Vodafone India Services Pvt. Ltd vs. UOI (WRIT PETITION NO.871 OF 2014) (Bombay High Court) dated 10.10.2014 Background: The Petitioner, Vodafone India Services Pvt. Ltd., is a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited. The Petitioner issued 2,89,224 equity shares of a face value of Rs.10/- each at the premium of Rs.8,519/- per share to its holding company. The Fair Market Value for the issue of equity shares was determined by the Petitioner in accordance with the methodology prescribed under the Capital Issues (Control) Act 1947. The Petitioner filed Form 3CEB alongwith return of income wherein the transaction of issuance of equity shares was declared as an International Transaction and also the ALP of the shares so issued, was determined. However, a note was appended to its Form 3-CEB report by the Accountant making it clear that the transaction of issue of equity shares did not affect the income of the Petitioner and was being reported only as a matter of abundant caution. According to the AO and TPO, the Petitioner ought to have valued each equity share at Rs.53,775/- and on that basis shortfall in premium to the extent of Rs.45,256/- per share resulted into total shortfall of Rs.1308.91 crores. The short fall in the value of shares issued by the Petitioner to its holding company was also treated as a deemed loan by the Petitioner to its holding company. This deemed loan was sought to be charged with interest at 13.5% per annum amounting to Rs.88.35 crores. Thus the total amount of Rs.1397,26,37,035/- was treated as transfer pricing adjustment for the FY 2008-09, relevant for the AY 2009-10.
Transfer Pricing
Redington (India) Limited v JCIT (ITA No.513/Mds/2014 dated 07.07.2014) – Chennai ITAT Background: The assessee, M/s. Redington (India) Limited provides end-to-end supply chain solutions for all categories of Information Technology(IT) products. The assessee has a wholly owned subsidiary company M/s. Redington Gulf FZE(‘RGF Gulf’) in Dubai. In 2008, a Private Equity Fund(PE fund)- IVC evinced interest to invest in the overseas operations of the assessee group. The assessee company set up another wholly owned subsidiary company in Mauritius in July, 2008 (‘RIML Mauritius’). The assessee made an initial investment of US$ 25000 equivalent of ` 10.78 lakhs. The said newly set up subsidiary M/s. RIML Mauritius, in turn, set up its own wholly owned subsidiary in Cayman Islands (‘RIHL Cayman’). IVC has infused a sum of US$ 65 millions into M/s. RIHL Cayman for fresh allotment of shares. After the above incorporation exercises, the assessee company transferred its entire shareholding in M/s. RGF Gulf to M/s. RIHL Cayman on 13th November, 2008. The transfer was made without any consideration. Once this transfer of shareholding was made, RGF Gulf became a step down subsidiary of RIML Mauritius and the assessee company. As the shares were transferred without consideration, the assessee company took the stand that it is a gift within the meaning of section 47(iii) and therefore, not chargeable to tax as capital gains. Further, it is also not an international transaction. It stated that in order to come under the purview of an international transaction, the transaction must generate income. The TPO held that the transfer of shares made by the assessee is an international transaction. In computing the value of shares transferred by the assessee, the TPO has adopted the price paid by IVC, the PE fund on allotment of shares in RIHL Cayman, as the comparable. The fresh infusion of funds by M/s. IVC and allotment of shares in M/s. RIHL Cayman, resulted in M/s. IVC, holding a stake of 27.17%. The TPO extrapolated the said shareholding and determined an amount of US$ 174.23 millions, as representing 100% of the value of M/s. RIHL Cayman and on that basis determined the ALP of RGF Gulf shares transferred by the assessee. Accordingly, the TPO determined the ALP of M/s. RGF Gulf shares at Rs 865,40,04,100. The Assessing Officer modified the above gross amount by setting off the indexed cost of acquisition and determined the long term capital gains adjustment at Rs 610,15,75,820. The DRP stated that a gift as generally understood is made out of love and affection by natural persons; that corporate entities cannot make gifts, as the term “gift” in sec.47(iii) is used in conjunction with the word “will”. It directed to give a marginal relief in the capital gains addition proposed against the transfer of shares. They accepted the argument that in view of the buy-back agreement between the Venture capital fund (PE fund) and the assessee, the PE investment was relatively risk-free. Consequently, the DRP agreed that to the extent of the risk premium, the […]
Company gifting shares to a foreign company is exempt u/s 47(iii) and also not an ...
