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Recent Developments on Transfer pricing ICAI webcast – Committee of International Taxation 21 August 2014 C.A. Ankush Mehta ► Global TP Scenario ► Key Controversies ► Budget Update – TP ► Judicial Updates Contents Global Transfer Pricing Scenario Page 3 Global transfer pricing scenario ► Transfer pricing continues to be a significant source of controversy between the world’s tax authorities and multinational enterprises ► ► Examinations by Revenue Authorities have expanded in scope and complexity and adjustments resulting in interest and penalties are on the rise ► ► Page 4 Italy and emerging countries such as India, China, Indonesia and South Korea are the top jurisdictions imposing transfer pricing penalties Significant increase in unresolved reviews and audits compared with previous years ► ► Tax risk management a priority In cases where examinations resulted in TP adjustments, penalties were imposed in 24% of the cases - up from 19% cases in 2010 and 15% cases in 2007 Top three countries involved in APAs are the US, Canada and the UK BEPS action plan – changes to the international tax landscape ► ► Action 1 : Address the tax challenges of the digital economy Action 15: Development of a multilateral instrument for amending bilateral treaties ► ► ► ► ► Action 2: Neutralise the effects of hybrid mismatch arrangements Action 3: Strengthen CFC rules Action 4: Limit base erosion via interest deductions and other financial payments Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance Action plan on Base Erosion and Profit Shifting (BEPS) ► ► ► ► ► ► ► Page 5 ► Action 11: Establish methodologies to collect and analyse data on BEPS and actions addressing it Action 12: Require taxpayers to disclose their aggressive tax planning arrangements Action 13: Re-examine transfer pricing documentation Action 14: Making dispute resolutions more effective Action 6: Prevent treaty abuse Action 7: Prevent the artificial avoidance of permanent establishment status Action 8: Consider transfer pricing for intangibles Action 9: Consider transfer pricing for risks and capital Action 10: Consider transfer pricing for other high-risk transactions OECD BEPS CbC Reporting ► As a part of the BEPS Action plan, OECD has released draft guidance on transfer pricing documentation and country-by-country reporting for public comments ► Objectives of transfer pricing documentation requirements are: ► To provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; ► To ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing p5 rices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns; and ► ► ► Page 6 To provide tax administrations with the information that they require in order to conduct an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction. OECD proposes a two tiered approach to transfer pricing documentation consisting of (i) a master file containing standardised information relevant for all MNE group members and (ii) a local file referring specifically to material transactions of the local taxpayer OECD BEPS CbC Reporting Templates proposed by OECD Organisation structure Template for master file Description of MNE’s business MNE’s intangibles MNE’s intercompany financial activities MNE’s financial and positions Details of the local entity ie organisation structure, indication of any business restructuring or intangible transfers in the present or immediately past year Template for local file Details of each of the controlled transactions ie Description, Aggregate amount, Associated enterprises involved in the transaction, Detailed functional analysis, Choice of most appropriate method, choice of tested party, Assumptions if any in the choice of TP method, Comparability adjustments if any, and Reasons for concluding that the relevant transaction was concluded at arm’s length Financial information ie complete audited financial accounts of the local entity and comparables used in the analysis and the source of such data Page 7 Recent transfer pricing developments in India ► Significant legislative changes ► ► ► Expansion in scope of “international transactions” Strengthening of penalty and enforcement framework Comprehensive definition of “intangible property” ► Use of “unspecified” transfer pricing method ► Reduction in permissible tolerance range ► ► Page 8 ► 3% for all transactions, other than wholesalers (1%) Introduction of ‘range’ concept while computation of ALP What is contract R&D and is Cost plus still the right answer? Safe Harbor Rules ► ► ► Circular on transfer pricing for Development Centers ► ► Domestic