Chambers of Tax Consultants Fundamentals of Transfer Pricing Recent Case Laws on TP concepts & controversies

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1 Chambers of Tax Consultants Fundamentals of Transfer Pricing Recent Case Laws on TP concepts & controversies Sunil Moti Lala, Advocate & CA Tushar Hathiramani SML tax chamber November 10, 2017 Index Sr No Case Law Citation Page Number I. Applicability of Transfer Pricing Provisions 1. Vodafone India Services Pvt Ltd v Addl CIT - AY ITR 001 (Bom) 4 2. Global Payments Asia Pacific (India) vs. TS-112-ITAT-2017 (Mum) TP ITA DCIT AY NO. 5345/MUM/ Topsgrup Electronic Systems Ltd v ITO - AY (2016) 157 ITD 1123 (Mum Trib) 6 II. International transactions 4. Aithent Technologies Pvt Ltd v DCIT AY and ITD 285 (Del) 9 5. SIS Live vs. ACIT AY TS-149-ITAT-2017(DEL)-TP - ITA No.1313/Del/ III. Deemed International Transactions 6. Kodak India Pvt Ltd v ACIT AY CTR 46 (Bom) 13 IV. Associated Enterprise 7. Page Industries Ltd. v. DCIT AY [2016] 71 taxmann.com 172 (Bangalore - Trib.) V. Methods for determining Arm s Length Price ( ALP ) 14 Comparable Uncontrolled Price Method 8. CIT v Adani Wilmar Ltd AY ITR 338 (Guj) GDF SucTSA Energy India P. Ltd (formerly Tractabel Energy South Asia (P) Ltd) vs. ACIT AY TS-537-ITAT-2016(Bang)-TP - I.T(TP).A No.984/Bang/

2 Resale Price Method 10. CIT v L Oreal India Pvt Ltd AY CTR (Bom) VI. Comparability Inter and Intra Industry 11. Rampgreen Solutions India Pvt Ltd v Commissioner of Income-tax (Delhi High Court) - AY [2015] 60 taxmann.com 355 (Delhi) CIT v Carlyle India Advisors Pvt Ltd AY ITR 584 (Bom) Thyssen Krupp Industries India Pvt Ltd AY TS-134-HC-2016(BOM)- TP 23 VII. Computation / Calculations / Adjustments 14. Alstom Projects India Ltd v ACIT AY ITR(T) 322 (Mum) Pr. CIT Vs Fiserv India Pvt. Ltd AY TS-437-HC-2016(DEL)-TP Owens Corning (India) Pvt Ltd. vs. DCIT AY TS-245-ITAT-2016(Mum)-TP Watson Pharma Pvt Ltd vs Dy CIT- TS-3-ITAT-2015(Mum)-TP 29 Specific Transactions VIII. Advertisement, Marketing & Promotion Expenses 17. Sony Ericsson Mobile Telecommunications India Pvt Ltd v CIT AY ITR 118 (Delhi) Maruti Suzuki India Ltd v CIT AY [2015] 64 taxmann.com 150 (Del) 34 IX. Share Transactions & Quasi Capital 1. Vodafone India Services Pvt Ltd v Addl CIT- AY Topsgrup Electronic Systems Ltd v ITO AY Cadila Healthcare Limited Vs ACIT - AY & ITR 001 (Bom) 4 (2016) 157 ITD 1123 (Mum Trib) 6 TS-241-ITAT-2017(Ahd)-TP - IT (TP) No. 898/Ahd/2014 and 694/Ahd/ X. Loans CIT v Cotton Naturals India Pvt Ltd - AY Strides Shashun Ltd v ITO AY & CTR (Del) TS-277-ITAT-2016 (Mum) TP ITA No 641 / Mum / 2007, ITA 39 Page 2 of 61

3 no.4063/mum./2010 & ITA no.274/mum./ Instrumentarium Coporation Ltd v ADIT (IT) (2016) 160 ITD 1 (Kol Trib) AY and XI. Corporate Guarantee 23. Bharti Airtel Limited v Additional Commissioner of Income-tax AY (2014) 63 SOT 113 (Del Trib) CIT v M/s Everest Kento Cylinders Ltd AY CTR (Bom) Micro Ink Ltd v Add CIT AY (2015) 63 taxmann.com 353 (Ahd Trib) 47 XII. Cost sharing Dresser Rand India Pvt Ltd v ACIT - AY SOT 423 (Mum) 50 XIII. Royalty and Technical Fee Payment CIT v EKL Appliances - AY and ITR 241 (Del) CIT v M/s Merck Ltd AY TS-608-HC-2016 (Bom) - TP 52 XIV. Assessment 29. International Air Transport Association vs. DCIT AY TS-62-HC-2016(BOM)-TP Honda Cars India Ltd v DCIT AY TS-51-HC-2016 (Del) TP Indorama Synthetics (India) Ltd v Add CIT - AY , and (2016) 386 ITR 665 (Del) 56 XV. Foreign Tested Party / APA 32. Ranbaxy Laboratories v ACIT AY [2016] 68 taxmann.com 322 (Delhi - Trib.) 58 Page 3 of 61

