TRANSFER PRICING - COMPUTATION OF ARM'S LENGTH PRICE

SECTION 92C

Comparables and adjustments/Adjustment - Service fee : Where in course of appellate proceedings, assessee brought voluminous documents on record in order to prove genuineness of professional service fee paid to AE, since Commissioner (Appeals) without taking into consideration said evidence, confirmed adjustment made by TPO, impugned order passed by him was to be set aside and, matter was to be remanded back for disposal afresh.

[2016] 73 taxmann.com 393 (Chennai - Tribunal)

Reference to TPO not invalid even if AO doesn't supply satisfaction note before making reference

Facts:

• Assessee filed the instant petition before the High Court challenging the validity of reference made by AO to TPO to determine ALP of international transaction.
• The petition was filed on following grounds:
• In terms of the Instructions No. 3/2016 dated 10-3-2016, the requirement of passing reasoned order on the objections of assessee (regarding whether a transaction is an international transaction or not) and the service of the order upon the assessee is a condition precedent to the Assessing Officer making a reference to the TPO.
• Non-compliance with either or both the above mandatory conditions render the reference to the TPO void.

The High Court held as under:

• The satisfaction recorded by the AO in the instant case contained sufficient reasons. He had indicated the relationship between the assessee and the other parties. He had made a comparative chart and alleged that the sales were under invoiced. That would be sufficient to refer the matter to the TPO. Whether the allegations are true or not must be tested before the authorities under the Act and not in a writ petition under Article 226. The challenge on this ground was, therefore, unsustainable.
• Another submission made by the assessee was that the the order recording satisfaction must be served upon the assessee. The purpose of this exercise of granting the assessee an opportunity of raising objections and the requirement of the AO to furnish reasons for the satisfaction is inter-alia to enable the assessee firstly to meet the case and represent against it to the TPO before the Assessing Officer on the ground that there is no international transaction and secondly in the event of his objections being overruled, an opportunity of challenging the same before the Disputes Resolution Panel or the Commissioner (Appeals) as the case may be, and thereafter before the Appellate Tribunal.
• An assessee is not entitled as a matter of right to invoke the writ jurisdiction at the stage of reference by the Assessing Officer to the TPO. His grievances can be raised in a challenge to the draft assessment order before the Disputes Resolution Panel or the final assessment order before to the Commissioner (Appeals).
• The contention of the assessee that the reference was void ab initio on account of the satisfaction note not having been furnished to the assessee before the reference of the transaction by the Assessing Officer to the TPO was, therefore, rejected. The failure to supply the satisfaction note before the reference to the TPO is at the highest a mere irregularity and does not prejudice the assessee in any manner whatsoever. In view of the above findings the writ petition was to be dismissed.

[2016] 74 taxmann.com 89 (Punjab & Haryana High Court)

Income arising to ‘Western Union’ from money transfer services isn’t taxable in India

Deputy DIT v. Western Union Financial Services Inc. [2015] 64 taxmann.com 230 (Delhi - Tribunal)

‘Western Union’ isn’t liable to pay any tax in India for transferring money to India for their American clients even if it appoints agents in India to provide those services and setS-up a liaison office to interact with such agents.

Facts

• Western Union Financial Services Inc. (‘Western Union’), incorporated in USA, was engaged in the business of rendering money transfer services.
• In order to provide said services to citizens of the USA desirous of remitting money to India, Western Union had set-up a liaison office (LO) in India. It appointed agents in India and provided them software (Voyager) to access its mainframes in the USA. The agents were paid commission on completion of money transfer transactions.
• Western Union filed its return declaring ‘nil’ income by contending that it was not liable to pay any tax in India on income arising from money transfer services as it didn’t have any permanent establishment (PE) in India.
• The Assessing Officer was of the view that income arising to the Western Union from money transfer services was taxable in India both under the Income-tax Act (‘the Act’) and the India-USA DTAA.
• CIT(A) set aside the order of the AO. Aggrieved by the order of the CIT(A), revenue filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under-

Though Western Union had business connection in India in terms of section 9 of the Income-tax Act, yet it did not have a PE in India under India-USA DTAA. It made following observations on different categories of PEs:

Fixed Place PE

It was held that Western Union could not be said to have fixed place PE in India as it did not have its own outlet in India and it was carrying on its business through agents appointed in India.

