Full Day Workshop on Transfer Pricing 5 September 2010

Transcription

1 Need for Transfer Existing Key Rulings and Pricing on Emerging Transfer Document Pricing Issues in India Full Day Workshop on Transfer Pricing 5 September 2010 Waman Y Kale 1

2 Agenda Significance of TP Litigation Key TP Judgments - Basic Issues and Principles - Method Selection and Application - Marketing Intangibles - Inter-company Loans, Debt and Guarantees Key takeaways and unanswered issues Dispute Resolution Way Forward 2

3 Significance of TP Litigation 3

4 Some important statistics (Estimates) AY Cases assessed = 1081 Cases adjusted d = 239 Total adjustment = USD 305 Mn AY Cases assessed = 1501 Cases adjusted d = 337 Total adjustment = USD 572 Mn Cases adjusted heading northwards. Is it just the tip of the Iceberg? AY Cases assessed = 1768 Cases adjusted = 471 Total adjustment = USD 858 Mn AY & AY Cases adjusted = 25 percent Total adjustment = More than USD 3000 Mn 4

5 What are Regulators Saying The transfer pricing i regulations have come of age in India both in terms of quality of audits as well as the revenue generated for the Government. Till date, the Directorate of Transfer Pricing has made an adjustment of Rs. 23,000 crore (approx. US $ 5000 million), which is a great achievement in a small period of time. For this, I appreciate the Income Tax Department. I am very happy to learn that CBDT is making all efforts to improve technical skill of the manpower posted in Directorates of Transfer Pricing. I am sure that CBDT by increasing its dedicated transfer pricing resources and by improving their specialists capabilities will be able to meet emerging challenges in administration of transfer pricing regulation and would augment government s effort to mobilize more revenue for the development work. Extracts from FM s inaugural address at the International Seminar on Transfer Pricing organized by CBDT and OECD (17 19 February 2010) India s director-general of international tax and transfer pricing has said thin capitalization, advance pricing agreements and safe harbour provisions are his three priorities for the coming year. -- Views of DG International Tax, as reported in TP Week issue dated 13 April

6 Increased administrative focus from Indian Revenue Time limit increased - 33 months from end of AY Expansion of TPOs Coordinated All-India approach Creation of special TP administration at CIT (A) and Tribunal level Training to TPOs on international practices % of ca ases adjust ted Co-ordination between Customs and Transfer Pricing 22 authorities planned 21 Audit Statistics Significant adjustments to companies in IT, AY AY AY AY Pharmaceuticals, Financial services, Automobiles and Assessment Year Chemicals Sector % of cases adj Amt of Adj (USD Mil) j (USD ) Am t of ad Mil) 6

7 Importance of judicial rulings in transfer pricing practice Understanding of facts Expected changes in law Application of law Best practice Transfer pricing assessment experience Cognizance of Indian & overseas judicial rulings 7

8 Basic Issues and Principles 8

9 Basic Principles No need for tax authorities to prove intention to shift profits Importance of F A R Analysis International transactions to be benchmarked on a disaggregated d basis Use of traditional transactional methods vis-à-vis profit based benchmarking Adjustments to prices / margins should be made (where appropriate) to enhance comparability Availability bl of +/- 5% variation as a standard d deduction d (Note: Finance Act 2009 has changed this provision w.e.f. 1 Oct 2009) Choice of tested party Use of multiple year data 9

10 Aztec Software Bangalore Tribunal (Five Member Special Bench) Legal issues answered AO need not prove avoidance of tax before invoking the TP provisions AO need not form an opinion i or satisfy if provisions ii of f92c(3)bf before initiating ii i a TP assessment AO need not grant an opportunity to assessee before referring the matter to TPO Instruction # 3 is binding on the AO (reference based on monetary threshold of Rs. 5 crore / Rs. 15 crore) AO should apply his mind after receiving the TPO s order no relevance after 1 June 2007 as section 92CA has been amended by Finance Act

