India: Recent Transfer Pricing cases – over case 900 summaries
Table of Contents
- Application of Transfer Pricing provisions not against “non-discrimination” clause of DTAA; DCF valuation subsumes goodwill: In the existing case, the taxpayer entered into a Share Purchase Agreement (“SPA”) with its Associated Enterprise (“AE”). The taxpayer’s share valuation report was rejected by the Transfer Pricing Officer (“TPO”) during the course of assessment proceedings and an upward adjustment on account of difference in discounting factor, goodwill adjustment and difference in exchange rate was proposed. The taxpayer also relying on the article 25(1) of the India-Italy DTAA contended that the TP provisions shall not be applicable on him. However, this has been rejected by the ITAT on grounds that TP provision shall be applicable even on an Indian legal entering into international transaction with its AEs. The ITAT highlighted that the requirement of furnishing share valuation report prepared by two independent valuers applies to the revenue, similarly, as it applies to the taxpayer. The ITAT stated that taking market risk premium for a longer period shall neutralize the effect of market abnormalities. Also, the ill-liquidity discount should be considered while valuing highly ill-liquid shares. Separate addition to the sale consideration for goodwill adjustment is not required when the DCF methodology had been adopted which subsumes the goodwill while doing share valuation. The share transfer transaction was done in INR which makes the question of exchange rate difference irrelevant. [Source: Technip Italy S.P.A [TS-122-ITAT-2019(DEL)-TP]
- Company cannot be rejected as a comparable merely on following different-FY wherein the data can be collated from the public domain relating to the year under consideration: In the present case, the taxpayer imported kits and spares from two of its AE’s and accordingly paid royalty. Further, the taxpayer adopted RPM for benchmarking the said transaction. In assessment proceedings, TPO adopted TNMM and accordingly analyzed the comparables submitted by the taxpayer. The TPO accepted two out of three comparables submitted by the taxpayer and rejected the third comparable owing to absence of data for the relevant period as the comparable followed a different financial year, thereby, resulting into upward TP adjustment. The same was upheld by CIT(A). Additionally, no separate addition was made by the AO as the taxpayer itself disallowed the same under section 40(a)(ia). Contrarily, the ITAT accepted the third comparable for the reason that the comparable was a listed Company with availability of quarterly results and hence it was possible to collate the figures relating to the financial year under consideration. Hence, the Tribunal restored the matter back to AO/ TPO. (Source: Greaves Cotton Limited [TS-153-ITAT-2019(Mum)-TP]
- HC accepts “headcount method” as a basis for apportionment of un-allocable cost: In the current case, the taxpayer entered into six international transaction and out of which five were accepted at ALP by the TPO. The TPO accepted the TNMM as MAM with respect to the transaction pertaining to “receipts for services rendered”, however, proceeded with the following adjustments viz. re-determination of taxpayer’s PLI, change in the set of comparable and re-computation of the working capital adjustment. In relation to thereof, proposed an upward adjustment. Further, DRP reduced the adjustment on account of working capital adjustment. Consequently, ITAT re-determine the PLI and working capital adjustment. ITAT rejects the method used for apportionment of un-allocable cost by the taxpayer as well as by the TPO viz. headcount basis and on the basis of gross revenue of the segments respectively. Further, tribunal opined that apportionment of un-allocable cost shall be on the basis of “gross margins” of the respective segments. Accordingly, ITAT set aside the impugned case and remit back the case for the fresh determination of the ALP. However, HC relied upon the co-ordinate bench ruling pronounced in the case of Commissioner of Income Tax vs. EHTP India Pvt. Ltd and accepted the “headcount” principle as an appropriate basis of allocation of cost. Hence, HC ruled against the Revenue and in favor of the assessee. (Source: Fujitsu India Pvt. Ltd. [TS-108-HC-2019(DEL)-TP]
- Here is a LINK to summaries of 900 other TP cases from India: Digest Of 900 Important Judgments On Transfer Pricing, International Tax And Domestic Tax (Jan To March 2018)