some important transfer pricing judgments sunil moti...

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Some important Transfer Pricing JudgmentsSunil Moti Lala

Advocate & Tax CounselSML tax chamber

www.smltaxchamber.com

CTC’s Study Group meeting held on July 30, 2015

Index

Sr No Case Law CitationPage

Number

I. Applicability of Transfer Pricing – Associated Enterprise & International Transaction

1. Vodafone India Services Pvt Ltd v Addl CIT- AY 2009-10 368 ITR 001 (Bom) 3

2. Bharti Airtel Limited v Addl CIT – AY 2008-09 63 SOT 113 (Del) 5

3.Aithent Technologies Pvt Ltd v DCIT – AYs 2005-06 and

2006-07154 ITD 285 (Del) 6

4. Kodak India Pvt Ltd v ACIT - AY 2008-09 115 TTJ 697 (Mum) 7

II. Methods for determining Arm’s Length Price (‘ALP’)

5. CIT v L’Oreal India Pvt Ltd – AY 2003-04 276 CTR (Bom) 484 8

6. CIT v Adani Wilmar Ltd – AY 2002-03 363 ITR 338 (Guj) 8

III. Comparability – Inter and Intra Industry

7. Maersk Global Centres (India) Pvt Ltd v ACIT - AY 2008-09 147 ITD 83 (Mum)(SB) 9

8.CIT v Intoto Software India Pvt Ltd – AYs 2005-06 and 2007-

08146 ITD 360 (Hyd) 11

9.CIT v Carlyle India Advisors Pvt Ltd – AY 2007-08

357 ITR 584 (Bom) 12

10. CIT v Adaptec India Pvt Ltd - AY 2008-09ITA No 638 of 2014

(AP)13

11. CIT v M/s Everest Kento Cylinders Ltd – AY 2007-08 277 CTR (Bom) 511 13

IV. Computation / Calculations / Adjustments

12. DCIT v Innodata Isogen India Pvt Ltd – AY 2005-06ITA No 1528 / Del /

201114

13. Alstom Projects India Ltd v ACIT – AY 2006-07 26 ITR(T) 322 (Mum) 15

14. BA Continuum India Pvt Ltd v ACIT – AY 2005-06 28 ITR(T) 445 (Hyd) 16

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15. GS Engineering & Construction Pvt Ltd – AY 2008-09ITA No 5221 / Del /

201217

V. Specific Transactions

16.

Issue of sharesParle Biscuits Pvt Ltd v DCIT – AY 2006-07

46 taxmann.com 11

(Mum)

17

17.

Loans & GuaranteesCIT v Cotton Naturals India Pvt Ltd - AY 2007-08 276 CTR (Del) 445

18

18.

Cost sharingDresser Rand India Pvt Ltd v ACIT - AY 2006-07 47 SOT 423 (Mum)

19

19.

Advertisement, Marketing & Promotion ExpensesSony Ericsson Mobile Telecommunications India Pvt Ltd v

CIT – AY 2007-08374 ITR 118 (Del)

20

20.

Royalty PaymentsCIT v EKL Appliances - AY 2002-03 and 2003-04 345 ITR 241 (Del)

23

21. CIT v CA Computer Associates India Pvt Ltd - AY 2002-03 351 ITR 69 (Bom) 24

22.

Other transactionsRedington India Ltd v JCIT - AY 2009-10

49 taxmann.com 146

(Che)

25

VI. Procedures and jurisdiction

23.

Aztec Software & Technology Services Ltd v ACIT - AY

2002-03 affirmed by Karnataka High Court in 209 Taxman

187

15 SOT 49 (Bang)

(SB)25

24. Essar Steel Ltd v ACIT – AY 2005-06 152 TTJ 265 (Mum) 26

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I. Applicability of Transfer Pricing – Associated Enterprise & International Transaction

1. Vodafone India Services Pvt Ltd v Additional CIT – 368 ITR 001 (Bom) AY 2009-10

The assessee, a wholly owned subsidiary of a company incorporated in Mauritius, namely

Vodafone Tele Services (India) Holdings Ltd (VTSHL) had issued 2,89,224 equity shares to its

holding company at a premium of Rs. 8,519 per share over and above its face value of Rs.10

pursuant to the fair market value arrived at in accordance with the Capital Issues Control Act

1947.

Out of abundant care and caution, the assessee reported the issue of shares in its Form 3CEB

and determined the arms’ length price of the issue stating that the transaction did not have any

bearing on income.

The TPO adopted the Net asset value as the ALP, amounting to Rs.53,775 per share and

considered the short fall of Rs. 1308.91 (i.e. difference between NAV and issue price) as a

deemed loan and charged 13.50 percent interest on the said loan resulting in an aggregate

adjustment of Rs.1397 crores. Aggrieved by the order of the TPO and the consequent draft

assessment order, the assessee filed objections with the Dispute Resolution Panel with respect

to the valuation exercise adopted by the TPO and not in relation to the jurisdiction and

applicability of the transfer pricing provisions which was raised via a Writ Petition before the

Bombay High Court. The Bombay High Court dismissed the said petition on the grounds that

the assessee had recourse to alternative remedy under the Act, i.e. the DRP and remanded

the matter to the DRP for determination of jurisdiction as well.

The DRP confirmed the additions made by the TPO, consequent to which, the assessee filed

a second writ petition before the High Court challenging the jurisdiction of the Revenue

authorities to tax an International transaction of issue of shares which did not result in any

income under the Act.

The High Court considered the contentions of the assessee and the revenue and based on the

following reasoning ruled in favour of the assessee:

Jurisdiction to apply Chapter X provisions – the High Court held that income arising from

an International transaction was a condition precedent for applying the provisions of Chapter X

Definition of income – Referring to the definition of income contained in section 2(24) of the

Act, the High Court observed that income would not in its normal meaning include capital

receipts unless it was so specified and that a taxing statute could not be interpreted on any

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presumption or assumptions. Share premium had been made taxable by virtue of a legal fiction

under section 56(2)(viib) of the Act which provided for taxing premium received in excess of the

fair market value but only in case of a resident shareholder. The Court held that neither the

capital receipts received by the assessee on issue of equity shares to its holding company, a

non-resident entity, nor the alleged short-fall between the so called fair market price of its equity

shares and the issue price of the equity shares can be considered as income within the meaning

of the expression as defined under the Act. Further, in dealing with the revenues contention

in respect of bringing the said issue of shares within the purview of transfer pricing under sub

clause (c) and (e) of Explanation (i) to Section 92B of the Act, the High Court held that a

transaction on capital account or on account of restructuring would become taxable to the

extent it impacted income.

Potential income – Against the argument of the revenue that had the assessee received the

ALP of the shares it would invested the same thereby giving rise to income, the High Court held

that the entire exercise of charging to tax the amounts allegedly not received as share premium

fails, as no tax is being charged on the amount received as share premium.

