Expenses incurred by Indian entity for setting up its
overseas subsidiary (pre-incorporation expenses) cannot be
relegated as "international transaction" and shall
consider being a "shareholder activity"
Facts of the case
New Delhi Television Ltd. ("the taxpayer") is engaged
in the business of Television, News Broadcasting to its two
channels namely NDTV 24x7 and NDTV India. During the financial year
2006-07, the taxpayer assisted its overseas subsidiary i.e. NDTV
Net Works Plc. [associated enterprise ("AE")] to set up
its business operations in England. For this purpose, the taxpayer
incurred certain expenditure prior to incorporation of its overseas
subsidiary, as a part of its plan to diversify into various domains
of the media. These expenses were subsequently reimbursed to the
taxpayer at cost by the AE. The taxpayer also rendered certain
management services to its AE post incorporation, towards which the
taxpayer again did not charge any markup.
During the course of transfer pricing ("TP")
assessment, the TP Officer ("TPO") spurned the
taxpayer's contention of treating its activities as
"shareholder activity" and proceeds to benchmark both the
transactions under the head "management services".
Accordingly, he proceeded and made an upward adjustment. At the
appellate proceedings, the Commissioner of Income Tax (Appeals)
upheld the order passed by the TPO to the extent of levying mark-up
on the services rendered post incorporation of the AE.
Aggrieved with the same, both taxpayer and revenue decided to
move to the Income Tax Appellant Tribunal ["the ITAT"/
1. On Pre-Incorporation Expenses
The ITAT, in relation to taxpayer's contention of
considering its expenditure incurred prior to incorporation of its
AE as "shareholder's activity", relied on OECD TP
Guidelines which define the term 'shareholder activity' as
"an activity which is performed by a Member of an MNE
group (usually the parent company or a regional holding
company)solely because of its ownership interest
in one or more other group members i.e. in its capacity as a
The ITAT held that the taxpayer had incurred expenses solely
because of its ownership interest and is different transaction from
the one of provision of managerial services after incorporation.
Thence classifying it as a shareholder activity, the tribunal
upheld the action of taxpayer of not charging any mark-up on
reimbursement of expenses incurred before AE come into
2. On Post-Incorporation Expenses
The ITAT clarified that the expenditure incurred by the taxpayer
before incorporation of its AE cannot be a deciding factor to
determine the arm's length price of international transaction
between the taxpayer and its AE post incorporation. Accordingly,
the ITAT held that the reimbursement of other managerial costs by
the AE to the taxpayer, post its incorporation, is considered to be
the serviced rendered by the taxpayer and thus, should be subjected
to an arm's length mark-up. The Tribunal further observed that
the taxpayer itself has worked out the arm's length margin of
12.29% in its TP report.
The Indian TP regulations do not have any specific guidelines
for identification and treatment of consideration paid/received for
shareholder activity or of any other nature. The instant case,
however, specifically brings out a distinctive feature between
"shareholder activities" & "services provided
under normal course of business" and with additional mark-up
policy in the former case.
Source: New Delhi Television Limited vs. ACIT
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
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.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).