs India Private Ltd. [2013] 35 taxmann.com 341 (Bang-Trib) – not a deemed international transaction, as conditions u/s 92B(2) not satisfied Now by an amendment through Finance Act 2014 even transaction between two residents also may become international transaction. Page 11 11 International Transaction-S.92B Explanation inserted from 1st April, 2002 (retro) the expression “International transaction” shall include : purchase, sale, transfer, lease or use – tangible property purchase, sale, transfer, lease or use – intangible property – transfer of ownership or use of rights capital financing including borrowings, lending or purchase/sale of marketable securities etc. provision of services – market research, scientific administration, legal/accounting services etc guarantee, research, business restructuring or re-organisation, entered into by an enterprise with an associated enterprise, Irrespective of the fact that it has bearing on the profit, income, losses, or assets of such enterprises at the time of the transaction or at any future 12 date. Page 12 International Transaction-S.92B Case law neutralized on account of amendment: Guarantee not an International transaction : – Four soft Ltd ITA No.1495/Hyd/2010 – Bharti Airtel Limited [2014] 43 taxmann.com 150 (Delhi-Trib.) (Post Amendment) Guarantee an International transaction -Four soft Ltd [2014] 44 taxmann.com 479 (Hyderabad - Trib.) (Post Amendment) Overdue accounts receivable from AE not an Intl.Tran – Nimbus Commns.Ltd(2011) 44 SOT 695(Mum), Patni Computer System ITA No.426 & 1131/PN/06 Business reorganisation / restructuring not an Intl.Tran if there is no tax trigger – Dana Corpn 321 ITR 178 (AAR) , Amiantit Intnl (2010) 322 ITR 678 , Goodyear Tyre & Rubber Co (2011) 334 ITR 69 (AAR) , Deere & Co (2011) 337 ITR 277(AAR) 13 Page 13 International Transaction-S.92B The expression “Intangible property” shall include : Marketing intangibles Technology intangibles – process, patents, know how Artistic intangibles – literary & musical copyrights etc. Data processing intangibles - software, data bases etc. Engineering intangibles - industrial design, trade secrets, product patents, drawings and blueprints etc. Customer intangibles – lists, contracts, relationship, Pos Contract intangibles – favorable supplier, contracts, licenses, franchises & non – compete agreements Page 14 14 International Transaction-S.92B The expression “Intangible property” shall include : Human capital intangibles – trained & organised work force, employment agreements & union contracts Location intangibles – leasehold rights, mineral exploitation rights, easements, air & water rights Goodwill intangibles – institutional, professional practice, personal , celebrity – goodwill, going concern value Methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates etc. Any other similar item that derives value from intellectual content rather than physical attributes Page 15 15 International Transaction-S.92B Wide gamut of transactions PE of foreign Coy in India & its AE in India – will get covered Transaction between two non-residents – giving rise to taxability in India – gets covered Indian Coy & its foreign branch - not covered Deemed International transaction - S. 92B(2) now covers transaction between two residents also Wide enough to cover even non-routine transactions Page 16 16 Comparability Analysis Comparability Factors - OECD & UN TP Manual & Rule 10B(2) Characteristics of Property/Service FAR Analysis Contractual Terms Economic Circumstances Business Strategies Page 17 17 Issues in comparability Analysis Tested Party & Use of foreign comparables Foreign Party may be selected as tested party – General Motors India Pvt. Ltd. (TS-215-ITAT-2013(Ahd)-TP) – Ranbaxy Laboratories Ltd. v. ACIT [2008] 114 TTJ 1 (Del. Trib) Contrary decision by Mumbai ITAT – Onward Technologies . v. DCIT [2014] 44 taxmann.com 295 (Mum Trib.) Internal Comparables vs External Comparables Internal Comparables preferable – Technimount ICB (P.) Ltd v. ACIT [2011] 11 taxmann.com 49.