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In 2013, the Hon’ble Income Tax Appellate Tribunal (ITAT) Pune delivered pivotal decisions that significantly influenced the landscape of transfer pricing. These rulings, spanning cases related to expense allocation, custom duty adjustments, working capital intricacies, and methodological debates, hold profound implications for businesses navigating the complexities of international transactions. This analysis delves into the detailed and nuanced aspects of these landmark decisions, offering insights into the tribunal’s interpretations and emphasizing the importance of precise financial documentation and methodological alignment in the realm of transfer pricing.
1. Allocation of Expenses
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1 |
M/s. Ampacet Speciality Products Private Limited, 797/PUN/2022 AY 2014-15 |
There was an issue of allocation of inadequate/no expenditure under the heads Employee benefit, Depreciation, Sales Commission and Other expenses between the manufacturing and trading segments | The Hon’ble ITAT held that: (i) Allocation of Other expenses in the ratio of GP as against ratio of sales in respective segment(ii) The expenses salaries of site Directors/Managers etc. can not be part of common expenses and need to allocate on actual basis.(iii) The Depreciation on plant & Machinery can not be part of common expenses and need to allocate on actual basis in respective segment.(iv) The Other expenses has to be allocated to both the segments proportionately. |
| 2 | Persistent Systems Limited 692/PUN/2022 AY 2018-19 |
Allocation of Common Cost | The assessee has benchmarked provision of software development services by using Transactional Net Marginal Method (TNMM). While calculating Operating Cost(OC), the assessee has allocated common cost on the basis Sales Ratio. On the other hand, TPO made allocation using base of ‘direct cost.’
During TP Proceedings, before TPO, the assessee further submitted that the cost may be allocated on ‘per person’ basis. TPO rejected this contention also on the ground that various branches of the assessee are situated in different countries, with different geographical location, therefore ‘per person’ allocation would also be not the correct key for allocation. The Hon’ble ITAT agreed with the contention of the TPO, agree with the TPO’s calculation of allocation based on the direct cost as it is the best suitable basis for allocation of Common Cost of G&A. Because the direct cost is easily available and verifiable. The Hon’ble ITAT further stated that the onus is always on the assessee to file all necessary details before the TPO to prove the allocation and in this case the assessee failed to file all the essential details. |
2. Custom Duty
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1 |
M/s. Ampacet Speciality Products Private Limited, 797/PUN/2022 AY 2014-15 |
TPO made adjustmenton rate of Custom Duty and not on amount of custom duty | Under the TNMM, the ALP is determined by considering the operating margin to a common base and while computing the operating margin, all the operating expenses and the corresponding revenue are taken into consideration. Having done so, it is usually not open to again go back to the individual items of the operating costs for claiming that such expenditure was higher in the case of the assessee in quantitative terms vis-a-vis the comparables and adjustment should be given. It is but natural that if a costly purchase of high quality product is made, it will yield higher sale price as well. This shows that if the operating cost is higher, the operating revenue will also be higher and vice versa. Once operating margin is considered for benchmarking, it implies that the higher operating costs have equalised the corresponding higher operating revenue as well. In such cases, there can be no question of granting any separate adjustment in respect of costly purchases. However, the adjustment will be warranted only if there is a difference between the rate of custom duty paid by the assessee and comparables. We are confronted with a situation in which the difference is only in respect of amount of custom duty and not the rate of custom duty. In such circumstances, there is no point in allowing any adjustment on account of custom duty. |
| 2 | Faurecia Automotive seating arrangements ITA No.1932/PUN/2018 2014-15 |
