Dear Readers, We are pleased to present TransPrice Times for the first fortnight of July 2016. In this bulletin, some key issues in Indian litigation have been discussed with regard to nature of foreign exchange fluctuations, selection of tested party for carrying out transfer pricing audit and method of benchmarking royalty transactions. Meanwhile on the international taxation front, OECD is keeping MNCs on its toes by releasing various discussion drafts on the work recommended under Action 4 (limiting interest deductions) and Action 7 (Preventing Artificial Avoidance of Permanent Establishment Status). 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 Happy Reading!!!

1. TransPrice Times
Edition: 1st
– 15th
July 2016
Contact us: 607A, 7th
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Fiserv India Pvt Ltd – HC – Delhi
Outcome: In favour taxpayer
Category: Foreign exchange fluctuations
Hon’ble High Court rejects Revenue’s questioning
on treatment of foreign exchange fluctuation as
operating income/ expenses. Further, upholds
taxpayer’s views with regard to inapplicability of
Safe Harbour to consider exchange
fluctuations as non-operating in year under
assessment. It is clarified that safe harbour rules
will be applicable prospectively and not apply for
the year in question where the rules were not in
existence.
GE Money Financial Services Pvt
Ltd – ITAT - Delhi
Outcome: Against taxpayer
Category: Selection of Tested party
Tax Court rejects taxpayer’s selection of its foreign
AE as tested party on the ground that comparison
of profits realised between Indian and foreign AE
entity cannot hold good in law for benchmarking
intra-group services. Additionally, it is held that the
argument of least-complex entity cannot be valid
for adopting foreign entity as tested party unless
there is an evidence proving the same.
Daksh Business Process Services
Pvt Ltd – ITAT – Delhi
Outcome: In favour taxpayer
Category: Royalty transaction
Tax Court rules in favour of taxpayer with regard to
selection of Transactional Net Margin Method
(TNMM) as the most appropriate method for
royalty payment. Further, reliance was placed on
the Cadbury India Ltd ruling [TS-314-ITAT-
2013(Mum)-TP] where TNMM was applied for
benchmarking royalty and rejects Department’s
adoption of Comparable Uncontrolled Price (CUP)
method due to lack of relevant information.
Abott Medical Optics Private
Limited – ITAT – Bangalore
Outcome: Against taxpayer
Category: Royalty transaction
Tax Court rules in favour of revenue with regard to
adoption of TNMM over Resale Price Method
(RPM) for trading activity carried out by taxpayer.
It is considered for RPM to hold true, trading
activity of taxpayer and comparables must be
similar. Additionally, taxpayer incurs huge
expenditure on sales, distribution and sales
promotion for goods imported from AE thus
rendering taxpayer’s business model to be
functionally dissimilar from the comparables.
Recent News:
OECD releases discussion draft on
Group Ratio Rule
OECD invites public comments in its discussion
draft on BEPS Action Plan 4 (limiting interest
deductions) recommending design and operation
of a ‘fixed ratio rule’. A fixed ratio rule restricts an
entity’s net interest deductions to a fixed
percentage of its EBITDA. For the purposes of
this rule following approaches are considered:
 to calculate group’s net third party interest
expense;
 to define group-EBITDA and;
 to address the impact of losses on the
operation of the group ratio rule
OECD releases discussion draft on
PE-profit attribution & revised
guidance on profit-splits
OECD expands on guidance provided in BEPS
Action Plan 7 (Preventing the Artificial Avoidance
of Permanent Establishment Status) with regard to
attribution of profits of the following:
 Dependent agent PE
 Fixed place warehouses
Further, revised guidance on profit-splits is
provided to bring clarity in respect of global value
chains by adopting two approaches of splitting
profits: actual profits and anticipated profits.