CA Manish Agarwal
In the modern global village, Transfer Pricing is one of the most disputed & complex subject with respect to the transactions with Associated enterprise. There are number of judgments coming everyday and below given summary of some of the important judgments during last one year.
01. Data of the rate charged to unrelated parties should be available.
01. Transfer Pricing provisions are not attracted in the case of transfer of the shares of the company when due to DTAA provisions, capital gain on such shares are not taxable.
02. TNM method requires comparison of net profit margins realized by an enterprise from an international transaction and not comparison of operating margins of enterprises as a whole.
03. The assessee can appeal before DRP in case he is not satisfied with the order of TPO.
04. The comparison study must be done with same countries as different countries have different economic & political situation.
05. In view of parameters prescribed in Rule 10B, bad debt written off cannot be a factor to determine arm’s length price of any international transaction.
06. RBI’s Approval does not put a seal of approval on true character of a Transaction from perspective of transfer pricing regulation
07. Before passing the order, the TPO must provide personal hearing to the assessee.
08. Chapter X dealing with Transfer Pricing is constitutionally valid.
09. The TPO can change the process of determining the ALP on the ground that process selected was complex .
10. Notional interest on interest-free loans can be assessed under transfer pricing law.
11. For determination of ALP under TNMM assessee was justified in taking profit level indicator of comparable companies as operating cash profits without taking into consideration, exclusion of depreciation was justified to eliminate difference in technology used, age of assets used in production, differences in capacity utilization and different depreciation policies adopted by various companies.
12. Merely because a comparable is making loss, same cannot be excluded from the TP comparison .
13. TPO can reject the price computed by the assessee, if they found that data provided by assessee are unrealistic.
14. Transfer Pricing TNMM must be applied to transaction margins and not to enterprise level margins. Adjustments must be confined to international transactions
15. It is Mandatory for assessee to follow one of prescribed methods and demonstrate that International transactions entered into by it with an associated enterprise are at arms length price
16. Where the supervisory activity of each project of the assessee company was for less than 75 days, the income from the supervision and installation of the plant cannot be treated as income of the PE
17. A reference made by AO to TOP on matters of ALP is not to be made in piece Meal Manner.
18. For determining the ALP of international transactions with AEs the TPO should work out the profit disclosed by the assessee on those receipts and compare the result with the comparables of independent cases, and in that exercise the domestic receipts are to be excluded for working out profit level indicator shown by the assessee in respect of the international transactions.
19. Data for comparison to be data relating to year in which international transaction entered into
20. Comparables of extreme cases both on higher side and lower side to be avoided. Foreign exchange fluctuations cannot be excluded. Income tax refund cannot be included. Donations to be included. Compensation for termination of agreement to purchase property to be excluded. Shifting from one process to another in selection process permissible.
21. Overdue Debt Attracts Notional Interest / Assessee company having an AE in USA, entered into a product development services agreement and a professional services agreement, both separately, with its said AE. Assessing Officer made reference under section 92C to TPO. TPO has accepted prices in respect of transaction entered into between assessee and its AE as ALP compatible. However, TPO noticed that an amount of Rs. 5.52 crores belonging to assessee was outstanding for more than six months. She opined that by parking this huge amount at disposal of its AE, assessee was depriving funds otherwise available in its hands and adversely affecting its profitability. TPO has calculated interest on aforesaid amount and recommended Assessing Officer to add interest in assesses’s taxable income. Assessing Officer made additions. Tribunal upheld the addition made by the Assessing Officer
22. For transfer pricing analysis internal comparables are preferable over external comparables. While applying TNMM, only profits related to the transaction with AEs should be compared and not profits of the company as a whole.
23. Rule 10C requires the “most appropriate” method to be chosen from amongst those specified. The exercise of selecting the “most appropriate” method implies that the appropriateness of method is to be ranked in some order. Accordingly, it is open to the TPO to reject the TNMM and adopt the CUP method on the basis that the latter is “most appropriate” on the facts of the case.
24. When an assessee company works in a risk mitigated environment. TPO cannot select extreme cases as comparable cost examine the ALP of the assessee under TNM methods
25. In case international transactions have demonstratively booted profits of a assessee, it is obvious that transaction are at Arm Length & no adjustment are called for in Operating Margin of Assessee
26. A continuing debit balance per se, in account of associated enterprise does not amount to an international transaction under section 92B in respect of which ALP adjustment can be made
27. An assessee is not entitled to concession, as prescribed in provision to section 92 C(2) when only one price (ALP) has been determined by TPO under most appropriate method
28. Where only one price has been determined under “most appropriate method” for evaluation of ALP, the question of application of proviso to section 92C(2) does not arise, therefore, assessee was not entitled to the concession of 5 percent as prescribed in the said proviso.
29. Unless the functional profiles of assessee company are examined minutely and in detail, it is very difficult to say that the assessee is engaged in the business of software development as decided by TPO and not in the business of rendering support in respect of engineering designs and drawings as claimed by the assessee.
30. Payment received by the assessee company from its AE / parent company was in the nature of reimbursement of incentives paid to the employees of the assessee and it did not have any element of income and therefore, no adjustment could be made in the computation of ALP by notionally imputing a mark up on that amount, more so when no such adjustment has been made in the earlier or subsequent years wherein also similar incentives were paid and the facts were identical.
31. Choice of method of determination of ALP is not an unaffected choice on the part of the tax payer and this choice has to be exercised on the touch stone of principles governing selection of most appropriate method set out in section 92C(1). Where the Assessing Officer finds that selection of most appropriate method is not correct, he has the powers as well as corresponding duty to select the most appropriate method and compute the ALP by applying that method.
32. In case of assessee engaged in trading of goods without any value addition, resale price method is the most appropriate method for determining the ALP with respect to AE Transaction
33. Lack of segmental reporting for reason that transaction with AES & non AES belong to same item of software related services cannot be made a basis for rejecting assessee method of computing ARMs Length price by way of internal comparison made between transaction with AES and unrelated parties
34. Additional evidence for TP study provided by assessee to be admitted
35. For Transfer pricing adjustment, assessee should take same class of transaction for comparing profit with comparables
36. Under Chapter X of the Income Tax Act, 1961, the determination of the arm’s length price of an international transaction has to be only at the transaction level or at a class of transactions. The law does not permit determination of the arm’s length price of international transactions, by comparing margins at entry level or by taking overall industry level averages.
37. Bad debts written off cannot be factor to determine the arm’s length price of any international transaction. The Transfer Pricing Officer had exceeded his limits in following a method not authorized under the Act or Rules.
38. The report of the TPO is not binding on the Assessing Officer. Assessing Officer can refer the matter to the TPO for determination ALP of an International taxation transaction or he may determine it on his own. AO can determine the price of imports of his own. New proviso to section 92C(2) came in to operation from asst year 2009-10 and therefore, did not apply to asst year 2003-04, further, where only one price is determined in the matter of ALP, the option of five percent under proviso to section 92C(2) is not available to the assessee.
39. Inclusion of non-operating income and non – exclusion of the non -operating expenses would definitely affect net margin of operating profits of comparable company
40. Sec 92C(2) specifies that adjustment of 5 percent is not applicable if a single price is determined by assessee
The above summary are based on the decisions of case laws on Transfer Pricing by various Tribunals & High Courts of India. There may be cases where facts of one case is being similar to other case . In case you required the full facts of any of the above particular judgment, please mail me at [email protected]