The assessee is engaged in the business of manufacturing of automotive seating and recliner. The majority of the raw material (69.02% of the total purchases) was imported. Whereas in the case of comparable, the percentage of imported goods is only 13.69%. It resulted in higher incidence of customs duty thereby increasing the cost of raw material, components, stores directly affecting the net profit margin of the appellant company vis-a-vis comparables selected by it. Accordingly, the assessee claimed adjustment on account of higher duty paid in order to eliminate the difference that are likely to materially affect the price or profit between the assessee company. | The ITAT held that – Undoubtedly, higher percentage of the imported raw material resulted in higher incidence of the customs duty, which increased the cost of manufacturing segment thereby directly affect the gross profit margin as compared to the comparables. The provisions of Rule 10B(1)(b)(iv) of the Rules provide that the adjustments can be made to eliminate the difference that are likely to materially affected the price, cost or profit between the controlled and uncontrolled transactions. Therefore, we find merit in the contention of the appellant company that the suitable adjustments should be made to iron out the differences of profit between the profit of tested company and comparables. |
3. Working Capital Adjustment
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1 |
M/s. Ampacet Speciality Products Private Limited, 797/PUN/2022 AY 2014-15 |
In this regard, the assessee calculated the working capital adjustment on segmental basis. However, it could not substantiate the figures of Receivables, Payables, Inventories relating to trading segment. |
Working capital adjustment required to be provided even in the segmental data, if assessee gives the accurate figures of payables/receivables in respective segment. |
4. Most Appropriate Method
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1 |
M/s. Ampacet Speciality Products Private Limited, 797/PUN/2022 AY 2014-15 |
Cup (TPO) vs TNMM (by assessee) | The CUP can be applied more appropriately if all other facts and circumstances of the international transaction and of the comparable transaction are similar. If there is difference in product, geography, timing or quantity sold etc., then the CUP method cannot be applied as the most appropriate method. |
| 2 | Bilcare Limited 333/PUN/2021 AY 2015-16 |
The assessee made purchases of packaging material from its AE and also sold certain packaging material to its AEs. For determining the ALP, the assessee employed the Comparable Internal Uncontrolled Price (CUP) method. The TPO observed that the assessee had used the transactional net margin method (TNMM) in the preceding years. He therefore rejected the assessee’s selection of the CUP and applied the TNMM as the most appropriate method The ld. CIT(A) echoed the application of the TNMM but accepted internal TNMM as MAM. |
The ITAT rejected the CUP and held that – There can be no comparison between the price charged or profit realized by the assessee in domestic market from non-AEs and in the international markets from its AEs, thereby frustrating the application of the internal TNMM. In view of such significant differences, the internal TNMM is not the most appropriate method to be applied. Accordingly, it was held that it is the external TNMM which should prevail. |
| 3 | Emerson Climate Technologies (India) Private Limited ITA.No.168/PUN./2022 AY 2017-18 |
With reference to payment for advisory and other services the TPO held ALP of transaction at NIL. The assessee benchmarked the transaction using TNMM. The TPO primarily contended that the assessee did not produce any evidence to demonstrate that the services were actually received. He, therefore, rejected the TNMM and applied the Comparable Uncontrolled Price (CUP) method and accordingly, he determined Nil ALP |
The Hon’ble ITAT rejected the CUP method adopted by the TPO and held that the application of the TNMM as the most appropriate method in determining ALP. |
| 4 | M/s. Franke Faber India Private Limited 300/PUN/2021 AY 2016-17 |
The issue involved is with reference to the ‘Payment of Management fees’. The assessee benchmarked the transaction using Transactional Net Margin Method. However, TPO proceeded to `allow’ or `disallow’ the Management Fee under various heads by using head count key and thereafter he worked out management costs allowable at Rs.7.89 crore as against claim of 10.79 crores. Disallowed balance amount. |
Hon’ble ITAT deleted the addition on the ground that ALP was not determined by the TPO under any of the prescribed methods, accordingly deleted the entire addition. |
| 5 | Kimberly-Clark Lever Private Limited 507/PUN/2015 AY 2010-11 |
Import of raw material CUP (by assessee) Vs TNMM |
The assessee benchmarked the purchase transaction using AE as tested party giving details of price and mark up charged in the form of confirmation certificates from AE issued by Independent Cost Accountant. As regards purchase from third party vendors, the assessee submitted certificates from third party vendors demonstrating that the price charged is lower than the market price. Under these circumstances, Hon’ble ITAT held that the lower authorities have failed to consider this submission and hence remitted back to the file of TPO. Hon’ble ITAT further held that if the TPO is not satisfied with the sufficiency of documents, TPO shall examine the comparison at gross profit level. |
