No related-party relationship, despite substantial single-party purchases
(Sep 8, 2015)
The Pune Bench of the Income-tax Appellate Tribunal upheld findings of the Dispute Resolution Panel that because a taxpayer merely had substantial single-party purchases, this factor alone did not demonstrate an influence on pricing or other conditions that would be present in an associated enterprise or related-party relationship under the transfer pricing rules. The tribunal observed that the clauses of the distribution agreement showed that both the taxpayer and the supplier were independent parties. As such, the transfer pricing provisions were not applicable to the taxpayer.
The taxpayer was engaged in trading, sales, and services of earth-moving equipment, mining equipment, and other items and also conducted an agency business. The taxpayer entered into a distribution agreement with an entity registered in Northern Ireland. Under that agreement, the taxpayer then imported a substantial amount of trading equipment from a member for the Northern Ireland entity’s corporate group
During audit, the Transfer Pricing Officer determined that because a substantial portion of the purchases was from a single member of the corporate group, the foreign company exercised “complete influence” on the taxpayer’s activities and that this invoked the transfer pricing rules. In support of this position, it was noted that the taxpayer made substantial purchases (over 95%) from a single party and that this factor showed the taxpayer was a related party.
The taxpayer countered that it was only a distributor, and not a related party or associated enterprise of the foreign group. The taxpayer point out that there were other distributors of this group in India, as well.
The Dispute Resolution Panel agreed with the taxpayer, that this was not a related-party relationship and that the transfer pricing rules did not apply. The tax department sought review by the Pune tribunal, which upheld the findings of the panel.