4 I. Applicability of Transfer Pricing Provisions 1. Issue of shares at a premium by assessee to its non-resident holding company does not give rise to any income from an admitted International transaction and, thus, there is no occasion to apply Chapter X in such a case Vodafone India Services Pvt Ltd v Additional CIT 368 ITR 001 (Bom) - AY Facts i. 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 Though the assessee was of the view that the transaction did not have an impact on its income and that the transfer pricing provisions were not applicable, out of abundant care and caution, it reported the issue of shares in its Form 3CEB and determined the arms length price of the issue. The TPO adopted the Net asset value as the ALP, amounting to Rs.53,775 per share and considered the short fall of Rs crore (i.e. difference between NAV and issue price) as a deemed loan and charged percent interest on the said loan resulting in an aggregate adjustment of Rs.1397 crores. i 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. Contentions of the assessee i. The sine-qua- non, for application of Section 92(1) of the Act is that income should arise from an International Transaction and since in this case, no income arises from issue of equity shares by the Petitioner to its holding company, the Transfer Pricing provisions would not apply. Page 4 of 61

5 That the word 'Income' would have to be understood as defined by other provisions of the Act i.e. Section 2(24) of the Act. A fiscal statute has to be strictly interpreted upon its own terms and the meaning of ordinary words cannot be expanded to give purposeful interpretation. Since, the issue of shares by the Petitioner to its holding company and receipt of consideration of the same was a capital receipt it could not be brought to tax unless specifically/ expressly brought to tax by the Act. i That the provisions of Section 56(2)(vii), being applicable to only residents would not apply in the instant case. Judgment The High Court considered the contentions of the assessee and the revenue and based on the following reasoning ruled in favour of the assessee: i. 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 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. i 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 Page 5 of 61

6 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. v. 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. 2. Global Payments Asia Pacific (India) vs. DCIT TS-112-ITAT-2017 (Mum) TP ITA NO. 5345/MUM/2012 dated AY The Tribunal deleted TP-addition of Rs Crore on purchase of intangible assets (Trademarks, Customer lists and Goodwill) by assessee consequent to acquisition of credit card processing and merchant banking acquisition business of HSBC India during AY As regards the Goodwill and Customer List, it noted that no deduction or depreciation was claimed on the consideration paid for it while computing taxable income and applied the decision of Bombay HC in Vodafone India Services and held that Chapter X provisions could only be invoked only when income arises from international transaction and there being no income from the said transaction, the provisions of Chapter X could not be applied. With regard to acquisition of Trademark, which had been capitalized and depreciated by assessee, the Tribunal approved the justification of ALP adopted by the assessee viz. on the basis of report of independent valuer, where weightage had been assigned considering various factors, including the potential of generating business in future wherein a higher weightage was given to the India territory and rejected the TPO s contention that lower weightage should have been given to Indian business as credit card business was much more advanced in other countries. Accordingly, it rejected TPO's conclusion that assessee has paid 25% extra for goodwill / trademark acquisition and deleted the TP addition. 3. Transfer pricing provisions in Chapter X of the Act do not apply to international transactions on capital account viz. investment in the share capital of the AE, not resulting in any income. Further, re-characterization of equity share capital into loan was on the ground that the investment was made at a value in excess of the value of shares as per the Wealth Tax Valuation Rules, was unwarranted since the transfer pricing laws in India do not permit such re-characterisation. Topsgrup Electronic Systems Ltd v ITO (2016) 157 ITD 1123 (Mum Trib) AY Page 6 of 61

