Section 92CA of the Act – Provision for
technical assistance does not essentially require the technology to be owned by
the service provider for use of technology – AO has to examine as to how much
is the arm’s length consideration for such services – high tax jurisdiction or
low tax jurisdiction is not relevant for the purpose of determination of arm’s
length price – where group is able to reduce tax burden by locating their units
is not a relevant factor under Indian Transfer pricing provisions
Facts
The taxpayer, an Indian entity, was engaged
in manufacture of high quality rubber parts, rubber plastic parts, rubber metal
parts and liquid silicon rubber parts. The Taxpayer had entered into
international transactions with its Associated Enterprises (AEs) (FCo1 in
Sharjah and FCo2 in Germany). FCo2 had granted non-exclusive licence to the
Taxpayer to manufacture, use, exercise or sell the licensed products at NIL
royalty. FCo1 was to provide technical assistance services in relation to the
licensed products. The Taxpayer made payments to FCo1 in relation to the
technical services.
The Transfer Pricing Officer (TPO) objected
that though the Taxpayer paid technical service fees to FCo1, all the
intangibles associated with manufacturing process were owned by FCo2.
Accordingly, TPO conducted TP adjustment in hands of the Taxpayer considering
the FTS paid to FCo1 as NIL. Taxpayer argued that the technical service
agreement with FCo1 was for achieving operational and technical competencies
relating to know-how and technology licensed by FCo2. For rendering technical
assistance, the service provider need not require be the owner of the
technology.
The Taxpayer filed objections before Dispute
resolution panel (DRP). DRP rejected the same on the ground that the services
provided by FCo2 and FCo1 are not distinct; when the same services were
received by the Taxpayer from FCo2 without any consideration, transaction with
FCo2 was an internal CUP (Comparable Uncontrolled Price). Therefore, the
services received from FCo1 should have been benchmarked at NIL.
Aggrieved, the Taxpayer approached the
Tribunal.
Held
(i) While agreement with FCo2
was for “use of knowhow and inventions”, the agreement with FCo1 was for
“provision for technical assistance required for use of technology”.The nature
of services under the two agreements was distinct even though somewhat
interconnected.
(ii) Provision for technical
assistance required for use of technology did not require the technology to be
owned by the service provider for use of technology.
(iii) It is undisputed that
FCo1 had the requisite expertise and skills available for rendition of
technical services. Once the rendition of services is reasonably evidenced, it
cannot be open to the TPO to disregard the same and come to the conclusion that
these services need not have been compensated for or ought to have been
rendered by FCo2 or some
other person.
(iv) In the course of
ascertaining the arm’s length price (ALP), all that the AO has to examine is as
to how much is the consideration that the Taxpayer would have paid for the
services in arm’s length situation, rather than sitting in judgment over
whether the Taxpayer should have incurred these expenses at all.
(v) Whether or not the person
entering into transaction is in a high tax jurisdiction or low tax jurisdiction
is also not relevant for the purpose of determination of ALP
(vi) The base erosion, which is
sought to be checked by the transfer pricing provisions in India, is the tax
base in India. Indian transfer pricing cannot be, and is not, concerned with
whether entire Group, as a whole, has been able to reduce their tax burden by
locating their units rendering technical services outside Germany.
(vii) Further,
even if the services rendered, or believed to have been rendered, by FCo2 are
the same as those rendered by FCo1, the same being an intra AE transaction,
cannot be treated as a valid internal CUP. It is only an uncontrolled
transaction, i.e. between the independent enterprises, which can be used as a
benchmark to ascertain ALP. Thus, a transaction between the AEs cannot be
considered as a valid input for application of CUP method. Relied on a rulings
in the cases of Skoda Auto India Ltd. vs. ACIT [(2009) 30 SOT 319 (Pune)] and
ACIT vs. Technimont ICB India Pvt. Ltd. [(2012) 138 ITD TM 23 (Mum)].
