Key Insights from Landmark Transfer Pricing Decisions by ITAT Pune.

Key Takeaways:

1. Allocation of Expenses

The Hon’ble ITAT held that allocation of other expenses should be based on the gross profit ratio, and salaries of site directors/managers should be allocated on an actual basis.

Depreciation on plant & machinery should not be part of common expenses and needs to be allocated on an actual basis in the respective segment.

2. Custom Duty

The ALP is determined by considering the operating margin to a common base, and it is usually not open to go back to individual items of operating costs for claiming adjustments.

Adjustment on account of custom duty is warranted only if there is a difference in the amount of custom duty paid by the assessee and comparables.

3. Working Capital Adjustment

The working capital adjustment should be provided even in the segmental data if the accurate figures of payables/receivables in the respective segment are provided.

4. Most Appropriate Method

The TPO’s calculation of allocation based on direct cost was upheld as the best suitable basis for allocation of common cost of G&A.

The onus is always on the assessee to file all necessary details before the TPO to prove the allocation.

5. FTS/Royalty

The agreement with the service provider should be carefully examined to determine if the services provided are covered within the definition of royalty as per the relevant DTAA.

6. Intra Group Services

The conclusion arrived at by the TPO becomes erroneous if the AO has held that AE has provided services to the assessee on the same subject.

7. Capacity Utilization

In principle, there can be no hindrance in granting capacity utilization adjustment if all the necessary particulars are made available by the assessee.

8. Corporate & Performance Guarantee

For both corporate guarantee as well as performance guarantee, the ALP should be arrived at by charging a fee at 0.5%, as increased by any expenditure actually incurred by the assessee in furnishing the guarantee.

9. A&M Expenses

The Revenue failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE.

10. DEMPE Expenses

The matter was set aside to the file of the TPO for verification of DEMPE function and the relevant clauses of the agreement.

11. Software Trading Vs Marketing Support Services

The matter was set aside for determination of ALP by upholding the contention of the TPO that the assessee being the reseller is doing only marketing support services.

12. Rule 10B vs Rule 10CA

The ALP should be determined w.r.t. rule 10CA and not as per rule 10B.

13. ITES Comparable Exclusions

Several companies were excluded due to functional differences and lack of segmental information.

14. Loss Claimed in the Revised Return

The claim for loss in the revised return of income was allowed based on relevant judicial decisions.

Synopsis:

In 2013, the Hon’ble Income Tax Appellate Tribunal (ITAT) Pune delivered pivotal decisions that significantly influenced the landscape of transfer pricing. These rulings, spanning cases related to expense allocation, custom duty adjustments, working capital intricacies, and methodological debates, hold profound implications for businesses navigating the complexities of international transactions. This analysis delves into the detailed and nuanced aspects of these landmark decisions, offering insights into the tribunal’s interpretations and emphasizing the importance of precise financial documentation and methodological alignment in the realm of transfer pricing.

Allocation of Expenses

The case of M/s. Ampacet Speciality Products Private Limited, 797/PUN/2022 AY 2014-15, involved an issue of allocation of inadequate/no expenditure under various heads between the manufacturing and trading segments. The Hon’ble ITAT held that the allocation of other expenses should be based on the gross profit (GP) ratio rather than the sales ratio, and that certain expenses such as salaries of site Directors/Managers and depreciation on plant & machinery should be allocated on an actual basis rather than as part of common expenses. This decision underscores the importance of accurate expense allocation to ensure a fair and accurate representation of segment-wise profitability.

Custom Duty

In the case of M/s. Ampacet Speciality Products Private Limited, 797/PUN/2022 AY 2014-15, the TPO made an adjustment on the rate of custom duty. The Hon’ble ITAT emphasized that under the Transactional Net Margin Method (TNMM), adjustments are warranted only if there is a difference between the rate of custom duty paid by the assessee and comparables, not just the amount of custom duty. This decision highlights the need for a thorough understanding of the impact of custom duty on operating margin and the criteria for making adjustments under the TNMM.