Applicability of Chapter X to issue of shares – The High Court held that section 92(2)

provided for situations wherein AE’s enter into arrangement where they were to receive any

benefit, service or facility then the allocation, apportionment or contribution towards the cost or

expenditure was to be determined in respect of each AE having regard to ALP and therefore

the said section would have no application in case of issue of shares where there was no

occasion to allocate, apportion or contribute any cost and / or expenses between the assessee

and the holding company.

The Court ruled that if it was income chargeable to tax under the normal provisions of the Act,

then alone could Chapter X be invoked and that the transaction at hand, not falling within a

statutory exception could not be brought to tax. Arriving at a transaction value on the basis of

ALP did not convert non-income to income and that tax could be chargeable only on income,

in the absence of which, applying the measure of ALP was unwarranted.

Machinery Provision v Charging Section - Further the High Court also held that Chapter X

was not a separate code in itself and in fact was a machinery provision. In the absence of being

a charging section in Chapter X of the Act, it was not possible to construe it as a charging

section and that income arising from an international transaction between AEs must satisfy the

test of income under the existent charging sections of the Act.

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2. Bharti Airtel Limited v Additional Commissioner of Income-tax – (Delhi Tribunal) - ITANo 5816 / Del / 2012 AY 2008-09

The assessee was engaged in the business of telecommunication services. The assessee

issued a corporate guarantee to Deutsche Bank on behalf of its AE situated in Sri Lanka

guaranteeing repayment for working capital facility. The assessee had issued the corporate

guarantee at nil consideration as it was part of its shareholder activity and it had not incurred

any cost or expense in relation to the corporate guarantee. However, the assessee determined

arm’s length commission at 0.65 percent based on market quotes.

The TPO determined the ALP of the guarantee commission at 2.68 percent plus 200 basis

points based on data obtained from various banks and accordingly made an addition to the

income of the assessee. DRP upheld the TPO’s order.

The ITAT examined the definition of international transaction contained in section 92B of the

Act and the explanation inserted thereto vide Finance Act 2012 and based on the following

reasoning held in favour of the assessee and deleted the addition made by the TPO.

It held that the explanation was ‘for removal of doubts’ and therefore it does not alter the basic

character of the definition of international transaction contained in section 92B of the Act and it

was to be read in conjunction with the said section. It noted that the explanation provided for 5

categories of international transaction.

Clause (a) and (b) of the Explanation directly related to 92B(1) of the Act which provides for

purchase, sale or lease of tangible or intangible property and that the explanation only added

the term ‘use’ to widen the scope of the definition. Clause (d) of the Explanation dealt with the

provision of services which is covered in 92B(2) of the Act. The ITAT then proceeded to

examine the remaining clauses of the Explanation i.e. Clause (c) and (e) dealing with capital

financing and business restructuring which were covered by the residual clause of definition in

international transactions ‘having a bearing on profits, incomes, losses or assets of such

enterprises’. It therefore held that for clause (c) and (e) of the Explanation, the transaction

would have to have a bearing on profits, incomes, losses or assets to be classified as an

international transaction.

With regards to clause (e) it noted that the impact on profits, incomes, losses or assets could

be immediate or a future impact but highlighted the fact that the impact could not be contingent.

It distinguished between future and contingent impact by stating that in case of future impact

there is certainty, though the actual crystallisation takes place later which is not the case of

contingent impact.

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Clause (c) would be applicable only if it impacted the profits, incomes, losses or assets of the

enterprise and therefore held that the Explanation in its entirety fortified the significance of

impact on profits, incomes, losses or assets and held that since the guarantee did not have any

cost to the enterprise issuing it, the same could not be classified as an international transaction.

The ITAT also noted that the AE had not even taken any loan from the bank and therefore the

corporate guarantee did not have any future impact as well. The ITAT established that the

onus to prove the impact on profits, losses, income or assets was on the revenue and no such

effort was made by the Revenue to discharge the onus and therefore held that transfer pricing

provisions were not applicable to the guarantee extended.

The ITAT dismissed the cases relied on by the Revenue as none of the cases examined the

issue in detail and some of the cases relied on were not applicable as they were decided by

Foreign courts where the tax laws were at a variance with the Indian tax laws.

3. Aithent Technologies Pvt Ltd v DCIT – 154 ITD 285 (Delhi Tribunal) – AYs 2005-06 and2006-07

ITAT held that transaction between head office in India and branch office in Canada could not

be considered as an ‘international transaction’ and thus could not be subject to ALP

determination since Canadian branch not a separate entity distinct from assesse.

It held that a bare perusal of the definition of ‘international transaction’ brings to light that for

treating any transaction as an international transaction, it is sine qua non that there should betwo or more separate AEs. Thus, a transaction between a branch and head office could not

be treated as an International transaction, notwithstanding the fact that the same was recorded

in Form 3EB out of abundant caution.

ITAT observed that on the principle of mutuality, since no person can transact with self, one

cannot earn any profit or suffer loss from self. It was observed that this principle has been

settled through various Supreme Court judgements. ITAT further held that even if Revenue’s

contention that the head office earned profit from its branch office was accepted as correct,

such profit earned would constitute additional cost of Branch office. ITAT held, “On the

aggregation of the accounts of the Head Office and branch office, such income of the HO would

be set off with the equal amount of expense of the BO, leaving thereby no separately identifiable

income on account of this transaction”.

ITAT also observed that “It is the merged figures of both the head office and branch office taken

together as one unit, that have been taken into consideration for all practical purposes including

the computation of total income and the transfer pricing analysis”.

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4. Kodak India Pvt Ltd v ACIT - 115 TTJ (Mum) 697 - AY 2008-09

The assessee sold its health imaging business to Carestream Health India Pvt Ltd, a company

incorporated in India. The assessee was of the view that the sale was a domestic transaction

not subject to transfer pricing. There was a larger sale transaction that took place during the

year wherein Eastman Kodak CO, USA the holding company of the assessee sold its imaging

business to Onex Inc, USA the Holding company of Carestream Health India Pvt Ltd located in

the US.

The TPO held that the transaction between the assessee and Carestream Health India Pvt Ltd

was made pursuant to the sale between the holding companies and concluded there was an

element of international transaction and proceeded to determine the ALP of the transaction.

The TPO determined the ALP of the transaction based on the ratio of revenue i.e. As per the

TPO, the revenue share of the assessee in the global consideration came to 1.4 percent of

USD 23.5 billion (global consideration) which amounted to USD 32.9 million. The TPO made

an upward adjustment of USD 19.36 million being the difference between USD 32.9 million (as

computed by him) and USD 13.54 million (received by the assessee as sale consideration).

The assessee contended that even though the sale was made pursuant to a global agreement,

the transaction was between two resident entities, which were not AEs and therefore the

transfer pricing provisions were not applicable to the transaction and that the transaction did

not fall within the deeming fiction of 92B(2) of the Act.

The ITAT examined the provisions of section 92A (Definition of AE) and 92B (Definition of

international transaction) and held that a transaction could be treated as an international

transaction if at least one party to the transaction was a non-resident. It concluded that there

has to be an AE with whom there exists an international transaction and only then it could be

examined as to whether the international transaction exists or no.

