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Edition: February 2023

Bilcare Limited – Pune ITAT

Outcome: Against the taxpayer
Category: Internal TNMM vs External TNMM

The taxpayer is an outbound multinational company engaged in manufacturing and trading of pharma packaging products. During the course of Transfer Pricing assessment proceedings, the taxpayer backed the application of the Internal TNMM to benchmark the international transaction and furnished its audited segmental Profit & Loss Account stating the appropriations for costs with regard to its AE and non–AE transactions to the TPO. The tax authorities benchmarked the transaction by applying external TNMM and determined the ALP margin and proposed TP adjustment. The CIT(A) accepted the contention of the taxpayer of using Internal TNMM as MAM and deleted the TP adjustment amount proposed by the lower income-tax authorities.

The Tax Court opined that taxpayer’s total revenue from sales is only 4.83% of the company’s sales made to related parties and non-related parties. Sales made to related parties are located in Germany, Singapore and USA, etc. whereas 90% of the non-related party sales are in domestic market only. The tax court further observed that geographical locations largely impact the pricing of a product and the resultant profit. The tax court also observed that in the said case, there are not only huge volume differences in as much sale made to related parties which is less than 5% of total sales, the geographical differences also largely exist in the pattern of sales made to related parties and non-related parties, which causes a serious threat to the application of Internal TNMM. The tax court held that there can be no comparison between the price charged or profit realized by the taxpayer in domestic market from non-related parties and in the international markets from its related parties, thereby resulting in internal TNMM, not being the MAM.

Perfetti Van Melle India Private Limited – Delhi ITAT

Outcome: In favour of the taxpayer
Category: AMP

The taxpayer had incurred Advertisement, Marketing & Promotional (‘AMP’) expenditure towards looking to the nature of the confectionary products, marketing for such impulse products, promotion, etc. The tax authorities contended that under the guidance of the Associated Enterprise (‘AE’), the marketing and brand development strategy was undertaken and the AE was deriving the profits. The tax authorities benchmarked the AMP transaction incurred by the taxpayer using PSM as the most appropriate method and proposed TP adjustment by using Bright Line Test (‘BLT’) i.e. taking the ratio of AMP expenditure incurred to ales of two comparable companies. The taxpayer represented that the payment of AMP expenditure does not qualify as an international transaction, and hence, the determination of ALP is not required and filed an appeal with the Tax Court.

The Tax Court relied on the ruling of the co-ordinate Tax Court for Assessment Year 2016-17. The Tax Court observed that the there is no substantial difference between the agreement that came in force from 01/07/2005 and that of agreement that came in force from 01/04/2010. Further, the Tax Court held that there was no kind of understanding / arrangement with the related party that can lead to interference that the AMP expenditure incurred by the taxpayer is an international transaction nor there is any iota of action that there was any action in concert.

3F Industries Limited – Visakhapatnam ITAT

Outcome: In favour of the taxpayer
Category: LIBOR rates for outbound INR loans to AEs

The taxpayer is engaged in the business of manufacturing of edible oils and its by-products, bakery shortenings and margarine. The taxpayer provided advances in the form of working capital and term loans to its subsidiary located outside India. The tax authorities benchmarked the interest received on outbound foreign currency loans by benchmarking the same to the PLR rates adopted by benchmarking companies in India.

The tax court by placing reliance on ruling in its own case for AY 2008-09 & 2009-10 and Delhi High Court in the case of Cotton Naturals India (P) Limited observed that taxpayer established that the loans were given for the purpose of carrying on the business and not with an intention of earning interest. The tax court held that prevailing LIBOR rate should be adopted for the interest received on outbound loans and not PLR of Indian banks.

BMW India Financial Services Private Limited – Delhi ITAT

Outcome: In favour of the taxpayer
Category: Justifying 5% mark-up on availing IT support services

The taxpayer obtained IT support services from its related party for AY 2017-18 & 2018-19, at cost plus 5% mark-up. The taxpayer also procured certain external licenses from the related party at cost.