11 Aztec Software Bangalore Tribunal (Five Member Special Bench) Transfer Pricing issues answered Importance of F.A.R. Analysis NASSCOM rates (akin to Unadjusted Industry Averages) cannot be used as CUPs as exact nature of services is not known Multiple-year data may be used if one can demonstrate that such data has an influence on determination of ALP Burden of proof to establish ALP and furnishing relevant documents is on the taxpayer Mere fact that taxpayer enjoys benefits under 10/10AA has no bearing on the determination of ALP 11

12 Mentor Graphics Delhi Tribunal Observations made by the Tribunal Transfer Pricing is not an exact science and certain approximation has to be done Importance of F.A.R. analysis reiterated - TPO needs to conduct proper study of specific characteristics of the controlled transaction in detail Assessment cannot be completed based on assumptions and presumptions TPO should take into account the presence of intangibles with the comparables Comparables selected by the taxpayer should be rejected only if they are deficient or insufficient 12

13 Mentor Graphics Delhi Tribunal Decision by the Tribunal on TP issues Adjustments need to be made on account of difference in risk profile Other adjustments e.g. working capital, R&D costs, should also be made Comparable companies having related party transactions should not be accepted High Profit making and High Loss making companies should be excluded from the set of comparables If taxpayer s py margin falls anywhere in the range it would be sufficient compliance (ALP is not the highest price or the highest profit margin in a range) 13

14 Other key rulings Applicability of the TP provisions Vanenburg Group (AAR) AAR held that Chapter X are machinery provisions which would not apply in the absence of liability to pay tax in India Dana Corporation (AAR) No capital gains - Transfer of shares of Indian company arising from a bankruptcy related reorganization at the Parent level Transfer pricing laws do not apply in the absence of any income being earned AAR held that Section 92 of the Act is not a charging provision but a provision providing computational Methodology 14

15 Other key rulings Comparables & Economic adjustments E-Gain Communication Material differences must be taken into consideration with an idea to make reasonable and Pvt. Limited accurate adjustment to eliminate such differences If the differences cannot be subjected to an evaluation, then transaction may be eliminated for Pune ITAT purpose p of comparison Potential comparables with abnormal profit / losses need to be excluded Philips Software Centre Pvt Ltd Bangalore ITAT Adjustment needs to be made to the margins of the comparable companies to eliminate differences on account of different functions, assets and risks More specifically, adjustment needs to be made for, (a) difference in risk profile, (b) difference in working capital position, and (c) difference in accounting policies Companies with even a single rupee of transactions with associated enterprises cannot be considered as comparables 15

16 Other key rulings Comparables, Economic adjustments and +/- 5% benefit Sony India An entity can be taken as uncontrolled if its related party transaction do not exceed 10 to 15 percent Delhi ITAT of total revenue. Tribunal allowed 20% deduction from the mean margin of comparable companies for difference in risk profile, intangibles, R&D, etc. The tribunal confirmed the availability of the +/- 5% adjustment at the option of the taxpayer (Note: Finance Act 2009 has changed this provision w.e.f. 1 Oct 2009) Development The tested party should be the least complex of the controlled taxpayers and should not own Consultants valuable intangibles or unique assets Kolkata ITAT Benchmarking exercise using foreign comparables is acceptable 16

17 Other key rulings Multiple year data Customer Services India (P) Ltd. Delhi ITAT While computing the ALP, it is mandatory to use current year s data for comparability purpose Multiple year data should be used only when it adds value to the transfer pricing analysis The tribunal confirmed the availability of the +/- 5% adjustment (Note: Finance Act 2009 has changed this provision w.e.f.1oct 2009) Honeywell Automation In relation to comparability analysis, the OECD guidelines allowed use of profits for the period India Limited under consideration, previous or next year or average of such profits. However, under Rule 10B(4) Pune ITAT there is no provision for consideration of data for a subsequent assessment year 17