7 Facts i. The Assessee belonging to the Topsgrup group of companies which were engaged in the business of providing security services, was incorporated to carry on the business of manufacturing security equipments. However, its business stopped post which it is carrying on the activity of an Investment / holding company. With the view to expand its security business on a global scale, the Topsgrup proposed to invest in Shield Guarding Company Ltd, UK, ( Shield ) which was also engaged in the business of providing security service. For this purpose, Tops Security Limited ( TSL or Holding company of the assessee ) entered into agreement dated with its investors viz. India Advantage Fund & Indivision who jointly invested Rs.140 crores for acquisition of Shield. Out of the said amount, TSL in the assessee / subscribed to 12,46,010 shares (of face value of Rs.10/ - and premium of Rs.990/- resulting in investment of Rs. 124,60,14,673. On receipt of the said money from TSL, the assessee invested the same in Tops BV Netherlands ( Tops BV ), its wholly owned subsidiary, which was to be an intermediate holding company to acquire 'Shield'. The money received by Tops BV Netherlands was further invested towards acquisition of 'Shield. The entire transaction was duly supported by a valuation report and was post approval from the RBI. The structure of Topsgrup of Companies was as follows: TSL TESL (100% WOS) Tops BV (100% WOS) Tops UK (100% WOS) Shield. The investment in Tops BV was disclosed in the notes in Form 3CEB but the same was not benchmarked as the assessee was of the view that since the subscription to equity capital did not have any bearing on profitability, TP regulations were not applicable. The TPO contended that as per the amended provisions of section 92B(2), transactions of capital financing have all along been international transactions. He observed that the AE (viz. Tops BV) got the huge premium due to its special relation with the assessee and the assessee had failed to establish that the AE was capable of raising funds., either by way of loan or share capital. He held that in the absence of this share premium, the AE would have had to take loans from the assessee or on open market which would entail it to pay huge interest costs and that therefore the AE got the funds by way of the above transfer without being charged any interest thereon. Thus, according to the TPO, the premium was nothing but a loan given by the assessee to its AE (vis. Tops BV) in the garb of share premium. The TPO then proceeded to compute the book value per share on the basis of Schedule III of the Wealth Tax Act, 1957 and accordingly made an addition of Rs.124,17,50,258/- being the alleged difference in ALP. The TPO made a further adjustment/ addition of Rs.18,62,62,539/- being notional interest on the aforesaid sum of Rs.124,17,50,258/- i The CIT(A) upheld the order of the TPOs and further held that the ratio of the Bombay High judgments in Vodafone India Services Pvt Ltd [368 ITR 001 (Bom)] and Shell India Markets Pvt Ltd [269 ITR 516 Page 7 of 61

8 (Bom)] did not apply to the assessee as the judgments covered inbound transaction i.e. where asssessee received the amount on issue of shares, whereas the transaction of the assessee was different i.e. an outbound transaction Contentions of the assessee i. That in the absence of income arising out of an international transaction, Transfer Pricing provision do not apply That a transaction of investment in share capital could not be re-characterized as a loan i Without prejudice to the above, that in any event since the international transaction had taken place in foreign exchange, the rate for computing notional interest cannot exceed the LIBOR of 5.514% Judgment i. The Tribunal held that Chapter X begins with section 92(i) of the Act which states that "Any income arising from and international transaction shall be computed having regard to the arms length price." Evidently, therefore, income arising from the international transaction is a condition precedent for computing the ALP and such income should be chargeable to tax under the Act. In the absence of such income, benchmarking of an international transaction and computing ALP thereof would not be in order. Consequently, if an international transaction is on capital account and does not result in income as defined under section 2(24) of the Act, the provisions of Chapter X of the Act would not be applicable to such transaction. It dismissed the contention of the Revenue, that the transfer pricing provisions would apply to potential income and therefore ought to apply to the impugned investment in shares as the same could lead to capital gains in the future and held that potential income arising from a capital transaction may be considered under Transfer Pricing provisions if it arises from out of the impugned transaction, which was not so in the instant case. i In respect of the contention of the Revenue the decision of Vodafone India Services (P.) Ltd. was not applicable to the assessee, the Tribunal noted that the said decision of the Hon'ble High Court, at para 42, had observed that it would be applicable to both inbound and outbound transaction..it is a recomputation exercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrant re-computation of a consideration received/given on capital account Further, following the decision of the High Court in of Besix Kier Dabhol SA (TS-661-HC-2012 (Bom) and the decisions of the Tribunal in Aegis Limited v ACIT [TS-342-ITAT-2015 (Mum) TP], Parle Page 8 of 61

9 Biscuits Pvt Ltd v DCIT [TS-127-ITAT-2014 (Mum) TP], Mylan Laboratories Ltd v ACIT [TS-399-ITAT (Hyd) TP], Allcargo Global Logistics v ACIT [150 ITD 651 (Mumbai)], Prithvi Information Solutions Ltd v ACIT [34 ITR(T) 429 (Hyd)], Tooltech Global Engineering Pvt Ltd v DCIT [51 taxmann.com 336 (Pune)] it held that re-characterization of investment in share capital into loan was not possible under the Transfer Pricing provisions. v. Accordingly, it deleted the adjustment by the TPO. II. International transactions 4. A transaction between head office and branch office cannot be considered as international transaction within meaning of section 92B of the Act Aithent Technologies Pvt Ltd v DCIT 154 ITD 285 (Delhi Tribunal) AYs and Facts i. The assessee entered into international transaction of 'Software/Product Development/Software Consultancy Services' with its AE in the USA and adopted TNMM as most appropriate method for benchmarking the said transactions. Apart from the assessee having an AE in the USA, it also had a branch office in Canada. While computing ALP, the assessee inadvertently considered transactions with its branch in Canada as international transactions. i The TPO selected a few comparable cases and determined their average operating profit rate and made a transfer pricing adjustment by applying the margin of the comparables to the base of the assessee's international transactions with its AE in USA and also its branch office in Canada. The assessee filed an appeal before the CIT(A) contending that the transactions with its branch office were not in the nature of transactions with AEs and, hence, the same should have been excluded. Assessee s contention That the transactions with its branch office were not in the nature of transactions with AEs and, hence, the same should have been excluded Judgment Page 9 of 61

