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September 24, 2019

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

Principal Commissioner of Income Tax vs. Tudor India Private Limited [2019-TII-92-HC-AMC-TP]

The Assessee is engaged in the business of manufacturing and marketing of storage batteries for different applications. As it has entered into various international transactions, its case was referred to the Transfer Pricing Officer (‘TPO’). During the TP assessment proceedings, the TPO accepted all international transactions of the Assessee to be at arm’s length, except (a) payment of Management fees; and (b) payment of insurance expenses to its Associated Enterprises (‘AEs’). The TPO in his order observed that (a) Management services provided by the AE were in the nature of supervisory activities undertaken on behalf of parent entity (i.e. shareholding activities) rather than the services for the benefit of the Assessee; and (b) there was duplication of insurance payment and the Assessee has not been able to substantiate the need for such payment. Accordingly, the TPO determined the arm’s length price for the above discussed transactions as “NIL”. The Dispute Resolution Panel (‘DRP’) upheld the action of the TPO.

The ITAT after considering voluminous documentary evidences on record observed as under:

(a)

Management Fees:

  • A core management support services under cost contribution arrangement are outside the limited scope of shareholder services;
  • Whether the Assessee “needs” the services or derives “benefits” from the services is not relevant for the Transfer Pricing analysis. The same should be best left to the commercial wisdom of the Assessee;
  • What would be relevant is whether the Assessee has received the services and the cost allocation adopted is fair and reasonable;
  • In the instant case, the e-mail correspondences and other details on record demonstrated rendition of services. Further, the allocation being on approximate time basis can be considered as reasonable for allocation of costs.
  • In the view of the above, the ITAT deleted adjustment in relation to payment of management fees.

(b)

Insurance expenses:

  • The ITAT observed that the Assessee has submitted sample copies of insurance and also detailed allocation working which is on a reasonable allocation key (i.e. turnover basis).
  • Further, there was no duplication of insurance payment as the types of insurance for which payment was made to the AE and third party were different.
  • Accordingly, the ITAT deleted adjustment in relation to payment of insurance expenses.

Revenue department filed an appeal before the Hon’ble High Court. The Hon’ble High Court in its detailed order upholding the observations of the ITAT, pronounced the following principles:

  • The commercial viability (i.e. the need and the benefits) of cost allocation is not the domain of Transfer Pricing Analysis, when receipt of services has been demonstrated with documentary evidences.
  • No substantial question of law arises as the findings of fact recorded by the ITAT in its order cannot be termed as perverse or contrary to the evidence on record. The Hon’ble Court extensively relies on Hon’ble Karnataka High Court decision in case of Softbrands India P. Ltd., reported in (2018) 406 ITR 513 in this regard.

Principal Commissioner of Income Tax vs. M/s Visteon Engineering Center India Private Limited [2019-TII-94-HC-MUM-TP]

The Hon’ble High Court in the said ruling dismissing Revenue Department’s appeal upheld the following principles:

  • The Transfer Pricing adjustment has to be restricted to international transactions with AEs and cannot be made at entity level / on all transactions;
  • The ITAT records the fact that certain companies are functionally not comparable to the Assessee. As the said finding of fact by ITAT is not shown to be perverse in any manner and therefore cannot give rise to any substantial question of law.

M/s Moog Controls India Private Limited vs. The Asst. Commissioner of Income Tax [2019-TII-399-ITAT-Bang-TP]

The Assessee is a company engaged in the business of design and manufacture of servo control and precision components for its AEs which are used in aviation industry, space industry and industrial controls divisions, etc. The Assessee had incurred losses in the manufacturing segment mainly due to under-utilization of capacity. Thus, post computing the capacity utilization adjustment, the Assessee concluded its margin in manufacturing segment were at arm’s length.

During the TP assessment proceedings, the TPO rejected the Assessee’s claim of capacity utilization and also rejected one of the comparable company selected in the TP study on the ground that it was a government company. The DRP upheld the action of the TPO. The Assesse filed an appeal before the ITAT.

