Transfer Pricing News

published on 31 January 2023 I reading time approx. 3 minutes

​Important Judicial Rulings on Transfer Pricing Matters

1. Hon’ble Ahmedabad Tax Tribunal upholds application of Internal Comparable Uncontrolled Price (‘CUP’) Method for benchmarking of international transaction pertaining to ‘payment of royalty’, as against adoption of External CUP Method by the revenue authorities

As per the facts of the ruling in the case of General Motors India Pvt Ltd [ITA No 1294/Ahd/2015], the taxpayer paid royalty at the rate of 5 percent of its net sales to its associated enterprises (‘AE’), for transfer of technology for assembly of entire vehicle. Additionally, the AE of the taxpayer also had a similar technology arrangement with a third party, wherein the royalty rate payable to the AE was equal to 5 per cent of net sales. Considering the existence of an internal third-party agreement, the taxpayer adopted the Internal CUP method to benchmark the said international transaction.

However, during the assessment proceedings, the tax officer rejected the application of Internal CUP method and conducted its own external search for comparable royalty agreements from the relevant database, wherein he determined the arm’s length royalty rate to be 3 per cent and proceeded to make a transfer pricing adjustment for the difference in royalty rates.

As the matter came up before the Ahmedabad Bench of Income Tax Appellate Tribunal (‘ITAT’), the ITAT ruled that the nature of technology transferred to the taxpayer and technology transferred under Internal CUP are comparable i.e., both involve transfer of technology for assembly of entire vehicle. On the other hand, the agreements selected by the tax officer under external CUP involve transfer of technology for the manufacturing of single component, and hence not comparable. 

Thus, in essence the ruling recognises the preference that is given to internal comparable transaction vis-a-vis external comparable, along with acceptance of benchmarking analysis of royalty related transactions under CUP method.

2. Hon’ble Bangalore Tax Tribunal accepts benchmarking of international transaction pertaining to ‘payment of royalty’ under CUP Method

In In another ruling on the issue of payment royalty by the taxpayer to its AE, the Bangalore ITAT in the case of Praxair India Private Limited [IT(TP)A No. 200/Bang/2021] relied on its earlier judgements in the case of the said taxpayer and accepted the arm’s length price of payment of royalty of 4 percent to its AE, which was based on application of external CUP method.

As per facts of the said case, the taxpayer had primarily aggregated the transaction of payment of royalty and certain other international transactions under Transactional Net Margin Method (‘TNMM’). In addition to the above, the taxpayer had also undertaken a separate supplementary benchmarking study using CUP method to justify the arm’s length nature of the transaction for royalty.

However, during the assessment proceedings, the tax officer rejected aggregation approach of the taxpayer under TNMM and arrived at an arm’s length royalty rate of 1 percent on an ad-hoc basis, which in turn was summarily rejected by the Hon’ble ITAT.

The said ruling becomes significant in the case of a taxpayer, wherein the payment of royalty is primarily benchmarked under TNMM by following the aggregation approach. In this connection, the taxpayers are advised to either undertake a supplementary analysis under CUP Method and document the same as part of its transfer pricing documentation or primarily benchmark the royalty related transaction under CUP Method, so as to avoid any transfer pricing challenges during tax assessment stage.

3. Hon’ble Bangalore Tax Tribunal accepts arm’s length price of ‘management service fee’ as NIL, in absence of any substantial documentary evidence presented by the taxpayer to prove actual receipt of services

In a recent significant ruling on the issue of receipt of intra group services in the nature of management support services, the Bangalore ITAT in the case of AB Mauri India Pvt Ltd. [IT(TP)A No’s. 84 to 86/CHNY/2018 & ITA No’s.3315 to 3317/CHNY/2018] accepted the stand of the tax authorities in holding the arm’s length price of ‘receipt management support services’ as NIL.

Additionally, the ITAT as a part of its fact-finding exercise analysed the complete details related to the service-related documentation maintained by the taxpayer, and found it to be vague, improper, self-serving and noted that the important details encompassing the receipt of any services were non-existent.

The said ruling becomes significant especially in case of taxpayers who usually don’t adopt the policy of documenting the evidence for actual receipt of such intra group services and cost allocation attached to such services, and simply rely only on existence of an inter-company service agreement and documenting only invoices received from the AEs.