Delhi High Court :Transfer pricing method applies uniformly to all international transactions (Nov 21, 2016)
The Delhi High Court agreed with the taxpayer, that once the Transfer Pricing Officer accepted the use of the Transactional Net Margin Method (TNMM) as the most appropriate method for all but one international transaction, it was not appropriate to subject that only one transaction to an entirely different method (in this case, the Comparable Uncontrolled Price or CUP).
Transfer pricing not applicable to transactions with branch office (Oct 19, 2016)
The Delhi Bench of the Income-tax Appellate Tribunal held that transfer pricing provisions cannot apply in respect of transactions between the Indian head office and its overseas branch office in Canada.
Transactions between the taxpayer, an Indian company and its overseas branch office in Canada, were treated as international transactions and the arm’s length price was determined by the Transfer Pricing Officer. The taxpayer also entered into an international transaction with its wholly owned subsidiary in the United States, and adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The Transfer Pricing Officer, however, applied a number of search filters in selecting comparable companies and accordingly made a transfer pricing adjustment.
(Oct 19, 2016)
Simultaneous Application Of Two Methods For Benchmarking An International Transaction Is Not Permitted In India TP Regulations
Mori Seiki Co. Ltd. [“the taxpayer”/ “the HO”], operating as a Branch office of Mori Seiki- Japan in India [“India BO”], is primarily engaged in selling machine tools manufactured by the HO in India. During the assessment year under review, the taxpayer provided marketing, sales, post sales, technical and consumer support services to the dealer network of its associated enterprise [“AE/ the HO”] and benchmarked the same by applying Transactional Net Margin Method [“TNMM”].
During assessment proceedings, the assessment officer [“AO”], by relying the terms of the agreement between the HO and its India BO held that the India BO is not only involved in selling of machines manufactured by the HO in India but also participates in determination of price of machines with the HO and thus, is exposed certain crucial business risks. Based on functional, assets and risk [“FAR”] analysis of the India BO and, the AO concluded that the taxpayer constituted a Permanent Establishment [“PE”] and accordingly, by applying the provisions of Rule 10(ii) of Income-tax Rules, 1962, attributed 50% of the gross profit arising from the sales generated from India.
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.
Even if TNMM is found acceptable as regards all other transactions, it is open to the TPO to segregate a portion and subject it to an entirely different method i.e. CUP if the assessee does not provide satisfactory replies to his queries (Mar 3, 2016)
The High Court had to consider the question “Whether the Transactional Net Margin Method adopted by the assessee is the most appropriate method envisaged under Section 92C(2) of the Income Tax Act, 1961 read with Rule 10C of the Income Tax Rules, 1962 and whether the Income Tax Appellate Tribunal had erred in directing the Assessing Officer to apply Comparable Uncontrolled Price Method?” HELD by the High Court: