Document

Report
Recent Developments on Transfer
pricing
ICAI webcast – Committee of International Taxation
21 August 2014
C.A. Ankush Mehta
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Global TP Scenario
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Key Controversies
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Budget Update – TP
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Judicial Updates
Contents
Global Transfer Pricing Scenario
Page 3
Global transfer pricing scenario
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Transfer pricing continues to be a significant source of controversy
between the world’s tax authorities and multinational enterprises
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Examinations by Revenue Authorities have expanded in scope and
complexity and adjustments resulting in interest and penalties are on the
rise
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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
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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
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Action 1 : Address the tax challenges
of the digital economy
Action 15: Development of a
multilateral instrument for amending
bilateral treaties
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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)
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Page 5
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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
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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
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Objectives of transfer pricing documentation requirements are:
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To provide tax administrations with the information necessary to conduct an informed transfer
pricing risk assessment;
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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
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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,
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Aggregate amount,
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Associated enterprises involved in the transaction,
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Detailed functional analysis,
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Choice of most appropriate method, choice of tested party,
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Assumptions if any in the choice of TP method,
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Comparability adjustments if any, and
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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
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Significant legislative changes
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Expansion in scope of “international transactions”
Strengthening of penalty and enforcement framework
Comprehensive definition of “intangible property”
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Use of “unspecified” transfer pricing method
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Reduction in permissible tolerance range
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Page 8
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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
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Circular on transfer pricing for Development Centers
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Domestic transfer pricing regulations
introduced
Introduction of APA
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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
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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
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Key aspects:
Page 10
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Is subscription to share capital an international transaction in the hands of foreign
company?
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Is issue of share capital an international transaction in the hands of Indian company
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The valuation methodologies used for determination of fair value on which shares
would be issued
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The taxability of such transaction in the hands of Indian company issuing shares and
foreign company subscribing the shares?
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If shares are issued at less than fair value, will such under receipt be taxed along
with interest (as in Shell/ Vodafone’s case)?
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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
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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)
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Key aspects:
Page 11
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Can AMP be treated as international transaction?
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Can bright line be used as a benchmarking method?
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Can compensation received from group company be knocked – off against the AMP
spend before computing the adjustment?
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Will selling expenses be excluded?
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Will companies owning domestic brands be considered comparable?
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Will mark-up on the excess AMP expense be added?
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If overall TNMM position is good, will it still be looked at separately?
Case Study 3 – Cost recharges/ Intra Group Services
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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
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Key aspects:
Page 12
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Proof or evidence in support of availing of services
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Purchasing power parity value for such services?
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Duplication of services?
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Cost benefit analysis undertaken for such services
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Cost allocation procedure adopted to determine the costs charged back to Indian
entity
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Basis of determining mark-up which can be loaded on the costs allocated
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Comparable/ third party transactions for such services from overseas or India
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If overall TNMM position is good, will it still be looked at separately?
Case Study 4 – Royalty payments on brand/
technical know-how
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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
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Key aspects:
Page 13
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Usefulness/ Uniqueness of the brand/ technical know-how shared?
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Rates that other group companies are paying for similar know-how/ brand
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Cost benefit analysis undertaken?
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Basis of determination of the rates of royalty paid?
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Comparable/ third party transaction analysis for the aforesaid transaction
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Dependency of Indian company on such licenses
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If overall TNMM position is good, will it still be looked at separately?
Case Study 5 – Business restructuring
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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
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Key aspects:
Page 14
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Does the proposed arrangement result in an international transaction?
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Is the Indian entity entitled to an exit charge for a change in functional and risk
profile?
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Mechanisms in which exit charge is determined? Methods followed?
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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
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At present, taxpayers can enter into an APA only for a prospective period upto a maximum
of 5 consecutive years
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“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)
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This amendment will take effect from 1st October 2014
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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”
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Roll back provisioning to apply subject to prescribed condition, procedure and manner –
What conditions would be expected?
Page 16
Augmenting APA team
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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
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This is important to sustain the success and value of the program in addition to living up
to taxpayer expectations
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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
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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
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There had been an ambiguity - whether 'deemed
international transactions' would cover a case where both
the contracting entities are Indian residents
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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)
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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
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“Range” concept followed internationally; also propounded by OECD
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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
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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
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However, arithmetic mean concept will continue to apply where number of comparable
companies are inadequate
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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
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Issue of ‘single year data vs multiple data’ has been a subject matter of debate and litigation so
far.
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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
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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)
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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.
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The amendment will come in effect from 1 October 2014.
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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:
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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
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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
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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
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Payment of referral fees
India
Cushman and
Wakefield
Page 23
CIT vs Cushman and Wakefield (India) Pvt. Ltd.
Assessment proceedings:
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The TPO disallowed the entire payment made towards the coordination and liaison services
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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”
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The AO in his draft order made the addition to the income based on the TPO order
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No adverse inference was drawn with respect to the referral fee paid by the taxpayer
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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:
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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)
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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
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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
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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
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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:
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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
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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:
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The AEs have only charged cost in accordance with the intra-group arrangement and there is no
charging of mark up/profit margin
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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
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Whether services have indeed been provided by the AEs to the taxpayer?
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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
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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
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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
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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
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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
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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)
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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
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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
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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 :
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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.)
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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:
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The information input provided by Tips Software are with regard to the information available with the
customs department at various ports
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Rule 10D(3) is illustrative in nature and it merely describes the information required to be maintained
by the assessee
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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
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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:
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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
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‘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
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Set up Mauritius Co
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Mauritius Co, in turn sets up subsidiary in
Cayman
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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:
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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
►
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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?

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