Liaison office as PE

It was held that LO could not be considered as Western Union’s PE in India as it carried out activities which were of a preparatory or auxiliary character. It had not carried on any trading activity for the assessee in India. It had only a small number of executives and a support staff. The LO had also filed status reports to the RBI listing out the activities which it actually carried out during the years. None of the activities could be described as anything other than of preparatory or auxiliary character. Therefore, the LO could not be considered to be the PE of the Western Union in India.

Software as PE

It was held that the software was the property of the Western Union and it had not parted with its copyright therein in favour of the agents. The agents had only been allowed the use of the software in order to gain access to the mainframe computers in the USA. Mere use of the software for the said purpose from the premises of the agents could not lead to the decision that the premises-cum-software would be the PE of the assessee in India. As per article 5 of India-USA DTAA, an installation might amount to a PE, provided it is used for the exploration of natural resources. Therefore, even if the software was to be considered as an installation, since it was not used for exploration or exploitation of natural resources, it could not per se be treated as a PE.

Dependent Agent PE

It was held that agents appointed by Western Union were acting in the ordinary course of their business and their activities were not devoted wholly or almost wholly to the Western Union. Further, commissions were paid to them at arm’s length price. Therefore, the agents were independent agents under Article 5.5 of the India-USA DTAA.

Hence, in the absence of any PE in India the profits of the Western Union, if any, attributable to the Indian operations could not be taxed In India.

Auditor's certificate can't be a substitute for Transfer Pricing study to benchmark international transaction

Metro Tunneling Group v. JCIT- [2015] 58 taxmann.com 372 (Mumbai - Tribunal)

Facts:

• Assessee reimbursed certain costs and expenses to its associated enterprises (‘AEs’) for coordination and liaison works.
• Transfer Pricing Officers (TPO) determined the ALP of transactions relating to “reimbursement of Head office overheads” as NIL.
• The assessee argued that he had claimed expenditure as per the certificate issued by auditors which spelled out Head office overheads as a percentage of revenues.
• TPO rejected the claim of assessee and made additions, which was further confirmed by CIT(A). Aggrieved-assessee filed the instant appeal before Tribunal.

Tribunal held in favour of Revenue as under:

• Assessee had not conducted any transfer pricing study forbenchmarkingof head officer expenditure. He had benchmarked this transaction on basis of certificate issued by the auditors.
• Under transfer pricing study, what is required to be seen is whether any other independent entity would have charged or the independent entity receiving the services would have paid to the extent that were charged by the AEs.
• This kind of study had not been carried out by the assessee as he was under the impression that the certificate issued by the auditors would satisfy the tests of Transfer Pricing study.
• In transfer pricing study, what is required to be done is to validate the claimwith an external comparable. Certificate issued by the auditors only spelled out the percentage of overheads over the revenue and, hence, it was only a factual aspect of internal figures.
• Accordingly,certificate issued by auditors could not be used as a substitute for Transfer Pricing study to benchmark international transaction.

No Transfer Pricing adjustment by treating share application money as loan to Associated Entity merely due to delay in issuance of shares

ADITYA BIRLA MINACS WORLDWIDE LTD. V. DCIT [2015] 56 taxmann.com 317 (Mumbai - Tribunal)

Share application money could not be treated as loan amount merely because there was delay in issuance of shares by subsidiary in name of assessee, particularly when cause for delay was duly explained by assessee

Facts

• The assessee advanced certain sum to its subsidiaryat Philippines, in the form of share application money. However, shares were not allotted till two subsequent years and subsidiary continued to use those funds.
• TPO was of the view that the share application money was actually in the nature of loan as there was considerable delay in issuance of shares by subsidiary in name of assesse. Accordingly, TPO made addition to assessee’s income by determining the arm's length interest rate on the said transaction.
• Commissioner (Appeals)confirmed the addition made by TPO. Aggrieved by the order, assessee filed the instant appeal before the tribunal.
• On appeal, the assessee submitted that the delay was due to obtaining necessary approval from the Securities and Exchange Commission, Phillipines and finally, the shares were issued as per the share certificate, which had been produced by the assessee as additional evidence before the tribunal.