(Mum.) Internal TNMM whether to be audited? Even unaudited can be considered – 3i Infotech Ltd. vs. ITO [2013] 35 taxmann.com 582 (Chennai - Trib.) – Birla Soft (India) Ltd. Vs DCIT [2011] 44 SOT 664 (Delhi - Trib.) – DHL Express (India) (P.) Ltd vs ACIT 46 SOT (Mum-Trib) Page 18 18 Issues in Comparability Analysis Use of secret comparables & cherry picking Taxpayer has a right to examine & contest such data procured by TPO u/s 133(6) – Genisys Intergrating Systems (India) Pvt. Ltd. (2012) 20 taxmann.com 715 Cherry picking not acceptable – Toshibha India Pvt. Ltd 2010-TII-14-ITAT-DEL-TP Number of uncontrolled transactions There is no hard & fast rule – Willis Processing Services (I) (P.) Ltd. V. DCIT [2013] 30 taxmann.com 350 (Mumbai - Trib.) – Haworth (India) (P.) Ltd. V. DCIT [2011] 131 ITD 215 (Delhi) – DCIT v. Petro Araldite (P.) Ltd [2012] 53 SOT 274 (Mum.) (URO) Page 19 19 Issues in Comparability Analysis Turnover This is a key filter for which most decisions are in favour of assessee except few contrary decisions – Genisys Integrating Systems (India) P.Ltd. (2012) 20 taxmann.com 715 – Quark Systems – 2010- TIOL- 31-CHD-SB – Symantec Software Solutions (P) Ltd 46 SOT 48 (Mum) Contrary decisions – Willis Processing Services (I) (P.) Ltd. V. DCIT [2013] 30 taxmann.com 350 (Mumbai - Trib.) – Capgemini India P Ltd vs. ACIT (2013) 33 taxmann.com 5 (Mum Trib.) Page 20 20 Issues in Comparability Analysis Contemporaneous Data Whether multiple year data allowed Budget 2014 Finance Minister stated that range concept & multiple year data would be introduced. Likely to amend the rules. International transaction evaluation separately or on aggregate basis Rule 10A(d) closely linked transactions – UCB India (P.) Ltd 30 SOT 95 (Mum.) - aggregation not allowed – Development Consultant Pvt Ltd (2008) 23 SOT 455- Same view as above OECD TPG P.3.9 & UN TP P.5.3.1.7 supports aggregation in deserving situations – This approach endorsed by Pune ITAT in Demag Cranes & Components 56 SOT 187 (Pune) Page 21 21 Issues in Comparability Analysis Functional Comparability FAR analysis very critical Contract Manufacturer cannot be compared with regular manufacturer High profit/ loss making companies These companies should be avoided while selection para 3.59 & 3.65 OECD TPG – Noteworthy UN TP manual para 5.4.4.3 – Exxon Mobil Co. India (P.) Ltd. v. CIT [2011] 46 SOT 294 (Mum.) – Maersk Global centers India P.Ltd [2014] 43 taxmann.com 100 (MumTrib) (SB) – Saven Technologies TS-44-ITAT-2014(HYD)-TP - Startup companies subsequent years operations to be analysed. Page 22 22 Issues in Comparability Analysis Related party transactions – Generally 25% is taken as yardstick in TP assessments Name of the Case RPT Filter Upheld 24/7 Customer.com p Ltd vs. DCIT [21 ITR 514 (B’lore.)(Trib.)] 15% Actis Advisers Pvt. Ltd. vs. DCIT [20 ITR138 (Del.)(Trib.)] 25% Avaya India Pvt. Ltd. vs. ACIT [15 ITR 237(Del.)(Trib.)] 15% Benetton India Pvt. Ltd. vs. ITO [7 Taxmann.com 5 / 134 ITD 229 (Del.)(Trib.)] 10-15% Bindview India Pvt. Ltd. vs. DCIT [34 Taxmann.com 164 (Pune)(Trib.) 25% HCL EAI Services Ltd. vs. DCIT [ IT(TP) A no.1348/(B’lore.)(Trib.)/2011] 15% Page 23 23 Issues in Comparability Analysis Name of the Case RPT Filter Upheld ITO vs. CRM Services India (P) Ltd. [48 SOT 41 (Del.)(Trib.)] 10-15% LG Soft India P. Ltd. vs. DCIT [ITA no. 1121/(B’lore)(Trib.) 2011] 15% M/s. ADP P Ltd. vs. ACIT [15 ITR 203 (Hyd.)(Trib.)] 25% PTC Software (India) Pvt. Ltd. vs. ACIT [ITA No. 1605/(Pune)(Trib.)] 25% Philips Software Center Pvt. Ltd. vs. ACIT [26 SOT 226 (B’lore) (Trib.)] Even a single rupee Sony India (P) Ltd. vs. DCIT [ 114 ITD 448 (Delhi.)(Trib.)] 10-15% Thyssenkrupp Industries India Pvt. Ltd. vs. ACIT 33 taxmann.com 107 (Mum.)(Trib.) 25% Page 24 24 Issues in Comparability Analysis Inadequate / Nil Comparable - OECD TPG P.3.41 to 3.46 Additive approach • Third parties engaged in comparable transactions • Similar to identifying internal comparables • May encompass both internal and external comparables • May come from other industries with similar functions Deductive approach • Search on Databases with search filters • In case of scarcity of comparables deductive approach would be supplemented by additive approach Page 25 25 Safe Harbour Rules The assessee is required to apply for opting safe harbour rules in Form 3CEG to AO The proposed safe harbour rules would apply to AY 2013-14 & 2014 -15. Assessee would not be entitled to margin variation benefit U/s 92C or any other comparability