India: Transfer Pricing 360º – November 2018

Last Updated: 19 December 2018
Article by SKP  

Transfer pricing litigation environment in India has been evolving over a period of time. In recent past, Indian courts have provided judgment on complex Transfer Pricing related issues involving of Intangible related transactions. At the same time, it continues to provide useful guidance on fundamentals of transfer pricing laws in India. In this issue, we have covered one of the recent Tax Tribunal judgment on application of Comparable Uncontrolled Price Method considering the data / quotations published on Internet / stock exchange. The ruling suggest that only a reliable and authentic quotations having similar physical features of products, contractual terms, similar timing/ terms of delivery, etc can be considered as a valid comparable uncontrolled price. The key take away from this ruling is that, multinational companies are advised to give robust attention during the stages of transfer pricing documentation preparation in order to factor all such important guidelines.

In this edition, under the India Updates, we bring you the guidance note released by CBDT, (apex Tax body in India) providing recommendations to tax authorities on how to deal with specified five types of rulings received from outside jurisdictions having regard to guidelines provided in BEPS Action 5.

The Global Developments section covers key transfer pricing related developments in Australia, wherein draft guidelines have been issued for inbound distribution arrangement. The edition also covers, updates to Bulgaria and Egypt transfer pricing documentation requirement.

We hope you find this newsletter useful.


A. Judicial Pronouncements

Suzuki Motorcycles India Private Limited1- Bright Line Test unsustainable for arm's length determination

Facts of the case

The taxpayer is a subsidiary of Suzuki Motorcycles Co., Japan Associated Enterprise (AE) and engaged in the business of manufacturing motorcycles. AE is responsible for core marketing, and it also has granted rights to the taxpayer to use its trademarks and brands. Further, the taxpayer has incurred certain Advertising, Marketing and Promotion expenses (AMP) for its business operations.

Approach of the tax authorities

The Transfer Pricing Officer (TPO) has considered the incurring of AMP expenses as an international transaction on the grounds that AMP expenses incurred by a taxpayer created marketing intangibles for AE in India and the taxpayer is required to be compensated for the same. The TPO made an adjustment using Bright Line Test (BLT) wherein it compared the AMP expenses to sales ratio of taxpayer vis-a-vis that of comparable companies. The Dispute Resolution Panel (DRP) upheld the adjustment.

The Ruling of the Income Tax Appellate Tribunal (ITAT)

The ITAT deleted the above TP adjustment relying on Hon'ble Delhi High Court ruling in case of Maruti Suzuki India Ltd (being a manufacturing entity) (CIT 2016 381 ITR 117 Del) which stated as below:

  • Application of BLT has no legal mandate and considering the excess of AMP expenses incurred beyond BLT as an international transaction is not warranted
  • Such incurring of expenses cannot be an international transaction in the absence of any material on record or any agreement/ arrangement with AE authorizing the taxpayer to incur such expenditure
  • The mere use of brand name of AE cannot lead to a conclusion that any AMP expenses incurred by the taxpayer are for the benefit of AE

Further, since the AMP issue is pending for disposal before the Supreme Court for numerous other taxpayers, the matter is to be kept in abeyance until the decision is given by Supreme Court. Thus, ITAT has set aside the matter and restored to Assessing Officer (AO) until ruling is given by the Supreme Court.

No penalty u/s 271G for non maintenance of segmental accounts for diamond jewellers - Interjewel Pvt Ltd2, Kiran Gems Private Limited3, Karp Impex Private Limited4 and Firestone International Private Limited5

Facts of the case

The taxpayers are engaged in the business of cutting and polishing of rough and polished diamonds. The taxpayers have benchmarked their international transactions using external Transactional Net Margin Method (TNMM).

Approach of the tax authorities

The TPO requested the taxpayer to furnish segmental profitability earned from Associated Enterprise (AE) vis-à-vis Non-AE. The taxpayer attempted to segregate segment wise amounts of sales and purchases and expenses and submitted these details to the TPO. The TPO further asked the basis of segmental profitability which the taxpayer could not submit on account of non-possibility of maintaining the same on account of the peculiar nature of business of the taxpayer. The TPO/Assessing Officer (AO) initiated the penalty proceedings and levied penalty under section 271G for non-maintenance and non-furnishing of documents as required under law.