For the transaction to be treated as an international transactions, it was necessary that the TPO

should have established that either subsidiary had an AE relationship with the holding company

of the other party which was not so in the given case.

Further, the terms and conditions of the sale were decided by the assessee itself who had

obtained a valuation through an independent valuator, had full authorization to take its own

decision with regard to sale and the entire sale proceeds was received by the assessee with

nothing being passed to the Holding company. Accordingly the ITAT held that the global

agreement did not have any effect on the transaction between the two domestic entities and

therefore could not be classified as a deemed international transaction within the meaning of

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section 92B(2) of the Act. The ITAT clarified that the intention behind the deeming provision

was to rope in those transactions which are strictly not ‘international transactions’ but have the

colour of international transactions.

II. Methods for determining Arm’s Length Price (‘ALP’)

5. CIT v L’Oreal India Pvt Ltd – 276 CTR 484 (Bombay High Court) – AY 2003-04

The assessee was engaged in the business of manufacturing and distribution of cosmetics and

beauty products and had exclusive rights to import, manufacture, market, distribute and sell

branded products, consumer products and professional products relating to the L’Oreal Group.

It had two segments – the manufacturing segment and the distribution segment. The TPO

accepted the ALP declared by the assessee in relation to the manufacturing segment but made

an addition in respect to the distribution segment.

The assessee used the Resale Price method as the most appropriate method for the

distribution segment which was rejected by the TPO who proposed to use the TNMM method

on the grounds that the degree of similarity in the FAR analysis was not sufficient for the RPM

method and that the gross profit margins could not be relied on due to difference in the products.

The CIT(A) and the ITAT ruled in favour of the assessee holding that the Resale Price Method

is the most appropriate method as it is based on the functions performed and not on similarity

of the product distributed.

Aggrieved by the order of the ITAT, the revenue appealed to the High Court wherein it upheld

the order of the ITAT and affirmed that RPM method is one of the standard methods in case of

distribution or marketing activities. The OECD guidelines also state that in case of distribution

or marketing activities when goods are purchased from AEs and there are sales effected to

unrelated parties without further processing, then, RPM method can be adopted.

6. CIT v Adani Wilmar Ltd – 363 ITR 338 (Gujarat High Court) – AY 2002-03

The assesse, Adani Wilmar Ltd. Is engaged in the business of manufacturing, refining and

trading of edible oil. During AY 2002-03, the assesse entered into an international transaction

with one of its AE for purchase of edible oil. The assesse adopted the CUP method as the

most appropriate method to determine the ALP and considered the mean of quotations from

‘Malaysia Palm Oil Board (MPOB)’ and ‘Oil World’ as the CUP. The TPO rejected the quotation

from Oil World stating that apart from having no statutory authority, Oil World’s was an

independent organization registered in Germany and had nothing to do with the oil prices

prevailing in Malaysia.

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CIT(A) deleted the TP addition and observed that Oil World was an authentic independent trade

organization providing primary information and quotations of different countries relating to the

oil industry, which could not be ignored by the TPO without valid reasons. Considering the

quotations of Oil World, the price paid by the assesse was considered to be at arm’s length

after granting the benefit of +/- 5% variation.

ITAT upheld CIT(A)’s order accepting the quotation given by Oil World and deleted TP addition

of Rs.58.49 lakhs.

HC referring to Rule 10D(3) (c ) held that, price publications as long as the same were authentic

and reliable, would be relevant material for ALP determination. HC noted that Rule 10B of the

Rules pertains to CUP method while Rule 10D pertains to ‘Information and documents to be

kept and maintained under Sec.92D’. Further the price quotations of MPOB were important,

however, it would not necessarily mean that the other quotations would lose their significance,

unless it was pointed out that such quotations lacked basis. HC observed that TPO’s only

objection to not consider the quotations of Oil World was that it was an independent entity

established outside Malaysia and had nothing to do with the old price prevailing in Malaysia.

Against this contention HC held that “When the CIT(Appeals) as well as the Tribunal have

accepted the reliability and authenticity of the organization and its publication of rate list, such

objection of the TPO must be overruled”.

III. Comparability – Inter and Intra Industry

7. Maersk Global Centres (India) Pvt Ltd v ACIT – 147 ITD 83 (Mumbai Special Bench) AY2008-09

The assessee was engaged, inter alia, in the business as shared service centre and renders

transaction processing, data entry, reconciliation of statements, audit of shipping documents

and other similar support services. It also rendered IT services such as process support,

process optimization and technical support services. It is a wholly owned subsidiary of Maersk

GSC Holdings A/S, which in turn is a downstream subsidiary of APMM Group (Maersk Group).

Mold Teck Technologies was a pioneer in structural engineering KPO services and its entire

business comprised of providing only structural engineering services to various clients and it

was a leading provider of engineering and design services with specialisation in civil, structural

and mechanical engineering services with an in-house software development team, quality

control training and trouble-shooting facilities. Eclerx Services was a company which provided

high end services involving specialised knowledge and domain expertise which could not be

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compared with the assessee. Eclerx provided complete business solutions, providing data

analytics KPO services in the financial services and retail and manufacturing business verticals.

The issue was whether the assessee could be compared to Mold-Tek and Eclerx Services.

Broad Functional Test: SB referring to the OECD Guidelines, observed that broad

functionality can be taken into consideration for selecting the potential comparables in case of

TNMM.

Further dissection / bifurcation of ITES: Referring to OECD Guidelines, the SB observed

that there was no bar in India TP regulations to exclude certain entities selected as potential

comparables on broad functionality test by applying the functional test at narrow or micro level

to attain the relatively equal degree of comparability. However, referring to Rule 10B(3), the

SB opined that it clearly provided for further exclusion of the comparables selected by applying

the test / criteria given in sub-rule (2) of Rule 10B if there is any difference found between the

enterprises entering into the transactions which materially affects the cost charged or the profit

arising from such transaction in the open market. Accordingly, it held that further dissection or

classification of ITES services can be done so as to select the entities having a relatively equal

degree of comparability.

Classification into BPO & KPO Services: The SB referred to NSDC report, and the Article

published in Chartered Accountants journal, as well as the CBDT safe harbour rules relied on

by assessee and interveners. The SB thereafter observed that the line of difference between

BPO and KPO services was very thin, and that the range of services rendered by the ITES

sector is so wide that a classification of all these services either as low end or high end is always

not possible. Analysing the nature of KPO and BPO services, SB stated that, “the KPO thus is

an evolution of BPO and upward shift in the value chain. BPO trying to upgrade it as KPO is

likely to render both BPO as well as KPO services in the process of evolution and such entity

therefore cannot be considered strictly either as a BPO or KPO.”

The SB further observed that there would be difficulty in classifying these services either as low

end BPO services or high end KPO services, or even a third category falling in between BPO

and KPO, and concluded that “ITES services cannot be further bifurcated or classified as BPO

and KPO services for the purpose of comparability analysis … introducing an artificial

segregation within ITES may lead to creation of more problems in the comparability analysis

than solving the same”.