adjustment such as, capacity, risk, working capital, etc. Assessee opting for safe harbour rules shall not be allowed to invoke Mutual Agreement Procedure (MAP). Definition – – Eligible assessee – Insignificant risk – Eligible International transaction Page 26 26 Safe Harbour Rules Contract research and development services- where the safe harbour rules are not applicable TNMM shall be considered as the MAM unless shown by the assessee that it is not feasible to apply this method. Safe harbour rules are not applicable if the associated entities are located in any country or territory notified under section 94A or in a no tax or low tax jurisdiction. Low tax jurisdiction is defined as the one where maximum marginal rate of tax is less than 15%. Page 27 27 Methodologies Traditional Transaction Methods • Comparable Uncontrolled Price Method (CUP) • Resale price method (RPM) • Cost plus method (CPM) Transactional Profit Methods • Profits split method (PSM) • Transactional net margin method (TNMM) Other method Page 28 28 Comparable Uncontrolled Price Method (CUP) Most ideal – meticulous similarity – adjustments – Rule 10B (1) (a) identify differences – • Internal comparables • External CUPs • Differences in business functions – adjustments? • Characteristics of the property • Contractual terms CUP is the most direct & reliable method Economic circumstances & characteristics must be comparable Strictest parameters for application Page 29 29 Comparable Uncontrolled Price Method (CUP) CUP method is ideal for : • • • Transfer of homogeneous items – trading Interest rates – on loans Transactions that are dependent on publicly available market quotations – Adani Wilmar Ltd [2014] 45 taxmann.com 365 (Guj) – Price publications by independent agency – CUP – KTC Ferro Alloys Pvt Ltd [2014] 161 TTJ 228 (Visakha.Trib) Quotations and estimations – External CUPs Page 30 30 Resale Price Method (RPM) RPM meant for trading of goods / services without any value addition Resale of products in short time Packaging, repacking, labeling / minor assembly allowed Ideally suited for distributors Assessee purchasing goods / services from AE and reselling to unrelated parties Gross margin comparison – functional comparability Possible only with internal comparables Detailed FAR analysis critical Page 31 31 Resale Price Method (RPM) Comparability possible with reasonable adjustments for contractual terms Inventory turnover transport cost other measurable differences Quality of data / assumptions / consistent accounting practices – critical for success of RPM RPM may not be reliable if differences exist in: Level of market ; or Functions performed; or Products sold RPM is the MAP for pure trading transactions having no value addition – Nokia India (P) Ltd (TS-349-ITAT-2014(Del)-TP) 32 Page 32 Cost Plus Method (CPM) CPM used for semi finished goods sold to AEs contract / toll manufacturing long term buy / supply arrangements Page 33 services provided Functional comparability – gross margins Direct and indirect cost - cost base – Critical Indirect cost allocation – area of dispute FAR analysis critical for comparability 33 Cost Plus Method (CPM) Efficiency / inefficiency – no adjustment Industry practice to be followed – direct & indirect costs CPM practical only with internal comparables Consistent accounting practices – critical – Alumeco India Extrusion Ltd [2013] 38 taxmann.com 371 (HydTrib)- CPM to be preferred over TNMM – GE BE Pvt Ltd [2014] 42 taxmann.com 554 (Bang) – CPM is the MAM for contract manufacturers – L’oreal India Pvt Ltd [2012] 24 taxmann.com 192 (Mum)– ALP based on gross margins are preferred over other methods Page 34 34 Cost Plus Method (CPM) Adjustments required for Page 35 complexity of manufacturing / assembling manufacturing, production & process engineering procurement, purchasing & inventory control Testing functions Selling, general & administrative expenses accounting treatment of costs foreign currency risks contractual terms 35 Cost Plus Method (CPM) CPM may not be reliable if material differences exist on account of : Page 36 intangibles cost structure business experience management efficiency functions performed products 36 Profit Split Method (PSM) Applicable mainly in International Transactions involving