No TP adjustment on imports at lesser value under predatory
pricing policy to capture market.
Facts of the case
Merck Limited ("the Taxpayer") is in pharmaceuticals
During AY 2003-04, the Taxpayer imported certain pigments from
AE and paid technical know/ consultancy fees to AE for availing
During the course of the assessment proceedings for AY 2003-04,
the Transfer Pricing Officer ["TPO"] rejected the
comparables selected by the Taxpayer in its TP study and applied
internal TNMM by considering the margin earned by the Taxpayer from
AEs and non-AEs irrespective of the fact that transactions with
non-AEs were not related to pigments. Therefore, TPO considered
margin of non-AE segment at 16% and proposed the adjustment.
Further, TPO disallowed part of technical fees paid by the
Taxpayer on the grounds that the Taxpayer had actually availed
services in respect of 3 areas instead of all the 12 different
areas which were agreed upon by the Taxpayer with its AE via
agreement. TPO considered NIL value of nine services which were not
availed by the Taxpayer and accordingly, proposed the addition by
rejecting part of technical fees paid.
Aggrieved by the findings of the TPO, the Taxpayer approached
higher appellate authorities and found relief at ITAT. However,
Revenue appealed against ITAT order and approached Bombay High
Court ("HC") to adjudicate the matter.
HC's Adjudication – Import of Pigments
HC observed that the Taxpayer was deliberately following
predatory pricing policy with a view to finish local competition;
hence, import of pigments at a price lesser than ALP is a matter of
HC further observed that bringing the import transaction at ALP
would result in TP adjustment of allowing higher purchase price to
the Taxpayer and thereby reducing income taxable in India, which is
HC therefore ruled in favor of the Taxpayer for international
transaction pertaining to import of pigments.
HC's Adjudication - Payment of technical know-how/
HC upheld the findings of ITAT that AEs were obliged to provide
services in 12 areas, however, there was no obligation upon the
Taxpayer to avail all the services;
While approving ITAT ruling, HC equated Taxpayer's
arrangement as that of a 'retainer arrangement' for
HC held that "the finding of the Tribunal that the
agreement for technical know how/ consultancy was in respect of all
the 12 services and the Taxpayer could avail of all or any one of
these 12 areas listed out in the agreement as and when the need
HC further noted that Revenue had not applied any of the
prescribed method for benchmarking the transaction and also in
respect of 3 areas wherein services were availed, no benchmarking
exercise of similar comparable transactions was carried out by
HC, concluding in favor of the Taxpayer, held that the finding
of the TPO attributing NIL value to nine of the services listed in
the agreement which were not availed of by the Taxpayer in the
present case was not justified.
A clear principle emerging from the above judgment is that, if a
taxpayer has a prior arrangement with its AEs for receipt of set of
services and if one of these services was not received or benefit
of such services was not realized or could not be established by
the taxpayer during audit stage, then the revenue authorities
cannot challenge the same and determine the ALP as nil. Also, the
revenue authorities can neither question such a commercial /
business decision nor can they carry out a benefit test to
demonstrate the ALP. Thus, it's important that the Indian
Revenue provide certain set of guidelines on documentation
requirements for such class of transactions taking cognizance of
what is practical and feasible, which will help the taxpayers to
reduce the overall compliance burden and also reduce litigation
[Source: Merck Limited; TS-608-HC-2016(BOM)-TP]
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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