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© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Income-tax Appellate Tribunal rejects the TPO’s approach of using a PSM for agency services; the taxpayer assumed minimal risk, performed limited functions

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The Delhi Bench of the Income-tax Appellate Tribunal in the case of Marubeni Corporation, Japan (the taxpayer) has confirmed the taxpayer being involved in performing low-end mediation services assuming minimal risk, and set aside a transfer pricing adjustment of INR301.4 million.

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Income-tax Appellate Tribunal rejects the TPO’s approach of using a PSM for agency services; the taxpayer assumed minimal risk, performed limited functions

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Rejects the TPO’s approach of using a PSM for agency services; the taxpayer assumed minimal risk, performed limited functions 9 June 2014 B Background The Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Marubeni Corporation, Japan 1 (the taxpayer) has confirmed the taxpayer being involved in performing low-end mediation services assuming minimal risk, and set aside a Transfer Pricing (TP) adjustment of INR301.4 million. Facts of the case  The taxpayer is a wholly owned subsidiary of the Marubeni Corporation, Japan (MCJ). The taxpayer’s operations primarily consist of agency services on behalf of MCJ and other Marubeni group companies. The taxpayer liaisons between various business departments of the Marubeni group companies and their suppliers/customers in India. _______________ 1 Marubeni Corporation, Japan (ITA No: 5397/Del/2012) – Taxsutra.com  In the Assessment Year (AY) 2008-09, the taxpayer entered into five international transactions. The taxpayer selected the Transactional Net Margin Method (TNMM) with operating profit/operating cost as the Profit Level Indicator (PLI). The taxpayer’s margin was 16.87 per cent in respect of its international transactions, as against 13.81 per cent for comparables on the basis of multiple years’ data. On this basis, the taxpayer claimed that its international transactions were at arm’s length.  There was no dispute on four transactions, however, the international transaction in the nature of ‘Provision of Agency and Marketing Support Services’, was challenged by the Assessing Officer (AO)/Transfer Pricing Officer (TPO). The TPO contended that the taxpayer provides some vital services to its Associated Enterprises (AEs) which formed the backbone of the sourcing services performed in India.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. TPO’s contentions  The TPO contended that apart from routine sourcing activities, the taxpayer was making sizeable investments in exploring and analysing the Indian market.  It further claimed that the taxpayer arranged feasibility studies, industry analysis and project evaluation for potential projects identified by the AEs. Additionally, the taxpayer was also helping its AEs in taking conscious sale and purchase decisions.  The TPO held that the taxpayer developed several unique intangibles which gave advantage to its AEs, though the development and usage cost was not taken into consideration in receiving compensation.  Against such a backdrop, the TPO held that the taxpayer was not adequately compensated by its AEs and the Profit Split Method (PSM) was required to be applied for determining the arm’s length price (ALP) of the international transactions under this segment.  In reaching this conclusion, the TPO mainly relied on the Tribunal ruling of Li & Fung 2 . Based thereon, the taxpayer was required to be compensated in the total profits on the Freight On Board (FOB) value of the goods transacted by foreign AEs, in the ratio of 70:30, in favour of the taxpayer, and arrived at a value of INR301.4 million as a share in profits.  Alternatively, the TPO adopted TNMM by treating the taxpayer as a commission agent and arrived at a set of nine comparables and arrived at a mean margin of profit at 42.13 per cent on cost. There was no clarity on the composition of the set and later the TPO dropped this approach and relied on the PSM approach. The Dispute Resolution Panel (DRP) upheld the TPO’s order. Taxpayer’s contentions  The taxpayer has placed some material on record stating that it did not carry out any feasibility study or any other kind of value-added services for its AEs. Its primary service was to act as a mediator.  The AEs and vendors were responsible for extensive activities like contracting, pricing, sourcing, procuring, inventory management, marketing, quality, etc., while the taxpayer's activities were limited to the supply of market information, liaising with vendors and co- ordination. ______________ 2 Li & Fung (India) Pvt. Ltd. v. DCIT (2012) 143 TTJ 201(Del)  The taxpayer was adequately compensated with a fixed fee for such activity. Observations of the Tribunal  The Tribunal stressed that due importance should have been given to the transactions structure of the taxpayer’s business as per the chart/table provided by the taxpayer, which was also submitted before the TPO. For each transaction, the taxpayer’s risk was minimal with least capital employed.  The TPO failed to consider this information and the risk analysis provided by the taxpayer. Further, the TPO’s claim of the taxpayer’s involvement in carrying out feasibility studies, etc. could only be linked to non-AEs. Other contentions of the TPO also could not be justified due to lack of supporting evidence.  The Tribunal also stated that the TPO was deeply influenced by the Li & Fung ruling, which was set aside by the Delhi High Court, without considering the functional and remuneration differences in the two cases. In the present case, the taxpayer followed a different compensation model with a fixed fee for rendering market support service and commission on purchase/sale transactions; unlike a cost-plus basis in the reference drawn.  Further, the tax department also relied on the Mitsubishi ruling 3 , without noting that there was transfer of titles in that case, whereas there was no such transfer, thereby impacting risk profiles, in the present case. Tribunal’s ruling  The Tribunal stated that the contentions made by the TPO; the taxpayer assuming substantial risks, doing critical functions for its AEs, and allowing the use of its highly-valued intangibles to such AEs are all in air without any bedrock. There was absolutely no evidence to support the findings.  As the TPO could not provide any evidence of the taxpayer assuming high level of risks or creating unique intangibles, a PSM could no longer be adopted. _____________ 3 Mitsubishi Corporation India Pvt. Ltd. v. ACIT (ITA 5147/Del/2010)
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The TPO initially denied the taxpayer’s TNMM benchmarking study and carried out its own study but did not disclose anything about the same. Hence, this issue was restored to the AO/TPO for arriving at the ALP afresh, and assured reasonable opportunity for the taxpayer being heard. It however found strength in the TPO’s claim of denying use of multiple year data. Our comments The Tribunal has dismissed the TPO’s contentions of the taxpayer carrying out crucial functions and significant risks, due to the lack of supporting evidence and set aside a TP adjustment of INR301.4 million. It has also stated the TPO’s findings to be whimsical and contrary to the facts. This is a welcome decision by the Delhi Tribunal as it has analysed the functions and risks of the taxpayer and confirmed that it acts as a service provider with minimal risks, and rejected the TPO’s stand of using a PSM for marketing services/agency services.
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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