transfer pricing regulations introduced Introduction of APA ► Specified taxpayers undertaking prescribed transactions can opt to be covered by safe harbor rules to avoid litigation UN TP Manual & India Chapter Key controversies Page 9 Case Study 1 - Share Valuation ► Company A issues shares to its Group company B in the US for Rs 150, when its fair value as per the valuation certificate obtained from a valuation expert is Rs 140 and its face value is Rs 10 ► Key aspects: Page 10 ► Is subscription to share capital an international transaction in the hands of foreign company? ► Is issue of share capital an international transaction in the hands of Indian company ► The valuation methodologies used for determination of fair value on which shares would be issued ► The taxability of such transaction in the hands of Indian company issuing shares and foreign company subscribing the shares? ► If shares are issued at less than fair value, will such under receipt be taxed along with interest (as in Shell/ Vodafone’s case)? ► If shares are issued at more than fair value, will such over receipt be treated as loan from overseas company and a notional interest be charged? Case Study 2 – AMP Expenses ► Company A, a subsidiary of a foreign company (which owns the brand), has undertaken significant advertisement and marketing promotion (AMP) activities in India. The foreign parent reimburses the Indian company partly for such expenses. However, even after such compensation, the overall AMP spend as a percentage of its revenue is higher than comparable companies (i.e., the bright line) ► Key aspects: Page 11 ► Can AMP be treated as international transaction? ► Can bright line be used as a benchmarking method? ► Can compensation received from group company be knocked – off against the AMP spend before computing the adjustment? ► Will selling expenses be excluded? ► Will companies owning domestic brands be considered comparable? ► Will mark-up on the excess AMP expense be added? ► If overall TNMM position is good, will it still be looked at separately? Case Study 3 – Cost recharges/ Intra Group Services ► Company A is availing treasury, marketing and technical services from its overseas Group company (Company B). For such services, Company B charges back the cost for such services along with a mark-up of 10 percent ► Key aspects: Page 12 ► Proof or evidence in support of availing of services ► Purchasing power parity value for such services? ► Duplication of services? ► Cost benefit analysis undertaken for such services ► Cost allocation procedure adopted to determine the costs charged back to Indian entity ► Basis of determining mark-up which can be loaded on the costs allocated ► Comparable/ third party transactions for such services from overseas or India ► If overall TNMM position is good, will it still be looked at separately? Case Study 4 – Royalty payments on brand/ technical know-how ► Company A has taken a license from its overseas parent to manufacture and sell products under a registered trademark of the overseas parent. For such licenses, Company A pays a royalty of 2 percent for trademark and 3 percent for technical know-how on net sales ► Key aspects: Page 13 ► Usefulness/ Uniqueness of the brand/ technical know-how shared? ► Rates that other group companies are paying for similar know-how/ brand ► Cost benefit analysis undertaken? ► Basis of determination of the rates of royalty paid? ► Comparable/ third party transaction analysis for the aforesaid transaction ► Dependency of Indian company on such licenses ► If overall TNMM position is good, will it still be looked at separately? Case Study 5 – Business restructuring ► Company A is undertaking full fledged manufacturing activities in India for its overseas group companies. Its parent company (Company B in US) decides to take over the entrepreneurial role from Company A and subsequently restrict the activities of Company A to being a risk mitigated contract manufacturer ► Key aspects: Page 14 ► Does the proposed arrangement result in an international transaction? ► Is the Indian entity entitled to an exit charge for a change in functional and risk profile? ► Mechanisms in which exit charge is determined? Methods followed? ► The taxability of such a charge (if it needs to be paid) in the hands of the Indian company Budget Update - Transfer Pricing Page 15 APA – Roll back provisions ► At present, taxpayers can enter into an APA only for a prospective period upto a maximum of 5 consecutive years ► “Rollback" provisions are proposed to be introduced wherein the outcome of the APA could also be