CA. Bhavesh Dedhia, CA. Bhavya Goyal, CA. Shazia Khatri
Shree Ram Dass Rice & General Mills vs. Deputy Commissioner of Income-tax [(2019) 105 taxmann.com 290 (Chandigarh - Trib.)]
The Assessee did not upload Accountant’s Report in Form no. 3CEB along with its Return of Income. However, the same was filed by the Assessee in the course of the assessment proceedings. The Assessing Officer levied a penalty of INR 100,000 under Section 271BA of the Income-tax Act, 1961 (‘the Act’) on account of failure of the Assessee to upload Form no. 3CEB in terms of statutory requirements. CIT(A) upheld the said penalty.
The ITAT noted that penalty under Section 271BA of the Act is discretionary and not automatic as the words used is “may” and not “shall”. Further, Section 273B of the Act which encompasses Section 271BA states that no penalty “shall” be imposed if Assessee proves “there was reasonable case for the said failure.” The ITAT appreciated that failure to upload Form no. 3CEB was unintentional and the same was made available at the time of assessment proceedings. Further, no adjustment was made by the TPO and the Assessee was not habitual defaulter. Accordingly, the orders imposing penalty under Section 271BA were set aside.
Deputy Commissioner /Assistant Commissioner of Income-tax vs. M/s. Emami Limited [TS-516-ITAT-2019(Kol)]
The Assessee had sold goods to its Associated Enterprises (‘AEs’) in Dubai & UK. The said transaction was benchmarked by applying internal cost plus method wherein gross margin of products sold to AEs were compared with gross margins of product sold to non-AEs. The Transfer Pricing Officer noted that Assessee had allowed significant credit period to its AE of around 180 days in comparison to 30 days allowed to non-AEs. Accordingly, the TPO computed working capital adjustment to the gross margins @ 8 percent and compared the adjusted margins post working capital adjustment of AEs and Non-AEs.
The ITAT noted that working capital adjustment is essentially an attempt to adjust time value of money where the payment schedules vary differently. Due to the extended credit terms, the entities are required to borrow money to fund the transactions. Accordingly, the ITAT held that “Since the exports to the AEs and non-AEs are denominated in foreign currency, it would be appropriate to work out the working capital adjustment against the relevant currency denominated LIBOR rate.” The international cost of funds in the hands of Assessee was 2.2 percent as against 8 percent adopted by the Transfer Pricing Officer. Based on revised computation of working capital as per interest rate of 2.2 percent, the Assessee’s transaction were held to be at arm’s length.
M/s. Videojet Technologies (I) Pvt . Limited vs. ACIT [TS-497-ITAT-2019(Mum)]
ITAT reversed the decision of Assessing Officer (pursuant to instructions of the DRP) and adopted Resale Price Method (‘RPM’) as most appropriate method (rejecting TNMM adopted by the Transfer Pricing Officer) noting that business of the Assessee involved only re-selling or distributing coding and marking equipment purchased from the AEs, without making any value addition.
With regard to the TPO’s reasoning for rejection of RPM on account of accounting and functional difference, the ITAT observed as under:
If the comparable companies selected by Assessee were inappropriate then the TPO should have made adjustments (Rule 10B(1)(b)(iv)) or searched for fresh comparable companies instead of rejecting RPM citing difference of accounting policies; and
A normal distributor undertakes all such functions related to sales i.e. sales and marketing, warehousing, inventory control, etc. and bears risks such as market risks, inventory risks, etc. The TPO failed to bring any material on record to prove that the comparable companies / distributors were not undertaking aforesaid functions.
Smith & Nephew Healthcare Pvt. Ltd. vs. Income Tax Officer [TS-496-ITAT-2019(Mum)]
The ITAT appreciated the need for depreciation adjustment for benchmarking the international transactions under TNMM considering Assessee’s submission that it provided for depreciation at a higher rate as compared to the comparable companies.
The TPO had held that the error in margin computation of comparable companies does not constitutes mistake apparent from records. The ITAT held that the TPO’s stand is unacceptable and error in margin computation of comparables clearly fall within the ambit of section 154 of the Act.
With regard to determination of arm’s length price of management fees as ‘NIL’ by the TPO / DRP, the ITAT observed that the TPO / DRP has neither followed any one of the prescribed methods nor have they examined the evidences filed by the Assessee to demonstrate receipt of services.
Accordingly, ITAT restores issues of depreciation adjustment and arm’s length price determination of management services to the AO / TPO and further, directs the TPO to dispose of rectification application on merit.
Other General Update
US IRS introduces campaign aimed at captive service providers
US – IRS on 16 April 2019 announced transfer pricing related campaigns that will focus on ensuring that US multinationals do not pay their foreign captive service providers more than arm’s length. The notice states that if the prices of such controlled services exceed arm’s length prices, the result could be inappropriate shifting of income and erosion of the US tax base. The motive further states that “The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary”.
OECD report - ‘Programme of Work’ to develop a consensus based solution to address the tax challenges arising out of the digitalization of the economy
OECD has released the ‘Programme of work’ highlighting important areas that need to be discussed among the members of inclusive framework.
The ‘Programme of Work’ also establishes the scope of work and technical issues that it will explore to resolve through the two main pillars.
The first pillar will explore potential solutions for determining where tax should be paid and on what basis, as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (‘profit allocation’).
The second pillar focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.
The international community has committed to continue working toward a consensus-based long-term solution by the end of 2020.
Emerson Electric Company (India) Private Limited vs. ACIT (Mumbai ITAT)
The Assessee is in the business of providing engineering support services including configuration engineering, framework design and graphical design, largely in connection with industrial automation projects undertaken by other Emerson group companies. Emerson also provided IT services including database administration and help desk support to various members of the Emerson group and maintained manufacturing and distributions operations.
For AYs 2013-14 & 2014-15, the AO made TP adjustments on account of provision of engineering and related services, provision of ITeS, provision of IT services and provision of marketing support services (‘MSS’).
Mumbai ITAT allowed aggregation of transactions falling under engineering and design services segment. It noted that the transactions of engineering service segment were closely linked to each other and the assessee had aggregated “class of transactions” under the segment and the AEs fell under “class of associated persons” as mentioned in Sec. 92C(1). It was held that as per Section 92C and Rule 10C, “Where (i) the nature and class of the international transactions; (ii) the class or classes of AEs...; as well as (iii) the FAR analysis...are similar, it would be prudent to aggregate the international transactions while determining the most appropriate method as per the Indian TP regulations.”. The TPO/DRP’s observation that the functions performed by the 3 divisions were not the same was rejected.
The ITAT also ruled on comparables for assessee’s segments of engineering services, IT support services, software development and MSS and also allowed working capital adjustment.