10 i. The Tribunal 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 be two 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. i The Tribunal observed that as per 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 judgments of the Hon ble Supreme Court viz. Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC) as well as of the Hon be High Courts viz. Betts Hartley Huett & Co. Ltd. v. CIT [1979] 116 ITR 425 (Cal.) & Ram Lal Bechairam v. CIT [1946] 14 ITR 1 (All.). Further, it 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. The Tribunal 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. It 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. Note: The aforesaid judgment has been followed in the assessee s own case for subsequent years as well (2016) 74 taxmann.com 214 (Del Trib) 5. Chapter X provisions were applicable despite the fact that the assessee, following the cash system of accounting, did not claim deduction for expenses were claimed as expenses viz. technical service fee paid, payment of reimbursement of expenses and payment of hiring fee. Since the impugned international transactions relating to availing of services, reimbursement of services, availing equipment on hire and Inter-company receivables fell within the categories of provision of services, lease of tangible assets and borrowing / lending of money u/s 92B(1) the condition of bearing on profit, income and loss was not relevant as it was only to applicable to the last category of transactions i.e. Other transactions. SIS Live vs. ACIT - TS-149-ITAT-2017(DEL)-TP - ITA No.1313/Del/2015 AY i. The assessee, a non-resident partnership firm based in the UK, came into existence through two partners, viz. Satellite Information Services Ltd. (70%) and SIS OB Ltd. (30%), for the purpose of Page 10 of 61

11 carrying out a Common Wealth Games (CWG) 2010, New Delhi, contract which was awarded by Doordarshan (a constituent of Prasar Bharathi, India) for producing and providing the coverage of the CWG 2010 to the Host Broadcaster, Prasar Bharathi for a total consideration of Rs. 246 crore. The assessee sub-contracted the said contract to a third party viz. Zoom Communications Ltd for Rs. 177 crore. The assessee filed its return of income in response to notice issued by the AO under section 142(1). However, it did not file Form 3CEB along with the return of income. During the course of assessment proceedings, the assessee declared 3 international transactions at the instance of the AO viz. technical service fee payable (Rs crore), payment of reimbursement of professional fee etc (Rs lakhs). and hiring of equipment (Rs crore), which were referred to the TPO for determination of ALP. The TPO recomputed the ALP of international transactions of technical service, reimbursement of profession fee etc. and hiring of equipment at Nil on account of lack of commercial expediency and also made an addition of notional interest chargeable from inter-company interest free loan (Rs. 21 crore of receivable). The AO passed a draft order including transfer pricing adjustment amounting to Rs crore. i The assessee, filed its objections before the DRP, wherein the DRP provided the assessee with partial relief by finalising the addition at approximately Rs crore. In the final assessment order, the AO inadvertently missed out making the said addition of Rs crore on the last page of its order in spite of making elaborate discussions on the merits of the issue. Aggrieved, by the addition, the assessee preferred an appeal before the Hon ble Tribunal wherein the Tribunal declined to adjudicate TP issue as no addition had been made by AO in final assessment order. On appeal by the Revenue, the Hon ble High Court [TS-263-HC-2016(DEL)-TP] noted that prior to the date of passing order by ITAT, the AO had passed rectification order incorporating the TP adjustment of Rs crore in its final assessment order. Therefore, it remanded the appeal back to the Tribunal for fresh adjudication. Contention of the assessee i. That since it followed cash basis of accounting, no expenses arising out of the international transactions were accounted for and claimed and deduction in the subject AY, therefore the transfer provisions u/s 92 were inapplicable. That the TP provisions would apply in the year in which the expenses/income are actually recorded in books of accounts. Reliance was placed on Bombay High Court decision in Vodafone India Services Private Limited [TS-308-HC-2014(BOM)-TP] wherein it was held that TP provisions' are machinery provisions and are not attracted on an independent basis, unless there is some income chargeable to tax in India. Judgment Page 11 of 61