The Special Bench concluded that with respect to comparability of companies performing KPO

functions with assessee providing back office support services to their overseas associated

enterprises, “if the assessee company, on the basis of its own functional profile, is found to

have provided to its AE the low-end back office support services like voice or data processing

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services as a whole or substantially the whole, the companies providing mainly high-end

services by using their specialized knowledge and domain expertise cannot be considered as

comparables”.

Comparability of Mold-Tek Technologies and eClerx Services Ltd.: The Bench contended

that “the assessee was a captive contract service provider mainly rendering back office support

services and such services rendered by it to its AEs involving some degree of special

knowledge and expertise formed only small portion of the services rendered by it which

essentially were in the nature of incidental services”.

With respect to Mold-Tek Technologies and E-Clerx Services, the SB analysed the nature of

services performed by these companies and observed that these companies were mainly

involved in providing high-end services to their clients involving higher special knowledge and

domain expertise in the field and the same were thus not comparable to the assessee, which

was mainly involved in providing low-end services. Accordingly, the Bench directed exclusion

of these companies from the list of comparables. The exclusion of these companies, the

arithmetic mean would fall within the range of +/-5%, and accordingly, the AO was directed to

re-compute ALP and not make any TP Adjustment if the difference between ALP and the price

charged by the assessee was within +/-5% range.

Comparability of companies earning abnormal high profit margin: Based on the Indian

TP regulations, ITAT held that, “potential comparables cannot be excluded merely on the

ground that their profit is abnormally high. In our opinion, the matter in such case would require

further investigation to ascertain the reasons for unusual high profit and in order to establish

whether the entities with such high profit can be taken as comparables or not”.

ITAT clarified that such investigation should ascertain whether earning of high profit reflected

normal business condition or whether it was the result of some abnormal conditions prevailing

in the relevant year, and if it was found that high margin profit making company did not satisfy

the comparability analysis and or the high profit margin earned by it did not reflect the normal

business condition, the company should be excluded as comparable.

8. CIT v Intoto Software India Pvt Ltd – 146 ITD 360 (Hyd) AYs 2005-06 and 2007-08

The assessee was engaged in the business of providing software development services to its

AE.

Before ITAT, assessee argued for exclusion of some of the comparables introduced by TPO.

With respect to 3 specific comparables i.e. Flextronics Software Limited, Foursoft Limitedand Thirdware Software assessee submitted that TPO had taken note of the fact that these

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companies were also into product development but had selected these companies as

comparables by applying the filter of revenue from software development being more than 70%

. Further, assessee argued that TPO had erred in allocating the expenditure in the proportion

of the revenue of these companies from software services and software products. Relying on

ITAT ruling in First Advantage Offshore Services Pvt. Ltd. vs. DCIT [TS-234-ITAT-2012(Bang)], assessee submitted that in absence of segmental details, the said companies

should not be taken as comparables.

ITAT excluded these companies as comparables and held that these companies were into

product development in addition to software development services and that, “it is clear that TPO

is aware of the functional dissimilarity between a product company and a software development

service provider. Having taken note of the difference between the two functions, the Assessing

Officer ought not to have taken the companies which are into both the product development as

well as software development service provider as comparables unless the segmental details

are available”. Further, rejecting Revenue’s method of allocating expenses on basis on

proportionate revenue, ITAT held that the method adopted by the TPO to allocate expenditure

proportionately to the software development services and software product activity cannot be

said to be correct and reasonable. Accordingly, ITAT held that wherever the AO/TPO cannot

make suitable adjustment to the financial results of the comparable companies with the

assessee to bring them on par with the assessee, these companies should be excluded from

the list of comparables.

9. CIT v Carlyle India Advisors Pvt Ltd – 357 ITR 584 (Bombay High Court) AY 2007-08

The assessee was engaged in providing investment advisory and related support services to

its group company in Hong Kong. It adopted the TNMM method as the most appropriate

method and arrived at a final set of 5 comparable companies having an average operating

margin of 18.97 percent. The assessee had earned an operating margin of 15.02 percent which

was within the 5 percent range allowable under the Act.

The TPO conducted a fresh search and identified 8 comparable companies out of which only

was company was a common comparable with the companies selected by the assessee.

Accordingly, the TPO made an adjustment which was affirmed by the DRP.

Aggrieved by the order of the DRP, the assessee filed an appeal before the ITAT. The ITAT

held in favour of the assessee on the grounds that the comparable companies selected by the

TPO were not functionally comparable with the functions performed by the assessee as some

of the companies chosen by the TPO were engaged in investment banking and merchantbanking services which is not the same as investment advisory services. Investmentbanking and merchant banking services involved assisting in financing capital

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requirements, underwriting of issues, loan syndication, providing venture capital andmezzanine financing amongst other activities which was not comparable to the workdone by the assessee which was restricted to research activities.

The ITAT also noted that the TPO had not given any reason for rejecting the comparable

companies selected by the assessee and relying on the decision of Addl. CIT v. Maersk Global

Service Center India (P.) Ltd. [2011] 133 ITD 543/ 16 taxmann.com 47 (Mum.), held that if the

TPO does not reject a comparable on the ground of functional incomparability, then the AO /

Revenue could not take a plea of functional incomparability of the comparable companies.

The High Court upheld the order of the ITAT and ruled in favour of the assesse.

10. CIT v Adaptec India Pvt Ltd - ITA No 638 of 2014 (Andhra Pradesh High Court) AY 2008-09

The assessee was engaged in the business of software design, development and testing in the

areas of high performance storage solutions. During the year under review it rendered software

development services to its AEs. Pursuant to the transfer pricing proceedings, the TPO had

included Infosys Technologies Ltd and Wipro Ltd as comparable companies.

The assessee contended the inclusion of the said companies before the ITAT wherein it was

held that since the TPO had excluded companies having turnover of less than Rs. 1 crore he

ought to have eliminated companies having extra-ordinary high turnover.

The High Court upheld the view taken by the ITAT and ruled in favour of the assessee by stating

that the 2 companies could not be considered as comparable.

11. Commissioner of Income-tax v M/s Everest Kento Cylinders Ltd – 277 CTR 511 (BombayHigh Court) AY 2007-08

The assessee was engaged in the manufacture of high-pressure gas cylinders and compressed

natural gas cylinders and had a subsidiary company situated in Dubai. In order to satisfy a

condition precedent for a loan taken by its AE for the purchase of fixed assets and for its working

capital requirements, the assessee provided the said AE a corporate guarantee and charged

guarantee commission at 0.5 percent.

Further, the AO concluded that the arm’s length price of the guarantee commission was 3

percent which exceeded the amount charged by the assessee by an amount of Rs. 28.50 lakhs

and accordingly made an upward adjustment to the income of the assessee.

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Corporate guarantee was found to be an international transaction within the definition contained

in section 92B of the Act. The TPO concluded that since the Dubai subsidiary was newly

incorporated and had low credit rating, it wouldn’t have been able to raise funds without the

provision of the corporate guarantee. Based on the case of General Electronic Capital Canada

Inc v Her Majesty, the Queen and another case involving RABO India Finance Pvt Ltd, the TPO

came to the conclusion that the arms length price of corporate guarantee charged should be 3

percent as opposed to the 0.5 percent charged by the assessee.

