NEWSLETTER

May, 2019

02
Direct Tax

www.nangia.com
NEWSLETTER
May, 2019
What’s
inside…
What’s
Inside…
DIRECT TAX TRANSFER PRICING
❑ Bangalore ITAT held that technical ❑ Appropriate database and relevant
services rendered by Ugandan residents filters to be considered while
shall be covered under Article 14, benchmarking the transaction of
‘independent personal services’ of the Royalty Payment
India- Uganda tax treaty
❑ TPO has no jurisdiction to make suo
❑ Hyderabad ITAT held that share premium motu adjustment on the SDTs not
is a capital receipt which cannot be taxed referred by AO, clarified by the Bombay
under 56(1) of the Act devoiding section HC
56(2)(viib)
❑ Outstanding receivables from
❑ Mumbai ITAT disregarded ‘multiple’ Associated Enterprises beyond a
counting of employees on a single day reasonable period to be considered as
while construing service PE threshold an international transaction

❑ Chennai ITAT held expats’ salary & other ❑ ITAT held incurring of AMP-expenditure
costs recharge to Foreign Group by a low-risk/no-risk distributor as an
company as FTS and not reimbursements international transaction; distinguishes
from full-fledged manufacturer
❑ Bangalore ITAT grants treaty exemption
to 'dual-resident' US citizen by applying
'center of vital interest' test under article
4 of India-USA tax treaty

INTERNATIONAL TAX
❑ New Zealand scraps capital gains tax

❑ Mauritius puts India-focused funds,

others under its regulatory lens

❑ ICC issues taxation policy statement for

the digitalized Economy

❑ France Wants EU to Adapt Its Crypto

Regulations, Keeps 30% Tax
September 16- October 15, 2018

DIRECT
TAX
NEWSLETTER
September
May, 2019 16- October 15, 2018
1. Bangalore ITAT held that
technical services rendered by
Ugandan residents shall be
covered under Article 14,
‘independent personal
services’ of the India- Uganda
tax treaty
Background
M/s. Wifi Networks P Ltd. (assessee) remitted
certain payments to the Ugandan residents as
consideration towards rendition of technical
services and contended that the said payments
shall be covered by Article 14 of the India-
Uganda tax treaty (tax treaty) and in the absence
of fixed place/ 183 days’ duration test, the same
shall be taxable only in Uganda whereas the
assessing officer (AO) opined that said income
shall be taxable in India as Fee for Technical
Services (FTS) in view of Article 12 of the tax
treaty. The Bangalore Income Tax Appellate
Tribunal (ITAT) denied the taxability of said
payments in India as FTS under Article 12 of the
tax treaty and held that same shall be covered by
Article 14 of the tax treaty. Moreover, provisions
of Article 14 can be invoked in spite of the fact
that services so rendered were technical in
nature. It opined that said payments shall be
taxable in Uganda in the absence of fixed base/
duration test in India.
Brief facts and contentions
❑ The assessee, a company incorporated in
India, made certain payments to the Ugandan
residents as consideration for availing
technical services from them and contended
that since the services rendered by the
Ugandan residents were in the nature of
personal services, provisions of Article 14 of
the tax treaty, being more specific provisions
related to individuals, shall be applicable.
Moreover, the assessee did not have a fixed place
of business in India nor the duration test i.e. 183
days was satisfied, the amounts paid should be
taxable only in Uganda
❑ The AO, on the other hand, opined that the
services availed by the assessee were in the
nature of technical services and payments
thereof qualified as FTS as defined in
explanation 2 to section 9(1)(vii) of the Act.
Hence, as per the provisions of Article 12 of
the tax treaty, the said payments would be
liable to tax in India and disallowed the
expenditure claimed by assessee by invoking
the provisions of section 40(a)(i) of the Income
Tax Act, 1961 (Act) for not deducting
withholding tax on such payments.
❑ Assessee filed an appeal before the
Commissioner of Income Tax [CIT(A)] but the
matter was decided in favor of the revenue
❑ Aggrieved, the assessee filed an appeal before
the ITAT
ITAT’s judgement
While holding that the technical service payments
made by assessee to the Ugandan residents
during AY 2011-12 shall not be taxable in India in
view of Article 14 of the tax treaty, it observed as
under:
❑ Considering the scope of work performed by
the Ugandan residents, it opined that article
14 covers in its ambit professional services
rendered by the individuals. Moreover, it
could not be said that the services rendered
by the Ugandan residents were not
professional services since they were technical
in nature. However, article 14 would be
applicable regardless of whether or not the
services are technical in nature
❑ It placed reliance on the Delhi ITAT ruling in
Poddar Pigments Ltd. to reach its conclusion
NEWSLETTER
September
May, 2019 16- October 15, 2018
❑ Hence, the concerned payments would be taxable
in Uganda and no TDS would be deducted under
section 195 of the Act and consequently no
disallowance under section 40(a)(i) would be
made.
NANGIA’S TAKE
The analysis of the judiciary in this case provides an
important insight that tax treaty should be
interpreted to find more specific and logical angels.
The ruling further strengthens the view that specific
article should be applied over general article.
However, it further adds an important point that
specific article should not be given narrow meaning.
Further, if there arise common factors under both,
i.e. specific and general articles (“technical service
could be professional also” as in the given case), then
also the specific clause shall prevail.
2. Hyderabad ITAT held that
share premium is a capital
receipt which cannot be taxed
under 56(1) of the Act devoiding
section 56(2)(viib)
Background
During the relevant year, the Assessing Officer
(AO) invoked the provisions of the section 56(1) of
the Income-tax Act, 1961 (Act) and Rule 11UA of
Income-tax Rules, 1962 (Rules) to re-determine the
valuation of share premium received by a public
limited company. The Income-tax Appellate
Tribunal, Hyderabad (ITAT) held that valuation of
share premium received by the Apollo Sugar Clinics
Ltd. (assessee) cannot be examined under section
56(2)(viib) of the Act as such a company is a public
limited company. It further rejected taxability of
such receipts by the Assessing Officer (AO) by
holding that share premium is a capital receipt
which cannot be taxed under 56(1) of the Act. Only
the receipts in the nature of income which cannot
be taxed under other heads of income can be
taxed under the said section.
Facts of the case
❑ During the first year of its operations, the
assessee received share premium amounting to
Rs.1,220/ share and Rs. 990/ share upon
issuance of its shares to M/s Sanofi Synthelabo
(India) Limited and M/s Apollo Health & Life
Style Limited respectively.
❑ Such a valuation was done by the assessee on
its own without resorting to Rule 11UA of the
Rules
❑ The AO disallowed the amount of share
premium by rejecting the valuation undertaken
by the assessee on the basis that it was free to
determine the value of shares after negotiating
with purchaser.
NEWSLETTER
September
May, 2019 16- October 15, 2018