CIT v M/s CUSHMAN AND WAKEFIELD (INDIA) PVT LTD [ITA No.475/2012 dated 23.05.2014] (Delhi HC) Background: The assessee, an Indian company, is engaged in the business of rendering services connected to acquisition, sales and lease of real estate and other services. The assessee reported following transactions under Section 92B: (a) Payment of referral fee of Rs. 1,73,26,631/- by the assessee to several foreign AEs for referring clients, and (b) Payment of Rs. 1,06,39,865/- as reimbursement to CWS (Singapore entity) and CWHK (Hong Kong entity) for costs incurred by them for certain coordination and liaison services in respect of their client, IBM. No benchmarking or a transfer pricing analysis was conducted by the assessee. In this respect, the transfer pricing study submitted by it stated: “A cost sharing agreement is a commercial decision of the company and helps the company liaise with international clients; it helps create a better understanding of client needs and disseminate information of the real estate market in India. The effort of these individuals is not a full marketing effort but provides a liaison and market access basis for the Company. The strong international presence of the Cushman and Wakefield group places it is a better position to identify and engage such a professional in a more cost effective manner than for the Company to do so directly with its own efforts.” In respect of the reimbursement of costs to the AEs, the TPO disallowed deduction of the expenditure. Additionally, the AO disallowed the referral fees as a deductible expenditure, stating that no benefit was derived by the assessee from the referral fees paid to the AEs. The assessee preferred objections before the Dispute Resolution Panel (“DRP”), against both findings. The DRP concurred with the AO, leading to a final assessment order under Section 143(3) read with Section 144C. The assessee then appealed to the ITAT, which held in its favour.
Reimbursement of costs to AE without markup cannot be treated as ALP in the absence ...
Motif India Infotech (P.) Ltd. v ACIT [IT APPEAL NO. 3043 (AHD.) OF 2010 dated 25.03.2014] – Ahmedabad ITAT Background: Assessee is an offshore business process outsourcing service provider whereby it renders data support services. Before the Transfer Pricing Officer (“TPO”), the assessee submitted that Transfer Pricing Laws are not applicable to the assessee as its income was exempt under section 10A. The assessee relied on the decision of the Bangalore Tribunal in the case of Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226. TPO did not accept the contention of the assessee stating that proviso to section 92C clearly provides that no deduction u/s 10A or section 10AA or sec 10B or Chapter VI A shall be allowed in respect of the amount of income by which total income of the assessee is enhanced after computation of ALP. TPO held that The TPO held that the assessee had disclosed its profit derived from the said business at the rate 17.89%, whereas on the basis of some comparable cases TPO determined the same at 34.26%.
Transfer pricing adjustment not required for 10A unit where exempt income declared is lower than ...
Nortel Networks India (P.) Ltd. v Addln CIT [ITA No 4765 (DELHI) OF 2011 & 427 (DELHI) OF 2013 dated 25.02.2014] – Delhi ITAT Background: Assessee entered into a service agreement for the provision of marketing and after sales support services on a cost plus mark-up basis. By this agreement, assessee provides marketing and after sales support services to AEs in relation to sale of telecommunication equipments, software and other IT products to customers in India. The assessee considered TNMM as the most appropriate method and has benchmarked the transaction taking Operating profit/ Operating cost (“OP/OC”) as PLI. TPO though accepted assessee’s TNMM method as appropriate method for the ALP, however reworked the same by applying inapplicable comparables as under: In its transfer pricing analysis, the assessee has considered seven comparable companies, whose average unadjusted margin comes to 11.57%, TPO held two out of seven as not comparable. The Capital Trust Limited was held as not a comparable because of low revenue as and Cyber Media Events Limited because of related party transaction exceeding 25% and having diminishing revenue. DRP upheld TPOs order on the ground that the turnover of the comparable in the relevant segment is Rs. 25 Lakh and cannot be compared with the company whose revenue from business support services is more than Rs. 134 Crores.
