We are pleased to present TransPrice Times for the month of August 2016. In this bulletin, some key issues in Indian litigation have been discussed with regard to intra-group services, pass-through costs and the inherent nature of international transaction. Further, importance has been stressed on taxpayers and tax authorities alike to focus on carrying out transfer pricing audit properly at a grass-root level. We hope you find this newsletter both timely and useful, and we look forward to your feedback and suggestions to improve it further. You can write to us at akshaykenkre@transprice.in

1. TransPrice Times
Edition: August 2016
Contact us: 607A, 7th
Floor, Ecstacy Commercial Complex, City of Joy, JSD Road, Mulund (W), Mumbai –
400 080. Tel: 022-64640494; Mobile: +91 9819245424; email: akshaykenkre@transprice.in
Knorr Bremse India Private
Limited – ITAT – Delhi
Outcome: In favour of taxpayer
Category: Intra-group services
Tax Court upholds taxpayer’s views on professional
consultancy and management support fees paid to
its Associated Enterprise (AE). As per facts, this
expense is paid by taxpayer to employees of AE. It
is understood that the AE had charged only salary
and other related costs of the employees without
any mark-up and treats transaction as
reimbursement of expenses.
Accordingly, tax court rules that although the
expenses incurred are paid directly to employees
of AE, these employees would be considered as
third party in this case where it is difficult to assign
revenue and costs to each employee. Further, Tax
Court upholds transaction as not a related party
payment and proceeds to delete any adjustment.
Lason India Pvt Ltd – ITAT –
Chennai
Outcome: Against taxpayer
Category: Pass-through
Tax Court holds payment for outsourcing data
entry work to domestic subsidiary and other
independent units by taxpayer (Indian) as not pass
through cost while benchmarking transactions
between taxpayer and overseas AE.
The taxpayer receives fixed percentage of mark-up
on pass through cost from overseas AE and argued
‘no nexus’ with actual operating income and
expenses for mere outsourcing payment made to
domestic subsidiary. Further, the taxpayer
includes pass through cost in its profit and loss
account. Accordingly, Tax Court rejects this
contention as payment is made on taxpayer’s
account and not on behalf of the AEs and rules that
such payment cannot be pass through as it is not
from overseas AE to subsidiary of taxpayer.
Sara Lee TTK Ltd – ITAT – Mumbai
Outcome: Against taxpayer
Category: Valid CUP
The Tax Court holds that RBI approval/ FIPB
approval is not conclusive evidence of arm’s length
and cannot be considered to be a valid CUP. It is
clarified that such approvals are meant for
facilitating ‘ease of doing business’ and not related
to determining arm’s length.
Copal Research India Pvt Ltd –
ITAT – Delhi
Outcome: Against taxpayer
Category: Functions, Assets and Risks (FAR)
The Tax Court admonishes the lackadaisical
approach by taxpayer or tax authorities in
conducting fundamental FAR analysis at primary
stages. It is observed that this practise results in a
breakdown at appellate level when challenged.
Accordingly, the Tax Court directs the tax officer to
redo entire FAR analysis properly before selecting
comparables for ITES services provided to AE.
New Delhi Television Ltd – ITAT –
Delhi
Outcome: In favour of taxpayer
Category: International Transaction
Tax Court rules that the expenses incurred by
taxpayer before incorporation of its overseas AE
represents ‘shareholder activity’. It is inferred that
when AE was not in existence, then pre-
incorporation expenses cannot be classified as an
international transaction as per Section 92B of
Income-tax Act 1961.
Further, reference is placed on definition of
shareholder activity in OECD TP Guidelines.
Winergy Drive Systems India Pvt
Ltd – ITAT – Chennai
Outcome: In favour of taxpayer
Category: External Commercial Borrowing (ECB)
Tax Court rejects tax officer’s determination of
interest rate based on ‘unadjusted industrial
average’ as per ‘India’s External Debt Status Report
– 2008’ on loan in Euros from AE.