Transfer Pricing News

published on 30 October 2024 I reading time approx. 2 minutes

Important Judicial Rulings on Transfer Pricing Matters

1. Hon’ble Delhi High Court specifies major tests that are to be applied for characterisation of an entity as a contract manufacturer:

In a recent judgement on the disallowance of a Royalty payment to an Associated Enterprise (‘AE’), the Delhi High Court in the case of Samsung India Electronics Pvt. Ltd [ITA 256/2019] rejected the approach adopted by the Transfer Pricing Officer (‘TPO’) to characterise the Assessee as a ‘contract manufacturer’, and then proceeding to determine the Arm’s Length Price (‘ALP’) of Royalty as ‘NIL’.

As per the facts of the captioned case, the Assessee paid Royalty to AE for providing the technological know-how for manufacturing of the electronic goods in India. The Assessee sold the manufactured goods to other Samsung group companies i.e. AEs and also to Non-AEs, and Royalty was calculated on all such sales.

However, during the assessment proceedings, the TPO determined ALP for Royalty as NIL, holding that the Assessee acts a contract manufacturer of the AE, which is the Ultimate Parent of Samsung Group, and payment of Royalty on portion of sales to AEs is like collecting payment on the sales being made to itself.

As the matter reached before Hon’ble Income Tax Appellate Tribunal (‘ITAT’), it rejected the contention of TPO, and confirmed that the Assessee is not a contract manufacturer by placing its reliance on Organization for Economic Co-operation and Development (‘OECD’) Guidelines, which provides that an entity can be termed as a contract manufacturer if it performs its manufacturing activity based upon the directives of Principal, and who also provides assurance to such entity for buying the entire output. Wherein, these aspects were absent in the business operations of the Assessee, as it acted as a licensed manufacturer and thus the ALP cannot be determined as NIL for Royalty Payments.

As the dispute further reached the Hon’ble High Court, it agreed with the decision of the ITAT, and rejected the appeal filed by tax authorities.

2. Hon’ble Delhi Bench of ITAT accepts the entity level benchmarking of intra-group service-related transactions under TNMM Method:

In an important ruling by the Delhi ITAT in the case of Borgwarner Emissions Systems India Private Ltd. [ITA No.2015/DEL/2022], the Hon’ble ITAT accepted the contention of the Assessee to apply transactional net margin method (‘TNMM’) for benchmarking the transactions pertaining to intra group service payment.

As per the facts of the case, the Assessee was availing certain support services in the nature business support, technical support from its AEs, including payment of Royalty, for carrying out its manufacturing business. In this connection, the Assessee benchmarked the same on an aggregated basis under TNMM. However, during the assessment proceedings, the TPO disallowed the same by holding the ALP of such service fees/ payments as ‘NIL’.

As the case went before the Hon’ble ITAT in its second round of litigation, the ITAT based on the documents and the justification presented, held that as the intra-group services utilized are supporting the core activities of the Assessee, the same can be benchmarked by applying TNMM.

Further, the important point to consider in the captioned judgement is that the Hon’ble ITAT did take note of the fact that the Assessee had submitted adequate evidence to show that the services were required for the business of the Assessee and the benefits derived therefrom, which was not controverted by lower Tax Authorities.

Thus, the taxpayers can rely on the said ruling and benchmark the intra-group service transactions on an aggregated basis under TNMM, depending on the face of its case.

However, the said ruling still reemphasises, like earlier decisions on similar lines, that it is imperative on the taxpayers to collate and justify the ‘actual receipt’ and ‘business need’ of services with the documentary evidence, in the case of receipt of intra-group services.

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