18 Method dselection and Application 18

19 Facts Schefenacker Motherson Ltd (SML) Delhi Tribunal SML manufactures rear view mirrors and cable assemblies for the automobile industry International transactions include import of components, exports of cable assemblies and payment of royalty for technical knowhow TNMM with cash profit (CP) / sales as PLI used for benchmarking to eliminate differences in technology used, age of assets, capacity utilisation and different depreciation policies adopted by comparables TPO rejected the above PLI stating that Rule 10B(1)(e)(iii) provides for adjustment to be made only to the results of comparable companies and to the tested party; and making a depreciation adjustment has no sanction in law Benefit of +/- 5 percent not allowed by the TPO 19

20 Schefenacker Motherson Ltd Delhi Tribunal Tribunal Decision / Observations Tribunal held that Cash Profit / sales or Cash Profit / total cost excluding depreciation can be adopted as an appropriate PLI under TNMM, to adjust for material differences in the assets utilized between tested party and comparable companies Discussed the concept of Operating Income. There is no standard test for deciding what constitutes operational income (or profit) and that it would depend on the facts and circumstances of each case Tribunal has also reiterated on the allowability of +/-5% range as a standard deduction based on precedence from Sony India & Development Consultants (Note: Finance Act 2009 has changed this provision w.e.f. 1 Oct 2009) 20

21 Facts Skoda Auto India Pvt Ltd (SAIPL) Pune Tribunal SAIPL is engaged in the business of manufacturing and selling passenger cars First full year of the operation for SAIPL International transactions include import of material and payment of royalties and technical know-how fees SAIPL adopted TNMM as the most appropriate method. Also relied on CUP method by contending that ex-factory selling price by yparent company would remain same for all AEs TPO rejected certain comparables on account of persistent losses and non-availability of contemporaneous data and made the TP adjustment Benefit of +/- 5 percent not allowed by the TPO 21

22 Skoda Auto India Pvt Ltd (SAIPL) Pune Tribunal Tribunal Decision / Observations CUP analysis rejected. The transaction has to be between two entities which cannot influence or control each other s decision Tribunal observed that the business models of the comparable companies having an import content ranging from 26 percent to percent is fundamentally different from that of SAIPL having import contents as high as percent Adjustment would be required for unusually high costs on account of initial stages of business Tribunal has also confirmed the availability of benefit of +/- 5 percent range to the taxpayer Remanded back to TPO for adjudication considering: (i) analysis of import content in future years; (ii) impact of noncenvatable import duty; y;( (iii) effect of product cycle and high initial costs; (iv) benefit of +/- 5% range 22

23 Facts Fiat India Mumbai Tribunal Taxpayer engaged in the business of manufacturing and selling of passenger cars and trading of spare parts Taxpayer adopted TNMM and made comparability adjustments Under utilization of capacity Higher incidence of octroi and excise duty (due to slow moving stock) Low volume from otherwise profitable spare parts business Relatively higher employee salary costs due to underutilization TPO considered PBDIT as the PLI and made adjustment Tribunal Decision / Observations Taxpayer sufficiently explained and demonstrated material differences in the facts of the taxpayer and comparable companies Taxpayer being in asset intensive industry depreciation should be considered for the purpose of computing the operating margin to lead to a meaningful outcome 23

24 Facts UCB India Mumbai Tribunal UCB engaged in the business of manufacture and marketing of prescription drugs in certain therapeutic areas International transactions included purchase of APIs UCB adopted TNMM on an entity wide basis TPO issued 133(6) notice to competitors of UCB and sought information on the purchase price of the APIs. TPO adopted CUP method and made adjustment UCB contended that: discharged the burden of proof cast on it by doing a proper transfer pricing study and therefore the burden of proof shifted to the Revenue; and the Revenue has not discharged d the proof CUP method cannot be applied due to various comparability factors no statutory requirements to maintain segmental data and segregation g of costs relating to different products is not practical. Non-availability of segmental data of the comparables in the public domain 24

25 UCB India Mumbai Tribunal Tribunal Decision / Observations Rejected both taxpayers TNMM analysis as well as TPOs CUP analysis and remanded back for fresh analysis Emphasizes the importance for companies to maintain detailed segmental information of transactions with AEs and non- AEs and the basis of pricing of the international transactions Merely because CUP method hda direct method, hdit does not automatically become the most appropriate method hd Requires a high degree of comparability API produced by an originator cannot be compared with API produced by a duplicator The Tribunal rejected the adoption of the CUP method by the revenue on the basis that it suffers from many deficiencies and infirmities, specifically the lack of information and data on comparables 25