Working Capital Adjustment

The case of M/s. Ampacet Speciality Products Private Limited, 797/PUN/2022 AY 2014-15, involved the calculation of the working capital adjustment on a segmental basis. The Hon’ble ITAT emphasized the need for accurate substantiation of figures related to receivables, payables, and inventories in respective segments to support the working capital adjustment. This decision underscores the importance of providing accurate and verifiable data to support working capital adjustments.

Most Appropriate Method

In the case of Persistent Systems Limited 692/PUN/2022 AY 2018-19, the issue revolved around the allocation of common costs using different bases. The TPO and the Hon’ble ITAT debated the most appropriate basis for allocating common costs, with the TPO favoring the direct cost basis and the assessee suggesting allocation on a ‘per person’ basis. The Hon’ble ITAT agreed with the TPO, emphasizing the onus on the assessee to provide all necessary details to support the allocation method. This decision highlights the importance of providing comprehensive and accurate details to support the selection of the most appropriate method for cost allocation.

Intra Group Services

The case of Benteler Automotive India Private Limited 670/PUN/2022 AY 2018-19 involved the payment of management services to an associated enterprise (AE). The TPO held that no chargeable intra group services were received by the assessee from its AE, resulting in an ALP of Rs. Nil. However, the AO in a subsequent order held that the AE had indeed provided these services. The Hon’ble ITAT emphasized the need for consistency in findings and conclusions, highlighting the importance of clear and consistent assessments of intra group services.

ITeS Comparable Exclusions

In several cases, the Hon’ble ITAT Pune excluded certain companies from the list of comparables due to functional differences, extraordinary events, lack of segmental information, or non-comparability with the functions of the assessee. These decisions underscore the importance of functional comparability and the need for clear and relevant segmental information to support the selection of comparables.

Conclusion

The Hon’ble ITAT Pune’s decisions in 2013 provide nuanced insights into transfer pricing matters, emphasizing the need for meticulous allocation, accurate data, appropriate method selection, and a thorough understanding of functional comparability. These rulings set crucial precedents for future transfer pricing assessments, highlighting the importance of precise financial documentation and methodological alignment in the realm of transfer pricing.

FAQ

Q1: What are the key considerations for expense allocation in transfer pricing?

A1: The allocation of expenses should be based on appropriate ratios and actual basis, and the onus is on the assessee to provide all necessary details to prove the allocation.

Q2: How are custom duty adjustments handled in transfer pricing?

A2: Adjustments on account of custom duty are warranted only if there is a difference in the amount of custom duty paid by the assessee and comparables.

Q3: What is the significance of the most appropriate method in transfer pricing?

A3: The most appropriate method should be carefully selected, and the onus is on the assessee to provide all necessary details to prove the allocation.

Q4: How are FTS/Royalty transactions evaluated in transfer pricing?

A4: The agreement with the service provider should be carefully examined to determine if the services provided are covered within the definition of royalty as per the relevant DTAA.

Q5: What are the key considerations for intra-group services in transfer pricing?

A5: The conclusion arrived at by the TPO becomes erroneous if the AO has held that AE has provided services to the assessee on the same subject.

Q6: How are capacity utilization adjustments handled in transfer pricing?

A6: In principle, there can be no hindrance in granting capacity utilization adjustment if all the necessary particulars are made available by the assessee.

Q7: What are the key considerations for corporate & performance guarantee in transfer pricing?

A7: For both corporate guarantee as well as performance guarantee, the ALP should be arrived at by charging a fee at 0.5%, as increased by any expenditure actually incurred by the assessee in furnishing the guarantee.

Q8: How are A&M expenses evaluated in transfer pricing?

A8: The Revenue failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE.

Q9: What are the key considerations for DEMPE expenses in transfer pricing?

A9: The matter was set aside to the file of the TPO for verification of DEMPE function and the relevant clauses of the agreement.

Q10: How are ITES comparables evaluated in transfer pricing?

A10: Several companies were excluded due to functional differences and lack of segmental information.

Q11: How are loss claims in the revised return handled in transfer pricing?A11: The claim for loss in the revised return of income was allowed based on relevant judicial decisions.