applied to four previous years immediately preceding the first year covered under the APA (subject to certain rules and procedure) ► This amendment will take effect from 1st October 2014 ► Memorandum to FB 2014 inter-alia mentions as follows: “Providing of such a mechanism in Indian legislation would also lead to reduction in large scale litigation which is currently pending or may arise in future in respect of the transfer pricing matters” ► Roll back provisioning to apply subject to prescribed condition, procedure and manner – What conditions would be expected? Page 16 Augmenting APA team ► Considering approximately 350 application are filed in the 2 years since the APA program took off operationally, there was need to supplement APA authority with additional manpower with additional competent work force ► This is important to sustain the success and value of the program in addition to living up to taxpayer expectations ► FM’s statement to strengthen the administrative set-up of the APA program so as to expedite disposal of APA applications shall give a further boost to the APA program Page 17 Definition of "deemed international transaction" amended ► The definition of "deemed international transaction" provides that a transaction of an enterprise with a third party shall be deemed to be an international transaction with the AE if there exists a prior agreement in relation to the said transaction or the terms of the said transaction are determined in substance between the AE and the third party ► There had been an ambiguity - whether 'deemed international transactions' would cover a case where both the contracting entities are Indian residents ► Hyderabad Tribunal in the case of Swarnandhra IJMII Integrated Township Development Co. P. Ltd vs. DCIT [TS-762-ITAT-2012(HYD)-TP] held that deeming fiction does not cover transactions between two Indian entities. Similar position taken in Kodak India Pvt Ltd (155 TTJ 69)(Mum ITAT) and Vodafone India Services Pvt Ltd (Bom HC) (262 CTR 153) ► ► Page 18 Clarification provided by Finance Bill (No.2) 2014 deemed international transactions would also cover cases where both the contracting parties are residents The amendment will take effect from 1 April 2015 Foreign Co Global MSA for Provision of IT Services Outside India India India Co (AE of FCo) Unrelated Customer SOW/ PO pursuant to MSA Introduction of ‘range’ concept ► “Range” concept followed internationally; also propounded by OECD ► Use of inter-quartile range is amongst the globally accepted best practice and also closer to economic realities wherein prices, and or margins, are compared to those within a range and not at to a particular point ► In order to align the transfer pricing regulations in India with the international best practices, "range" concept is proposed to be introduced for determination of arm's length price ► However, arithmetic mean concept will continue to apply where number of comparable companies are inadequate ► Detailed rules would be prescribed in this regard Page 19 Illustration highlighting difference between the arithmetic mean concept and the range concept Name of the company Operating Margin A Limited -5.08% B Limited 6.51% C Limited 8.67% D Limited 18.08% E Limited 27.99% Tested Party 5.00% Arithmetic mean 13.23% Highest Observed Value 27.99% Upper Quartile* 23.04% Median** 8.67% Lower Quartile*** 0.72% Lowest Observed Value -5.08% No of observations (n) Interquartile range (Upper Quartile – Lower Quartile) 5 0.72% - 23.04% * Upper quartile = [3/4 *(n+1)] th data value in the data set = 4.5 = average of 4th and 5th observation ** Median = [1/2 *(n+1) th data value in the data set = 3 = 3rd observation *** Lower Quartile = [1/4 *(n+1)] th data value in the data set = 1.5 = average of 1st and 2nd observation As evident from the above illustration, ‘range’ concept is expected to provide greater flexibility to the taxpayers in respect of setting of transfer price as compared to the existing ‘arithmetic mean’ approach Page 20 Other amendments Use of multiple year data ► Issue of ‘single year data vs multiple data’ has been a subject matter of debate and litigation so far. ► FM in his speech contemplated to allow use of multiple year data for computation of the arm's length price Empowering the TPO to levy penalty under section 271G ► The existing provisions of section 271G of the Act provide that if any person who has entered into an international transaction or SDT fails to furnish any information/ document as prescribed by the transfer pricing provisions, then such person shall be liable to a penalty up to 2% of the