Transfer Pricing

CA. Bhavya Bansal, CA. Bhavesh Dedhia, CA. Shazia Khatri

Wipro Enterprises Private Limited [TS-51-HC-2024(KAR)-TP]

  • A batch of writ petitions were filed by Wipro Enterprises Private Limited (the assessee) against TPO’s orders with respect to the transfer pricing adjustment made on account of Specified domestic transactions (‘SDT’) for AYs 2013-14 to 2018-19 and 2020-21;

  • Assessee in all the writ petitions had argued that TP adjustments made by TPO were not restricted to transactions with AEs or related parties and had also been made in respect of transactions with unrelated third parties;

  • The High Court observed that under the various statutory provisions and the rulings of various High Courts in cases of Thyssen Krupp Industries India P. Ltd, Tara Jewels Exports Pvt. Ltd, Petro Araldite Pvt Ltd, Hindustan Unilever Ltd etc it has been categorically held that adjustments must be restricted to AEs transactions only;

  • HC sets aside the impugned order and remits the matter back to TPO for fresh reconsideration bearing in mind the aforesaid judgments and the relevant statutory provisions

OECD released Amount B report on February 19, 2024

  • OECD/G20 Inclusive Framework on BEPS released the report on Amount B of Pillar One on Februray 19, 2024;

  • The report aims at providing simplified and streamlined approach to application of ALP to baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries;

  • This report is released in line with the July 2023 Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy;

  • This report highlights that the changes to OECD TP Guidelines agreed in this report will provide jurisdictions with the option of “applying straightforward bright-line rules to these activities, allowing them to secure revenue and preserve valuable tax administration resources while providing additional certainty to multinational enterprises”;

  • OECD remarks that the report, which introduces two options for implementation for jurisdictions that opt into the simplified and streamlined approach from January 2025, describes the circumstances under which a distributor is within scope of Amount B including cases where it also performs certain non-distribution activities, viz manufacturing;

  • This report also sets out the activities which may exclude a distributor from the scope of simplified and streamlined approach, such as the distribution of commodities or digital goods; The report highlights that the inclusion of Amount B guidance into the OECD TP Guidelines is accompanied by conforming changes to the Commentary on Article 25 of the OECD Model Tax Convention.

- Letter of Credit not akin to Guarantee, delete the TP adjustment - Tata International Limited [TS-50-ITAT-2024(Mum)-TP]

Facts

  • The TPO held that Letter of Comfort (‘LOC’) is in the nature of Guarantee and would fall within the ambit of the term international transactions under Section 92B of the Act.

  • The TPO alleged a fee at the rate of 3 percent of the total funding facility covered by LOC.

  • The DRP upheld the approach of the TPO, however reduced the rate to 1.5 percent.

Hon’ble Tribunal

Deleting the TP adjustment, Hon’ble Tribunal endorsed the following:

  • There is a fundamental gap between guarantee and LOC. Guarantee is a legally enforceable; however, LOC is not.

  • Relied on hon’ble Karnataka High Court ruling in case of United Braveries (Holding) Ltd. vs. Karnataka State Industrial Investment and Development Corporation (M.F.A. No. 4234 of 2007 (SFC)) held that LOC merely indicates the party’s assurance that respondent would comply with the term of financial transaction without guaranteeing performance in the event of default.

  • As the very title of the LOC suggests, the LOC merely provides comfort to the Bank as to the AE’s ability / willingness to perform its obligations and neither creates nor is intended to create any kind of binding recourse which the Banker may have on the Assessee.

  • It is an incidental benefit arising merely from passive association with the group and are therefore not regarded as giving rise to arrangements subject to remuneration.