The Revenue relied on inquiries made by the TPO from various banks in relation to the rate of

guarantee charged by them and contended that the arms length price of bank guarantee was

3 percent.

The ITAT deleted the adjustment made by the TPO pursuant to which the revenue filed an

appeal before the High Court.

The High Court held that the adjustment made by the TPO were based on instances restricted

to the commercial banks providing guarantees and did not contemplate the issue of a Corporate

Guarantee. Further the Court held that the consideration which apply for the issuance of a

corporate guarantee are distinct and separate from that of bank guarantee and accordingly held

that the commission charged cannot be called into question in the manner in which the TPO

had done and therefore dismissed the appeal.

IV. Computation / Calculations / Adjustments

12. DCIT v Innodata Isogen India Pvt Ltd –ITA No 1528 / Del / 2011 (Delhi Tribunal) AY 2005-06

The assesse, Innodata Isogen India, was engaged in the business of providing content related

services such as data conversion, composition editorial services and indexing etc. to its parent

company Innodata US. IT enabled services provided by the assesse was used by Innodata

US / Innodata Asia in the services provided by them to the ultimate customers. Assessee was

established as a Software Technology Park (STP) Unit.

The Assessee’s revenue model was based on a price per transaction / transmission undertaken

for its AEs. The per-transaction price received by the assesse was determined as a % of the

sale price derived by the AEs from the sale to the ultimate end customer. The assessee’s

revenues (and consequently its margins) were directly interlinked to the revenues generated

by the AEs. The assesse thus shared the market and related risks with the AEs and was not a

risk free service provider who is generally compensated on a cost plus basis by the buyer of

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the services. As against the multiple year data used by the Assessee, the TPO held current

year data. CIT(A) accepted current year data, which was also accepted by the Tribunal.

ITAT noted from functional profile and business model that like other service providers, the

assesse and its parent were also exposed to risks of business fluctuations. ITAT referred to

assessee’s business model and observed that its revenues and margins fluctuated on a year

to year basis, depending on the revenues generated by its AEs, and also that assessee’s

annual margins could fluctuate widely, although on a long term basis it would tend to earn a

margin commensurate with its functions and risks. ITAT noted that this was a different model

as compared to a cost plus service entity which would earn a low and consistent returns on a

year on year basis. It also noted that in one of the earlier years, the Revenue too had used

multiple year data and there was no reason to deviate from the same in the relevant year.

13. Alstom Projects India Ltd v ACIT – 26 ITR(T) 322 (Mumbai Tribunal) AY 2006-07

The assessee was inter alia engaged in business in the power sector. During AY 2006-2007,

the power segment of the assessee had made a turnover of Rs. 891.21 crores with an operating

profit to sale margin of 6.06 percent. In the said segment, the assessee had four transactions

of purchases from its AE aggregating to Rs. 69.32 crores and therefore the TPO decided to

benchmark the transactions and accordingly arrived at an operating profit to sales margin of

6.44 percent considering 12 comparable companies and computed the margin of the assessee

at 6.03 percent. Accordingly, the TPO made an adjustment of Rs. 3.83 crores on the basis of

the entire turnover of the segment, since the adjustment was over and above the 5 percent

benefit permitted under section 92CA of the Act.

The assessee contended that even if the TPO proposed to make an adjustment he should have

done so only in respect of the international transactions entered into with the AEs and not on

the entire turnover.

The assessee contended that the adjustment to be made on the international transactions was

limited to Rs. 32 lakhs and in support of the same filed a detailed working to illustrate the

computation. Since the adjustment of Rs. 32 lakh with respect to international transactions

amounting to Rs. 69.32 crores fell within the 5 percent benefit, the assessee contended that

the addition should be deleted.

The ITAT held in favour of the assessee by stating that TP adjustment is permissible only on

transactions undertaken with AEs. With regards to the application of the 5 percent safe

harbour, the ITAT held that since the computation furnished by the assessee, correctly

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demonstrated the possible adjustment and that the said adjustment was within the 5 percent

range, which was not disputed by the Revenue, no addition was to be made.

Note: This is one of the very few cases wherein instead of setting the matter to the file of the

TPO to compute the adjustment vis-à-vis AE transactions, the Tribunal deleted the addition

14. BA Continuum India Pvt Ltd v ACIT – 28 ITR(T) 445 (Hyderabad Tribunal) – AY 2005-06

The assessee was a company engaged in the business of providing ITES services to its AE.

During the TP proceedings for the year under review, the TPO rejected the search undertaken

by the assessee and conducted its own search pursuant to which an addition was made.

The assessee challenged the comparability analysis adopted by the TPO via an appeal before

the CIT(A) who confirmed the actions of the TPO. Aggrieved, the assessee approached the

ITAT.

The ITAT held as follows:

Relying on the decision in the case of DCIT v Hellosoft India Pvt Ltd the ITAT held that

companies having extraordinarily high profits / losses could not be considered as comparable

companies and thereby accepted the claim of the assessee by excluding two companies

proposed by the TPO

The ITAT also accepted the contention of the assessee for the exclusion of a company on the

grounds that data for the said company was not available for a full financial year and only for

four months. The ITAT held that part period data cannot be considered as comparable to

determine the ALP.

With regards to the contention of the assessee that companies having abnormal salary cost to

total cost percentage were not to be included as comparable companies as it signified

difference in functional profile, the ITAT relied on the case of Brigade Global Services Pvt Ltd

(143 ITD 59) and directed the exclusion of companies having abnormal salary cost to total cost

percentage.

Further, the ITAT held that in cases where depreciation had a major impact on the profit margin

of the assessee, depreciation adjustment was to be made for the difference in rate of

depreciation charged and held that in such cases profit before depreciation and tax to total cost

should have been considered as the Profit Level Indicator.

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15. GS Engineering & Construction Pvt Ltd - ITA No 5221 / Del / 2012 – (Delhi Tribunal) AY2008-09

Assessee is engaged in the business of Engineering, Procurement and it entered into

international transaction with its AE for providing Engineering design and drawing services, and

adopted TNMM to justify length price.

While determining the ALP, the assesse had put its claim of idle capacity being first as to the

cost of infrastructure on the ground that no commensurate revenue was derived by assesse.

TPO accepted the assessee’s contention in principle because this being their first year of

operation, the unabsorbed fixed cost required to be appropriately adjusted.

TPO did not allow any adjustment in regard to electricity and maintenance charges on the

ground that they were in the nature of variable cost but allowed 50% adjustment under the head

rent and accordingly allowed idle adjustment capacity. DRP directed the AO/TPO to allow for

50% of the maintenance cost in addition to 50% of rent already allowed.

Before ITAT assesse submitted a chart to substantiate its claim of idle capacity of 37% based

on specific number of work stations in different months which remained unutilized. ITAT

observed that “Once the assesse has given specific details, there remains no scope for any

estimation” and allowed the idle capacity adjustment claimed by the assesse.