transfer of unique intangibles or in multiple International Transactions which are so interrelated which can not be evaluated separately for determining Arm’s Length Price (ALP) The combined profit to be allocated to Associated enterprises on the basis of market returns of similar transactions by Independent Enterprises (TNMM) Residual combined net profits of Associated Enterprises arrived. Relative contribution of each Associated Enterprises on the basis of FAR analysis . Such residual Net profit is split among the Associated 37 Enterprises in proportion to their contributions. Page 37 Profit Split Method (PSM) Residuary Profits is to be done on the basis of contribution of each entity – Global One India (P.) Ltd. [2014] 44 taxmann.com 100 (Delhi Trib.) Profit split Method is most appropriate for bench marking of cost collection received/paid to AEs for providing Freight services . – Net Freight (India) (P.) Ltd. [2014] 42 taxmann.com 504 (Del Trib.) Page 38 38 Transactional Net Margin Method (TNMM) Net margin comparison – broad functional comparability Tested party – least complex entity without any intangibles Profit level indicator (PLI) • Operating margin • Cost cover ratio • Return on the assets ratio • Berry ratio Aggregation of transactions – interlinked – Rule 10A(d) Search process – documenting critical Last resort method – but widely used Page 39 39 Transactional Net Margin Method (TNMM) Irons out many functional differences – adjustments to be made if required – Comparability Revenue prefers TNMM in spite of assessee relying on other methods with suitable data Contemporaneous data – multiple year data Whether internal TNMM allowed when international transactions are limited ? Business strategies & unique situations FAR analysis – very critical Page 40 40 “Other Method” for determination of ALP New Rule 10AB inserted vide Notification No.18/2012 dated 23-05-2012 Refers to “price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts” Page 41 41 Important Judicial Perspective Whether PBDIT is allowed? – BA Continuum India Pvt Ltd – TS 295 ITAT 2013 (Hyd)-TP – Pentair Water India Pvt Ltd – TS 153 ITAT 2014 (PAN) -TP – Schefenacker Motherson Ltd – 2009-TII-05-ITAT-(Del)-TP – Qualcore Logic Ltd Vs DCIT [2012] 22 taxmann.com 4 (Hyd) Idle Capacity - adjustment to be made for underutilisation of capacity – Google India Pvt Ltd -TS- 161 ITAT 2014 (Bang)-TP – Mando India Steering Systems Pvt Ltd – TS 110 ITAT 2014 (CHNY) -TP – El Dupont India Pvt Ltd. [2012] 49 SOT 123 (Delhi) – CRM Services India Pvt Ltd (2011) 48 SOT 41 (URO) (Del.Trib) Page 42 42 Important Judicial Perspective Commercial expediency of expenditure cannot be questioned by TPO – Social Media [2013] 40 taxmann.com 37 (Hyderabad - Trib.) – Airliquide Engineering India P Ltd [2014] 43 taxmann.com 299 (Hyd Trib.) - relying on EKL Appliances R & D Expenses – Cost Contribution Agreement – Indigene Pharmaceuticals [2014] 43 taxmann.com 270 (Hyd) – Dresser Rand India P Ltd (2011) 47 SOT 423 - R & D activity & accrual of benefit – Dufon Laboratories (2010) 39 SOT 59 (Mum.Trib) – Legitimacy of expenditure cannot be questioned – British Gas India Pvt Ltd 45SOT 172 (URO)(Del.Trib) – Cost sharing agreement different from rendering of services Page 43 43 Important Judicial Perspective Rejection of functionally different comparables allowed though included in TP Study – Parexel International ITA No.144 & 607/Hyd/2014 – Ivy Comptech Pvt ltd [2013] 40 taxmann.com 227 (Hyderabad - Trib.) – Deloitte Consulting [2013] 36 taxmann.com 68 (Hyderabad - Trib.) – Quark Systems [2010] 38 SOT 307 (CHD.) (SB) Companies with extraordinary events to be excluded – Conexant Systems Pvt.Ltd ITA No. 1160/Hyd/2011 – Intoto Software [2013] 35 taxmann.com 421 (Hyderabad - Trib.) – Ness Innovative Business Services P Ltd TS-177-ITAT-2014(HYD)-TP Page 44 44 Important Judicial Perspective Only persistent loss making companies to be excluded : – John Deere India P Ltd TS-351-ITAT-2014(PUN)-TP – Cummins Turbo Technologies Ltd [2013] 35 taxmann.com 350 (Pune - Trib.) – Qualcom India [2013] 37 taxmann.com 306 (Delhi - Trib.) – Saven Technologies (TS-44-ITAT-2014(HYD)-TP) Royalty Payment : RBI approval itself establishes arm’s length standard – Airliquide Engineering India P Ltd [2014] 