- Holds CIT(A) not empowered to restore matter back to AO under Section 251 of the Act - AJE India Pvt Ltd [TS-35-ITAT-2024(Mum)-TP]

Hon’ble Tribunal made the following observation:

“We find that as per section 251 of the Income-tax Act, the Ld. CIT(A) in appeal against order of the assessment made confirm, reduce, enhance or annul but he can’t restore the matter back to the Assessing Officer. Further section 250(4) of the Act prescribes for making any inquiry by himself or he may direct the Assessing Officer for making further inquiry but in this case no inquiry has been carried out by the Ld. CIT(A). Therefore, we are of the opinion that the direction given by the Ld. CIT(A) not being in accordance with law, we set aside the finding of the Ld. CIT(A) and restore the matter back to him for deciding afresh after providing adequate opportunity of being heard to both the Revenue as well as to the Assessee.”

- ITAT Allows risk adjustment to a captive service provider, remits computation verification - ITA NO.723/MUM/2022

Allowing the risk adjustment, Hon’ble Tribunal noted as under:

  • The Assessee being a captive service provider is not exposed to the risks.

  • The Assessee has claimed risk adjustment and has also furnished a working providing for risk adjustment while computing margin of the comparable companies.

  • It is fairly well settled that in appropriate cases, adjustment towards risk factor can be allowed. In fact, rule 10B(1)(e)(iii) provides for such adjustment.

  • In case of DBOI Global Services Pvt. Ltd. ([2016] 74 taxmann.com 83 (Mumbai)), the Coordinate Bench has rejected the single customer risk argument put forward by the Department.

  • Restores the verification of risk adjustment computation to the Assessing Officer.

- Character of loan, whether quasi-capital, to be seen at time of advancement - Intas Pharmaceuticals Ltd. [TS-27-ITAT-2024(Ahd)-TP]

Facts

  • The Assessee had advanced amounts for the purpose of using the same towards filing of registration and other activities in overseas jurisdictions.

  • The amounts advanced to the AEs are inextricably linked with the export sale of finished goods (Finished Drug Formulation) by appellant company.

  • The activities performed by the AEs have yielded numerous economic benefits to the appellant including increase in export turnover.

  • The advances were made out of own interest free funds available with the assessee and therefore, no interest can be imputed in the instant facts. The TPO however imputed the interest and made an upward adjustment.

  • The CIT(A) accepted the Assessee’s argument that the advances were in the nature of quasi capital i.e., these advances were to be converted into equity at the option of the Assessee.

  • Accordingly, those interest on those advances which were converted were deleted by CIT(A) and for balance the adjustment was upheld.

  • Both the Assessee and the Department preferred an appeal before the Tribunal.

Hon’ble Tribunal

Restore the issue to the file of CIT(A) for computing the correct interest adjustment, Hon’ble Tribunal noted following on below contention of the Assessee:

Are Advances quasi capital in nature?

“15. In our considered view, in the light of the assessee’s facts, the Ld. CIT(A) has erred in facts and in law in coming to the conclusion that the nature of advances given by the assessee to it’s subsidiaries / Associated Enterprises as quasi capital in nature. The nature of advances, whether it is quasi capital in nature or not, has to be seen at the time of granting of advance / loan to the subsidiary. In the instant facts there was nothing to suggest that at a time of advancement of such loan to the Associated Enterprises the nature of such advances was quasi capital in nature and fact that in the subsequent year, such amounts have been converted into equity (at the option of the assessee) would not alter such advance as being in the nature of quasi capital.”

Can Interest free loan be given due to Commercial Expediency or availability of interest free funds?

Hon’ble Tribunal noted as under:

“…. if the argument of commercial expediency were to be accepted as a guiding tool for non-applicability of transfer pricing adjustments to international transactions, then no transfer pricing adjustment can be made in respect to almost all international transactions between Associated Enterprises, since mostly such transactions are based on the principles of commercial expediency. Further, transfer pricing provisions are special provisions have been introduced specifically to ensure that there is no tax base erosion at the India level and profits are not shifted outside of India by way of certain pre-arranged transactions between associated enterprises. Therefore, the arguments that the advances were given out of one interest-free funds or that the transactions between the associated enterprises were guided by commercial principles, in our considered view, are irrelevant considerations for the purpose of computing arms length Price between associated enterprises, since transfer pricing provisions are special provisions introduced with an aim of checking tax base erosion.”