12 i. The Tribunal referring to the provisions of Section 92B defining an international transaction as well the retrospective amendment vide Finance Act 2012 inserting Explanation to Section 92B. It held that as per the provisions of 92B(1) International transaction has the following ingredients:- a. There has to be a transaction as defined u/s 92F(v) b. One of the party to the transaction is a non-resident c. The nature of the transaction is i. Purchase, sale or lease of tangible or intangible property Provisions of services i Lending or borrowing money Any other transaction having a bearing on the profits, income, losses or assets of such enterprises v. Mutual agreement or arrangement for allocation or apportionment or any contribution to any cost or expenses in connection with benefit, service or facility. It then proceeded to analyse each of the transactions entered into by the assessee vis-à-vis the contention of the assessee that they did not have an impact on its profits / losses as they had not been recorded in the relevant year since it followed the cash system of accounting: Services provided by SIS Outside Broadcast Ltd (Rs Cr): It noted that these services availed by the assessee were required in absence of necessary skill and resources to manage the scale of work and held that it fell within the nature of provision of services u/s 92B(1), and since the condition of bearing on profit income and loss of the assessee only applied to other transactions, it was an international transaction. Reimbursement of expenses (Rs Cr): It observed that these expenses were reimbursed by assessee to its AE in connection with professional fees and concluded that this transaction also fell in the category of provision of services and it was not required that it should affect assessee s profitability and therefore held that it was an international transaction. Availing of equipment on hire (Rs Cr): The Assessee had rented certain equipment from its AE to render broadcasting services. The Tribunal held that this transaction was covered under the category of purchase, sale or lease of tangible or intangible property and therefore concluded that it was an international transaction irrespective of the impact on profit, income, losses or asset of the assessee. Inter-company receivables (Rs. 21 Cr): Noting that the assessee had not charged any interest on inter-company receivable from its AE, the Tribunal held that this was a transaction of lending of borrowing money and was an international transaction u/s Sec 92B(1). Page 12 of 61

13 i Further, it disagreed with the assessee s contention that these transactions were required to be benchmarked only in the year in which they are claimed as deduction under cash accounting system. Illustrating a case where Indian entity advances an interest free loan of Rs. 100 crores to its AE, it held that under cash accounting system, income from these advances would not get recognized at any point, whereas Section 92B(1) provides that any income from international transaction shall be computed having regard to ALP and therefore explained that income would arise from interest free advances given by assessee to its AE by benchmarking interest amount receivable, irrespective of the method of accounting followed by assessee. It also distinguished assessee reliance on the Bombay High Court decision in Vodafone India as well as coordinate bench decisions in Bharti Airtel [TS-76-ITAT-2014(DEL)-TP]and Toppsgrup Electronic Systems [TS-61-ITAT-2016(Mum)-TP] rulings relied on by assessee, stating that the transactions in those cases dealt with the last category being issue of share capital or issue of corporate guarantee, i.e. other transactions, which impacts profit, Income, loss or assets of the assessee, whereas assessee s transactions were covered under lease of tangible assets, provision of services or lending and borrowing money. Accordingly, it dismissed assessee s ground and held that transactions benchmarked by TPO were international transactions u/s 92B despite the method of accounting followed by assessee and not claiming such expenditure as deduction. v. With regard to the TPO s determination of ALP of certain international transactions (viz. services availed, reimbursement of expenses and hiring of equipment) at Nil on account of lack of commercial expediency (for the reason that assessee had secured the contract for Rs. 246 Cr and assigned it to Zoom Communication for Rs. 177 Cr without providing any services), the Tribunal disagreed with TPO s ALP determination at Nil without examining the details of various information provided by the assessee and relying on the other reports etc. It held that the TPO was required to examine all these evidences and then determine whether the services were rendered or not and then derive at the ALP of such transaction in accordance with law. Noting that neither TPO nor DRP had appreciated the evidence produced by assessee for the said transaction in a proper perspective, it remitted the issue to the file of AO/TPO for examining the evidences produced and then determining ALP of the transactions. III. Deemed International transactions 6. Where the holding companies of the assessee and the company to which the assessee sold its imaging business, entered into a global agreement for the sale of business, since the global agreement did not control the terms and conditions of the actual transaction between the assessee and the buyer, the same could not be considered as a deemed international transaction under section 92B(2) of the Act. Page 13 of 61

