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Transfer Pricing | Goods and Services Tax

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Vishakhapatnam ITAT Validates Assessee's Unsecured NCDs Interest Rate Benchmarking

Arkha Solar Power Private Limited

Nature of issue: Interest on Non-Convertible debentures

Decision summary

Assessee operates in Solar Power generation and issued Rs. 27 Crores Non-Convertible
Debentures (NCDs) to AEs.

Benchmarking of NCDs interest followed CUP method.

To identify similar transactions, assessee made search on BSE, NSDL, CDSL websites.

NCDs were unlisted, unrated, unsecured, redeemable, taxable with a fixed interest rate
of 13% per annum.

The TPO selected comparables with secured debentures or not in Solar Power sector.

The assessee raised objections with Dispute Resolution Panel (DRP).

The DRP dismissed objections, stating NCDs were issued to the controlling entity and
hence whether it is unguaranteed or unsecured it will not make any difference and
thereby dismissed the objections raised by assesse.

TPO failed to apply filter for secured/unsecured and included Wind Sector
comparables.

ITAT, citing precedent judgments, underscored the principle that a higher risk
associated with unsecured loans warrants a commensurately higher interest rate.

ITAT clarified that the relationship between a holding and subsidiary is not a
determinative factor for interest rates in the context of secured or unsecured debt
instruments.

Assessee's plea accepted by ITAT, considering interest rate at arm's length.

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Bangalore ITAT upheld entity level TNMM for benchmarking of Royalty

Toyota Kirloskar Motors Pvt. Ltd.

Nature of issues: Benchmarking of Royalty

Decision summary

The assessee, a private limited company and subsidiary of TMC, is established in India for
the manufacturing and sale of MUVs and passenger cars, holding a license and
technology from TMC.

In the course of manufacturing, the assessee procures various spares/components from its
associated enterprises (AEs) and pays royalty for the technology transferred by TMC.

Assessee has applied TNMM at entity level after aggregating all transactions.

TPO proposed a separate benchmarking for royalty payments, distinct from other
transactions.

Assessee gave detailed reasons as to why royalty is considered as closely linked

transaction and should not be separately benchmarked.

Assessee argued that royalty, being included in the financial statements as part of other
expenses, is considered an operating cost.. Therefore, it is clear that royalty is included as
part of operating cost while computing ALP under TNMM.

Citing the assessee's case for AY 2013-14, the ITAT highlighted the upheld approach by the
coordinate bench, asserting that once net profit margin aligns with the Arm's Length
Price (ALP), all components contributing to net profit are deemed at arm's length.

As a result, ITAT concludes that no separate benchmarking of royalty payment is

necessary.

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Mumbai ITAT Rules NCCRPS Distinct from Equity Financing

Thomas Cook (India) Limited

Nature of issues: Benchmarking of Cost of Finance

Decision summary

The assessee issued 12,50,00,000 Cumulative Redeemable Non-Convertible Preference

Shares (NCCRPS) to AE on 01-12-2015 at ₹10 per share, committing to pay an 8.5% dividend.
The NCCRPS are redeemed at par within three years.

TPO observed that the assessee did not benchmark the transaction in Form 3CEB. The
TPO contended that the NCCRPS should be categorized as quasi-equity, falling under
section 92B(2) and Explanation (i)(c).

The TPO benchmarked the transaction using other method, considering the quoted
market rate of the company’s equity shares of ₹205.45 per share on the date of issuance.
The TPO added the differential amount as receivable in the hands of the assessee.

The TPO treated the receivable amount as a deemed loan, applying an arm’s length
interest rate of 9.945% based on the average borrowing rates from audited financials.

The assessee argued that no income arises from the NCCRPS issuance.

DRP sustained the TPO's view, citing capital financing under Explanation (i)(c) to section
92B, necessitating benchmarking.

ITAT agreed with the TPO that it's an international transaction falling under section 92B,
treated it as quasi-capital, not quasi-equity, and rejected the valuation at ₹205.45 per
share.

ITAT directed benchmarking based on the cost of finance, i.e., the 8.5% dividend, against
the LIBOR rate with adjustments for risk factors, given the AE's investment without
collateral. The ALP should be the difference between the 8.5% dividend and the
benchmarked LIBOR rate.

Ground raised by the assessee is allowed, necessitating the AO/TPO to benchmark and
determine the ALP based on the provided guidance.

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Mumbai ITAT Rules TPO Order Time-Barred Due to Digital Signature Date Discrepancy

Zydus Wellness Products Limited

Nature of issue: Section 92CA

Decision summary

Assessee challenges the validity of the order under Sec. 92CA(3) dated 31/10/2019 by the TPO.

