Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Tribunal holds that selection of the foreign AE as tested party lacks
statutory sanction
March 14, 2019
In brief
Recently, the Pune bench of the Income-tax Appellate Tribunal (Tribunal) held1 that there is no statutory sanction in Indian law for selection of foreign associated enterprises (AEs) as the tested party.
Considering contrary decisions laid down, apparently the opinion of different benches of the Tribunal is divided on selection of “foreign tested party”. Contrary to the subject ruling, various judgements have been concluded in favour of selecting foreign tested party. Considering the litigation scenario, taxpayers may have to wait for certainty on the use of foreign tested party, until the litigation reaches finality.
In detail
Facts
The taxpayer2 entered into an agreement with AEs for availing Finance, Human Resource, Legal, IT, Business
Development, Marketing, Quality control, supply chain management, etc., having different mark-up on cost as a charge for each service.
The taxpayer, in its TP documentation, considered foreign AEs as the tested party, adopted the cost plus method (CPM) as the most appropriate method and determined the international transaction to be at arm’s length.
1 ITA No. 1260/PUNE/2018 and 1308/PUNE/2018
2 This tax insight covers one of the grounds raised before the Tribunal.
The Transfer Pricing Officer (TPO) rejected the approach, and in the absence of receipt of services determined Arm’s Length Price (ALP) at NIL.
The Commissioner Income-tax (Appeal) upheld the TPO’s adjustment stating that the taxpayer could not prove conclusively that the services were availed from the AEs.
Issue before the Tribunal Can the foreign AE be considered as the tested party?
Tribunal’s ruling While discussing the
application of the provisions under Chapter X, the
Tribunal:
Noted that section 92(1) of the Income-tax Act, 1961 (Act) applies to the income from an
enterprise with regard to an international
transaction, which is chargeable to tax under the Act.
Discussed the application mechanism of
Transactional Net Margin Method (TNMM) and stated that “the net profit margin realised by the enterprise from an international
transaction entered into with an AE is computed which is then compared with the net profit margin realised by an unrelated enterprise.”
Tax Insights
2 pwc
Further while explaining the modus operandi of
determining ALP under TNMM the Tribunal stated that “the profit realised by the taxpayer is determined, which is then compared with the rate of profit of the comparable cases so as to ascertain the arm’s length.”
Opined that it failed to
comprehend the use of foreign AE as the tested party by stating that the profits of the Indian taxpayer is sought to be ensured for ALP
determination.
Accordingly, with its analysis of Chapter X of the Act and
corresponding rules, the Tribunal held that the selection of foreign tested party does not have statutory sanction3.
The takeaways
Contrary to this ruling, decisions in cases of Development
3Relied in the case of Onward Technology Limited v. DCIT [2013] 36 CCH 46 (Mumbai) and Aurionpro
Consultants (P) Limited, Ranbaxy Laboratories Limited, General Motors India Private Limited, Royal Canin India Private Limited, Landis Gyr Limited, Global Vantedge Private Limited, Moserbaer India Limited, and very recently, IDS Infotech Limited, have concluded in favour of selection of the foreign tested party. Many of these decisions favouring the selection of the foreign AE as a tested party have discussed and relied upon India’s position, as per the Country Chapter (India) of the United Nation’s Transfer Pricing Manual which
categorically states that foreign tested parties are acceptable.
Separately, the OECD guidelines prescribe that the selection of tested party should be consistent with the Function Assets and Risk analysis. It should be one to which the transfer pricing method can be applied in the most
reliable manner and for which
Solutions Limited v. ACIT [2013] 27 ITR 276 (Mumbai ITAT)
most reliable comparable can be found, i.e., it will most often be the one with the less complex functional analysis.
Considering contrary decisions laid down, apparently the opinion of different benches of the
Tribunal is divided on selection of
“foreign tested party. Ostensibly, the terms “taxpayer” and
“enterprise” have been interchangeably used in this ruling. Further, there is no indication in this ruling that the term “enterprise” as defined under the Act has been specifically examined.
Considering the current scenario, taxpayers may have to wait for certainty on the use of foreign tested party, until the litigation reaches finality.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
For private circulation only
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2019 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with over 250,000 people who are committed to delivering quality in assurance, advisory and tax services.
Find out more and tell us what matters to you by visiting us at www.pwc.com.
In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India’s service offerings, visit www.pwc.in
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
© 2019 PwC. All rights reserved
Follow us on:
Our Offices
Ahmedabad Bengaluru Chennai
1701, 17th Floor, Shapath V, Opp. Karnavati Club, S G Highway,
Ahmedabad – 380051 Gujarat
+91-79 3091 7000
6th Floor
Millenia Tower ‘D’
1 & 2, Murphy Road, Ulsoor, Bengaluru – 560 008 Karnataka
+91-80 4079 7000
8th Floor
Prestige Palladium Bayan 129-140 Greams Road Chennai – 600 006 Tamil Nadu
+91 44 4228 5000
Hyderabad Kolkata Mumbai
Plot no. 77/A, 8-2-624/A/1, 4th Floor, Road No. 10, Banjara Hills, Hyderabad – 500034
Telangana
+91-40 44246000
56 & 57, Block DN.
Ground Floor, A- Wing Sector - V, Salt Lake Kolkata – 700 091 West Bengal
+91-033 2357 9101/
4400 1111
PwC House Plot No. 18A,
Guru Nanak Road(Station Road), Bandra (West), Mumbai - 400 050 Maharashtra
+91-22 6689 1000
Gurgaon Pune For more information
Building No. 10, Tower - C 17th & 18th Floor,
DLF Cyber City, Gurgaon – 122002 Haryana
+91-124 330 6000
7th Floor, Tower A - Wing 1, Business Bay, Airport Road, Yerwada, Pune – 411 006 Maharashtra
+91-20 4100 4444
Contact us at