TP: Companies with lower turnover can also be considered if they are functionally comparable – ...
ADAPTEC (INDIA) PVT LTD v ACIT (ITA No.1758/Hyd/2012 dated 21/03/2014) – Hyderabad ITAT Background: The asseseee is engaged in the business of software design, development and testing in the areas of high performance storage solutions. The assessee renders software development services to its Associated Enterprise (AE) i.,e., Adaptec Inc, USA. The assessee is registered as 100% EOU under the STPI Scheme. The assessee being a captive service provider to its AE is remunerated on a cost plus mark up basis for the services provided. On the basis of FAR analysis, the assessee categorized it as a risk mitigated contract service provider and selected itself as the tested party. Transactions Net Margin Method (TNMM) was chosen as the most appropriate method for determining ALP. Operating profit/operating cost was selected as the profit hence Indicator (PLI). The assessee conducted search from the database to select comparable companies and finally selected 28 companies as comparables with weighted average arithmetic mean of 14.53%. As the assessee’s net margin from the provision of services to AE at 14.03% was within the arm’s length, no adjustment was made in the TP study. The TPO, though accepted TNMM as the most appropriate method and the PLIOP/OC, he nevertheless rejected the TP study of the assessee by observing that multiple year data was considered while selecting comparables and companies engaged in software development have been treated as comparables irrespective of the verticals/horizontals of software services which has made the comparability analysis defective and unreliable. TPO also applied certain additional filters, one of them being companies having turnover of less than 1 crore were rejected. The TPO finally selected 19 companies as comparables with average margin of 26.20% and after allowing working capital adjustments of 3.58% arrived at the adjusted arithmetic mean PLI of 22.62% and determined the ALP at Rs.19,48,41,447. The TPO treated the shortfall of Rs.1,82,73,532/- as the transfer pricing adjustments u/s 92CA of the Act.
Companies with turnover less than 1 crore and abnormally high turnover to be excluded from ...
Bharti Airtel Limited vs. ACIT (ITAT Delhi) The assessee issued a corporate guarantee to Deutsche Bank on behalf of its associated enterprise, Bharti Airtel (Lanka), whereby it guaranteed repayment for working capital facility. The assessee claimed that since it had not incurred any cost on account of issue of such guarantee, and the guarantee was issued as a part of the shareholder activity, no transfer pricing adjustment could be made. However, the TPO held that as the AE had benefited, the ALP had to be computed on CUP method at a commission income of 2.68% plus a mark-up of 200 bp. This was upheld by the DRP by relying on the retrospective amendment to s. 92B which specifically included guarantees in the definition of “international transaction”. On appeal by the assessee to the Tribunal HELD allowing the appeal:
Corporate guarantee is not an ‘international transaction’ subject to TP provisions – Del ITAT
Maersk Global Centres (India) Pvt. Ltd vs. ACIT (ITAT Mumbai Special Bench) Transfer Pricing: Companies in ITES cannot be classified into low-end BPO services and high-end KPO services for comparability analysis but have to be classified based on the functions performed. Comparables with abnormal profit margins cannot be discarded per se but must be examined to determine whether the high margins are due to normal business conditions or not
TP: Potential comparables cannot be excluded merely on the ground that their profit is abnormally ...
ACIT v Casio India Co P Ltd I.T.A .No.-6135/Del/2012 (Delhi ITAT) Dated 13/12/2013 Background: Assessee is a wholly owned subsidiary of Casio and Computer Company Ltd., Japan (hereinafter called `Casio Japan’). The assessee distributes watches and consumer information products and other related products of Casio Japan, in India. The assessee entered into certain international transactions with Casio Japan which were benchmarked on ‘Transactional Net Margin Method’ (TNMM). On a reference made by the AO, the Transfer Pricing Officer (TPO) noticed that the assessee incurred a certain sum on the Advertising, Marketing & Promotion (AMP) expenses. Out of that, a sum of Rs.2,63,50,982/- was held to be towards developing marketing intangibles for the Associated Enterprise (AE). As against that, only a sum of Rs.1,02,13,645/- was reimbursed by the AE. Adding in mark-up of 14.93% on the differential amount, the TPO proposed adjustment accordingly.