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DATE: December 22, 2015 (Date of pronouncement)
DATE: January 1, 2016 (Date of publication)
AY: 2008-09
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CITATION:
Transfer pricing of AMP Expenditure: the onus is on the Revenue to demonstrate by tangible material that there is an international transaction involving AMP expenses between the Indian Co and the AE. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In the absence of a machinery provision it is hazardous for any TPO to proceed to determine the ALP of such a transaction since Bright Line Test has been negatived as a valid method of determining the existence of an international transaction and thereafter its ALP

The provisions under Chapter X do envisage a ‘separate entity concept’. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses

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DATE: December 2, 2015 (Date of pronouncement)
DATE: December 21, 2015 (Date of publication)
AY: 2007-08
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CITATION:
Transfer Pricing: An adjustment with respect to transfer pricing has to be confined to transactions with Associated Enterprises and cannot be made with respect to transactions with unrelated third parties

In terms of Chapter X of the Act, re-determination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act

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DATE: December 11, 2015 (Date of pronouncement)
DATE: December 11, 2015 (Date of publication)
AY: 2006-07
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CITATION:
Transfer Pricing: Important legal principles on whether an adjustment for Advertisement & Market Promotion (AMP) expenses can be made on the basis that there is an assumed “international transaction” with the AE because the advertisement expenditure of the Indian company is “excessive” explained

The transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the ‘bright line’ by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found ‘excessive’ the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing ‘adjustment’. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO “to examine the ‘international transaction’ as he actually finds the same.” In other words the very existence of an international transaction cannot be a matter for inference or surmise

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DATE: November 6, 2015 (Date of pronouncement)
DATE: November 23, 2015 (Date of publication)
AY: 2007-08
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CITATION:
Rule 10A(d): Law on when multiple transactions can be regarded as a single composite transaction for determining arm’s length price explained. Fact that a transaction results in a profit or a loss has no bearing on whether it is at arm’s length price

The answer to the issue whether a transaction is at an arm’s length price or not is not dependent on whether the transaction results in an increase in the assessee’s profit. A view to the contrary would cause considerable confusion and lead to arbitrary, if not illogical, results. A view to the contrary would then raise a question as to the extent of profitability necessary for an assessee to establish that the transaction was at an arm’s length price. A further question that may arise is whether the arm’s length price is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee’s claim, it is not determinative of the same

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DATE: November 4, 2015 (Date of pronouncement)
DATE: November 17, 2015 (Date of publication)
AY: 2005-06
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Transfer Pricing: (i) If the AO & CIT make a mechanical reference to the TPO without applying mind to the TP report & other data filed by the assessee, the reference is invalid, (ii) A transfer pricing adjustment cannot be made if the assessee's income is exempt u/s 10A or 80HHE or (iii) if the AE is assessed at a rate of tax higher that tax rate in India

(c) The AO erred in not himself examining the issue of Transfer Pricing and with the approval of the CIT, made a reference to the TPO u/s 92CA(1) of the Act; that the AO as well as the CIT failed to apply their mind to the TP Report filed by the assessee, or to any other material or information or document furnished. The TPO made an adjustment which was incorporated by the AO in the assessment order. Thereby, the AO as well as the CIT did not discharge necessary respective judicial functions conferred on them under sections 92C and 92CA of the Act;

(d) Further, the assessee is also correct in contending that no TP adjustment can be made in a case like the present one, where the assessee enjoys u/s 10A or 80HHE of the Act, or where the tax rate in the country of the Associated Enterprises is higher than the rate of tax in India and where the establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible.

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DATE: August 19, 2015 (Date of pronouncement)
DATE: August 27, 2015 (Date of publication)
AY: 2008-09
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CITATION:
Transfer Pricing: Circumstances in which the Profit Split Method (PSM) has to be preferred over the TNMM for determining the ALP and method of allocation of profits between the assessee and the AE under the PSM explained

The Profit Split Method (PSM) first identifies the profit to be split for the associated enterprise from the controlled transactions in which the AEs are engaged. It then splits these profits between the AEs on an economically valid basis that approximates the division of the profit that would have been anticipated and reflected in an agreement, transaction or a residual profit intended to represent the profit that cannot readily be assigned to one of the parties. The contribution of each enterprise is based upon a functional analysis and valued to the extent possible by any available reliable standard market data. The functional analysis is an analysis of the functions performed (taking into account assets used and risk assumed) by each enterprise

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DATE: August 20, 2015 (Date of pronouncement)
DATE: August 27, 2015 (Date of publication)
AY: 2007-08, 2008-09
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CITATION:
Transfer Pricing: Transactions of providing support services to “Sogo shosha” entities cannot be characterized as trading transaction for purposes of comparison and determining ALP and the cost of sales cannot be included

The activities of purchase and sale i.e. trading involves risk and finance whereas in the activity of support services i.e. intending transactions the assessee has neither to incur any financial obligation nor carries any significant risk. The nature of two activities is absolutely different. The activities of trading i.e. purchase and sale are highly insignificant as compared to activity of support service which constitutes the core business activities of the assessee. The TPO and DRP are wrong in applying the trading margins ignoring the facts of the case that the assessee being a service provider the trading margins cannot be applied. Further, the TPO DRP have gone wrong in including the cost of sales in OP/TC ignoring the fact the value of the sale under no circumstances effects the activities of the assessee company, a service provider. For support services the correct method is the TNMM and the assessee has computed the same on the basis of OP/TC. The OECD guidelines also supports this contention that in TP study business transactions cannot be recharacterized. The support service or intending provided by the assessee company is nothing but a trading facilitation both in form and substance

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DATE: August 10, 2015 (Date of pronouncement)
DATE: August 26, 2015 (Date of publication)
AY: 2008-09
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CITATION:
Transfer Pricing: Important law laid down on the principles for identifying comparables for benchmarking an international transaction & determining the ALP in the context of whether KPO services are comparable to BPO services. Law also laid down on whether for TNMM method, broad functionality is sufficient and whether supernormal profits indicate that there is functional dissimilarity

We have reservations as to the Tribunal’s aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression ‘BPO’ and ‘KPO’ are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression ‘KPO’ in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services

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DATE: June 4, 2015 (Date of pronouncement)
DATE: August 18, 2015 (Date of publication)
AY: 2008-09
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CITATION:
Transfer Pricing: The allotment of shares/ receipt of share application money by the assessee from the AE for a price less than the book value of the shares cannot be regarded as a “deemed loan” by the assessee to the AE and notional interest cannot be imputed thereon

Though the international transaction on capital account per se cannot call for any addition on account of transfer pricing adjustment because of the absence of any provision under the Act charging income from such transactions, but the transactions flowing out of such original transaction on capital account, having impact on the profitability of the assessee, would be required to pass the mandate of Chapter-X of the Act. In other words, if such offshoot transactions of the original transaction on capital account, such as, interest or depreciation are not at arm’s length price, then it is mandatory to determine their ALP and make addition, if any, on account of transfer pricing adjustment

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DATE: August 6, 2015 (Date of pronouncement)
DATE: August 10, 2015 (Date of publication)
AY: 2012-13
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CITATION:
S. 92B(1): If assessee contends that it has not entered into an "international transaction" with an AE, the TPO has to counter that by furnishing relevant information. Failure to do so can be challenged by a Writ Petition

When the petitioner no.1 replied to the said notice by its letter dated 29th April, 2015, the concerned respondent authority ought to have given a reply by supplying such relevant materials with which it come to a conclusion that the petitioner no.1 was an “associated enterprise” of PricewaterhouseCoopers Services BV. The reason why furnishing of such relevant materials were singularly important is that if the petitioner no.1 was not an “associated enterprise” of PricewaterhouseCoopers Services BV, there cannot be any computation of income from “international transaction” having regard to arm’s length price as envisaged under section 92 of the Income Tax Act, 1961

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