14 CIT v M/s Kodak India Pvt Ltd 288 CTR 46 (Bom) - AY Facts i. The assessee, an Indian subsidiary of M/s Eastman Kodak Co, USA, had, during the relevant assessment year, sold its imaging business to an Indian company viz. Carestream Health India Pvt Ltd, who was in turn a subsidiary of Carestream Inc, USA. The TPO treated the same as a deemed international transaction under section 92B(2) of the Act on the basis that the holding company of both the assessee as well as Carestream India had entered into a global agreement for sale of its business which was prior to the sale of the imaging business. i Aggrieved, the assessee filed objections before the DRP, wherein the DRP upheld the view of the TPO. The Tribunal concluded that on the interpretation of Section 92B(2), as in force during the relevant year (i.e. prior to the amendment in Section 92B(2) with effect from April 1, 2015), the transaction would not be covered by the definition of international transaction. Further, the Tribunal held that even if one was to proceed on the basis that Section 92B(2) of the Act was applicable, the transaction would still not come within the definition of international transaction since the transfer was independently between the assessee and Carestream India done on its own terms and conditions and the global agreement between the holding companies did not control the terms of the sale. The Tribunal also noted that the law relevant to the assessment year in question did not permit the use of any other method as the most appropriate method for determination of ALP and therefore it held that the method used by the TPO was incorrect. v. Aggrieved, the Revenue filed an appeal before the Hon ble High Court for the interpretation of the provisions of section 92B(2). Judgment The Hon ble High Court upheld the order of the Tribunal and further held that the question of law raised by the Revenue was academic considering the finding of facts given by the Tribunal i.e. that as per Section 92B(2) prevalent during the relevant assessment year, the transaction would not fall within the definition of deemed international transaction and that the transaction of sale was neither controlled by the holding companies of the assessee nor by Carestream India and therefore would not fall under the definition of international transaction. Accordingly, it dismissed the appeal of the Revenue. IV. Associated Enterprise 7. For the purpose of constituting an AE, both sub-section 92A(1) and 92A(2) were to be fulfilled together and therefore, where the assessee was a mere licensee of the brand-name 'Jockey' and there was no participation of Jockey International Inc ( JII ) in the management and capital of the Page 14 of 61

15 assessee i.e. the conditions of Section 92A(1) of the Act were not satisfied, the royalty paid by the assessee to Jockey International Inc (JII) was not an international transaction and therefore could not be subjected the provisions of Chapter X. Page Industries Ltd. v. DCIT [2016] 71 taxmann.com 172 (Bangalore - Trib.) AY Facts i. Assessee company, engaged in the business of manufacture and sale of ready-made garments, is a licensee of the brand-name Jockey for the exclusive manufacture and marketing of Jockey readymade garments under license agreement with Jockey International Inc, USA ['JII']. In consideration for granting the right to use brand-name, the assessee-company paid consideration in the form of royalty at the rate of 5% of the sales. The TPO contended that assessee and JII were AEs under section 92A(2)(g) which provides that enterprise shall be deemed to be AE if the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights. Accordingly, it treated expenditure on advertisement, marketing and product promotion as an international transaction and determined its ALP by applying Bright Line Method, computed TP adjustment. i The assessee contended before DRP that the said transactions did not constitute international transaction as the assessee-company and JII were not AEs since the conditions specified u/s 92A(1) of the Act were not were not satisfied between the assessee-company and JII and in the absence of relationship, the transaction did not constitute an international transaction within the meaning of sec.92b of the Act. However, DRP dismissed the objections raised by the assessee. v. Accordingly, the assessee filed an appeal before the Hon ble Tribunal. Judgment i. The Tribunal observed that it was not the contention of the TPO that the assessee and JII were associated enterprises u/s 92A(1) which provides for management/control/capital of the other enterprise but he contended that the assessee and JII were AEs by virtue of deeming provisions under section 92A(2)(g). It further observed that assessee-company was merely a licensee of the brandname 'Jockey' for exclusive manufacture and marketing of goods under license agreement and there Page 15 of 61

16 was no participation of JII in the capital and management of the assessee-company. It considered the amendment of section 92(2) and corresponding Memorandum of Finance Bill 2002 which provided that: "It is proposed to amend sub-sec.(2) of the said section to clarify that the mere fact of participation of one enterprise in the management or control or capital of the other enterprise or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprise unless the criteria specified in sub-sec(2) are fulfilled. Accordingly, it held that as per the amendment unless the requirements of sub-sec.(2) were fulfilled, the sub- section (1) could not be applied at all and therefore, in order to constitute relationship of an AE, the parameters laid down in both sub- sections (1) and (2) should be fulfilled. i Since the parameters laid down in sub-section (1) were not fulfilled in the instant case, there was no relationship of AE between assessee-company and JII and therefore, the provisions of chapter X of the Act have no application. Adopting the principle of interpretation that while interpreting the taxing statute, construction shall not be adopted which renders particular provision otiose, it held that the contention of the Revenue [that the two parties were AEs as they satisfied the provision of Section 92(2)] could not be upheld as it would render the sub-section (1) otiose. v. Accordingly, TP addition was deleted. Obulapuram Mining Co. (P.) Ltd. v. DCIT [2016] 76 taxmann.com 240 (Bangalore - Trib.) The Tribunal held that assessee and a Singapore company having a common director were not associated enterprises as the parameters laid down under section 92A(1) and (2) were not satisfied. It held that in order to constitute relationship of an AE, parameters laid down in both sub-sections (1) and (2) of section 92A should be fulfilled for enterprises to be associated as per Section 92A and where the common director did not exercise any control over the AE, the mere fact that the assessee and its AE had one common director alone did not establish the AE relationship under Section 92A(1) despite the fact that the conditions of 92A(2) were fulfilled. V. Methods for determining Arm s Length Price ( ALP ) Comparable Uncontrolled Price Method 8. Where the assessee relied on the quotations by Oil World, an organisation based in Germany to justify the ALP of the purchase of edible oil from it AE, unless the TPO pointed out that quotations of of Oil World, Germany, lacked basis, those quotations were to be considered while determining ALP Page 16 of 61