value of international transactions (or SDT) which may be levied by the AO or the CIT(A) ► Given that determination of ALP in several cases is done by TPOs, TPOs are now empowered to levy penalty under section 271G for failure to furnish information/ documentation. ► The amendment will come in effect from 1 October 2014. ► Need to be mindful of the 30 days time limit for submission of information/ documents during the course of transfer pricing audits Page 21 Judicial Updates Page 22 CIT vs Cushman and Wakefield (India) Pvt. Ltd. TS-150-HC-2014(DEL)-TP Brief Facts of the Case: ► The taxpayer is an Indian company engaged in the business of rendering services connected to acquisition, sales and lease of real estate and provision of advice and research on such matters, project management etc within and outside India ► The taxpayer availed certain intra-group services (a) coordination and liaison service from its Associated Enterprises (AEs) which was charged at actual cost and (b) Payment of referral fees to several AEs for referring clients which were paid according to international fee sharing rules and referral fees on Tenant Representation Transactions ► The taxpayer in its TP documentation benchmarked the referral fee transaction and concluded the transaction were undertaken on arm’s length basis. As AEs charged actual cost for the coordination and liaison services, no benchmarking analysis was conducted by the taxpayer AE Outside India Provision of coordination and liaison service Payment of referral fees India Cushman and Wakefield Page 23 CIT vs Cushman and Wakefield (India) Pvt. Ltd. Assessment proceedings: ► The TPO disallowed the entire payment made towards the coordination and liaison services ► The TPO was of the opinion that the services were ancillary services and taxpayer did not derive any benefit from the said service. Hence the ALP was determined as “Nil” ► The AO in his draft order made the addition to the income based on the TPO order ► No adverse inference was drawn with respect to the referral fee paid by the taxpayer ► Further, the AO disallowed the referral fees as a deductible expenditure on grounds that the same was not incurred for the business of the taxpayer Page 24 CIT vs Cushman and Wakefield (India) Pvt. Ltd. Appellate Proceedings: ► The taxpayer filed its objection before Dispute Resolution Panel (DRP). The DRP upheld the adjustments proposed by the AO. Aggrieved by the DRP order, the taxpayer filed an appeal before the Income-tax Appellate Tribunal (ITAT) ► With respect to the coordination and liaison services, the ITAT held that the taxpayer had furnished documentary evidence to substantiate the services were received and subsequent benefit was derived from services ► The ITAT held that the assessee had shown to have earned substantial revenue from its client and it could not be said that the revenue earned by the assessee in respect to the services rendered by the AEs, was only on account of incidental benefit ► The ITAT held that it was necessary for the assessee to provide service outside India and if such services were rendered by the employee of the assessee it would have resulted in extra expenditure. As the services were received and benefit was derived, ITAT deleted the adjustment ► For the referral fees the ITAT held that once ALP is determined by the TPO, the AO does not have the power to re-examine the transaction. The Tribunal also held that the taxpayer had furnished sufficient evidence to support the payment of referral fees and disallowed the adjustment on merit The tax authority challenged the order of the Tribunal before the HC Page 25 CIT vs Cushman and Wakefield (India) Pvt. Ltd. Revenue’s Contention: ► No benchmarking of the cost charged by the AEs was conducted by the taxpayer. The cost paid by the taxpayer to its AEs must be compared on other similar transaction, on the basis of one of the methods determined for calculating the ALP ► In the absence of determination of ALP by TPO and AO, ITAT could not have taken upon itself the primary task of determining the ALP and holding the cost claimed was reasonable Taxpayer’s Contention: ► The AEs have only charged cost in accordance with the intra-group arrangement and there is no charging of mark up/profit margin ► The Tribunal’s approach was statutorily sanctioned under Section 92 (3) of the Act, which states that TP provisions will not apply if the result of the ALP determination is a reduction of the overall tax incidence in India Questions before the High Court ► Whether services have indeed been provided by the AEs to the taxpayer? ► Whether