It noted that assessee cannot overlook the
valuation legislations included under the Act
specifically for carrying out valuations and since,
assessee’s valuation is imaginary with surmises, it
cannot be accepted
If any receipt cannot be taxed under sub clause 2 of
section 56, it cannot be taxed under sub-clause (1)
also.
NANGIA’S TAKE

❑ The Commissioner of Income-tax (Appeals)
[CIT(A)] upheld the additions made by the AO
by examining only the valuation without
considering the application of section 56 of
the Act.
❑ Aggrieved, the assessee contended before the
ITAT that case of the assessee doesn’t fall
either under section 56(2)(viib) of the Act or
56(1) of the Act. The assessee is a public
limited company and received share premium
which is a capital receipt and not income,
thereby, falls out of the purview of the
aforesaid sections.
ITAT’s Judgement
The judgment has established that law should be
interpreted in a chain of steps and should not be
applied vaguely. One cannot read the implications
of a specific sections to be general in nature. Not all
the receipts should be bluntly brought under the
Act, its character has to be identified first
depending on which it shall be taxed under the
specific provision of the Act.
The question of correct valuation arises only if
concerned provisions of the Act are applicable in
the first place. And, its application has to examined
by having regard to what is laid down by such
section in conjoint reading with the other sections,
if any.

The ITAT upheld the contention of the assessee

on non-application of either of the sub-clause of
the section 56 of the Act. While holding the
same, it observed as under:

❑ It noted that the assessee is a public limited

company and invocation of section 56(2)(viib)
of the Act requires the assessee to be a
company in which public are not substantially
interested. Thus, the assessee gets spared
from the application of said provisions.

❑ Further, section 56(1) of the Act is a residuary

section which requires taxation of such
“income” not falling under the other income
heads. Share premium is a capital receipt and
not an income as per the meaning under
section 2(24) of the Act. This analysis also
takes the assessee out of the sub-clause (1) of
the section 56(1).