26 Facts Gharda Chemicals Mumbai Tribunal Ghards Chemicals (GC) engaged in manufacturing of fertilizers and chemicals International transactions included export of a chemical to Gharda US Gharda India had sold similar chemical to other non-related customers in jurisdictions other than US but at a much higher price GC adopted CUP method relying on independent report as external CUP The TPO advocated use of internal CUP over external CUP and made adjustment GC contended that there was no intention to shift profits to Gharda US as it was making losses GC contended that internal CUP alleged by TPO had following anomalies: Sale to wholesaler (Gharda US) vs. sale to ultimate customers Sale of bulk quantities (Gharda US) vs. sale of small lots 26

27 Gharda Chemicals Mumbai Tribunal Tribunal Decision / Observations From Indian TP perspective, the quantum of tax paid by the foreign associated enterprise and effect of the international transaction on the tax liability of the Group as whole are irrelevant factors The factors like quality, grade, quantity, location of parties, position of the parties in the supply chain have a overbearing effect on the standards of comparability and should be considered while applying Internal CUP RPM could be applied only in a case where Indian enterprise purchases goods or obtains services from its AE and not in a reverse case Remanded back to TPO for fresh adjudication 27

28 Facts Dufon Laboratories Mumbai Tribunal Taxpayer engaged in the business of manufacturing a specialized chemical Taxpayer sold specialized chemical to its AE in USA in various lots. In the same FY, taxpayer also sold similar chemical to third parties in USA, Taiwan and Korea Taxpayer adopted CUP method comparing the prices with unrelated party in USA Transaction with unrelated party in Taiwan and Korea considered as stray transactions by taxpayer TPO accepted CUP method by considering mean of the entire sale made to third parties (USA, Taiwan and Korea) Taxpayer contended that the factors such as volume, geographical location, etc. were not considered by the TPO while making a comparability analysis Tribunal Decision / Observations Matter remanded back - Comparability of uncontrolled transactions should be analysed in greater detail for which adequate opportunity should be given to the assesses to produce documentary evidence to substantiate its case 28

29 Cheminova Mumbai Tribunal Facts Taxpayer engaged in manufacturing of agrochemicals, pesticides, weedicides and plant growth stimulators Taxpayer purchased raw material from its AE and Non-AEs (Chinese suppliers). Purchased from domestic market at a higher rate than the price paid to AE Taxpayer selected CUP method The TPO cherry picked the data favorable to the revenue and disregarded the other comparable data and made adjustment Tribunal Decision / Observations Importance of economic and commercial factors in ALP determination Substitution to Chinese supplier was not feasible until quality was established Key takeaway even in a case where adverse CUP exists, proper documentation of the business reasons and robust economic analysis can come to the rescue 29

30 Facts 3 Global Services Mumbai Tribunal Taxpayer engaged in the business of providing IT enabled services. Provided voice based customer care services to its AEs External CUP method used considering industry hourly rate published by NASSCOM specifically for voice based customer care services TPO applied TNMM rebutting CUP adopted by the taxpayer and without giving the taxpayer adequate opportunity of being heard Tribunal Decision / Observations Range of rates as published by NASSCOM specific to the Customer care BPO segment tis not general lin nature and dtherefore comparable 30

31 Facts Intervet India Mumbai Tribunal Taxpayer engaged in manufacturing and trading of animal health and veterinary products International transactions included import and export of raw material and finished goods Taxpayer adopted TNMM TPO applied CUP method and made additions after partially allowing adjustment in relation to volume, credit period and credit risk Tribunal Decision / Observations Mere geographical contiguity of two countries need not mean similarity in economic and market conditions Remanded d back - All the disparities i i should be considered d and suitable adjustments made 31