17 CIT v Adani Wilmar Ltd 363 ITR 338 (Gujarat High Court) AY Facts i. The assesse, Adani Wilmar Ltd, was engaged in the business of manufacturing, refining and trading of edible oil. During AY , the assesse entered into an international transaction with one of its AEs 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 was an independent organization registered in Germany and had nothing to do with the oil prices prevailing in Malaysia. i 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. The Tribunal upheld CIT(A) s order accepting the quotation given by Oil World and deleted TP addition of Rs lakhs. v. Aggrieved, the Revenue filed an appeal before the Hon ble High Court Judgment i. The Court 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. It noted that Rule 10B of the Rules pertained to CUP method while Rule 10D pertains to Information and documents to be kept and maintained under Sec.92D. Further, it held that 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. The Court 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 the Court 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. Page 17 of 61

18 9. Where the assessee had acquired shares of a JV from its AE and immediately sold the shares to Jindal Group, the TPO was justified in applying the CUP method to benchmark the purchase of the said equity shares by adopting the per share purchase price paid by independent third parties and comparing the same with the price paid by the assessee for the purpose of acquiring the said shares. GDF SucTSA Energy India P. Ltd (formerly Tractabel Energy South Asia (P) Ltd) vs. ACIT - TS- 537-ITAT-2016(Bang)-TP - I.T(TP).A No.984/Bang/2010 & I.T(TP).A No.1030/Bang/2010 AY Facts i. The assessee was a 100 % subsidiary of Tractebel S. A., Belgium ( TSA ). Pursuant to a shareholders agreement, TSA and a business group called Jindal Group had floated a joint venture company called Jindal Thermal Power Company Ltd, ( JV ), wherein both parties had 50% equity shares each in the JV. After floating the JV, TSA entered into two agreements for providing engineering assistance and legal and financial assistance to the JV, for which it was to be compensated as per the terms of the agreements. However, due to a dispute vis-à-vis the compensation, TSA initiated arbitration proceedings before the International Chamber of Commerce. Thereafter a settlement was reached between TSA and the Jindal Group, pursuant to which the Jindal group agreed to buy out the shares held by TSA in JV. The assessee was appointed to act as an intermediary for the sale of shares held by TSA for administrative convenience, since, if TSA was to directly sell the shares to concerns in India, then multiple approval from the RBI would be required. Accordingly, the assessee had agreed to purchase the shares held by TSA in per share, which had been justified by way of valuation reports provided by a Chartered Accountant. The transfer of shares had been approved by the RBI. On the very same day that the assessee acquired the shares, it had entered into an agreement to sell the shares to 5 parties 3 from the Jindal Group viz. VSL, GAGAN and SUN and 2 independent banks viz. ICICI and IDBI. i The TPO was of the opinion that the entire transaction of transfer of shares from TSA to the assessee was a composite one, structured to evade tax. According to him, the consideration paid by the assessee to TSA partly consisted of the fee that TSA had to recover from the Jindal Group for providing engineering, legal and financial assistance to JV. He noted that out of the 5 parties who purchased shares from the assessee, ICICI and IDBI, being unrelated parties had purchased the Rs. 10 per share and considering the same as an internal CUP made an adjustment of the excess amount paid by the assessee (Rs Rs. 10 per share) under the transfer pricing provisions. He also held that the approval of the RBI did not imply that the price paid by the assessee was a fair price. Aggrieved, the assessee filed an appeal before the CIT(A) who upheld the order of the TPO. Page 18 of 61

