The tax court placed reliance on the taxpayer’s own case on a similar issue wherein the adjustment towards cost contribution charges (‘CCCs’) was deleted by the tax court. Taxpayer had selected Transactional Net Margin Method (‘TNMM’) for payments linked to its core business which it demonstrated through details of services availed and benefits received from its related party. Further, the cost allocation was carried out using a uniform allocation policy/key. However, lower tax authorities selected the Comparable Uncontrolled Price Method (‘CUP’) considering the CCCs as a separate class of transaction as there are no restrictions in place to benchmark transactions solely at the entity level.
Considering that the taxpayer’s own case containing similar facts was adjudicated in favour of the taxpayer and having regard to the fact that payment made towards these charges are integral to the core business of the taxpayer, taxpayer upheld TNMM as Most Appropriate Method (‘MAM’) as against CUP for computing the arm’s length price pertaining to the transaction of cost contribution charges .
The taxpayer had filed a petition in the tax court on the ground that in assessment proceedings, involving Transfer Pricing (“TP”) issues, the tax authorities had passed a regular assessment order without passing draft assessment order u/s 144C of the Act quantifying final tax demand and penalty. The tax authorities accepted the contention of the taxpayer and represented before the tax court that due to technical lapse of uploading assessment order instead of draft assessment order in the Income Tax Department (ITD) software, the demand notice was automatically issued by the system.
The tax court remarked that Section 144C of the Act clearly states that a draft assessment order has to be passed and the taxpayer has an option to accept or file objections before the lower tax authorities. The tax court placed its reliance on a judicial precedent where it was clearly settled proposition that Section 144C of the Act sets forth a mandatory scheme of assessment and the tax officer has to pass an order of draft assessment before finalising the assessment. The tax court strongly disagreed with the tax authority’s contention of error in selection of wrong field in the ITD software. Further, the tax court noticed in the assessment order, the total income has been assessed and the order is accompanied by a computation sheet determining the demand payable along with interest. Hence, tax court opined that the tax authorities has passed a regular assessment order, not following the scheme of assessment in terms of Section 144C. Hence, the tax court held in the favour of the taxpayer, quashed the assessment order quashed by the lower tax authorities and deleted the demand.
The taxpayer had appealed to the tax court against the order of the tax authorities passed in accordance with the directions of the DRP. Thereafter, the taxpayer requested for withdrawal of the appeal pursuant to signing of Advance Pricing Agreement (‘APA’), in light of the fact that taxpayer has entered into an APA with the CBDT. Further, the APA stated that as per the prescribed rules, if any appeal is undecided for any rollback year on points which form the subject matter of APA, then such appeal would be withdrawn to such extent of covered issues. The tax court held the appeal to be withdrawn with regards to the TP issues and dismissed the appeal.
The tax court accepted the lower tax authority’s NIL arm’s length price determination in relation to the international transaction of ‘reimbursement of expenses’. The tax court held that it was prerogative of the taxpayer to prove the actual rendering of services / expenditure by way of producing necessary agreement or any other communication which would convincingly / conclusively establish rendering of such services / incurring of expenditure.
The taxpayer, part of Capgemini Group, is engaged in providing consultancy, technology outsourcing and legal and professional services.
During the year under consideration, it had provided corporate guarantee for its Associated Enterprise (‘AE’) for which the transfer pricing authorities proposed an adjustment of a ‘corporate guarantee fee’.
On perusal of the facts and contentions that were put forward by both the parties, the Tax Court placed reliance on various judgements and opined that one of the vital requirements for a transaction to be an ‘International Transaction’ is that it should have a bearing/ impact on the profits, incomes, losses or assets of the taxpayer. In the instant case, the income clearly arises in France as the guarantee has been given by the taxpayer, a French company to BNP Paribas, a French bank in France, and therefore, Article 23.3 has no applicability as income does not arise in India. Also, noting the taxpayer’s contention that since the guarantee given by one Non-resident (taxpayer) to another non-resident located outside India, no income accrues or arises to the taxpayer in India within the meaning of Section 5 r.w.s. 9 of the Act nor any income can be deemed to accrue or arise in India within the meaning of section 9 of the Act.