Despite the date mentioned in the title, the order was digitally signed by the TPO on
01/11/2019.

A note in the order clarifies that the date of digital signature is considered the date of the
document.

The TPO was required to pass the order by 31/10/2019 but did so on 01/11/2019, making it
time-barred by one day.

The subsequent final assessment order under Sec. 143(3) dated 30/06/2021 is also argued to
be time-barred.

The department defends the order, stating it was passed within the limitation period but
digitally signed a day later for technical reasons.

ITAT emphasizes that the note in the order clarifies the date of signature as the date of the
order and asserts that an order is incomplete and invalid until signed by the competent
authority.

Since the order was signed on 01/11/2019, it is considered the order's date.

Considering the provisions of Sec. 92CA(3A) r.w.s. 153 and citing the Hon'ble Madras High
Court, ITAT concludes the order is time-barred.

ITAT concludes that the absence of a valid order under Sec. 92CA(3) denies the AO the
extended period under Sec. 153(4), making the final assessment order time-barred.

The appeal is decided in favor of the assessee.

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Delhi ITAT Grants Assessee's Application for New Evidence and allows for fresh search

American Express Services India Ltd

Nature of issue: Rule 29

Decision summary

The Assessee file application for admission of additional evidence under Rule 29 of the
Income-tax (Appellate Tribunal) Rules, 1963.

Assessee claims error in considering comparable companies in 'financial and leasing

services' instead of 'business support services' for AY 2004-05.

Transfer pricing report indicates the assessee's services are in the nature of marketing or
business support, not financial advisory.

In AY 2008-09, the assessee corrected benchmarking to business support services,

followed in AY 2009-10 and 2010-11.

Assessee identifies new comparable companies, submits fresh evidence for AY 2004-05.

DR opposes, citing the late filing of additional evidence after seven years from the appeal
and 17 years from the completion of the financial year 2003-04.

The Tribunal's authority to admit additional evidence, as governed by Rule 29, is

permissible under specific circumstances, including: (i) Tribunal's own requirement, (ii)
inadequate opportunities given by income-tax authorities.

Revenue argues Rule 29 not applicable to negligent, non-cooperative assessee.

Rule 29 permits the admission of additional evidence for 'any other substantial cause,' and
the ITAT held that this rule should be interpreted in conjunction with Section 254(1) of the
Act, which grants the Tribunal wide discretion.

Both assessee and TPO were mistaken on the functional profile, justifying comparables in
'financial and leasing services.'

ITAT set aside the final assessment order, TPO directed to consider fresh evidence for
Section 92C of the Act.

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ITAT Mumbai Upholds Revenue Recognition Policy and Challenges Negative Margin Determination

Varian Medical Systems International India Private Limited

Nature of issue: Margin Computation

Decision summary

The assessee provides after-sales warranty services for equipment sold by its AEs to
customers in India.

The assessee follows a policy of receiving a 5-year advance warranty income, booked in
the "Contract Deferred Revenue" account in the balance sheet.

For the Assessment Year (AY) 2017-18, the assessee received warranty income of INR
1,04,81,976 from the AE, accrued warranty income for the same year amounted to INR
18,11,42,540, transferred from the advance account, and total revenue of INR 19,16,24,516
was recognized in the Profit and Loss Account, forming the basis for computing a margin
of 35.71% for benchmarking.

The TPO recomputed the warranty segment margin, considering only the warranty
income of INR 1,04,81,976 from Form 3CEB.

The exclusion of accrued warranty income in the Profit and Loss Account led to a negative
margin of (-) 92.58% for the segment.

The Dispute Resolution Panel (DRP) upheld the TPO's view, rejecting the assessee's
objections.

The assessee argued that the TPO erred in rejecting its accounting policy and excluding
accrued revenue from margin computation.

The assessee consistently followed the practice of accruing warranty income and
transferring it from the Contract Deferred Revenue account, accepted by tax authorities.

The ITAT, after examining the accounting policy of assessee, held that warranty services
span multiple financial years, and Revenue recognition in any given financial year is the
sum of (a) the revenue received during that year related to the same year and (b) the
revenue received in earlier financial years but applicable to the current financial year.

ITAT concluded that the margin should be computed by considering the entire revenue of
INR 19,16,24,516 under this segment.

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Chennai ITAT treats foreign exchange fluctuation as operating in nature

LS Automotive India Private Limited

Nature of issue: Treatment of forex gain/loss

Decision summary

Assessee excluded forex loss/gain from operating cost, claiming it as non-operating in PLI
computation.

TPO and CIT(A) rejected the argument, stating forex loss/gain related to revenue items
and had a direct link to business activities.