43 taxmann.com 299 (Hyd - Trib.) – Owens Corning India P Ltd – TS 328 ITAT 2014 (Del) -TP Royalty to be benchmarked under TNMM – Airliquide Engineering India P Ltd [2014] 43 taxmann.com 299 (Hyd - Trib.) – Cadbury India Ltd – TS 314 ITAT 2013 (Mum) – TP Page 45 45 Important Judicial Perspective TP adjustments to be only on Intl.Trans. – Alumeco India Extrusions Ltd [2013] 38 taxmann.com 382 (Hyd) – Genisys Integrating Systems [2012] 53 SOT 159 (Bang) – Global Vantedge 37 SOT 1 (Del) Interest on Loans to AEs - comparing interest rate on rupee loans with foreign currency loans an economic mismatch LIBOR + Percentage rate as correct: – Aurobindo Pharma Ltd [2014] 43 taxmann.com 418 (Hyd) – Foursoft Ltd 46 SOT 141 (Mum) – Siva Industries & Holdings Ltd 46 SOT 112 (Chennai) Tainted Comparables to be excluded – Market Tools Research P Ltd (2013) 32 taxmann.com 358 (Hyd Trib)46 Page 46 Important Judicial Perspective Traditional Transaction Methods Vs Profit Methods : • CUP/CPM/RPM Vs. TNMM • OECD guidelines originally held Transaction methods preferable to profit methods. • OECD TP guidelines 2010 now suggest MAM ITAT ruled in favour of transaction methods – Alumeco India Extrusion Ltd. [2013] 38 taxmann.com 382 (Hyd) – MSS India - 2009-TII-07-ITAT-PUNE – Serdia Pharmaceuticals 44 SOT 391 (Mum) – Clear Plus India (P.) Ltd. vs DCIT, Circle-3(1), Delhi [2011] 10 taxmann.com 249 – Delphi TVS Diesel Systems Ltd. [2012] 24 taxmann.com 179 (Chennai) Page 47 47 Important Judicial Perspective AMP Expenses - Advertisement, marketing and sales promotion expenses BMW India (P.) Ltd. V. ACIT [2013] 37 taxmann.com 319 (Delhi - Trib.) As per importation agreement between assessee and its foreign AE, assessee had performed greater intensity of service than a normal distributor, by also performing functions of advertisement, it contributed to brand building for its AE, and constituted an international transaction. Bright line is an accepted method for calculating non routine AMP expenditure following LG Electronics SB ruling.. Compensation for such higher service was embedded in pricing arrangement of contract goods itself and price charged was adequate to ensure recovery of total costs as well as earning of representative profits, no transfer pricing adjustment was required. Page 48 48 Latest Case Law Maersk Global Centres (India) (P.) Ltd. V. ACIT [2014] 43 taxmann.com 100 (Mumbai - Trib.) (SB) Large number of services falling under ITES and where there difficulty in classifying these services either as low end BPO services or high end KPO services, it is not always possible to bifurcate ITES services as BPO and KPO services for purpose of comparability analysis In transfer pricing proceedings, potential comparables cannot be excluded merely on ground that their profit is abnormally high rather such a case would require further investigation to ascertain reasons for unusual high profit in order to establish whether entities with such high profit can be taken as comparables or not. In course of transfer pricing proceedings, TPO made adjustment to assessee's ALP engaged in rendering IT enabled services, in view of fact that assessee was basically a BPO, providing low-end services like process support, voice calling etc., whereas comparables selected by TPO were maintaining KPOs providing high-end technical services, impugned adjustment was to be set aside and, matter was to be remanded back for disposal afresh. Page 49 49 Latest Case Law Tata Communications Transformation Services Limited vs. DCIT [TS-377-ITAT2014(Mum.) Upholds assessee’s "transaction based benchmarking" against TPO’s entity level TNMM Assessee's international transactions of ‘communication network operation/engineering services’ and ‘administrative support services’ are different activities, to be evaluated separately for ALP determination; TPO/ DRP not justified in rejecting segmental results merely because segments were unaudited or prepared later only for purpose of TP study Unless any defect is pointed out in segmental results shown by assessee, TPO/DRP cannot reject the same; Restores matter to AO / TPO with directions to consider and verify audited segmental accounts of assessee. Page 50 Latest Case Law Vodafone India Services (P.) Ltd. V. Union of India [2014] 50 taxmann.com 300 (Bombay) (HC) Issue under consideration : Issuance of Equity Shares by Indian company to its foreign parent – Share premium has been made taxable by a legal fiction under Section 56(2)(viib) and the same is enumerated as Income in Section 2(24)(xvi) of the Act. However, what is brought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. – In the case of Vodafone what is being sought to be taxed is premium allegedly not received on application of ALP – The capital receipts received by the Petitioner on issue of equity shares to its holding company or the alleged short-fall between the so called FMV of its equity shares and the issue price of the equity shares cannot be considered as income. – Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. Page 51 51 Latest Case Law In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute: (a)subject of tax; (b)person liable to pay the tax; (c)rate at which tax is to be paid, and (d)measure or value on which the rate is to be applied. There is difference between a charge to tax and the measure of tax (a) & (d) above. This distinction is brought out by the Supreme Court in Bombay Tyres India Ltd. v. Union of India reported in 1984 (1) SCC 467 wherein it was held that the charge of excise duty is on manufacture while the measure of the tax is the selling price of the manufactured goods. In this case also the charge is on income as understood in the Act, and where income arises from an International Transaction, than the measure is to be found on application of ALP so far Chapter X of the Act is concerned. The arriving at the transactional value/ consideration on the basis of ALP does not convert nonincome into income. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of ALP to transactional value/consideration itself does not arise. The ingredient (a) above is not satisfied i.e. subject of tax is income which is chargeable to tax. The issue of shares at a premium is a capital account transaction and not income. 52 Page 52 Latest Case Law Wider meaning of “Income” is not permissible in absence of specific provision in the statute. Chapter X does not include a charging provision: It is well settled position in law that a charge to tax must be found specifically mentioned in the Act. In the absence of there being a charging Section in Chapter X of the Act, it is not possible to read a charging provision into Chapter X of the Act. There is no charge express or implied, in letter or in spirit to tax issue of shares at a premium as income. Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions are found in Sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from other Sources). Issue of shares does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case. Page 53 53 Latest Case Law Shell India The Bombay High Court’s decision on 18th November, 2014 favoured Shell on the grounds that issuance of shares by an Indian company to its foreign parent was not exigible to the Transfer pricing provisions, The High Court held that the legal principle laid down by it in the Vodafone case in October 2014 also applies in the Shell case too and rejected the I-T department’s argument that the facts of the Shell case were different from the Vodafone case. The ruling in the Shell case follows the Bombay High Court’s decision in the Vodafone case, which had held that the transfer-pricing regulations would not be applicable if there is no income component involved in the transaction. Page 54 Form 3 CEB Clause Particulars Part – A 4 Nature of business or activities of the assessee 8 Aggregate value of international transactions as per books of accounts 9 Aggregate value of specified domestic transactions as per books of accounts Part – B 11 Tangible Property 12 Intangible property: International transactions in respect of transfer and lease 13 Provision of Services 14 Lending or borrowing of money 15 Guarantee 16 Issue and buyback of equity shares 17 Mutual Agreement / Arrangement (Apportionment of Contribution / Cost / Expense incurred) 18 International transaction arising out / being part of any business restructuring or reorganization 19 Transactions having bearing on the profits, income, losses or assets 20 Page 55Deemed international transaction 55 Page 56 56