| 6 | Kimberly-Clark Lever Private Limited 576/PUN/2014 AY 2009-10 |
In respect of transaction of import of raw material of TPO benchmarked the transaction using TNMM as most appropriate method as against CUP method used by the assessee. | A controlled transaction has been defined to mean that a transaction entered into between two associated enterprises and therefore, we are of the considered opinion that the lower authorities were justified in not giving any credence to the certificates issued by deemed AEs. However, in the light of additional evidence filed before us in the form of price list obtained from the third parties, we remit the matter back to the file of AO / TPO with a direction to undertake the exercise of benchmarking the transaction of import of raw material taking cognizance of price list furnished by the assessee from the third-party vendors and to restrict any TP adjustment only in respect of AE transactions. |
5. FTS/Royalty
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1 |
Balasai Net Pvt. Ltd 596/PUN/2017 AY 2013-14 |
AO held that expenditure incurred towards Hosting charges, Email Defence Services, Email server software services falls within the definition of fees for technical services both under the Act as well as tax treaty as assessee failed to deduct TDS on these payments, disallowed the expenditure u/s 40(a) | The agreement with the service provider has clearly spelt out use of trademark, ownership of which is exclusively with service provider. The Hon’ble ITAT set aside the issue for verification, the clauses of the agreement and held that if the service provider has allowed the assessee to use the trademark, then it is covered within the definition of royalty as per Article 12 of the relevant DTAA. |
| 2 | Faurecia Automotive Holdings ITA No. 44/PUN/2023 AY 2020-21 |
There was an issue of the receipt of Rs. 50,93,44,646/- claimed on account of “IT support fees and management services‟. AO held that the payment received by the assessee from its AE are in terms of service agreement are covered by the definition of royalty under Article 13(3) of India France DTAA as well as under clause 4 of Explanation 2 to section 9(1)(vi) of the Act |
The Hon’ble ITAT held that – Such income is neither royalty nor FTS and therefore, not taxable either within the Act or within DTAA. |
6. Intra Group Services
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1 |
Benteler Automotive India Private Limited 670/PUN/2022 AY 2018-19 |
The assessee had paid an amount of Rs.11,52,81,428/- to its AE for management services as per the service agreement, which was considered NIL by the TPO. | The TPO and DRP held that no chargeable intra group services were received by the assessee from its AE Therefore, TPO arrived at ALP of Rs. Nil.
However, in the subsequent order passed u/s 143(3) for the same year the AO has held that AE has provided these services to the assessee. Due to such categorical findings of AO on the same subject, the conclusion arrived at by TPO becomes erroneous. |
| 2 | Emerson Climate Technologies (India) Private Limited ITA.No.168/PUN/2022 AY 2017-18 |
With reference to payment for advisory and other services the TPO held ALP of transaction at NIL.
The assessee benchmarked the transaction using TNMM. |
The Hon’ble ITAT rejected the CUP method adopted by the TPO and held that the application of the TNMM as the most appropriate method in determining ALP. |
| 3 | Faurecia Automotive seating arrangments ITA No.1932/PUN/2018 AY 2014-15 |
There was an issue of intra group professional services and R&D cost sharing fees. TPO as well as the Hon’ble DRP determined the arm’s length price of the above at Nil for two reasons:
(i) there was no proof in support of the receipt of the services from the AEs in respect of professional services and (ii) in respect of cost sharing of R&D, the lower authorities was of the opinion that it is duplication of the services for royalty and R&D cost. |
The onus of proving the receipt of services lies on the assessee claiming deduction on account of payment made towards professional charges. It is a condition precedent to prove that the receipt of services for availing the deduction towards the payment. For such verification, matter was set aside to TPO if TPO finds that the appellant had received the professional services, and these transactions are closely linked transactions with the business of segment, then the Assessing Officer/TPO shall benchmark these transactions by including cost of the services as part of the cost base, as the TPO had adopted and accepted the TNM Method at entity level as the most appropriate method. Otherwise, the Assessing Officer/TPO shall undertake the exercise of benchmarking of these transactions under CUP Method by bringing the comparables on record. |