these services ought to be benchmarked under the Indian TP provisions considering the fact TP Provisions will not apply if the result of the ALP determination is a reduction of the overall tax incidence in India? Page 26 CIT vs Cushman and Wakefield (India) Pvt. Ltd. High Court ruling – Coordination and liaison services availed by AEs ► High Court (HC) observed that the cost incurred by the AEs have not been disputed and equally admitted that the ALP has to be determined as per the provisions of the Act. High court held that it was necessary to test if third party in an uncontrolled transaction would have charged lower, equal or greater amount as compared to what was charged by AE ► HC opined that concept of base erosion is not logical inference from the fact that the AE have only asked for reimbursement of cost. Further, whether the cost itself is inflated or not is a matter to be tested under comprehensive TP analysis ► Upholding the principle in Dresser-Rand India, the HC ruled that the authority of the TPO is restricted to the determination of ALP and not to determine whether there is a services or not from which the taxpayer benefits ► HC held that the details of the specific activities for which cost was incurred by both AEs and the attendant benefit to the taxpayer have not been considered till date. This has to be provided in addition to the consideration of the ALP vis-à-vis total cost claimed. Thus, the matter is remanded back for consideration of ALP determination Page 27 CIT vs Cushman and Wakefield (India) Pvt. Ltd. High Court ruling – Referral fees ► HC observed that the jurisdiction of the AO and TPO are distinct. A referral by the AO to TPO is only for the limited purpose of determining the ALP. It does not imply a concrete view as to the existence of services or the accrual of benefits (such that allowance under Section 37 must be permitted) ► Relying on ITAT ruling in Deloitte Consulting and HC ruling in Sony India, HC observed that AO can determine that expenditure claimed was not for the purpose of business and thus disallow the amount. This would not restrict or bypass the functions of the TPO ► The HC ruled TPO’s determination of ALP is binding on the AO and hence the AO cannot reassess the issue on the quantum of payment. However, the AO in his assessment decide whether the work or services were actually rendered as claimed by the assessee and if the services are real and genuine ► The HC noted that neither the AO nor the Tribunal have discussed the correctness of evidence of the existence of referral transactions and hence remanded the matter back to AO for a detailed verification of facts and provisions of reasoned conclusions with the AO being bound by the TPO’s approval of the pricing of referral fees Page 28 Tilda Riceland Private Limited vs ACIT TS-47-ITAT-2014(DEL)-TP Brief Facts : ► The assessee has exported brown basmati rice and milled basmati rice to its AEs and applied CUP method by comparing the average of transfer prices with the average of uncontrolled prices. (as reported in “Daily Export Port Data – April 2007 to March 2008” compiled by TIPS Software Services Pvt Ltd., Mumbai.) ► The TPO rejected CUP method stating quotes given by a private company are not covered within the provisions of Rule 10D(3) and CUP requires same products (including Brand) and thereafter the TPO made adjustments applying TNMM at the entity level ITAT Ruling: ► The information input provided by Tips Software are with regard to the information available with the customs department at various ports ► Rule 10D(3) is illustrative in nature and it merely describes the information required to be maintained by the assessee ► TIPS software is public data maintained by customs department. If TPO had any doubts, he could call for information to examine authenticity of data furnished ► The product categorization has been done on the basis of reasonable generic description, and the product being generic in nature, such categorization in reasonable and sufficient Page 29 Tilda Riceland Private Limited vs ACIT ITAT Ruling: ► Even if there are minor variations in prices of generic goods, such factors are adequately taken care of by average in the case of large size of comparables ► ‘The international transaction’ referred to in rule 10 B(1)(a)(iii) is used in singular and does not permit taking into account ‘a number of such transactions ’. While averaging is thus permissible for the uncontrolled transactions, each international transaction is to be taken on standalone basis. (followed similar ruling on CPM in case of Tara Ultimo Pvt Ltd) Page 