Transfer Pricing practice in India has evolved a long way. In thirteen years of implementation of the transfer pricing regulations (TPR) and nine rounds of completed audits (assessments), transfer pricing (TP) has depicted a changing landscape, wherein the revenue authorities position on various issues have highlighted the future course that practice of transfer pricing is going to tread, albeit full of controversies.
The buoyant Indian economy and impressive financial performance of Indian companies have guided the revenue authorities’ outlook that multinational enterprises (MNEs) operating in India should have robust transfer pricing between group companies, resulting in healthy margins for the India operations.
Laws were not made in a day. They have evolved over years. Its birth had reasons; growth was a straddle, but existence inevitable. Law today personifies a magic stick which guides the obedient and whips the one who dares to cross it.
Transfer pricing provisions are reflective of such transition. Though seemingly simple, the intricacies in its implementation have caught many unaware. Various amendments have been made post 2001 in Chapter X of the Income-tax Act, 1961 (the Act), dealing with the transfer pricing legislation both in respect of substantive and procedural law. The amendments have far reaching consequences and have nullified some of the decisions of the Income-tax Appellate Tribunal (ITAT )/Courts. Even after a decade, the transfer pricing law is still evolving. It is volatile and unpredictable and its practice demonstrates the contrasting positions taken by the taxpayer and the revenue authorities.
The introduction to transfer pricing provisions and the detailed explanation of the six specified methods for benchmarking the controlled transaction i.e., comparable uncontrolled price (CUP) method, resale price method (RPM), cost plus method (CPM), profit split method (PSM), transactional net margin method (TNMM) and the Other method as prescribed by Rule 10AB were explained earlier in various articles. Further, this article analyses the legal jurisprudence landscape that is slowly emerging, which throws light on the various intricacies of transfer pricing law in India.
Recent important transfer pricing judgments have been analysed to bring out these intricacies.
1. Toll Global Forwarding India Pvt. Ltd.1
Facts of the case:
Toll Global Forwarding India Pvt. Ltd. (the taxpayer) is a joint venture between BALtrans International (BVI) Limited, a company listed in Hong Kong Stock Exchange, holding 74% equity, and KapilDevDutta, holding balance 26% equity. The taxpayer was primarily engaged in the business of freight forwarding through air and ocean transportation which includes rendition of related services outside India as well. In the course of conducting this business, the taxpayer picked up/received freight shipments from its customers, consolidated these shipments of various customers for common destinations, and, at destination, distributed these shipments and effected delivery to the consignees.
The taxpayer entered into two types of international transactions:
a) Arranging import of cargo from other countries to India by air and sea transportation and delivering the same to consignees in India and
b) A rranging export of cargo from India to other countries by air and sea transportation wherein consignments are picked up in India by the taxpayer and are sent to the destination as per instructions of consigners for the purpose of delivering to consignees through its AEs The taxpayer controlled the pricing to the end customers in domestic market and pricing for the end customers in connection with consignment picked up abroad was essentially determined by the AEs. The global practices followed by the similar companies in freight forwarding industry was such that the profits earned after deducting transportation costs, in respect of import and export of cargo, were to be shared equally i.e., 50:50 ratio between the taxpayer and its AEs or independent third party business associates.
In the transfer pricing study report submitted by the taxpayer, for the AY 2006-07, the taxpayer adopted the CUP method for determining the arm’s length price (ALP). However, the Transfer Pricing Officer (TPO) rejected the business model and applied TNMM and proposed an adjustment of Rs. 2.09 crore. The adjustment was confirmed by Dispute Resolution Panel (DRP). Aggrieved, the taxpayer appealed before Delhi bench of ITAT .
Key Observations and decision of the Delhi ITAT: –
ITAT observed that in the taxpayer’s industry it was a standard practice to share profits in 50:50 ratio, even for transactions with unrelated parties, and that the CUP method was the most direct method of ascertaining ALP. The ITAT observed that “the trouble however is that while there is a standard formulae for computing the consideration, the data regarding precise amount charged or received for precisely the same services may not be available for comparison.”
‘Price’ as per Rule 10B – purposive and realistic interpretation
– ITAT proceeded to analyse the definition of ALP determination under Rule 10B of the Income-tax Rules, 1962 (the Rules) which sets out that the CUP method cannot be applied unless the amount charged for similar uncontrolled transaction was the same as international transaction between the AEs. However, the ITAT questioned whether ‘price’ as per Rule 10B(1) (a) covers not only the amount but also the formulae according to which price was quantified.
– ITAT thus relying on the decision of Agility Logistics Pvt Ltd2 and DHL Danzas Lemuir Pvt Ltd3 noted that in both cases, ‘price’ under rule 10B(1)(a) was treated to include even the mechanism in terms of formulae to arrive at the consideration. ITAT also held that this was a very ‘purposive and realistic interpretation’.
Price vs. Amount
– ITAT distinguished the use of the expression ‘amount’ as per US TP Guidelines, with the term ‘price’ in Indian domestic TP regulation, in cases when “agreed price or service rendered to, or received from, an associated enterprise is not stated in terms of an amount but in terms of a formulae which leads to quantification in amount.”
– On a conceptual note, ITAT noted that ‘price’ in economic and business terms, could be interpreted as rewards for functions performed, assets employed and risks assumed (FAR ), while ‘amount’ is a relatively mundane quantification in terms of a currency. Providing various examples, ITAT extended the application of the expression ‘price’ beyond specific ‘amounts’ and held that the stand of revenue authorities that in such cases CUP method cannot be applied, because of non availability of data in terms of comparable amount having been charged for the same service is irrelevant.
Procedural issues
– The ITAT expressed that there could be procedural issues, owing to limitations of methods prescribed under Rule 10B, and stated that “transfer pricing, by itself, is not, and should not be viewed as, a source of revenue; it is an anti –abuse measure in character and all it does is to ensure that the transactions are not so artificially priced with the benefit of inter se relationship between associated enterprises, so as to deprive a tax jurisdiction of its due share of taxes. Our transfer pricing legislation as also transfer pricing jurisprudence duly recognize this fundamental fact and ensure that such pedantic and unresolved procedural issues, as have arisen in this case due to limitations of the prescribed methods of ascertaining arm’s length price, are not allowed to come in the way of substantive justice, particularly when it is beyond reasonable doubt that there is no influence of intra AE relationship on the determination of prices in respect of intra AE transactions.”
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