Sony India Pvt Ltd [TS-742-HC-2023(DEL)-TP]

• For the AY 2008-09 in the case of Sony India Pvt Ltd (“the assessee”), the Delhi ITAT deleted Advertising, marketing and sales promotion TP adjustment;

• In the appeal before the High Court by the revenue, it was pleaded that AMP adjustment was required to be made and TPO ought to have used the bright line test (BLT) in computing ALP concerning AMP activities carried out by the assessee;

• HC noted that the pari materia issues are settled by HC in assessee’s own case for AY 2007-08 wherein while deleting said adjustment it was inter alia held that assessee was only in the business of import and distribution of Sony products and that compensation for AMP expense was received by assessee in terms of higher profitability for the product sold; Jurisdictional HC had also held that the fact that comparables chosen by TPO had a net margin lower than that registered by the assessee would persuade us to hold that no upward adjustment concerning AMP expenses ought to have been made;

• The HC held that the aforesaid decision will apply mutatis mutandis to the instant case and thereby dismissed Revenue’s appeal

Google India Private Limited [TS-723-HC-2023(KAR)-TP]

• Google India Pvt Ltd (“the assessee”) had filed objections to the AO’s proposed adjustments within 30 days of receiving the draft assessment order, as required under Section 144C(2) with the Dispute Resolution Panel (DRP);

• However, the assessee only filed objections with the DRP and inadvertently failed to provide a copy to the AO, also known as the Faceless Assessment Centre, as mandated by Section 144C(2)(b)(ii).

• The HC acknowledged that the obligation to file objections with both the DRP and AO is indisputable but emphasized the need for a meaningful and harmonious interpretation of this requirement.

• The court highlighted that the ultimate goal is for the objections filed with the DRP to result in directions, and the AO must complete the assessment in accordance with these directions, as outlined in Section 144C(13).

• Based on the principle of harmonious and meaningful interpretation of Section 144C, the HC quashed the assessment order, computation sheet, demand notice, and penalty proceedings.

• The HC remitted the proceedings to the stage of Section 144C(5) and directed the DRP to consider the assessee’s objections against the proposed variance.

• It clarified that the proceedings from this stage should be completed, taking into account the period for completion from the date of receiving a certified copy of the court’s order.

Procter & Gamble Hygiene and Health Care Limited [TS-734-ITAT-2023(Mum)-TP]

• Procter & Gamble Hygiene & Healthcare Limited (“the assessee”) is engaged in marketing, selling, dealing in the business of manufacturing and sale of medicines and various personal and health-care products;

• The assessee had benchmarked its export transaction using external TNMM, however, the Transfer Pricing Officer (“TPO”) applied internal TNMM, leading to a TP-addition. The Assessing Officer (“AO”) initiated a penalty based on the TPO’s adjustment;

• Further, the Commissioner of Income Tax (Appeals) [“CIT(A)”] rejected the TPO’s methodology, however made a fresh TP-addition;

• ITAT observed that the fresh TP-addition was on a different ground altogether and stated that AO cannot levy a penalty based on CIT(A)’s addition or enhancement.

• The ITAT highlighted that the assessee disclosed all relevant facts during TP proceedings and diligently explained the benchmarking methodology.

• The ITAT relied on a Delhi High Court ruling in Verizon India Pvt. Ltd. [TS-397-ITAT-2015(HYD)-TP] and deleted the penalty levied by the AO under section 271(1)(c).

- Approves aggregated benchmarking for interest-free loans considering benefit derived by the Assessee - Rubamim Limited [TS-732-ITAT-2023(Ahd)-TP]

Facts

• The Assessee is engaged in the business of manufacturing of wide range of Cobalt, Nickel and Copper.

• The Assessee is acquiring raw material of Cobalt from Democratic Republic of Congo (DRC). For the purpose of seamless supply of raw material, it has set up wholly owned subsidiary first in UAE Sharjah and indirect subsidiary in DRC.

• The Assessee has provided interest free loans & advances to its AE in UAE.

• The Assessee submitted that loan should be aggregated with the purchases and other transactions carried out with the AE. As all the transactions are interlinked, the TNMM method was adopted by the Assessee for the purpose of benchmarking.

• The TPO rejected the TNMM and adopted CUP method and imputed interest on the interest free loans & advances. CIT(A) upheld the approach of the TPO and adopted LIBOR rate of 0.75 percent.

• The Assessee preferred an appeal before the Hon’ble Tribunal.

Hon’ble Tribunal

• Hon’ble Tribunal noted that the transaction for advancing the interest-free loans to the AE has to be seen in the context of the benefit received by it from such AE. The Assessee got huge business from its AEs, which would not have been possible until the Assessee had not incorporated a company in UAE and DRC.

• As such the transaction of interest free loans/ advances viz a viz the benefit received by the Assessee are intrinsically linked which has to be evaluated after aggregating the transactions.

• Notes Para 3.9 of OECD Transfer Pricing Guidelines which reiterates that though ideally the arm’s length principles should be applied on a transaction-by-transaction basis, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis.

• Also draw reference to Para 3.13 of OECD Commentary which deals with the topic of Intentional set offs where it was mentioned that the Intentional set-offs generally occur between AEs in respect of controlled transactions wherein when one enterprise provides benefit to another enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return.