30 Redington India Limited vs JCIT TS-208-ITAT-2014(CHNY)-TP Existing Structure and Steps Resultant Structure Redington India Limited Redington India Limited India India Outside India Outside India Mauritius Co Mauritius Co Cayman Co* Gulf Co Cayman Co ► Set up Mauritius Co ► Mauritius Co, in turn sets up subsidiary in Cayman ► Gift of shares by the Taxpayer in Gulf Co to Cayman Co Page 31 Gulf Co *Mauritius Co holds shares in Cayman Co along with other PE Investors Redington India Limited vs JCIT Brief Facts of the Case: ► The taxpayer provides end-to-end supply chain solutions for all categories of Information Technology(IT) products. It also carries on business in office automation products. The taxpayer provides supply chain solutions primarily in India, Middle East and Africa ► The taxpayer has overseas wholly owned subsidiary (WOS), Redington Gulf FZE (RGF Gulf) which is also engaged in similar line of business as that of tax payer. In order to attract investments to expand its business operations in Middle East and African, the taxpayer had initiated setting up of certain WOS ► Taxpayer set up an WOS in Mauritius, Redingtion International Mauritius Ltd. (RIML Mauritius). RIML Mauritius in turn set up a subsidiary in Cayman Islands by name Redington International (Holdings) Limited (RIHL Cayman) ► The taxpayer transferred its entire shareholding in RGF Gulf to RIHL Cayman, making RGF Gulf a step down subsidiary of RIML Mauritius and the taxpayer. As the shares were transferred without consideration, the taxpayer took the stand that it is not an “international transaction” ► The taxpayer issued guarantees on behalf of its subsidiaries and other companies and also paid trademark license fees to its AE for use of trademark “REDINGTON” Page 32 Redington India Limited vs JCIT Assessment proceedings: ► The TPO held that the transfer of shares made by the taxpayer is an international transaction coming under the purview of transfer pricing regulations and determined the ALP @ INR 865 crores ► The TPO observed that the taxpayer had issued corporate guarantees on behalf of its subsidiaries and in light of the amendments brought in the Finance Act 2012, held that corporate guarantees have to be treated as international transaction and made an ALP adjustment of INR 9.28 crores ► With respect to the trademark license fees, the TPO made a downward adjustment of INR 1.89 crores and added to the total income of the assessee ► The AO modified the long term capital gains adjustment by setting off the indexed cost of acquisition and determined the revised ALP @ INR 610 crores. Further, the AO added two disallowances pertaining to bad debts and factoring charges ► The taxpayer filed its objection before DRP, who upheld the adjustment and provided marginal relief in the capital gains addition proposed against the transfer of shares and restricted the corporate guarantee or guarantee fee to a lower rate determined as ALP in the earlier assessment years ► Aggrieved by the DRP order, the taxpayer filed an appeal before the Tribunal Page 33 Redington India Limited vs JCIT Transfer of shares to a subsidiary as an international transaction: Department’s Contentions: ► Transfer of shares made by the taxpayer is a case coming under the purview of Chapter X of the Act, discussing the special provisions relating to avoidance of tax ► The taxpayer by way of transferring its shares in its subsidiary, RGF Gulf to its step down subsidiary, RIHL Cayman has not only avoided the payment of tax but also made schemes to avoid tax perpetually, through a series of corporate re-structures ► ► Page 34 Gift can be made only to natural persons and concluded that a corporate body cannot make a gift to another, as the pre-condition to make a gift in natural love and affection Capital gains tax is computable and hence the TPO has rightly applied the TP provisions to arrive at the arm’s length consideration for determination of amount chargeable to tax Assessee’s Contentions: ► The voluntary transfer of shares to the step down subsidiary is the nature of gift and therefore the same is exempted from capital gains tax under the provision of ITL. Further, the transfer of shares was purely on commercial and business expediency and there was no motive to avoid tax ► Considering that gift is not defined under the ITL, reliance was place on the provisions of transfer of property of Act (TOPA) and the Gift Tax Act to support the argument that a corporate body can make gift to another corporate body as like any other person ► Even otherwise, since no consideration was received or