The taxpayer is engaged in the business of manufacturing TMT bars. The taxpayer had entered into the international transaction of ‘purchase of mild steel ingots’ from its related party and the same was benchmarked using Comparable Uncontrolled Price (‘CUP Method’) as the Most Appropriate Method.
The lower-level tax authorities proposed transfer pricing adjustment for the month of January 2014 on the ground that the sales made by the AEs to non-related parties was only 12.31% and the percentage was significantly higher in comparison with other months.
The tax court observed that the high-level income tax authorities noticed that there is a qualitative difference between the MS ingots sold by the related party to the taxpayer vis-à-vis the ingots sold by the related party to third parties. The taxpayer had been able to provide substantial evidence to prove that the difference in prices is due to the quality of products sold. Also, the lower-level tax authorities accepted the contention of the taxpayer for the month of December 2013, February 2014 and March 2014 and the adjustment was made for the month of January 2014 on the ground that the sales made by the related party to the taxpayer was significantly higher as compared to other method. The tax court found no rationale in making the adjustment only for the month of January 2014.
The taxpayer is engaged in the trading of comedy. To benchmark the international transactions entered into, the taxpayer considered TNMM as the most appropriate method and arrived at the margin of 3.61% considering OP/OC as Profit Level Indicator.
The lower-level tax authorities considered forex loss as operating since it was inextricably linked to sales. The lower-level tax authorities also relied on various judicial pronouncements. The lower-level tax authorities also extracted the scenario provided by the taxpayer wherein it is proved that foreign exchange loss incurred even before the sale has been made and that is because of reinstatement / adjustment of advances received against sales.
The tax court observed that the taxpayer neither incurred any loss or any gain because of forex fluctuation, it is only an accounting treatment. The tax court held that forex loss should be considered as operating while computing the Profit Level Indicator (‘PLI’) of the taxpayer since sales and forex losses incurred by the taxpayer are closed linked to each other.
The taxpayer is engaged in the business of asset management for mutual funds and segregated funds.
During the course of the assessment proceedings, with regards to the transaction of payment of cost allocation charges towards central and regional support services and business support services, the tax authorities determined ALP of cost allocation charges 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 cost allocation charges were attributed to group entities based on an appropriate allocation key. The same was justified based on the global TP study and other documentary evidence. With regards to the taxpayer’s reference for justifying the cost allocation based on allocation key, the taxpayer relied on Jabil Circuit India Private Limited wherein usage of allocation keys for allocating intra-group services was upheld after considering OECD guidelines. The tax court deleted the transfer pricing adjustment after noting that the taxpayer duly substantiated availing of various services from the related party vide documentary evidence and that the allocation among group entities was undertaken on the basis of well-accepted allocation key method.
The issue under consideration is that the arm’s length transactions entered into by the taxpayer is within the 3% range from the arm’s length price determined by the lower-level tax authorities.
The lower-level tax authorities determined the arm’s length margin at 3.59%, while the margin of the taxpayer is 2.29%, thereby resulting in transfer pricing adjustment of INR 21,29,779.
The tax court observed that the variation in the arm’s length price(‘ALP’) determined by the tax authorities and the price at which the international transactions undertaken by the taxpayer does not exceed the variation of 3%, thereby deleting the transfer pricing adjustment of INR 21,29,779.
The taxpayer operates in different segment viz. consumer, lifestyle and healthcare.
During the course of the assessment proceedings, the lower-level tax authorities (transfer pricing officer) rejected six out of the seven companies identified by the taxpayer in the transfer pricing documentation study report and selected two new comparable companies namely Tata Elxsi Limited and Sasken Communication Technologies Limited. The lower-level tax authorities (DRP) rejected Sasken Communication Technologies Limited and Persistent Computers Limited. Post the directions of the DRP, only one comparable company remained in the set. The adjusted margin of Tat Elxsi Limited was 13.61% and the margin of the taxpayer was 10.53%.
The tax court observed that the difference in the benchmark margin of 13.61% vis-à-vis 10.53% of the taxpayer falls within the tolerance limit of +/- 5% as contained in Section92C(2) of the Act and relying on the decision of the Development Bank of Singapore, the tax court held that benefit of tolerance limit under 2nd proviso to Section 92C(2) of the Act is available to the taxpayer in the current case where only one comparable of Tata Elxsi is considered for the purpose of benchmarking.