The tax authorities held that the taxpayer merely performs co-ordination services and adds no value to the functions that the third party performs. Hence, the same does not require any mark-up from the Indian entity. The tax authorities further held that the third-party cost, which is invariably allocated to the taxpayer, already includes a mark-up and thus, a double mark-up cannot be justified under these circumstances, more so, when around 88% of total IT cost is third party cost.

The tax court noted that the agreements with third party vendor entered into by related party showed the fixed price which shall be charged to related party for provision of Wide-area Network (’WAN’) services at the location of taxpayer in India – the amount charged by the third-party vendor was then passed on to taxpayer in India by the related party along with additional costs which the related party might have incurred in connection with such services with a mark-up of 5%. The tax court held that the software/IT support services cannot be said to be charged at par. A markup of 5% policy for the IT services rendered is an acceptable markup by international guidelines and as per EU Joint Transfer Pricing Forum. It cannot be expected that the parent organization supply support services without charging anything for such services rendered. Hence, it is held that the markup of 5% is sufficient to recoup the expenditure involved by the related party in exploration, inspection, testing and finalization of the suitable software.

Tata Power Solar Systems Limited – Bangalore ITAT

Outcome: In favour of the taxpayer
Category: Final assessment order passed without incorporating DRP directions

The taxpayer is engaged in the business of manufacture and sale including exports of solar cells photovoltaic module and systems. The tax authorities while passing the final assessment order did not factor in the directions of the Dispute Resolution Panel (‘DRP’). The DRP while passing its directions revised the transfer pricing adjustment to INR 12.09 crores, instead of INR 3.29 crores, by stating that tax authorities considered only transactions with related party whereas transactions had to be considered in total.

The tax court, by placing reliance in the case of Toyota Tsusho Private India Limited, observed that the taxpayer’s case is similar wherein the tax authorities had not given effect to the directions of the DRP in the final assessment order and retained the same adjustment as in the draft assessment order. The tax court quashed the TP adjustment and held the legal contentions in favour of the taxpayer. As the TP adjustment was quashed on the basis of legal issue, the tax court did not adjudicate on the grounds raised with regards to TP adjustment on merits leaving the same open.

WeWork India Management Private Limited – Bangalore ITAT

Outcome: In favour of the taxpayer
Category: Rejects NIL ALP of management fee payment when related party relationship established due to existence of services

The taxpayer is primarily engaged in leasing of a network of shared workspaces of fully or partly equipped premises.

During the course of the assessment proceedings, with regards to the transaction of ‘payment of management fees’, the tax authorities determined ALP of management fees as NIL, as the taxpayer failed to prove actual receipt of services and also failed to satisfy the need / benefit test.

The tax court observed that the nature of services and the related benefits, the test of determination of management fee along with relevant agreement are placed on record which depicts that the entire business model of the taxpayer is dependent on the related party, which has provided the concept, support, the acquisition and design of property, trademark and trade name, proprietary and third-party software for the day to day operations of the taxpayer in India. ITAT also noted that one of the related parties does not hold any share in the taxpayer, and that Section 92A(2)(g) of the Act gets attracted only when one related party provides service to the other related party by allowing the related party to use the know-how, patents, trademark, franchise, etc. and the business of the taxpayer is wholly depended on such IP/franchise.

Once the foundational condition is receipt of IP/franchise of which the tested party’s business is wholly dependent and only on that basis, the related party relationship was established, consequently TP provisions were applicable, it is unsustainable then to turn around and hold that the taxpayer did not receive the IP/franchise from its deemed related party. By this logic when the tax authority alleges that the taxpayer has not received any of the above services, it would indicate that the very relationship based on which the taxpayer and related party have been established as related party would be non-existent. The very fact that the entire business model of the taxpayer is dependent on related party … clearly establishes that services were rendered by the related party to the taxpayer. The taxpayer further held that once the above mentioned fact is established, ALP of management fee paid by the taxpayer to related party cannot be determined at ‘NIL’ by the tax authority. 

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