32 Facts Diamond Dyechem Mumbai Tribunal Taxpayer engaged in manufacturing Optical Brightening Agents (OBAs) - a product used in textile and paper industries Taxpayer exported product to AEs as well as non-aes. Taxpayer s export sales to its AEs were more than six times the export sales made to Non-AEs Taxpayer adopted TNMM TPO applied Cost Plus method and made adjustment Tribunal Decision / Observations Tribunal upheld the use of the CPM as the most appropriate method as the taxpayer could not satisfactorily justify / elaborate substantial differences in functional and risk profiles Tribunal allowed an adjustment on account of volume discount remanded back for computing volume discount 32

33 Facts IL Jin Electronics Delhi Tribunal Taxpayer was engaged in manufacture of Printed Circuit Boards Taxpayer imported 45.51% 51% of the raw materials from its AEs TNMM was selected as the most appropriate method The TPO proposed an adjustment by rejecting certain high loss making comparables Taxpayer contended that working capital adjustments should be made to the margins of comparable companies. Further, adjustment if any should be restricted having regard to the proportion of the international transaction with total turnover. 33

34 IL Jin Electronics Delhi Tribunal Tribunal Decision / Observations TNMM was selected as the most appropriate method in absence of data with regard to purchase of raw material by the AE from third parties Working capital adjustment depends on the credit period extended and availed by the taxpayer The adjustment was restricted to the ratio of international transaction to the total cost of raw material 34

35 Global Vantedge Delhi Tribunal Facts GV India is engaged in rendering IT-enabled services in the field of credit collection and telemarketing services and is eligible for deduction under Section 10A GV India adopted TNMM as the most appropriate method considering AE as a tested party. GV India had losses at operating level TPO considered GV India as tested party and made an adjustment to the international transactions by comparing comparables margin of (-)11.88% with loss of GV India (-)53.5% 35

36 Global Vantedge Delhi Tribunal Tribunal Decision / Observations Foreign entity could be selected as the tested party if it is least complex. However due to non-availability of data for carrying out FAR / adjustments and geographical differences in entitlements foreign entity could not be treated as tested party Total adjustment along with the ALP reported by the taxpayer cannot exceed total revenue earned from the transaction from an end to end perspective p Adjudicated that the taxpayer s transactions with third parties should not be considered while using TNMM It was held that comparables engaged in dissimilar activities and those having substantial related party transactions should be rejected. Further, as the taxpayer was in the start-up phase, accordingly adjustments due to surplus capacity should be carried out for the comparables. 36

37 Other recent judicial decisions Indo American Jewellery Transfer pricing study and ALP determined cannot be rejected simply without any cogent reasons Mumbai iitat The fact that associated enterprises earned meager profit or incurred losses as compared to the taxpayer showed that there was no transfer of profit by the taxpayer out side India As tax rates were higher in the overseas jurisdiction as compared to India, there would be no incentive to shift profits offshore Firmenich Aromatics Mumbai ITAT No penalty for bona fide difference of opinion between the Revenue and the taxpayer on the Most Appropriate Method, as it cannot be construed to be concealment of facts or furnishing of inappropriate particulars. Chrys Capital Investment Advisors India Pvt. Ltd. Delhi ITAT Non-operating income - such as interest, dividend, income from share trading, etc. to be excluded in determining the amount of the profit margin under TNMM. Expenses incurred on behalf of associated enterprises if included in operating cost, any reimbursement pertaining to such expenses must be included in operating revenue 37

38 Other recent judicial decisions Quark Systems Chandigarh h Tribunal Tribunal re-states the importance of FAR analysis and provides useful guidance on some of the basic parameters which needs to be considered for selecting appropriate comparables Moser Baer Taxpayer should be provided an opportunity of being heard DlhiHihC Delhi High Court The show cause notice issued by the TPO immediately prior to determination ti of ALP should refer to the documents, information or material available with the tax department in relation to the international transaction being determined Oracle India Assessing officer s adjustment to international transactions not justified when transfer pricing officer accepts arm s length Delhi Tribunal character of international transactions 38