The amounts advanced by the assessee are inextricably linked with export sale of finished goods

Hon’ble Tribunal noted as under:

Further, the fact that the amounts advanced by the assessee to it’s AEs are inextricably linked with export sale of finished goods or such advances have yielded the economic benefits to the assessee including increase in export turnover or that the advances were given out of interest free funds available with the assessee, in our view, are irrelevant consideration while deciding the issue of charging of interest by the assessee from it’s AEs, since Transfer Pricing is a special provision for computing arm’s length price in respect of international transactions between Associated Enterprises, with a view to ensure that there is no tax base erosion at the India level and shifting of profits to an overseas jurisdiction with a view to avoid taxes.

Based on the ITAT upheld charging of interest on advance issued by the assessee and rejected the stand taken by the CIT (A).

- Weighted average rate of interest was accepted, where there was a moratorium period in the initial years- Tata Power Co. Ltd [ITA NO. 753/MUM/2013(A.Y. 2008-09)]

Facts

  • The Assessee entered into international transaction of provision of loan to its AE. Assessee granted USD 273 million inter-company loan to its AE.

  • Purpose of loan – For acquisition of 30% equity stock in 2 major Indonesian Coal Producers for securing Assessee’s fuel requirements in Mundra Ultra Mega Power Plant.

  • The Assessee had used proceeds from foreign currency convertible bonds (‘FCCB’) issued for lending the loan to the extent of USD 200 million and balance USD 73 million was funded out of available balance in India. FCCB was taken at interest rate of 3.88%

  • The Assessee for the purpose of TP held that the average effective rate of interest is 4.11%. In the present case, there was moratorium period for first 2 years and hence effective interest rate was computed as under:

    • Period

    Rate (A)

    Weight (Number of years) (B)

    Weighted Rate (A*B)

    July 2007 to June 2009

    0%

    2

    0

    July 2009 to June 2010

    2.5%

    1

    2.5

    July 2010 to Dec 2021

    5%

    11

    55

    Total

    		  

    14

    57.5

    Weighted Average Rate (57.5/14)

    4.11%

  • The Assessee claimed that the effective interest charged (4.11%) from AEs towards loan was higher than the interest paid on FCCB at 3.88% p.a. Hence, transaction should be considered to be arm’s length.

TPO’s and DRP’s contentions

  • Since, the Assessee has given a moratorium period of 2 years to AE. The Assessee has not received any interest from the AE towards the loan during the year under consideration.

  • The TPO did not accept the submissions of the Assessee that weighted average rate i.e., effective rate of interest should be considered for the purpose of benchmarking. Accordingly, for loan extended out of FCCB funding, TPO added a markup of 3% to the rate at which FCCB was borrowed i.e., 3.88%. The TPO considered interest rate of 6.88% to arrive at the TP adjustment.

  • With respect to USD 73 million, which is given from funds available in India, TPO applied weighted average of 7.55% per annum considering that the domestic market borrowing rate ranges from 7.5% p.a. to 10.53% p.a. TPO also added a markup of 3% and thereby applied 10.55% to compute TP adjustment.

  • DRP upheld the same.

Hon’ble Tribunal

  • Hon’ble Tribunal accepted the effective rate of interest where there is a moratorium period in the initial years. It stated that, in the present case, there was moratorium period of first two years, wherein Nil interest was charged by the Assessee. For the next one year the Assessee charged 2.5% interest and for the remaining 11 years the Assessee has charged 5% interest per annum. Thus, weighted average rate of interest charged by the Assessee over the period of 14 years including moratorium period is 4.11%. In the light of facts of the case and the judicial precedence, the Hon’ble Tribunal accepted weighted average rate applied by the Assessee.

  • Further, with respect to the interest rate of loan, the Tribunal directed adjustment should be made at average LIBOR rate existing at that time. It is a settled legal position that for the purpose of determination of ALP the rate of interest should be charged in the currency in which loan is borrowed.