• Notes that the amount of interest cost imputed by the revenue department stood at INR 28 lakhs whereas the amount of gross import of material and export generated by the Assessee is far more than the interest expenses.

• Holds – “In view of the above and after considering the facts in totality, we hold that no adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances.”

- Directs adoption of interest saving approach to benchmark Corporate Guarantees - ACG Associated Capsules Pvt Ltd [TS-701-ITAT-2023(Mum)-TP]

Facts

• The Assessee had given corporate guarantee aggregating to Euro 6 million equivalent to INR 40.73 crs on behalf of its AE for availing various credit facilities from Banks.

• The Assessee had not benchmarked the said transaction for the reason that the same is not an international transaction.

• The TPO stated that the bank rates for such guarantee varies from 0.7% to 3% where the lowest rate of commission is charged on entities having higher credit rating and highest commission is charged on entities having less credit rating and thereby determined the guarantee commission @ 1.75%.

• CIT(A) upheld the said transaction to be an international transaction and determined the rate at 0.7% based on the Assessee’s reliance on Standard Chartered Bank rate to be reasonable.

• Both the Assessee and Revenue Department preferred an appeal before the Hon’ble Tribunal.

Hon’ble Tribunal

Upholding corporate guarantee as an international transaction, Hon’ble Tribunal made following observation regarding the commission rate:

“… the corporate guarantee given by the assessee on behalf of its AE for availing loan facility is for the purpose of reducing the interest rate charged by the banks and while determining the ALP of the said transaction the same has to be considered on the perspective of the benefit received by the AE as per the interest saving approach by reason of the corporate guarantee given by the assessee and to compare the same as to what would be the interest rate charged by the bank for the loan availed by the AEs if the corporate guarantee is not given by the assessee for availing the said loan. It is observed that both the lower authorities have failed to look into this issue before determining the ALP of the said transaction. Reliance placed on the decision in the case of Hon’ble Jurisdictional High Court in the case of Everest Kento Cylinders (supra) cannot be the basis for holding the corporate guarantee commission to be 0.5% which was held to be an appropriate rate by the Hon’ble High Court in case of that assessee and for that particular year under consideration. It is evident that 0.5% cannot be a standard rate for charging corporate guarantee commission and the same has to be determined in each case and for each year based on the credit rating of AE, comparable loan transactions where guarantees are issued and non guaranteed loans by working out interest saving and then sharing it between transacting parties.”

- AO cannot levy Sec.271(1)(c) penalty qua fresh TP-addition made by CIT(A) unless directed - Procter & Gamble Hygiene and Health Care Limited [ITA No.2298/Mum/2014]

Facts

• The Assessee benchmarked export transaction of finished by using external TNMM, the TPO however made TP addition by applying internal TNMM.

• CIT(A) rejected TPO’s methodology but made a fresh TP-addition (rejecting Assessee’s plea for exclusion of 2 comparable and denying working capital adjustment).

• The AO initiated and levied a penalty on basis of TP addition made by the CIT(A).

Hon’ble Tribunal

• Deleting the penalty on TP addition, Hon’ble Tribunal held that the AO cannot levy a penalty in respect of addition or enhancement made by the ld. CIT (A), because when any addition or enhancement is made by the CIT (A), then only CIT (A) can initiate penalty proceedings while making enhancement or can direct the AO to initiate penalty proceedings.

• Further noted that, during the course of TP study proceedings, the Assessee has disclosed all the relevant facts and duly explained and justified the manner of benchmarking in the TP study report to substantiate that the same was done with due diligence in accordance with the Rules.

• Hon’ble Tribunal observed “It is not the case of the ld. AO that computation of arm’s length was not done in good faith and not with due diligence in terms of Explanation 7 to section 271 (1) (c). Thus, the penalty cannot be levied on TP addition in absence of any overt act by the assessee, which discloses any conscious and material suppression…”

- Upholds mark-up on costs for corresponding banking services rendered by India Branch. Rejects reliance by the Assessee on Article 7(3) of India-Canada treaty - The Bank of Nova Scotia [TS-729-ITAT-2023(Mum)-TP]

Facts

• The Assessee rendered correspondent banking services to its AE and recovered charges on cost.

• The TPO added 23.43% mark-up to such services and considered it as taxable business profits.

• In First Appellate proceedings, the Assessee for the first time raised the contention regarding the applicability of Article -7(3) of India-Canada treaty. The same was rejected by the CIT(A).

Hon’ble Tribunal

Upholding CIT(A)’s order, Hon’ble Tribunal observed as under:

• The Assessee’s reliance on Section 28(iii) of the Act is superfluous as the term ‘specific services’ in the Act has limited application on contextual transaction and does not directly correlate with the concept under Article 7(3) of the treaty for determination of profits of PEs.

• Article 7(3) did not grant immunity to the Assessee from taxation of correspondent banking charges.

• The present issue pertained to TP-adjustment and not determining taxability of income in international transaction.

• Endorses TPO’s reasoning that if same services were provided by an Indian branch in an uncontrolled environment to a third party, a mark-up would have been added indicating that the Assessee’s payment for correspondent banking charges was not at arm’s length.