7. Capacity Utilization
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1 |
Bilcare Limited 333/PUN/2021 AY 2015-16 |
Capacity Utilization | In principle, there can be no hindrance in granting capacity utilization adjustment, if all the necessary particulars are made available by the assessee. |
8. Corporate & Performance guarantee:
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1 |
Bilcare Limited 333/PUN/2021 AY 2015-16 |
The assessee entered in to nine transactions comprising of seven of loan guarantees and two of performance guarantees. The TPO held that 2% guarantee fee was required to be charged as arm’s length price. The ld. CIT(A) reduced the arm’s length rate of loan guarantee fee to 1.75% as against 2% applied by the TPO; | The Hon’ble ITAT held that For both corporate guarantee as well as performance guarantee ALP should be arrived by charging fee at 0.5%, as increased by any expenditure actually incurred by the assessee in furnishing the guarantee. |
9. A&M Expenses
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1 |
Kimberly-Clark Lever Private Limited 507/PUN/2015 AY 2010-11 |
TPO made disallowance of A&M expenses, which worked out to 0.25% of the sales against that of comparables which were only 0.05%. | The Revenue had failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE and apparently there is no material referred to by the lower authorities to show that the assessee had incurred the expenditure in advertising and marketing expenses in order to promote the brand value of the foreign AE part disallowance was made. |
10. DEMPE Expenses
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1 |
Mercedes Benz 708/PUN/2022 AY 2018-19 |
In this case there was an issue of T.P addition pertaining to development, enhancement, maintenance, protection, exploitation (“DEMPE‟) related functions.
For quantifying the remuneration to be received by the assessee for the alleged DEMPE functions, the T.P.O referred the computation done for the excess royalty payment and adjustment was made. |
The Hon’ble ITAT in this case set aside the matter to the file of the TPO for verification of DEMPE function and the relevant clauses of the agreement. The matter was also set aside for determination of ALP using any of the prescribed method, if such DEMPE activity has been carried out by the assessee. |
11. Software Trading Vs Marketing Support Services
| 1 | MSC Software Corporation India Pvt. Ltd. 375/PUN/2022 AY 2015-16 |
The assessee is engaged in the business of distribution of software, developed by the AE. The only issue is whether the assessee is engaged in trading activity or simply providing marketing support services. | The matter was set aside for determination of ALP by uphelding the contention of the TPO that the assessee being the reseller is doing only marketing support services. The assessee is only performing routine marketing activities in India attracting customers of software products in the Indian market. |
12. Rule 10B vs Rule 10CA
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1 |
Rafiq Naik Exports Private Limited 939/PUN/2022 AY 2016-17 |
During transfer pricing proceedings, the assessee considered single year data as against three years as mandated by Rule 10B. As per the assessee’s contention, the data for comparability can also be taken as per Rule 10B and it is not mandatory to adopt data as per rule 10CA. | The Hon’ble ITAT rejected the assessee’s contention and held that the ALP should be determined w.r.t. rule 10CA and not as per rule 10B |
13. ITeS Comparable excluded by Hon’ble Hon’ble ITAT, Pune on functional Differences
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Infosys BPO |
Excluded | High Brand Value | BNY Mellon International Operations (I) P. Ltd. 199/PUN/2021 AY 2016-17 |
| M.P.S Ltd. | Excluded | it is providing publishing solutions to its clients and there have been several acquisitions also. This extraordinary event itself by way of several acquisitions renders, this company as non-comparable with that of the assessee. | BNY Mellon International Operations (I) P. Ltd. 199/PUN/2021 AY 2016-17 |
| M.P.S Ltd. | Excluded | engaged in software products also like typesetting and data digitalization services etc. Further, there was no segmental information relating to ITES services and in the absence of such information held the same is not comparable to that of assessee’s functions | M/s. FIS Solutions Software 583/PUN/2022 AY 2018-19 |
| Domex E-Data Pvt. Ltd | Excluded | the said company is engaged into software development with the usage of very high end software, hardware, | M/s. FIS Solutions Software (583/PUN/2022 AY 2018-19) Katerra Technology Services LLP (629/PUN/2022 – AY 2018-19) |