Accordingly, ITAT directed AO/TPO to allow adjustment for idle capacity as claimed by assesse

in regard to rent and maintenance charges.

V. Specific Transactions

a. Issue of shares

16. Parle Biscuits Pvt Ltd v DCIT – 46 taxmann.com 11 (Mumbai Tribunal) AY 2006-07

The assessee, Parle Buscuits P Ltd engaged in the business of manufacturing biscuits under

the name of Parle-G, Krackjack, Monaco, Nimkin, etc for AY 2006-07, reported 3 international

transactions involving loan to its AEs.

During transfer pricing proceedings, the TPO noted that the assessee had paid share

application money to its AE Pardee Foods Nigeria Ltd on August 19, 2005 whreas the share

certificates were actually issued only on June 14,2006. TPO did not find the assessee’s

explanation for delay in issue of certificates acceptable and therefore treated the amount of

share application money up to the date of allotment of certificates as loan and made TP

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adjustment on account of interest on such loan calculated at LIBOR of 4% plus 300 basis point

for the period from August 19, 2005 to March 31, 2006. CIT(A) upheld the TPO’s order.

CIT(A) rejected assessee’s contention except claim for reducing interest rate for share

application money to LIBOR plus 200 basis points. Aggrieved, the assessee was in appeal

before ITAT wherein it contended that clear transaction of share application money could not

be treated as loan merely because of delay in allotment of shares.

The ITAT deleted TP addition of notional interest on share application money relying on Delhi

ITAT ruling in Bharti Airtel Ltd. Wherein it was held that a transaction of capital contribution, the

character of which is not under dispute, cannot be treated as interest free loan merely due to

delay in allotment of shares, and that there is no such deeming fiction under Income-tax Act.

b. Loans & Guarantees

17. CIT v Cotton Naturals India Pvt Ltd - 276 CTR 445 (Delhi High Court) – AY 2007-08

The assessee was a leading manufacturer of rider apparel. During the year under review, it

entered into international transactions with its AE for sale of equestrian apparel and received

interest at the rate of 4 percent on the loan provided to its AE. The assessee used the CUP

method as the most appropriate method for both the international transactions and submitted

that the 4 percent interest rate received was comparable with the export packing credit rate

obtained from banks in India.

The TPO was of the view that the interest should be calculated at 14 percent i.e. the average

yield on unrated bonds for FY 2006-07. The DRP provided partial relief to the assessee by

adopting the interest rate at 12.20 percent based on the Prime Lending rate fixed by the RBI.

The ITAT held that the domestic prime lending rate would have no applicability in the current

transaction and the international rate fixed by LIBOR should have been taken as the

benchmark. The ITAT also observed that the assessee had an arrangement for loan with Citi

Bank for less than 4 percent and has charged its AE 4 percent therefore the adjustment made

by the TPO was not warranted. It also added that since the assessee’s profits were exempt

under section 10B of the Act there was no benefit or motive for shifting of profits.

On further appeal, the High Court held that the transfer pricing determination is not primarily

undertaken to re-write the character and nature of the transaction and that there were only two

exceptions (as per the Decision of the Delhi HC in EKL Appliances) for doing so:

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a. Where the economic substance of the transactions differ from its form

b. The arrangements when viewed in totality differed from those which could have been

adopted by the independent enterprise behaving in a commercially rational manner

The Court also highlighted that the Transfer pricing provisions do not permit the revenue to step

in the shoes of the assessee and decide whether or not a transaction should have been entered

into. The High Court noted that the assessee had incorporated a subsidiary (i.e. its AE) in the

USA for undertaking distribution and marketing activities and therefore the loan given should

not be seen in isolation.

With regard to the comparability analysis, the High Court held that it should ensure that the

functions performed by the comparable companies should match with the functions being

performed by the AE to whom payment is made for the services rendered and rejected the

reasoning of the TPO, that the transfer pricing adjustment could restructure the transaction to

reflect maximum return that a party could which would be used as a yardstick for determining

the interest payable by the subsidiary.

The High Court disagreed with the TPO’s finding that comparable test to be applied is to

ascertain what interest would have been earned by the assessed by advancing a loan to an

unrelated party in India with a similar financial health as the AE to whom the loan was granted.

It held that the reasoning was unacceptable as the loan to the AE in the given case was not

granted in India and was not to be repaid in Indian currency and therefore the finding of the

TPO that interest rate should be 14 percent was to be rejected.

Further, the Court held that the interest rate should be the market determined interest rate

applicable to the currency concerned in which the loan had to be repaid and that there was no

justification or reason for applying PLR for outbound loan transaction where the Indian parent

has advanced loans to its AEs abroad.

c. Cost sharing

18. Dresser Rand India Pvt Ltd v ACIT 47 SOT 423 (Mumbai Tribunal) AY 2006-07

The assessee was engaged in the business of manufacturing process gas compressors and

its accessories along with providing field services in connection with the same. During the year

under review, the assessee incurred expenses towards cost contribution allocation by its

holding company i.e. Dresser Rand Co – USA. During the transfer pricing proceedings, the

assessee provided the TPO with detailed reasoning for which it entered into the cost

contribution agreement which included the fact that it had no facilities or manpower to handle

the administrative functioning of its business and submitted the description of services received

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by it in consideration for the payment made to its AE. The TPO was of the view that there were

no real services availed by the assessee and that the payment made was not a genuine

expenditure and held the ALP of the payment to be Nil.

In this regard, the ITAT ruling in favour of the assessee held that how an assessee conducts

his business is entirely his prerogative and it is not for the revenue to decide what is necessary

for an assessee and what is not. The ITAT held that the TPO went beyond his powers in

questioning the commercial wisdom of the assessee and that in determining the ALP of an

international transaction the real question which is to be determined is whether the price of the

service is what an independent enterprise would have paid for the same and therefore held that

the allocation of cost on the basis of headcount and turnover was reasonable.

Additionally, the TPO noted that the assessee had granted a 10 percent discount in respect of

field services rendered to its AEs but no such discount was granted to domestic customers and

therefore held that the transaction was not at ALP.

The ITAT noted that the assessee had adopted the TNMM method for determining ALP which

had not been rejected by the Revenue authorities and therefore their action of attempting to

use the CUP method in this situation was unwarranted. It held that when the assessee is

dealing with an AE there are no commercial risks, no marketing costs and there could be

several other considerations justifying a normal discount granted. It held that even in normal

business situations granting discounts is a normal occurrence and that in the given case the

Revenue authorities have brought nothing on record to suggest that the discount was not at

ALP and therefore deleted the addition made.

d. Advertisement, Marketing & Promotion Expenses

19. Sony Ericsson Mobile Telecommunications India Pvt Ltd v CIT – 374 ITR 118 (Delhi HighCourt) AY 2007-08

In 2013, the Special Bench of the Delhi Tribunal in the case of LG Electronic India Private Ltd

ruled on the issue of marketing intangibles and held that it was justified on the part of the

Revenue authorities to make transfer pricing adjustment in relation to AMP expenditure incurred

by assessee for creating or improving the marketing intangible on or behalf of its AE. The

Special Bench acknowledged the Bright Line Test which sought to bifurcate the AMP expenses

incurred into routine and non-routine expenses and treat the non-routine expenses as an

international transaction subject to transfer pricing. The determination of routine and non-

routine would be based on the AMP expenses incurred by comparable companies.

