CIT Vs Cisco Systems (India) Pvt. Ltd. (Karnataka High Court)
FUNCTIONAL PROFILE PREVAILS OVER FORM—CISCO’S SPARE-REPLACEMENT ACTIVITY IS A SERVICE, NOT TRADING: KARNATAKA HIGH COURT UPHOLDS TNMM
The Karnataka High Court has held that the most appropriate transfer-pricing method must be selected on the basis of the assessee’s actual functions, assets employed and risks assumed, and not merely because goods physically pass through the assessee.
Cisco Systems India was held to be a captive service provider in respect of its spare-parts replacement activity and not a trader. It did not acquire ownership of the spares, determine their resale price, select customers or assume inventory and obsolescence risks. The High Court consequently upheld the Tribunal’s direction to apply the Transactional Net Margin Method instead of the Resale Price Method.
Facts of the case
Cisco India entered into international transactions with its associated enterprise in relation to product-replacement services. The company furnished a transfer-pricing study applying the Transactional Net Margin Method—TNMM as the most appropriate method, with operating profit/value of services as the profit-level indicator.
The Transfer Pricing Officer rejected TNMM. According to the TPO, Cisco India was essentially carrying on a trading activity by purchasing products from its associated enterprise and reselling them to the AE’s customers in India. Based on this characterisation, the TPO applied the Resale Price Method—RPM and proposed a transfer-pricing adjustment of ₹26,86,57,520.