The ITAT after considering the facts and arguments put forth observed as under:

  • The adjustment for under-utilization of capacity can be granted provided the under-utilization of capacity vis-à-vis comparable companies is established with evidence. Further, with regard to computational aspects, the ITAT appreciated Assessee’s argument that the capacity utilization of main product only should be considered or at best, the weighted mean of the products should be considered.
  • With regard to rejection of government company as comparable, the ITAT relying on Hon’ble Madras High Court decision in case of “Same Deutz Fahr India (P) Ltd. [(2018) 405 ITR 345 (Mad)], held that a government company cannot be rejected as a comparable if it passes the all filters adopted (quantitative as well as qualitative).

M/s Tega Industries Ltd. vs. Assistant Commissioner of Income Tax (ITA No. 404/Kol/2017 and ITA No. 2527/Kol/2017)

The ITAT relying on coordinate bench ruling in case of M/s. Manaksia Limited 2018-TII-544-ITAT-KOL-TP held that while the explanation to Section 92B of the Income-tax Act, 1961 (‘the Act’) inserted vide Finance Act 2012 w.e.f. 1 April 2002 is clarificatory in nature, it does not inherently covers the issuance of corporate guarantee within the ambit of definition of ‘international transaction’ under Section 92B of the Act. The ITAT appreciated the principles laid down in M/s. Manaksia Limited (supra) wherein the ITAT observed as under:

“In our opinion, the condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transactions namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding of ours gets further clarified by way of insertion of Explanation in section 92B(1)by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find that in the said explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructuring or reorganization, entered into by an enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date. 12.12. Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any bearing on its profits, income, losses or assets, it will be outside the ambit of international transaction under section 92B(1) of the Act.

The Ld. CIT, DR’s reliance in the case of Everest Kanto Cylinder Ltd. (supra) would not come to the rescue of Revenue because in that case, the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon’ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, so the facts of the case are different and case law is distinguishable and, therefore, the Hon’ble High Court’s order cannot come to the rescue of the Revenue.”

Other Update

As per third proviso to Section 92C(2) of the Act read with proviso to sub-rule (7) of Rule 10CA of the Income-tax Rules, 1962 (‘the Rules’), if the variation at arm’s length price determined and price at which the international transaction or SDT has actually been undertaken does not exceed such percentage as may be notified (not exceeding 3 percent) by the Central Government in the Official Gazette, the price at which the international transaction or SDT has actually been undertaken shall be deemed to be the arm’s length price.

In this regard, the CBDT had prescribed tolerance limit not exceeding one percent of the value of international transaction in respect of wholesale trading and three percent of the value of international transaction in all other cases vide Notification No. 64/2019, dated 13 September 2019 for Assessment Year 2019-20.

Hitachi High Technologies Singapore Pte Ltd [Delhi ITAT]

Case Facts and Summary

Hitachi High Technologies [“assessee”-company incorporated in Singapore] had established a Liaison Office (‘LO’) in India for rendering preparatory and auxiliary services, including market research and liaison activities and further in 2007, the assessee established a Branch Office in India.

In the first round of litigation before ITAT, the matter was remanded back and in the present second round of litigation, ITAT Delhi ruled that the LO constitutes a PE in India.

ITAT rejected assessee’s stand that activities carried by LO in India were preparatory or auxiliary in nature and hence fell under the exclusionary clause of Article 5(7)(e) of the India-Singapore DTAA. However, the ITAT set aside PE profit attribution computation adopted by the AO and accepted assessee’s stand that “the operating margins resulting from attribution made by the Revenue are in the range of 163% to 2357%, which is not only excessive but absurd”.

It directed the AO to re-compute the attribution of profit to LO-PE by applying TNMM as most appropriate method. ITAT observed that the activities carried by LO in India were in respect of ‘advertisement and marketing, sales promotion, market research and administration’ and ruled that “activities of the LO are core activities for a trading business” carried on by the assessee company. ITAT Observed that “in India-Singapore DTAA, preparatory or auxiliary character, as used in para 7 of Article 5 of India-Singapore DTAA is ejusdem generis to the other terms used therein which means that “similar activities which have preparatory or auxiliary character has to be read as business solely used for the purpose of advertising, for the supply of information, for scientific research or for similar activities”. The assessee had further contented that no violation was found by the RBI with the activities of the LO. With respect to this the ITAT clarified that “Whether the assessee violated the conditions of RBI or FEMA is not relevant in determining the LO as a PE under the I.T. Act”

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