The tribunal held in favour of assessee as under-

• Though there was delay in issuance of shares against the share application money given by the assessee to its subsiary, however, the assessee had duly explained the cause of delay and it was not a deliberate delay for using the money by subsidiary in the garb of share application money
• Since share certificates were not before the authorities below, for limited purpose of considering the said certificates, the issue was remanded to Assessing Officer/TPO to consider the same. 
• As far as the re-characterization of the share application money as loan was concerned, the High Court in the case of DIT, International Taxation v. Besix Kier Dabhol S.A. [2012] 26 taxmann.com 169 (Bom.) had considered an identical issue and held that there were at the relevant time and even on relevant day no thin capitalization rules in force to consider debt as an equity.
• Accordingly, subject to verification of the share certificates by the Assessing Officer, the share application money could not be treated as loan amount merely because there was a delay in issuance of shares by the subsidiary in the name of the assessee, particularly when cause for delay was duly explained by assessee.

No Transfer Pricing addition for variation between actual price and ALP of fixed asset but depreciation to be re-computed on ALP

HONDA MOTORCYCLE & SCOOTERS INDIA (P.) LTD. V. ACIT - (2015) 56 taxmann.com 237 (Delhi - Tribunal)

The international transaction of purchase of fixed assets is required to be benchmarked as per the most appropriate method. An increase in the value of the fixed assets after application of ALP, being a capital transaction in itself, will not give rise to anyaddition towards transfer pricing adjustment, but the depreciation on such assets, being a revenue offshoot of the capital transaction, will be requiredto be recomputed on such revised value.

Facts:

• Assessee had made international transaction of purchase of fixed asset from its AE.

• TPO made addition on the value of international transaction of the purchase of fixed assets. The counsel of assessee contended that the TPO was not justified in proposing the transfer pricing adjusting w.r.t. the value of purchase of fixed assets. It was argued that only the depreciation element of such adjusted value of the international transaction of purchase of fixed assets would call for adjustment to the operating profits.

• Aggrieved-assessee filed the instant appeal

The Tribunal held in favour of assessee as under:

• Section 92 is not a charging provision, but it is a procedural provision for recomputing the income arising from an international transaction having regard to its ALP. Before applying the mandate of this provision, it is of utmost importance that there should be some existing income chargeable to tax, which is sought to be recomputed having regard to its ALP.

• If there is an international transaction which in itself gives rise to income that is chargeable to tax, then its ALP shall constitute a basis for making of addition on account of difference between the assigned value and ALP of such international transaction as per the relevant provisions. But if there is an international transaction in the capital field, which does not otherwise give rise to any income in itself, then even though its ALP may be computed in consonance with the provisions, but no adjustment can be made for the difference between the declared value and the ALP of such international transaction.

• It does not mean that the computation of the ALP of such an international transaction in the capital field is just a ritual and should not be embarked upon. In fact, such a computation is necessary because of the impact of such a transaction of capital nature on the transactions of its revenue offshoots.

• In the instant case, the international transaction of purchase of fixed assets was required to be benchmarked as per the most appropriate method. The application of the ALP, if required, would give rise to the re-computation of the revised value of the purchase of fixed assets. Such an increase in the value of the fixed assets, being a capital transaction in itself, would not give rise to anyaddition towards transfer pricing adjustment, but depreciation on such assets would be required to be recomputed on such revised value.

