Transfer Pricing Case
The Income-tax Appellate Tribunal in the case of ACIT v. Rajratna Metal Industries Ltd. [ITA No. 1050/Ahd/2015 with CO No. 91/Ahd/2015, AY: 2010-11] held that a foreign exchange fluctuation gain/loss is an operating item and is not to be excluded for the purpose of computing the arm’s length price (ALP).
The Tribunal also found that income generated by the taxpayer on account of a business transaction which is not related to his international transactions (generation of electricity and sale to the manufacturing business) was not considered to be operating income for this purpose and must be excluded for the purpose of calculating the ALP. However, taking into account the taxpayer’s proposal, the Tribunal agreed to also exclude the expenditure related to that income.
A decision was made and governed by an Israeli District Court that when an Israeli company gained IP ownership and shortly thereafter its employees and other assets (with IP) to a related party, the transfer should be counted as a sale for whole business doing. Also, in that case, IP value was also well-defined and it was resulting from the share acquisition (from Israeli companies) price for tax purposes.
For the first time, the court ruling notices that this type of transaction occurs in acquisitions of Israeli companies where the employees and assets (including IP) are shifted as well as it creates a capital gain. The Court also give its explanation regarding transfer pricing principles, which notifies the way of describing the essence, the chance of assets being transferred and the way of selecting the price of those assets.
The Ahmedabad Bench of Income-tax Appellate Tribunal, in the case of: SABIC Innovative Plastics India Pvt Ltd. (ITA No. 1125/Ahd/2014 – Assessment Year 2009-10 and IT (TP) No. 427/Ahd/16 – Assessment Year 2011-12), deleted the adjustment made by the Transfer Pricing Officer (TPO) Dispute Resolution Panel (DRP) with respect to payment for intra-group services to associated enterprises of the taxpayer.
The Tribunal rejected the Nil Arm’s Length Price determined by TPO with respect to management services under Comparable Uncontrolled Price Method (CUP).
The Delhi High Court, in the case of: Pr.CIT v. Mitsui Prime Advanced Composites India Pvt. Ltd. (ITA 913/2016, CM APPL.46519/2016), dismissing tax department’s appeal and upheld the Tribunal’s order deleting penalty under Section 271(1)(c) of the Income-tax Act, 1961 (the Act).
In that case, the Delhi High Court agreed with the tribunal’s decision, to remove a penalty imposed on the taxpayer for an alleged concealment of income with respect to certain related-party transactions even though the taxpayer accepted the transfer pricing adjustment. The High Court also held that because the taxpayer had entered a new line of business (manufacturing), the taxpayer’s failure to disclose certain benefits and advantages from related-party services could not have triggered the automatic presumptive application of the penalty.
The Delhi Bench of the Income-tax Appellate Tribunal in the case of: Swarovski India Private Ltd. v. ACIT (ITA No. 5621/Del/2014 and ITA No. 5622/Del/2014), held that the resale price method is the most appropriate method to benchmark an international transaction for the taxpayer’s trading activity involving purchases of goods from foreign related parties and then reselling the same goods without adding any value to them. The Tribunal also found that comparable transactions must be limited to comparable companies for which the gross profit margin can be computed without allocations.
In the case of Swarovski India Private Ltd. v. ACIT, the taxpayer, in its transfer pricing study, used the comparable uncontrolled price (CUP) method with respect to its international transactions involving the imported goods. The Transfer Pricing Officer rejected the CUP method, finding that the comparable data related to different items, and instead applied the transactional net margin method (TNMM) as the most appropriate method. In the course of administrative proceedings the taxpayer submitted an alternative analysis and applied the resale price method. This was rejected by the Commissioner of Income-tax (Appeals).
The Tribunal rejected the CUP method as the most appropriate method because complete data for analysis was not available. The tribunal then turned to measure the TNMM against the use of the resale price method and concluded that the resale price method was the most appropriate method when the goods purchased from related parties are resold with no value added to the imported goods before the resale.
India: Loss making company couldn’t be excluded from comparable list if it satisfies comparability analysis
The Ahmedabad Bench of Income-tax Appellate Tribunal in case of: Erhardt+Leimer (India) Private Limited v. ACIT (ITA Nos. 3298/Ahd/2011 & 2880/Ahd/2012) held that consistent loss-making companies cannot be rejected as comparable unless the functional profile is different, and various comparability adjustments including capacity adjustment, volume adjustment and warranty cost adjustment are to be allowed.
The tribunal further explained that, comparable entities cannot be rejected outright merely on the basis of consistent loss-making status and that a comprehensive functional analysis is vital for reliable results. Additional, the tribunal said that in instances of a substantial investment in fixed assets, incremental depreciation is to be excluded in computing the profit level indicator.
However, if the taxpayer’s profit level meter has gone through a substantial hit due to capacity underuse, the difference must be adjusted with respect to comparable entities instead of the tested party for effective comparability.