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This matter dealt with appeals and cross appeals of various assessees in relation to

determination of whether advertisement, marketing and sale promotion expenditure (‘AMP’)

beyond and exceeding the bright line is a separate and independent international transaction

undertaken by the resident Indian assessee towards brand building for the brand owner, i.e.

the foreign AE and the consequent determination of ALP of such a transaction.

The assessee a subsidiary of a Sweden based entity, Sony Ericsson Mobile Communications

AB‘, was engaged in importing/buying and selling, and distribution, promotion and marketing of

mobile handsets under the brand name ‘Sony Ericsson‘ and providing post sale

support/warranty services in India. The assessee in the transfer pricing report accepted that

the group companies, i.e. the AEs, owned significant and valuable intellectual property rights

in commercial or marketing intangibles in the form of brand-name, trademark, logos, etc. but

did not own any significant or valuable non-routine intangibles itself.

In its transfer pricing report, the assessee declared a net profit margin of 2.5 percent which was

higher the operating margin of the 18 comparable companies it arrived at using the TNMM

method. The TPO reject 6 of the companies selected by the assessee on the ground that they

were themselves the owners of the brands. The AMP to sales ratio of the 12 comparable

companies selected by the TPO was 3.35 percent whereas the AMP to gross sales ratio of the

assessee was 7.06 percent. Using the bright line test, the TPO made an addition of Rs.60.82

crores. On appeal, the ITAT provided the assessee with partial relief by arriving at the normal

AMP to sales ratio of the comparable companies 4.02 percent as opposed to 3.35 percent.

Aggrieved by the order of the ITAT, the High Court was approached. The High Court ruled on

various issues which are provided below:

Jurisdiction of TPO: With regard to the jurisdiction of the TPO in case of transactions not

reported in form 3CEB, the High Court held that the retrospective amendment introduced vide

Finance Bill 2012 empowered the TPO to consider transactions not specifically reported in

Form 3CEB without requiring a reference from the AO for the said transaction.

Whether AMP is an international transaction: The High Court held that the AMP expenditure

is an international transaction within the meaning contained in section 92B of the Act. It clarified

the scope of chapter X vis a vis Section 37(1) of the Act and held that Chapter X is not

concerned with the disallowance of expenditure but related to determination of ALP of an

international transaction between two AEs and therefore the two provisions pertain to different

fields. The High Court held that the application of TP provisions sought to determine an arms

length compensation for the marketing and distributon functions performed by the assessee

thereby determining the adequacy of compensation received and not questioning the

reasonableness of AMP expenditure.

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Bundling of transaction: In relation to bundling of marketing and distribution transactions,

The HC observed that expression “class of transaction”, “functions performed by the parties”

under section 92C (1) of the Act, illustrate that the word “transaction” includes a bundle or group

of connected transactions. Clubbing of closely linked, which include continuous transactions,

may be permissible under the Act. However close linkage of transactions is a pre-condition for

aggregation.

Application of TNMM for benchmarking AMP expenses: The HC upheld the use of the

TNMM method since the tested party was engaged in a single line of business and further held

that if the AO / TPO adopts and accepts TNMM, AMP expenses must not be treated as separate

international transaction since AMP expenses is the cost or expense and is not diverse, and is

factored in the net profit of the inter-linked transaction

Use of RPM for AMP transactions: The High Court held that RPM could be used as the most

appropriate method only if the functions performed by the comparable companies are similar

to that of the tested party or else it would result in a mismatch. It held that internal comparables

would not be appropriate since AMP expenses do not get factored and compared. For this

reason, external comparables, not being the legal owner of the brand name, trade mark etc.

but performing similar functions including AMP expenses should be used to give more accurate

and precise results.

Brand Building: The High Court held that it would be erroneous to treat brand building as

counterpart to advertisement expenses. It held that it was possible to build a brand name

without incurring substantial advertisement or promotion expenses and also considered cases

where in spite of extensive and large scale advertisements, brand values have not been

created.

Bright Line Test: The HC negated the bright line test adopted by the Special Bench in the LG

ruling stating that the said method measures all taxpayers by a similar yardstick without

focusing on the facts of the case. It held that since brand building was not solely dependent on

advertisement and marketing expenses, the applicability of the bright line test was unwarranted.

The bright line test ignored the functional profile of entities and cited the difference between a

distributor and a retailer. The High Court held that held that computing the value of the

international transaction by applying a Bright line test is not mandated in the Act and it amounts

to writing and prescribing a mandatory procedure not stipulated in the Act.

Selling expenses: The High Court held that direct marketing and selling expenses have a

direct connect with increasing volume of sales and therefore should not be considered as AMP

expenses.

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e. Royalty Payments

20. CIT v EKL Appliances - 345 ITR 241 (Delhi High Court) AY 2002-03 and 2003-04

The assessee, was engaged in the manufacturing and trading of refrigerators, washing

machines, microwave ovens, air conditioners, etc. For A.Y. 2002-03 and 2003-04 the assessee

declared a loss. The assessee paid royalty / brand fee to its Swedish AE for the brand

Kelvinator” @ 0.5% of net sales (later revised to 1 %)

Considering the perpetual losses suffered by the assessee, the TPO concluded that though

there was an increase in turnover, the royalty payment had not benefited the assessee and that

the assessee failed that to demonstrate the actual benefit derived by it by using the brand name

Hence, the TPO held that the royalty payment for the impugned years was unjustified and ought

to be taken as “nil”. The CIT (A), ITAT and Delhi HC decided in favour of the assessee.

HC held that “it is not necessary for the assessee to show that any legitimate expenditure

incurred by him was also incurred out of necessity. It is also not necessary for the assesse to

show that any expenditure incurred by him for the purpose of business carried on by him has

actually resulted in profit or income either in the same year or in any of the subsequent years.

The only condition is that the expenditure should have been incurred ‘wholly and exclusively”

for the purpose of business and nothing more”.

Rule 10B(1) (a) does not authorise disallowance of any expenditure on the ground that it was

not necessary or prudent for the assesse to have incurred the same or that in the view of the

Revenue the expenditure was un-remunerative. The disallowance was not possible on the

ground that in view of the continued losses suffered by the assesse in business, he could have

fared better had he not incurred such expenditure.

Also the assesse had furnished copious material and valid reasons as to why it was suffering

lasses continuously. Full justification supported by facts and figures was given to demonstrate

that the increase in three employees cost, finance charges, administrative expenses,

depreciation cost and capacity increase have contributed to the continuous losses. No material

was placed on record by the revenue to show that these were incorrect figures or that reasons

for the lasses were not genuine.