| CES Ltd | Excluded | is into KPO/BPO which is evident from its annual report . | M/s. FIS Solutions Software 583/PUN/2022 AY 2018-19 |
| Exilant Technologies Pvt. Ltd | Excluded | Since Annual Report is not available for the entire year and presence of extraordinary events, we hold that Exilant Technologies Pvt. Ltd., cannot be included in the comparables for the present year. | Persistent Systems Limited 692/PUN/2022 AY 2018-19 |
| E-Infochips Pvt. Ltd. | Excluded | it is in the business of Software Development and ITES. However, no segmental profitability is separately available in the Annual Report. | Persistent Systems Limited 692/PUN/2022 AY 2018-19 |
| Nihilent Ltd., | Excluded | is seen from the description of the services provided in the Annual Report that these services are functionally dis-similar to the services provided by assessee, hence, it is not functionally comparable. | Persistent Systems Limited 692/PUN/2022 AY 2018-19 |
| Cybage Software Pvt. Ltd. : | The company is engaged in ITES, BPO Services. It is also involved in branding creative production, content marketing, campaign management. Therefore, it is functionally dis-similar and hence cannot be accepted as comparable. | Persistent Systems Limited 692/PUN/2022 AY 2018-19 |
|
| Ninestars Information Technologies Ltd. | Based on the cryptic information available in the Audit Report, it is not possible to understand actual functions performed by Ninestar Information Technologies Pvt. Ltd. Hence, Ninestar Information Technologies Pvt. Ltd., is held to be functionally not comparable with the assessee. | Persistent Systems Limited 692/PUN/2022 AY 2018-19 |
|
| M/s. Manipal Digital Systems Private Ltd., |
Excluded | The said company is not functioning in “ITES segment”. | Rage Frameworks India Private Limited 674/PUN./2022 AY 2018-19 |
| Vitae International Accounting Services Private Limited, |
Excluded | have been carrying-out their business activities and deriving revenues from accounting, |
Rage Frameworks India Private Limited 674/PUN./2022 AY 2018-19 |
| Access Healthcare Services Private Limited |
Excluded | deriving revenues from healthcare services | Rage Frameworks India Private Limited 674/PUN./2022 AY 2018-19 |
| Integra Software Services Private Limited |
Excluded | deriving revenues from e-publishing services. Further M/s. Integra Software Services Private Limited had undergone a merger scheme with M/s. Integra Infotech Private Limited as per the National Company Law Tribunal’s [in short “NCLT”] order to this effect in the relevant previous year. | Rage Frameworks India Private Limited 674/PUN./2022 AY 2018-19 |
| M/s. Cheers Interactive (India) Private Limited |
Excluded | had not derived any revenue in “ITES” segment. |
Rage Frameworks India Private Limited 674/PUN./2022 AY 2018-19 |
| Sundaram Business Services Limited |
Excluded | nowhere specified any “ITES” activity | Rage Frameworks India Private Limited 674/PUN./2022 AY 2018-19 |
| M/s. I Services Private Limited | Remitted Back to the TPO | Rage Frameworks India Private Limited 674/PUN./2022 AY 2018-19 |
14. Loss claimed in the revised return
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1 |
Bilcare Limited 273/PUN/2021 AY 2016-17 |
The Singapore AE was 100% subsidiary of the assessee company Subsequently, the said subsidiary went into liquidation. The assessee company transferred the ordinary shares of this subsidiary held to another wholly owned subsidiary of the assessee company. However, the assessee had not reflected the said disinvestments in audited financial statements. The assessee incurred a LTC loss in this transaction, which was not shown in the original return of income but shown in the revised return of income. Such claim for loss in the revised return of income was denied on the ground that the said revision of return was not on account of any omission or wrong statement in the original return of income. |
The Hon’ble ITAT allowed the claim of the assessee based on the decision of Hon’ble Supreme Court in view of the decision of the Hon’ble Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders, 349 ITR 336 (Bom.); The Hon’ble Delhi High Court in the case of CIT vs. Jai Parabolic Springs Ltd., 306 ITR 42 (Delhi) and the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Mitesh Impex (367 ITR 85). |
Conclusion: The Hon’ble ITAT Pune’s decisions in 2013 provide nuanced insights into transfer pricing matters, emphasizing the need for meticulous allocation, accurate data, appropriate method selection, and a thorough understanding of functional comparability. These rulings set crucial precedents for future transfer pricing assessments.
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