39 Marketing intangibles 39

40 Marketing intangibles Within a multinational group, the trade mark owner is typically a separate entity, legally and geographically, from the subsidiary that undertakes the marketing investment Typically, y development of the market is at the risk and economic cost of the distributor (or) the foreign parent indirectly subsidises the development of the market through a reduced transfer price (or) the foreign parent provided the distributor with a rebate of a portion of the distributor s advertising & market promotion spend (AMP) based on sales volumes High marketing expenditure by a subsidiary is increasingly being scrutinised by revenue authorities The authorities are either a) Disallowing AMP expenditure of distributor b) Deeming a service fee for the marketing effort c) Expect higher marketing margins as return for investment 40

41 Maruti Suzuki India Limited - Delhi High Court Facts Suzuki Motor Corporation, Japan The taxpayer is a joint venture company in India of Suzuki Motor Corporation ( SMC ), Japan Jp Engaged in manufacture of automobiles and its spares and components SMC granted composite license in 1992 for technical-know how and use of Suzuki ( S ) S) trade-mark under an agreement The taxpayer paid a recurring royalty besides lump-sum payment Taxpayer started using the logo S in new cars after 1993, instead of the logo M initially used The TPO allocated 50 percent of royalty amount as being paid dfor use of trade-mark and ALP of the same to be NIL Maruti Suzuki India Limited, India assister in development theory / Bright Line Test TPO contended that taxpayer incurred advertisement expenses for SMC and not been compensated on ALP for developing Suzuki brand name in India 41

42 Maruti Suzuki India Limited Principles Onus on the taxpayer to satisfy TPO that ALP is in consonance with provisions of the Act The TPO under an obligation to convey grounds for adjustments vide notice Discretionary use of foreign trade-name for retaining competitive advantage entitled for outbound compensation Compensation for mandatory use of fforeign-trade mark to be made by AE to domestic entity Incidental benefit arising to the overseas party is not required to be matched by an artificial consideration A domestic company is entitled to receive compensation for value creation and incremental mileage for foreign brand Bright-line test for AMP expenditure to be viewed in conjunction with benefits & burdens test No comparison between price of imported components from AE and domestic purchases former contains IPR cost element 42

43 Glaxo Smithkline US U.S. Dispute Dispute involved sale of GSK heritage pharma products (mainly ulcer drug Zantac ) in the U.S. U.S. IRS contended that Glaxo US (distributor in the U.S.) should have retained a larger share of the profits attributable to the U.S. Glaxo U.S. had made significant contributions to develop valuable sales and marketing intangibles in the U.S. Glaxo U.S. payment to Glaxo UK for product intangibles and trademarks too high Matter settled before it could go to trial GSK agreed to settle the case with the U.S. IRS be paying $3.4 billion in back taxes (in effect conceding to 60% of the U.S. IRS claim) 43

44 Points to evaluate Should the marketer be compensated as a service provider, i.e. for providing promotional services? Should the subsidiary share in any additional return attributable to the marketing intangible? How should the return attributable to the marketing intangibles be identified? If these marketing activities are successful, how should the resulting profit be divided between the subsidiary and the trademark legal owner? As a corollary, if the efforts are unsuccessful, who should bear the losses? Bright-line test - While every licensee or distributor is expected to expend a certain amount of cost to exploit the items of intangible property to which it is provided, it is when the investment crosses the bright line of routine expenditures into the realm of non-routine that, economic ownership likely in the form of a marketing intangible, is created. 44

45 Inter-company Loans, Debt and Guarantees 45

46 Perot Systems Delhi Tribunal Facts The taxpayer is an Indian company engaged in the business of designing and developing technology enabled business transformation solutions The taxpayer had extended d interest free foreign currency loans to its AEs The TPO adopted LIBOR % as the arm s length interest Taxpayer s Contentions before Tribunal The loans were in the nature of quasi-equity Hungary thin capitalization rules kicked in and part of the debt was treated as capital The AEs were start-up companies and no lender would have lent money The intention of advancing loan was to earn dividend and not to earn interest Real income concept argued 46

