15 March 2017
The Chennai Bench of the Income-tax Appellate Tribunal held that under a provision of India’s tax law, “influence” implies dominant influence when “a person who purchased more than 1/5th of the total sales of the taxpayer would have a distinctly dominant influence on the pricing and can exercise a de facto control.” The tribunal, thus, concluded that sales to two customers constituting more than 20% of the taxpayer’s total sales constituted “dominant influence.” The related-party relationship was upheld.
The taxpayer (incorporated as a subsidiary of a Singapore company) engaged in manufacturing and selling of generic injectable drugs to its group entities and certain other concerns. The taxpayer acquired the generic injectable pharmaceuticals business as a going-concern on slump-sale basis. The agreements entered into by the pharmaceuticals business and distribution entities were inherited by the taxpayer as “legacy agreements.” The business model of the taxpayer’s relationship with is distribution partners was on a profit sharing basis.
The Transfer Pricing Officer proposed adjustment because of or relating to the following:
- A deficiency in pricing of supplies to the taxpayer
- Profit shared on sales on the pharma products with related parties
- The rate of interest paid by the related parties on the inter-corporate convertible debentures issued by the taxpayer to its related parties
The conclusions of the Transfer Pricing Officer were upheld by the dispute resolution panel. The taxpayer appealed before the tribunal. The tribunal held that:
- More than 20% of the taxpayer’s sales were to related-party entities, given their dominant influence on the taxpayer.
- The tax authorities erred in determining the profit share by merely relying on the settlement commission order without analysing the facts and circumstances of the taxpayer.
- The tax authorities erred in determining the profit share between the taxpayer and the distribution entities.
The tribunal, thus, set aside the orders of the tax authorities in relation to the determination of profit share and remanded the case back to the Assessing Officer / Transfer Pricing Officer for consideration.