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21. CIT v CA Computer Associates India Pvt Ltd - 351 ITR 69 (Bombay High Court) AY 2002-03

The Assessee, entered into a Software Distribution Agreement with its AE in the US whereby

the assesse was appointed as a distributor of the AEs products in India and was liable to pay

an annual royalty on all amounts invoiced at a rate of 30%. The assessee declared a loss in

its return of income for AY 2002-03. It had also written off bad debts in respect of some of the

invoices raised on its customers.

The AO/TPO concluded that the assesse had paid the royalty to its AE even on the bad debts

and in cases where the customers had raised complaints regarding the quality of the products

and that therefore, there was no question of payment of any royalty to that extent, as the

payments were not received by the assesse and were written off in its books.

While the CIT(A) ruled in favour of the Revenue, ITAT ruled in favour of the assesse. The

Honourable Bombay High Court held that Section 92C of the Act does not either expressly or

impliedly consider failure of the assessee’s customers to pay for the products sold to them, to

be a relevant factor in determining ALP. In the absence of any statutory provision or the

transactions being colourable, bad debts on account of purchasers refusing to pay for the goods

purchased by them from the assessee from the assessee can never be a relevant factor while

determining the ALP of the transaction between the assesse and its principal. Once it is

accepted that the ALP of the royalty is justified, there can be on reduction in the value thereof

on account of the assessee’s customers failing to pay the assessee for the product purchased

by them from the assessee.”

The payment of royalty and the sale of products to the customers were two distinct transactions.

Vendor or licensor is not concerned with whether its purchaser/ licensee recovers its price from

its clients to which it has in turn sold / licensed such products. The two are distinct, unconnected

transactions. The purchaser’s / licensee’s obligation to pay the consideration under its

transaction with its vendor/ licensor is not dependent upon its recovering the price of the

products from its clients.

The AE was not concerned with the assessee’s inability to recover the consideration from its

clients. Further, it was not alleged that transactions in this case were colourable. Thus, HC

held that ITAT was justified in deleting the disallowance of royalty paid by the assesse to its

AE.

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f. Other transactions

22. Redington India Ltd v JCIT - 49 taxmann.com 146 (Chennai Tribunal) AY 2009-10

Assessee, an Indian company provided end to end supply chain solutions for all categories of

Information Technology (IT) products – It was having a wholly owned subsidiary company by

name ‘RGF Gulf’ engaged in same line of business – Assessee company transferred its shares

in RGF Gulf to RIHL Cayman which was a step down subsidiary located in Cayman Island –

Assessee company contended that transfer was a gift. According to assesse if said gift at all

was to be treated as a transfer of capital asset for purpose of capital gains taxation, it was

exempt under section 47(iii). Revenue authorities rejected assessee’s claim holding that

company could not make a gift. The Tribunal held that in view of provisions of Transfer of

Property Act, 1882, and Gift tax Act, 1858, a company can make a valid gift within meaning of

Act – therefore transfer of shares made by assesse company without consideration was a valid

gift and in absence of any income element involved, transaction in question could not be

subjected to transfer pricing provisions.

VI. Procedures and jurisdiction

23. Aztec Software & Technology Services Ltd v ACIT - 15 SOT 49 (Bangalore Special Bench)AY 2002-03

The assessee was engaged in the business of development and export of software and was

entitled for deduction under section 10A in respect of profits and gains derived from export of

software. Since the value of international transactions undertaken by the assessee exceeded

Rs.5 crore reference was made to the Transfer Pricing Officer for determination of ALP. On

receipt of the TPOs order, the assessee contended that the said order was erroneous as (i) the

TPO was required to determine ALP only and he could not make adjustments; and (ii) the order

lacked jurisdiction since the Commissioner’s approval had not been obtained before referring

the computation of ALP to the TPO. The Assessing Officer was not convinced with the

objections filed by the assessee. He observed that the permission of the Commissioner had

already been obtained before making a reference to the TPO and the same was on record.

According to him, there is no provision in the Act for furnishing the copy of the approval of the

Commissioner to the assessee. Consequently, the adjustments were made by the Assessing

Officer under section 92C(4), read with section 92CA(4). On appeal the Commissioner

(Appeals) held that addition based on determination of ALP on the basis of order of TPO could

not be justified and the order was unsustainable. Accordingly, he deleted additions made by

the Assessing Officer.

On appeal the Special Bench ruled as follows:

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The AO need not establish ‘tax evasion’ nor give the assessee an opportunity of being heard

before making a reference to the TPO

The burden to establish that international transactions had been carried out at ALP was on

the assessee and the assessee was required to maintain documentations and select

appropriate method

The TPO may determine ALP based on a method other than the one adopted by the tax

payer but any changes in the most appropriate method is to be dealt with by way of a

speaking order

Prior to substitution of Section 92CA(4) with effect from June 1, 2007, the TPOs order was

not binding on the AO and after recording appropriate reasons, the AO could determine ALP

other than the one determined by the TPO but from June 1, 2007 onward the TPO’s order

was binding on the AO.

The TPO is at liberty to collect independent relevant information of comparable

uncontrollable transactions.

That the AO is not required to prima facie demonstrate that the conditions set out in 92C(3)

of the Act are satisfied prior to making a reference to the TPO

24. Essar Steel Ltd v ACIT – 152 TTJ 265 (Mumbai Tribunal) AY 2005-06

During the year under review, the assessee sold shares held by it in a foreign company to its

AE situated in Mauritius and adopted the average of the NAV and PE value to support its sale

price. On reference made to the TPO, the NAV method was rejected the PE value was taken

to be the ALP figure resulting in an upward addition.

Subsequent to the completion of assessment, the TPO noticed that there was an error in

computing the PE ratio and therefore modified his order invoking section 92CA(5) of the Act

and determined the ALP at a lower amount. Subsequently, the DIT forwarded to the CIT, a

proposal submitted by the TPO for considering action under section 263 of the Act on the basis

that the Transfer pricing order passed rejecting the NAV method was erroneous and prejudicial

to the interest of the revenue.

The CIT followed the request of the DIT and initiated proceedings under section 263 of the Act

pursuant to which the assessment order passed under section 143(3) of the Act was set aside.

This was challenged by the assessee on the ground that the order passed by the AO was in

compliance with section 92CA(4) of the Act and incorporated the order under section 154 of

the Act passed by the TPO, not warranting any revision by the CIT. In fact, the CIT, in his order,

proposed to amend the revised order of the TPO. However, there was no such order on record

as the TPO had rectified its erstwhile order via an order under section 154 of the Act and

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therefore in effect the CIT had rectified the order of the AO and not the revised order of the

TPO.

Accordingly, the ITAT held that instead of rectifying the revised order of the TPO, the CIT has

revised the order passed by the AO which was incorrect as the order of the AO did not suffer

any mistake or error. Further, the ITAT held that the CIT has no jurisdiction over the TPO

administratively and therefore could not have revised the order passed by the TPO. Further

the ITAT held that where there are two views possible and the TPO had taken one possible

view the proceedings under section 263 of the Act could have been invoked.

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