receivable, computation mechanism would fail. Since the transfer of shares were without consideration, there is no income chargeable to tax and hence the TP provision would not be applicable Redington India Limited vs JCIT Corporate and bank guarantee charges and trademark license fees: Department’s Contentions: ► Corporate guarantees have to be treated as international transactions in the light of the amendment brought in by the Finance Act, 2012, with retrospective effect from 1st April, 2002 ► The taxpayer made a payment towards trademark/ license fees to its AE for using the trademark “REDINGTON”. There is no genuine rationale for making such a payment for trademark/license fees and supported the action of the TPO in determining the ALP at Nil Page 35 Assessee’s Contentions: ► No fresh guarantees were issued during the relevant previous year. Further, no fees is charged from the AE since the same is considered to be in the nature of a shareholder activity. Relying on decision of Delhi ITAT in the case of Bharti Airtel Ltd held that it is not an international transaction ► With regard to adjustment against trademark/license fees, the Revenue Authorities are not justified in analyzing the commercial rationale and justification to determine, whether the taxpayer ought to have incurred an expenditure or not. Further, the transaction need not be tested independently as the same is already at arm’s length under combined transaction TNMM approach Redington India Limited vs JCIT ITAT ruling: ► Considering that the term “gift” has not been defined under ITL, reference was made to TOPA and Gift Tax Act. ITAT held that the essential ingredient of a valid gift are existence of property, which is transferred voluntarily, without consideration and there is no requirement that the same should be out of love and affection ► ITAT held that the under the ITL gift transaction is exempt from capital gain tax and there is no specific provision which states that the exemption would be available only to gift made by individuals. In the absence of specific restriction under the ITL to this extent, there is no need to read down the law to make an interpretation that a company cannot claim exemption. Accordingly, gift by the Taxpayer should be exempt from capital gains ► Even otherwise, in case of gift tax, since no consideration was received or receivable, neither can the consideration be ascertained, the computation mechanism for ascertaining capital gains will fail. Consequently, the charge in respect of capital gains also fails ► The computation of ALP is dependent on the income arising to an assessee from an international transaction. In the present case since no income arises to the taxpayer, TP provisions will not apply Page 36 Redington India Limited vs JCIT ITAT ruling: ► Since the taxpayer has not issued any fresh corporate guarantees in the relevant previous year, the reliance placed by the TPO on the definition of “international transaction” as retrospectively amended by the Finance Act, 2012, is not proper ► ITAT held that the corporate and bank guarantees provided by the Taxpayer enable its associates to secure credit in their overseas jurisdiction. Thus, taxpayer has provided the corporate and bank guarantees for the over-all interests of its business ► In view of the nature of corporate and bank guarantees and placing reliance on Delhi ITAT ruling in the case of Bharti Airtel Ltd, the TP addition was deleted by ITAT ► With regard to payment made for trademark/ license fees, the ITAT held that the taxpayer is exploiting the trademark for the purpose of carrying its business and therefore there is nothing uncommon in the taxpayer making payment to the use of the trademark to its AE ► Further, the ITAT held that it is for the taxpayer to decide the dynamics of its business and placed reliance on Supreme court ruling in the case of S.A.Builders where it was held that expenditure incurred by the assessee if justified by commercial expediency is allowable for purpose of taxation and what is commercial expediency is a matter to be decided by the assessee Page 37 Deloitte Consulting India Pvt. Ltd. vs ACIT TS-224-ITAT-2012(MUM) Mastek Limited (AE) Outside India India Deloitte Consulting India Private Limited Page 38 Provision of Software and IT services Availing of Software and IT services Reimbursements for marketing services Reimbursement for receipt of support services Brief Facts of the Case: ► The Taxpayer is a joint venture between Mastek Limited (Mastek) and Deloitte Consulting (DC), engaged in providing software development and IT services ► DC is responsible