The appellate authorities both Commissioner of Income-tax (Appeals) [CIT(A)], as well as Income Tax Appellate Tribunal (ITAT), deleted the penalty levied by the TPO / AO on account of following grounds:

The TPO failed to consider the peculiar business and products of taxpayers where no two diamonds can be compared and thus, maintaining detailed segmental profitability from AE and Non-AE is not possible. It is also not possible to identify which rough diamond got converted into a polished one, and out of which lot of diamonds was it picked up from.

Further, TPO did not perform alternative benchmarking analysis to determine arm's length price.

ITAT has accepted the reliance placed by the assessee on rulings of ACIT vs. Dilipkumar V. Lakhi (ITA No 2142/ Mum/2017) and ACIT vs. Navinchandra Exports Private Limited (ITA No 6304/Mum/2016) where a similar decision was upheld.

JSL Limited (Now known as Jindal Stainless Ltd)6- Market quotations from internet an "unreliable CUP"; average prices can be used for CUP if transactions are inter-linked

Facts of the case

The taxpayer is engaged in the business of manufacturing stainless steel. The taxpayer has entered into the transaction of export of goods with its AE based in Indonesia. This transaction is benchmarked using Comparable Uncontrolled Price (CUP) method. For the purpose of CUP analysis, sale transactions of Taxpayer with the Associated enterprises can be broadly categorized as under:

Approach of the Taxpayer Approach of the tax authorities
Category I - Internal CUP
Taxpayer sold same goods to AE as well as third parties. For the purpose of CUP analysis, the taxpayer compared monthly average sale price to AE with the corresponding monthly average sale price to third parties since transactions were inter-linked TPO benchmarked the transaction by rejecting monthly average prices and considering comparable price on same dates or nearest dates.
Category II - Adjusted Internal CUP
For the purpose of CUP analysis, the Taxpayer compared sale price to AE with sale price to third parties in previous years.

The sale price to third party was adjusted for fall in the Nickel prices to the date of the transaction. Also, the Taxpayer discounted the comparable prices to the extent of 5% towards bulk discount adjustment.

The adjustment was computed basis the average price of Nickel for same period, available on 'London Metal Exchange'.
The TPO rejected the manner of adjustment proposed by the taxpayer in the comparable prices, especially, monthly 'average' price and the ad-hoc bulk discount of 5%.
Category III - External CUP
For the purpose of external CUP analysis, Taxpayer compared the sale price to AE with Chinese market quotations available on internet Chinese market quotations were rejected on following reasoning:
  • Differences in geography, quality of products manufactured by Chinese manufacturers and the taxpayer
  • Actual data is required to perform a CUP analysis
  • Reliable and authentic quotations are required for CUP analysis, and quotations downloaded from the internet cannot be considered as reliable
  • Similarity in physical features, quality, contractual terms, volumes traded, timing and terms of delivery, etc., are to be considered
Finally, the TPO considered adjusted domestic sale price of Taxpayer to unrelated parties as CUP for benchmarking this Category of transaction. The TPO adjusted the domestic sale price to factor export license benefits, customs duty, freight etc.

Ruling of the ITAT

As regards Category I transactions, the ITAT remanded back the matter to the file of TPO to assess if all transactions in a month are interlinked, so as to adopt monthly average prices.

Similarly, as regards Category II transactions, the ITAT has remanded the matter back to the file of TPO to ascertain Nickel component in the product, prices of Nickel on London Exchange, etc. to verify the comparability analysis. Further, the ITAT also rejected the ad-hoc 5% bulk discount adjustment as the Taxpayer was not able to produce any documentary evidences.

Lastly, as regards Category III transactions, the ITAT upheld the approach of the tax authorities in rejecting the Chinese market quotations as CUP.

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1. ITA No. 476/Del./2015, AY 2010-11

2. ITA No. 5628/ Mum/ 2016, AY 2011-12

3. ITA No. 5626/ Mum/ 2016, AY 2011-12

4. ITA No. 5627/ Mum/ 2016, AY 2011-12

5. ITA No. 5304/ Mum/ 2016, AY 2011-12

6. ITA No 4249 / Del/2012, 4110/Del/2013 & 6337/ Del/2013

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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