19 Accordingly, the assessee preferred an appeal before the Hon ble Tribunal. Contentions of the assessee i. That the price of Rs. 10 per share at which ICICI and IDBI purchased shares from it was not reflective of the ALP as the Jindal Group was obliged to buy back the shares from ICICI and IDBI after 1-3 years ensuring 16 percent annualised return on investment That in any case, the RBI had approved the share value of Rs per share Judgment i. At the outset, the Tribunal held that the approach of the TPO and CIT(A) in attempting to bifurcate the consideration received by TSA from the assessee into i) the value of equity shares and ii) value of fees forgone was not justified as the same was based on mere surmises. However, it held that the TPO was justified in adopting the price at which ICICI and IDBI (unrelated parties) purchased the impugned shares from the assessee as the ALP and upheld the consequent addition. Noting that there was no embargo placed on the banks preventing from selling the shares to any third parties it dismissed the contention of the assessee that the price adopted by the TPO was incorrect as it did not account for the fact that the Jindal Group was to subsequently purchase the shares ensuring 16 percent annualised return. Resale Price Method 10. In case of distribution or marketing activities when goods were purchased from associated entities and sales were effected to unrelated parties without any further processing, then, Resale price method ( RPM ) was most appropriate method to determine ALP of said transaction CIT v L Oreal India Pvt Ltd 276 CTR 484 (Bombay High Court) AY Facts i. 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. Page 19 of 61

20 The TPO accepted the ALP declared by the assessee in relation to the manufacturing segment which was benchmarked under the Cost Plus Method, but made an addition in respect to the distribution segment. i The assessee used the Resale Price method as the most appropriate method for the distribution segment and had selected comparables distributing FMCG products, but which were not in the same line of business of the assessee i.e. cosmetics. The TPO rejected the RPM and proposed to use the TNMM method on the ground 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 Tribunal 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. v. Aggrieved by the order of the Tribunal, the Revenue appealed to the High Court. Judgment The Court upheld the order of the Tribunal and affirmed that RPM method was one of the standard methods in case of distribution or marketing activities. It relied on the OECD guidelines which states that in case of distribution or marketing activities where goods were purchased from AEs and sold to unrelated parties without further processing, then, RPM method could be adopted. VI. Comparability Inter and Intra Industry ITES Sector 11. Call Centres not functionally comparable with KPO service provider. Supernormal profits indicating functional dissimilarity would require further analysis. Rampgreen Solutions India Pvt Ltd v Commissioner of Income-tax (Delhi High Court) [2015] 60 taxmann.com 355 (Delhi) - AY Facts i. The assessee, a wholly owned subsidiary of vcustomer, USA, was engaged in providing voice-based customer care to its AE s clients falling under the category of Call Center Services in the ITES sector for which it was remunerated on a cost plus basis. To justify the arm s length price of the international transaction, the assessee adopted the Transactional Net Margin Method which was accepted by the TPO. The operating margin of the assessee was percent and the operating margin of the Page 20 of 61

21 comparable companies was percent which was within the acceptable range as provided in second proviso to Section 92C of the Income-tax Act, 1961 ( the Act ). However, the TPO rejected the benchmarking conducted by the assessee and proceeded to determine his own comparable companies selecting 8 companies in total aggregating to a operating margin of percent, including Vishal Information Technology Ltd ( Vishal ) and Eclerx Services Ltd ( Eclerx ). The assessee was of the view that Vishal and Eclerx could not be considered as comparable as they were engaged in the providing KPO services which was functionally not comparable to the Call Centre services it provided. Aggrieved by the order of the TPO, the assessee filed objections before the DRP which accepted certain contentions raised by the assessee but upheld the inclusion of Vishal and Eclerx in spite of functional dissimilarities. i Subsequently, the assessee preferred an appeal before the Tribunal, wherein it was held that both Vishal and Eclerx were engaged in providing ITeS and once it fell within that category then no sub-classification was permissible. The Tribunal held that KPO is a term given to the branch of BPO services where apart from processing of data, knowledge is also applied and therefore upheld the inclusion of the comparable companies. Pursuant to the order of the Tribunal, the assessee preferred an appeal before the Honourable High Court for the exclusion of Vishal and Eclerx Contention of the assessee That even though companies providing KPO services were covered under the broad umbrella of Information Technology Enabled Services, they could not be compared to low end / BPO service providers Judgment The Court noted the nature of services provided by Voice Call Centers were low end in nature and akin to customer support and processing of routine data and that KPO services involved a higher level of skill and knowledge such as analytical services, market research, legal research, and engineering and design services. It also noted that both Voice Call Centers and KPO service providers would be employing IT based delivery systems but the characteristics of services, functional aspects, business environment risks and quality of human resource employed would be materially different. The Honourable High Court emphasized the importance of functional analysis in determining the level of comparability and the fact that adjustments should be made for any material differences between comparables. Accordingly, it held that the view adopted by the Tribunal was contrary to the rationale of determining ALP using comparables and held that treating the entities to be comparable only for the Page 21 of 61