for undertaking marketing activities i.e. generation of sales, managing and maintaining customer relationships, etc and enters into consulting assignment with the clients. Mastek provides and manages infrastructure, operations recruitment, training, administration, etc ► During FY 2003-04 and 2004-05 the taxpayer and DC entered into several international transactions: (i) Provision of software and IT services (ii) Availing Software and IT services (iii) Reimbursements for marketing services (iv) Reimbursement for receipt of support services Deloitte Consulting India Pvt. Ltd. vs ACIT Assessment proceedings: ► Post commencement of audit proceedings, the taxpayer filed a revised tax return and voluntary performed a TP adjustment by not claiming the allocated marketing cost as tax deduction and claimed tax holiday on the enhanced total income ► The tax authority disregarded the revised tax return and thereafter made a TP adjustment by disallowing the claim made for marketing cost as a tax deduction in the original return and denied tax holiday on the enhanced income arising from TP adjustment ► The tax authority initiated penalty proceedings on the ground that the taxpayer had concealed true particulars of income and thereafter levied a penalty of 100% to the amount of tax arising on TP adjustment. The same was confirmed by the first appellate authority and the taxpayer has appealed before the ITAT on the validity of penalty Page 39 Deloitte Consulting India Pvt. Ltd. vs ACIT Assessee’s contentions: ► The taxpayer argued that from commercial perspective it was prudent to incur the cost of marketing personnel of DC who were specifically engaged in marketing the Taxpayer’s off-shore capabilities ► The taxpayer argued that it had voluntarily filed a revised return reversing the marketing expenses and claiming tax holiday on the enhanced income and hence should not be denied the benefit of tax holiday deduction. Tax holiday can be denied only if a TP adjustment is made and not in case of a voluntary TP adjustment ► No penal consequence would follow as the returned income and assessed income would be the same as the taxpayer having admitted to a wrong claim, increased its income to that extent that and deductions under section 10A could not be validly denied Revenue’s contentions: ► The taxpayer’s role was to execute projects and render software development services. It was not assigned any marketing function and hence allocation of marketing cost would not arise ► The entire revenues of the taxpayer was from job work from DC and it was not a case where contract from clients were passed on back to back basis. The taxpayer and not rendered any services to third parties. Further, the taxpayer had not been able to demonstrate any benefit derived from the such marketing cost ► The taxpayer filed a revised tax return but revised Form 3CEB was not furnished and thus the claim on quantum of international transaction was not changed Page 40 Deloitte Consulting India Pvt. Ltd. vs ACIT ITAT ruling: ► The ITAT held that no marketing function was assigned to the Taxpayer and its role was limited to provision of software development, and hence the arguments that expenses were borne out of commercial expediency is not valid ► ITAT held that the return were filed after initiation of TP audit, in anticipation of TP adjustment. “Voluntariness” and “bona fides” are essential for a valid revised tax return and thus the revision was not voluntary as it was guided by the motive to avoid adjustment and impact of tax holiday denial ► ITAT held that the revised return were not valid and hence the original return should be considered as valid. Consequently, the enhancement of income due to TP adjustment would be applicable and also the provisions for denial of tax holiday ► ITAT did not accept Taxpayer’s argument that there is no specific provision for revising the Form 3CEB. ITAT held that anything which is wrong or is not valid has to be withdrawn and correct information should be furnished ► A taxpayer may be protected from penalty if the taxpayer can establish that the price charged or paid was computed in accordance with the provision of the law, in good faith and with due diligence ► ITAT held that the taxpayer has being unable to prove the truthfulness of the transaction stating marketing expenses to be considered as a discount to its principal buyer. The taxpayer is in contradiction to its own report in Form 3CEB, which the taxpayer is under law obliged to defend and prove as representing true and correct account of its international transactions Page 41 Questions?
