India: YKK TP Alert

Last Updated: 11 October 2016
Article by Nangia & Co

Delhi Tribunal estopped Assessing Officer to assume Transfer Pricing Officer's power; Held that the arm's length price determined by the TPO cannot be disregarded by the AO

Facts of the Case

YKK India Private Limited ["the taxpayer"] is engaged in the business of manufacturing zippers and fasteners.  During assessment year ["AY"] 2003-04, the taxpayer had made the following payments to its Associated Enterprises ["AEs"]:

  • Payment to royalty to YKK corporation Japan under a collaboration agreement; and
  • Payment of technical fees to YKK Holdings Asia Pte Ltd ["YKK Asia"].

During the course of assessment proceedings, the Assessing Officer ["the AO"] objected the payment of technical fees to AE and held that since the taxpayer has already paid royalty to its AE, there is no need of such separate payment of technical fees.  On the contrary, the taxpayer submitted that YKK Asia is a support centre for 'production planning and implementation' and the services received by the taxpayer were in the nature of assistance in marketing and procurement, support in research and development activities of the taxpayer, informational technology support services and assistance and support in administrative, secretarial, accounting and finance function.

The Assessing Officer was of the view that since the taxpayer was entitled to receive know how under the royalty agreement, no separate payment for production planning in manufacturing process was warranted. 

On the basis of above, the Assessing Officer concluded that "it was legal duty of the licensor to provide such services for which he was already paid as royalty charges, and therefore, technical fees to its own AE is nothing but a diversion of income and hence, is required to be disallowed" under provisions of section 37(1) of Income-tax Act, 1961 ["the Act"].  Aggrieved, the taxpayer filed an appeal before Commissioner of Appeals ["CIT(A)"] wherein the disallowance made by the AO was partly confirmed.

In view of the above, the taxpayer filed appeal before Income Tax Appellate Tribunal ["the ITAT"/ "the Tribunal"].

The Tribunal's ruling: On determining the arm's length price by the Transfer Pricing Officer

In this regard, the ITAT made following observations:

  • The payments made by the taxpayer to its AE were covered by the international transactions reported by the taxpayer and the TPO had accepted the same to be at arm's length.
  • It cannot be open to the AO to assume the powers of the TPO and hold that these are not arm's length payments. Such a parallel analysis of transactions by the AO and the TPO is not at all contemplated under the Indian TP legislation.
  • AO is not entitled to deal with the matter once he has referred the same for determination of arm's length price to the TPO.
  • Section 92CA(4) of the Act, provides that "On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under subsection (3) by the Transfer Pricing Officer." Thus, it cannot be open to the AO to disregard the arm's length price determined by the TPO.
  • It cannot, therefore, be open for the AO to say that even though transaction value is held to be at arm's length by the TPO, the arm's length price can be reduced on account of actual rendition, or non-rendition, of services.

In view of the above, the Tribunal allowed the taxpayer's appeal and set aside the additions made by AO.

Nangia's Take

The Indian TP provisions empower the TPO to determine arm's length price of a transaction once the matter has been referred to him by the AO. Such determination involves a detailed factual analysis and is not just a theoretical exercise.  Thereafter, while computing the total income, the AO cannot disregard the arm's length price determined by the TPO on the basis of any random assumptions.

Source: Deputy Commissioner Of Income Tax vs YKK India Pvt Ltd (ITA No. 238/Del/16)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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