Transfer Pricing News

In a recent judgment by the Delhi High Court in the case of Burberry India (P.) Ltd. [ITA 471/2019], the Hon’ble Court upheld the decision of the Income Tax Appellate Tribunal (ITAT) regarding the Taxpayer’s case. The ITAT had determined that the Resale Price Method (RPM) was the Most Appropriate Method (MAM) for benchmarking transactions related to the purchase of finished goods and their resale without any value addition.

The case involved the Taxpayer importing luxury products from its Associated Enterprise (AE) and applying RPM to benchmark the corresponding international transactions. During the assessment, however, the Transfer Pricing Officer (TPO) argued that the Taxpayer had incurred excessive Advertising, Marketing, and Promotion (AMP) expenses and, therefore, could not be considered a simple distributor justifying the application of RPM.

Upon appeal, the ITAT found merit in the Taxpayer’s argument that its AMP expenses were not excessive, as alleged by the TPO, and were in line with those of comparable entities. The ITAT concluded that the Taxpayer acted as a routine distributor, merely purchasing and reselling products without any value being added, and accordingly, RPM was the MAM in its case.

When the matter was brought before the Delhi High Court, the Court concurred with the ITAT’s findings and dismissed the appeal filed by the Tax Authorities.​

In a significant ruling, the Mumbai ITAT in the case of Otis Elevator Company (India) Ltd. [ITA No. 3337/Mum/2024] dismissed the proposed addition made by the Tax Authorities regarding the payment of management fees by the Taxpayer to its AE.

In this case, the Taxpayer availed management support services, including business and operational support, from its AEs to facilitate its manufacturing and service operations for elevators. The Taxpayer benchmarked the 5 per cent markup charged by the AE on service costs and also conducted a supplementary benchmarking using the Transactional Net Margin Method (TNMM) on an aggregated basis.

During the assessment proceedings, the TPO argued that the Taxpayer had failed to provide evidence of costs incurred by the AE. The TPO claimed the transaction resulted in profit shifting and base erosion and determined the Arm’s Length Price (ALP) of such service fees as ‘NIL.’

When the matter was brought before the ITAT, the Tribunal, based on the documents and justifications provided, held that the intra-group services supported the Taxpayer’s core business activities. It further emphasized that Tax Authorities are not permitted to challenge the quantum of fees but may verify whether the services were genuinely rendered and necessary.

The ITAT also noted that the Taxpayer had furnished sufficient evidence demonstrating the actual receipt of services, which the lower Tax Authorities did not refute.

This ruling underscore the importance for Taxpayers to maintain robust documentation to substantiate the actual receipt, business necessity, and benefits of intra-group services to withstand scrutiny in transfer pricing disputes.​