• Therefore, addition made by TPO due to the determination of the ALP of purchase of fixed assets was required to be set-aside and AO was directed to compute depreciation on such fixed assets on adjusted value.

No Transfer Pricing addition for variation between actual price and ALP of fixed asset but depreciation to be re-computed on ALP

HONDA MOTORCYCLE & SCOOTERS INDIA (P.) LTD. V. ACIT - (2015) 56 taxmann.com 237 (Delhi - Tribunal)

The international transaction of purchase of fixed assets is required to be bench-marked as per the most appropriate method. An increase in the value of the fixed assets after application of ALP, being a capital transaction in itself, will not give rise to any addition towards transfer pricing adjustment, but the depreciation on such assets, being a revenue offshoot of the capital transaction, will be required to be recomputed on such revised value.

Facts:

• Assessee had made international transaction of purchase of fixed asset from its AE.
• TPO made addition on the value of international transaction of the purchase of fixed assets. The counsel of assessee contended that the TPO was not justified in proposing the transfer pricing adjusting w.r.t. the value of purchase of fixed assets. It was argued that only the depreciation element of such adjusted value of the international transaction of purchase of fixed assets would call for adjustment to the operating profits. 
• Aggrieved-assessee filed the instant appeal

The Tribunal held in favour of assessee as under:

• Section 92 is not a charging provision, but it is a procedural provision for recomputing the income arising from an international transaction having regard to its ALP. Before applying the mandate of this provision, it is of utmost importance that there should be some existing income chargeable to tax, which is sought to be recomputed having regard to its ALP.
• If there is an international transaction which in itself gives rise to income that is chargeable to tax, then its ALP shall constitute a basis for making of addition on account of difference between the assigned value and ALP of such international transaction as per the relevant provisions. But if there is an international transaction in the capital field, which does not otherwise give rise to any income in itself, then even though its ALP may be computed in consonance with the provisions, but no adjustment can be made for the difference between the declared value and the ALP of such international transaction. 
• It does not mean that the computation of the ALP of such an international transaction in the capital field is just a ritual and should not be embarked upon. In fact, such a computation is necessary because of the impact of such a transaction of capital nature on the transactions of its revenue offshoots. 
• In the instant case, the international transaction of purchase of fixed assets was required to be bench-marked as per the most appropriate method. The application of the ALP, if required, would give rise to the re-computation of the revised value of the purchase of fixed assets. Such an increase in the value of the fixed assets, being a capital transaction in itself, would not give rise to any addition towards transfer pricing adjustment, but depreciation on such assets would be required to be recomputed on such revised value. 
• Therefore, addition made by TPO due to the determination of the ALP of purchase of fixed assets was required to be set-aside and AO was directed to compute depreciation on such fixed assets on adjusted value.

Market interest rate applicable to currency in which loan is repayable to AE has to be used to compute ALP of interest

CIT v. COTTON NATURALS (I) (P.) LTD. (2015) 55 taxmann.com 523 (Delhi High Court)

 

The arm's length interest rate for loan to overseas subsidiary should be computed on basis of market rate of interest applicable to the currency in which the loan has to be repaid.

Facts:

• Assessee (an Indian Company) gave loan to its US subsidiary at interest rate of 4%.
• TPO made upward adjustment to the assessee's income as he was of the view that the rate of interest charged by assessee was not equivalent to rate of interest prevailing in Indian market.
• On objections filed by assessee with DRP, it directed TPO to take arm's length rate of interest as Prime Lending Rate ('PLR') fixed by the RBI. 
• Aggrieved by the order passed in pursuance of DRP's directions, assessee filed appeal before the Tribunal who passed its order in favour of assessee. Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under:

• Interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e., the rate of interest.
• In the instant case, the loan was given in foreign currency, i.e., US dollar and such loan was to be repaid in the same currency. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate. Thus, Arm's length price of interest has to be determined on basis of market rate of interest applicable to loan taken in US dollar.