The Ahmedabad Bench of the Income-tax Appellate Tribunal issued a decision finding, in part, that foreign exchange fluctuation gain or loss was an operating item, and was not to be excluded under the arm’s length price standard.
The taxpayer asserted that foreign exchange fluctuation gain or loss must be treated as operating in nature for the purpose of computing the arm’s length price. The tax department disagreed and proposed a transfer pricing adjustment.
The Tribunal upheld the decision of CIT(A) in treating foreign exchange income/(loss) as an operating item to be included for the purpose of computing ALP as the Income tax department could not present a rebuttal to the judicial pronouncements relied upon by the taxpayer.
Transfer Pricing adjustment has to be done only in respect of International Transactions with Associated Enterprises. The fact that the assessee has chosen entity level PLI to benchmark the AE transactions and that it has not maintained segmental accounts is irrelevant. If segmental accounts are not available, proportionate adjustments have to be made only in respect of the international transactions with Associated Enterprises (December 14, 2016)
(i) In all above appeals, this Court after hearing both sides upheld the view of the Tribunal that the transfer pricing adjustment has to be done only in respect of International Transactions with Associated Enterprises and not at an entity level. It may be pointed out that during the course of all the above appeals, the fact that two appeals had been admitted on the above issue were not pointed out.
(ii) Nevertheless, the distinction sought to be made by the Revenue is that the issue of non keeping of segmental accounts by the Assessee was not for consideration in the above cases which were dismissed, as in this case.
(iii) This very issue/question as raised herein was raised by the Revenue in Pedro Araldite Pvt. Ltd. (Supra). The question raised therein was as under:
“Whether on the facts and law the Tribunal was justified in directing AO/TPO to bench mark as AE transactions without appreciating (a) the Assessee itself in its transfer pricing study & report (TPSR) has chosen entity level PLI to benchmark the AE transactions; (b) the Assessee had itself failed to furnish audited segmental accounts and therefore, the TPO had rightly applied revised PLI at the entity level to determine the ALP?”
September 21, 2016
The assessee is obliged to carry out a bench-marking exercise with independent comparables and prove that its transactions with AEs are at arms length. Mere fact that the transaction is approved by the RBI and Govt is not sufficient.
The assessee did not bench mark the royalty payment separately. On enquiry by the TPO, it relied on RBI approval given in 1995 and also on the fact that the assessee earned a gross profit of 41.6%. TPO applied Press Note 9 (2000 series) and restricted it to 1% on the plea that the payment was for use of trademark without transfer of technology. This was confirmed by the CIT(A). On appeal by the assessee to the ITAT HELD:
Transfer Pricing: Whether a transaction is entered into at an Arm’s Length Price or not must depend upon the facts of each case relating to the transaction per-se. The fact that the transaction has not yielded results or has resulted in a loss is irrelevant (Sep 2, 2016)
(i) The contention of the lower authorities for not accepting the assessee’s case was that the assessee had not been able to substantiate that the payment for the services had actually increased its profits. The TPO held that the assessee should have been able to show the level of increase in profit post the said transactions.
(ii) The answer to the issue whether a transaction is at an arm’s length price or not is not dependent on whether the transaction results in an increase in the assessee’s profit. This would be contrary to the established manner in which business is conducted by people and by enterprises. Business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits.
S. 92(2): Important principles of law laid down with regard to the “Need Test”, “Evidence Test” or “Rendition Test” to evaluate the ALP of intra-group services rendered by an Associated Enterprise and whether the TPO has the right to determine the ALP at ‘Nil’ (May 7, 2016)
The rendering of intra group services for which Assessee has paid Rs.21,20,48,533/- TPO determined ALP at NIL holding that the assessee did not obtained any benefit of such services and the services provided by the foreign AE were either not required, these are incidental or stewardship services or duplicate services and hence unwarranted. Since, in his opinion, the assessee failed to provide any evidence about the services rendered by the AE necessitating the payment of such charges, he computed the ALP of this international transaction at Rs. Nil. TPO has simply held that as there is no benefit from the services for which payments has been made in determined the ALP of this international transaction at Nil without carrying out any FAR analysis of this intra-group services. On appeal HELD by the Tribunal:
The existence of an “international transaction” w.r.t. AMP Expenditure cannot be assumed. The onus is on the TPO to prove such transaction. There is no machinery provision to ascertain the price to promote the AE’s brand values. The AMP Expenditure should be treated as operating cost to apply TNMM and determine ALP of transactions with AE (March 3, 2016)
(i) No TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee company and its foreign AE.
(ii) In the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act.