Assessee referred to Rule 10TA(j)(iv) and Safe Harbor Rules, asserting that forex loss/gain is
excluded from operating expenses or income per the Rules.

DR supported TPO and CIT(A), citing a previous Tribunal decision and contending that the
assessee failed to prove application of Safe Harbor Rules.

The ITAT Chennai ruled that the nature of income/expenditure should be considered over
book treatment and emphasized that cherry-picking definitions from Safe Harbor Rules is
invalid unless applied comprehensively.

Additionally, it concluded that forex loss/gain, when derived from trading or revenue
accounts, should be treated as operating, supported by the appellant's past treatment
and the Tribunal's prior decision.

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Mumbai ITAT Deletes Notional Interest on Receivables, Citing Uniform Treatment for AEs and Non-AEs

Strides Pharma Science Limited

Nature of issue: Notional interest on receivables

Decision summary

TPO made adjustment related to interest on delayed realization of export proceeds from
AEs.

Assessee does not charge interest on delayed realization from both Associated Enterprises
(AEs) and Non-AEs.

Assessee submitted that average period of realization of sale proceeds is 29 days, with the
following exceptions:
1. Stride Inc. (AE) : 311 days
2. Co Pharma Ltd (AE) : 58 days
3. Non AE 1 : 398 days
4. Non AE 2: 219 days

No interest charged on delayed payment from either AEs or Non-AEs.

Similar adjustments made by Transfer Pricing Officer (TPO) in previous assessment years
(2011-12, 2013-14, 2014-15) were deleted by the Dispute Resolution Panel (DRP).

Departmental Representative argues that the average realization period from AEs is
significantly longer than from Non-AEs, suggesting a disparity.

ITAT observes that assessee follows a consistent policy of not charging interest on delayed
realization from both AEs and Non-AEs.

Refers to the Indo American Jewellery case, where the Jurisdictional High Court held that
uniformity in not charging interest from AEs and Non-AEs justifies no addition of notional
interest in transfer pricing proceedings.

The ITAT holds in favor of the assessee, allowing the appeal.

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Delhi ITAT Rules in Favor: TP Adjustment for SBLC Commission Deleted

Bhartiya International Limited

Nature of issue: Computation of Arm’s length price

Decision summary

Transfer Pricing Officer (TPO) noted a claim of Rs.68,64,578 for bank charges related to
standby letter of credit by the assessee.

TPO believed the assessee should be compensated at 2.5% by its Associate Enterprises
(AEs) for the risk on the SBLC, as no amount was charged during the expense.

Assessee argued it had already recovered the full charges from the AEs and disputed the
TPO's adjustment.

Assessee contended that no cost was incurred by the company, the guarantee charges
charged by the bank are on market rate and the assessee has also recovered the same at
the rate at which the bank has charged.

The DRP upheld the TPO's action, and a rectification order affirmed the proposed
adjustment of Rs.23,06,351 without clear reasoning.

Assessee brought the case to the Tribunal, claiming errors in the adjustment and
reiterated that no cost was borne, and charges were recovered from AEs.

Assessee referred to a Co-ordinate Bench judgment suggesting a lower adjustment rate

of 0.5% for corporate guarantee, citing the Everest Kento Cylinders Ltd. case.

Tribunal found no justification for the Transfer Pricing Adjustment, considering the
undisputed facts of no cost borne and full recovery of bank commission charges from AEs.

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Bangalore ITAT ruling on RPT filter and treatment of service tax refund as operating in nature

MetricStream Infotech (India) Private Limited

Nature of issue: Application of RPT filter, and nature of service tax refund

Decision summary

Assessee argued for the calculation of RPT (Related Party Transactions) ratio on an
aggregate basis.

Assessee contended if the RPT ratio is not applied on aggregate basis, the whole purpose
of applying RPT filter would be lost because companies having substantial RPT will be
selected.

ITAT directed the Assessing Officer (AO) to calculate the RPT ratio on an aggregate basis,
considering the ratio of RPT income plus RPT expenses by sales across all comparable
companies.

Regarding the treatment of service tax refund:

1. Assessee claimed that service tax refunds for FY 2011-12 to FY 2014-15, written off, formed
part of operating cost.
2. Contended that since cost was considered operating while calculating FY 2017-18
operating margins, the service tax refund should be deemed operating and deducted
from operating costs.
3. Argued that the service tax refund, being an export incentive linked to operations, should
be considered part of operating revenue.
4. Stated that any reversal of expenses previously categorized as "Operating Expenses"
should be treated as "Operating Income."

ITAT ruled that the service tax refund, treated as an export incentive, is operating income.

ITAT directed the TPO/AO to consider the service tax refund as operating income,
excluding any interest portion included, if applicable.

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