47 Perot Systems Delhi Tribunal Tribunal Decision / Observations No income arising argument rejected Interest free loan does not satisfy the arm s length principle No special feature in contract demonstrated to treat the loan transaction to be equity in nature Contentions re commercial expediency / inability of the Sub to borrow - rejected Benefit of 5% range denied - Observed that by using LIBOR no more than one price has been used. Consequently denied the benefit of 5% range 47

48 VVF Ltd. Mumbai Tribunal Facts The taxpayer advanced interest free loans to its AEs out of its own funds and determined the ALP as Nil The TPO made an upward adjustment by adopting 14% p.a. (rate charged by Citibank on cash credit) paid by taxpayer as arm s length interest Taxpayer s Contentions Loan was granted to AEs out of the interest free funds and since the taxpayer had sufficient interest free funds it was justified in not charging interest on the loans given to the AEs Real income concept advocated On a without prejudice basis, the taxpayer submitted that the TPO in subsequent assessment years had computed the arm s length price of the international transaction of interest free loan at 4.5 percent per annum The taxpayer submitted a letter from bank as external CUP 48

49 VVF Ltd. Mumbai Tribunal Tribunal Decision / Observations Cost of funds is not relevant for determining CUP Need to see comparable transactions internal or external CUP compares the price of an international transaction with that of comparable uncontrolled transaction Comparable transaction should be a forex loan ITAT rejected the application of CUP by the TPO (rate on cash credit) VVF Ltd. had availed ailed foreign currency loan from ICICI Using the interest rate charged thereof, confirmed the addition for interest 49

50 Nimbus Communication Mumbai Tribunal Facts Taxpayer had receivables outstanding from AEs for > 180 days TPO attributed interest on extended credit and made adjustment For adjustment TPO used rate of interest charged for inter-company loan Tribunal Decision / Observations Taxpayer has not charged interest on delayed payments from third parties Taxpayer has not paid interest on delayed payments to its creditors TPO has not followed any of the methods in making adjustment Loans and trade credit are different and not comparable ITAT deleted adjustment on merits and law 50

51 General Electric Canadian Case Tax Court of Canada (TCC) ruled that the guarantee fee paid by the GE Canada to its parent company did not exceed the ALP TCC rejected the notion that the subsidiary s s credit rating should be equalized with that of its parent and effectively accepted that the guarantee fee arrangement positively affected the subsidiary s borrowing capacity and costs 51

52 Key takeaways and unanswered issues 52

53 Key Takeaways from Recent Rulings No need to establish diversion of profits outside India to determine applicability of the TP provisions Detailed FAR analysis for tested party and comparable companies is crucial International transactions should not be aggregated unless they are inextricably linked Least complex entity to be selected as the tested party Adjustments be made to improve comparability Use multiple year data where the business is cyclic and the trend has impacted the business results 53

54 Key Takeaways from Recent Rulings Unquestionable inference taxpayers must have a robust documentation with sound FAR analysis and well developed economic analysis to justify the transfer prices Mere finding of faults with the approach adopted by TPO - will not help to delete the adjustments at the appellate level Taxpayer maintains strong documentation - it becomes increasingly challenging for the TPOs to disprove the same. Considering the factual nature of the transfer pricing disputes - the rulings have a limited precedent value in case there are variation in facts 54

55 Unanswered Issues Whether one should take cognizance of the group s global profitability scenario What is the definition of contemporaneous data? Whether high margin and loss making companies can be removed from a set of comparables? Whether companies having related party transactions can be completely eliminated from the set of comparable? Does use of consolidated results help? With the use of TNMM, whether markets of the tested party and the comparables should be considered? Whether companies maintaining statutory books of account for periods other than April to March should not be considered? Whether one should take cognizance of the size of operations of the tested party while choosing comparables? Howwouldariskadjustmentbemade? would adjustment made? How would an adjustment for presence of intangibles be made? 55

56 Dispute Resolution Way Forward 56

57 Dispute Resolution Way Forward Dispute Resolution Panel (DRP) experience Mutual Agreement Procedure Advance Pricing Agreement (APA) Proposed by DTC Binding on Department and Taxpayer qua transaction Certainty for 5 years International experience 57

58 Questions 58