Monday, February 27, 2017

TPO couldn't apply 'benefit test' while determining ALP of royalty payments: HC


a) Assessee had entered into an agreement with its UAE based Associated Enterprise (AE) for payment ofroyalty equivalent to 3% of the net ex-factory sale price of the products on both domestic and export sales.

b) Transfer pricing (TP) study by the assessee in relation to this component was by adoption of Transaction Net Margin Method.

c) Transfer Pricing Officer (TPO) found that substantial expenditure had been incurred by the assessee on advertisement and marketing and it were these efforts which had yielded increased revenue and profit. Thus, he held that assessee had to satisfy the 'benefit test' to justify payment of royalty and as it had failed to do so, royalty payment was pegged at 2% instead of at 3%.

d) On appeal, the Tribunal rejected the application of the 'benefit test' adopted by the TPO. Revenue filed instant appeal before the High Court.

The High Court held in favour of assessee as under:-

1) TPO did not undertake any analysis in fixing the arm's length price of the royalty payment made by the assessee to the AE. TPO had also not adopted any of the methods prescribed under Section 92CA of the Act of 1961, read with Rule 10B of the Income Tax Rules, 1962.

2) TPO determined that the reason for the improvement in the net sales and profit of the assessee was increased marketing along with offer of discounts. Thus, there was no justification for payment of royalty at 3% to the AE by the assessee.

3) This reasoning was without legal basis of law as it was not for the TPO to decide the best business strategy. It was not for the TPO to determine as to what could be the other reasons for increase in the assessee's sales and profit.

4) Therefore, TP additions made on account of royalty payment by reducing rate of payment amounted to an arbitrary and unbridled exercise of power by TPO. - [2017] 78 230 (Andhra Pradesh)

No FTS when global telecom facility provided to shipping agents helped them to discharge their functions


a) The foreign shipping company had 3 agents in India who were acting as clearing agents.

b) In order to help agents, assessee had set up and was maintaining a global telecommunication facility called “Maersk Net”. Agents were paying for said facility on pro-rata basis to the assessee.

The issue before the Supreme Court was as under:

Whether the income from the use of Global Telecommunication Facility called 'Maersk Net' can be classified as fees for technical services?

The Supreme Court held in favour of assessee as under:-

1) “Maersk Net” was a facility which enables the agents to access several information like tracking of cargo of a customer, transportation schedule, customer information, documentation system and several other information.

2) Maersk Net System was an integral part of the shipping business which was allowed to be used by agents in order to enable them to discharge their role more effectively.

3) Neither the AO nor the CIT (A) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India.

4) It was in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems.

5) Therefore, payments made by the agents for use of that Maersk Net System could not be treated as “Fees for Technical Services”. - [2017] 78 287 (SC)

No response for suspicious deposits may invite tax dept. at your doorstep – 10 things to know

The Income-Tax department had identified around 18 lakh taxpayers in its first phase who had made cash deposits during demonetization. These taxpayers were required to submit online response till 15th February 2017.

Now, the tax department has initiated verification of such accounts. It has issued the following Standard Operating Procedure for verification of cash transactions of taxpayers. 

1) In case of individuals, not having any business income, no verification shall be made by Assessing Officer ('AO') if the cash deposits do not exceed Rs 2,50,000.

2) In case of taxpayers above 70 years of age, the threshold limit shall be Rs 5,00,000. The source of such deposits can be either household savings or savings from the past. 

3) Wherein online response has not been submitted the tax authorities may initiate survey. During survey, tax dept. can check CCTV recording at cash counters of banks where there is suspicion of back dating transaction or fictitious cash transactions.