Indian Judicial Transfer Pricing (TP) Disputes

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1 Indian Judicial Transfer Pricing (TP) Disputes Foundation for International Taxation (FIT) Vispi T. Patel Vispi T. Patel & Associates Chartered Accountants

2 Agenda Transfer Pricing Disputes An Overview Judicial Pronouncements

3 Transfer Pricing Disputes An Overview Six rounds of TP audit completed FY , , , , and All cases having transaction value > INR 50 million referred by AO to TPO for TP scrutiny 3

4 Transfer Pricing Disputes Debatable Issues Payment of License Fees for use of intangibles vis-à-vis marketing spend Payment of management fees / charges / cost allocation Mark-up on services rendered Resorting to TNMM where direct methods are applicable

5 Judicial Pronouncements

6 Maruti Suzuki

7 Maruti Suzuki. Decision of the Delhi High Court Suzuki Trade-mark was not piggybacking on Maruti logo No transfer of Maruti brand to Suzuki No right given to Suzuki for using Maruti logo Agreement is critical for payment of license fees Compulsory usage of logo of AEs results in creation of marketing intangibles for AEs, hence compensation from AE is required Level of marketing spend by licensee will determine whether the licensee needs to be compensated

8 Dana Corporation Dana Corporation, resident of US, filed bankruptcy As part of the bankruptcy proceedings, a reorganization plan was submitted to the US Bankruptcy Court The reorganization resulted in the transfer of shares of the three Indian companies to the new company The transfer was without consideration as per the share transfer agreement

9 Dana Corporation. The AAR held as under: Transfer of Indian companies shares was without consideration; or At any rate the consideration is indeterminable Thus, the charging provision of Capital Gains (Section 45) is not applicable Hence, such transfer of shares are not chargeable to tax Where the charging section fails to operate, the transfer pricing provisions does not come to the rescue of the revenue authorities

10 SAP Lab India Pvt. Ltd. SAP India engaged in software development and related services to SAP AG SAP India operated under R&D Agreement and was remunerated at cost plus 6% or 1.5 times of wages bill whichever was higher Transfer Pricing Officer (TPO) initially tried to apply CUP method, by comparing rates charged by comparable companies as per NASSCOM data TPO later applied TNMM ignoring the initial intention to apply CUP and made adjustment

11 SAP India. Tribunal held as under: Transfer Pricing provisions are applicable irrespective of the fact whether income is taxable or not Under the Income Tax Act, even if income is exempt, transfer pricing adjustment is not exempt from tax Aim of transfer pricing provision is to determine the arm s length price by applying the most appropriate method (MAM) In the process of evaluation of MAM, all methods need to be evaluated, hence shifting from one method to another is within law

12 SAP India. Tribunal held as under: Need to evaluate correctly the operating margin of the tested party Proviso to Section 92C(2) provides for +/- 5% range from arm s length price as a standard deduction, however, after amendment by Finance (No. 2) Act, 2009, this leeway is not available and the amendment is prospective in nature Comparable analysis needs to consider the economics of the tested party. Thus in the present case, high profit making and loss making companies need to be eliminated from the set of comparable companies

13 Way Forward

14 Way Forward Revenue Authorities becoming extremely stringent in protecting tax base Multinationals need to factor in Revenue Authorities stand in their business strategy in India Taxpayers need to bring out the true economic substance of the controlled transaction, the depiction of risks undertaken and other relevant documentation to discharge their burden of proof, under the Indian TPR Mechanical approach to TP with emphasis only on mere quantification analysis may not be sufficient to protect the taxpayer

15 Thank You Vispi T. Patel & Associates Chartered Accountants #10, Dwarka Ashish, Jambul Wadi, Opp. Edward Cinema, Kalbadevi Road, Marine Lines, Mumbai Contact No.: / vispitpatel@vispitpatel.com