❑ It noted that the above fact is further

substantiated as the section 56(2) of the Act
deals with specific receipts which is not
income as per section 2(24) but specifically
brought under the definition of income by the
Legislature.
NEWSLETTER
September
May, 2019 16- October 15, 2018
3. Mumbai ITAT disregarded
‘multiple’ counting of
employees on a single day
while construing service PE
threshold
Background
The income earned by Linklaters (assessee)
through rendition of legal consultancy services in
India was assessed to tax by the Assessing Officer
(AO) in India. While computing the period of 90
days, the AO included the period for which one
employee availed study leaves. And also, it took
into account the period of stay of each employee
independently, in order to ascertain satisfaction of
criteria for constituting the service permanent
establishment (PE). Mumbai Income Tax Appellate
Tribunal (ITAT) overruled the decision of the AO
and first appellate authority to hold that employee
does not constitute service PE in India and
consequently, its income shall not be taxed.
Facts of the case
❑ The assessee, a partnership firm based in UK
rendered legal consultancy services to its
different customers in India
❑ The AO taxed the professional fees received by
the assessee by holding that it constitutes the
service PE in terms of article 5(2)(k)(i) of India-
UK Double Taxation Avoidance Agreement
(DTAA). It noted that period of stay of
employees in India was more than 90 days
during the Financial Year 2001-02. Further, it
admitted that such income was neither taxable
as royalty of fee for technical services.
❑ Aggrieved, the assessee contended before the
Commissioner of Income-tax (Appeals) [CIT(A)]
that the period of 90 days should exclude the
days on which employees availed vacations.
Further, such a period of employee’s stay
should be determined cumulatively and not
separately for each employee.
❑ The assessee filed an appeal before ITAT against
the order of CIT(A) wherein it rejected the
assessee’s contention of multiple counting of
common days along with non-rendition of
services on account of vacations
ITAT’s judgement
The ITAT held that income earned by the assessee
through rendition of legal consultancy services in
India shall not be taxed in India as the period of stay
of employees during 12 months’ period was 87 days
excluding the vacation days of an employee and
multiple counting of common days and thus, no
service PE gets constituted. While holding the same
it observed as under:
A. The employee did not render any service during
his vacations
➢ The ITAT noted that the concerned employee
also confirmed his leaves during the alleged
period
➢ Daily logs kept by the assessee had shown that
the concerned employee was on leaves and no
chargeable hours were reported
➢ The bifurcation of the reimbursement did not
include any hotel or travelling expenses being
a relevant factor while rendering onshore
services
➢ The above facts indicated that the concerned
employee was on study leaves during the
period beginning from 17 April 2001 to 4 May
2001.
B. Multiple counting of common days
➢ From the language of the India-UK tax treaty,
it becomes clear that the stay of employees in
India on any particular day has to be taken
cumulatively and not independently.
➢ Multiple counting of days of employee’s stay
would be impermissible
NEWSLETTER
September
May,
August
2019
, 2018
16- October 15, 2018
NANGIA’S TAKE
The case is an interesting mix of the facts and
legal interpretation wherein ITAT have analyzed
both the angels to arrive at the conclusion. It has
highlighted employee leaves and independent
counting of days as two important factors which
shall become relevant in taking the assessee out
of the threshold for constituting service PE. The
ruling underlines that law should be read with
clear logic and potential intent behind the
provisions.
4. Chennai ITAT held expats’
salary & other costs recharge to
Foreign Group company as FTS
and not reimbursements
Background
M/s. Nippon Paint (India) Pvt. Ltd. (“assessee”)
remitted salary and certain other expenditure in
respect of foreign nationals taken on secondment
as reimbursement to its group company. The
assessing officer (“AO”) treated such remittance as
Fee for Technical Service (“FTS”) for rendering
technical support services and further held the
assessee as assessee in default for not deducting
TDS under section 195 of the Income Tax Act, 1961
(“The Act”). The Income Tax Appellate Tribunal,
Chennai (“the ITAT”) upheld the order of
[Commissioner of Income-tax (Appeals)] and noted
that the expenses were incurred in connection
with technical service agreement and hence, they
bore a clear nexus with the technical services
rendered. Since the assessee did not become the
employer of seconded employees, amount paid to
foreign counterparts as salary would be the
income of those companies and not in nature of
reimbursement of salary.
Brief facts and Contentions
❑ The assessee, an Indian company, made foreign
remittances in respect of salary and other
expenses such as air fare, conveyance, food
expenses etc.,
treating it as a reimbursement cost incurred in
respect of foreign nationals taken on
secondment from the group company without
deducting TDS
❑ The AO treated the entire amount of
remittances paid as salary and other
expenditure as fees for rendering technical
support and accompanying activities on
which it was liable to deduct TDS under
section 195 of the Act. Consequently, the
assessee was held as an assessee in default
under section 201(1)/(1A) of the Act for not
deducting TDS under section 195 of the Act
❑ Aggrieved by the decision of AO upheld by
CIT(A), the assessee further filed an appeal
before the ITAT
❑ The assessee before the ITAT, alleged that
the remittances were travel expenses, food
expenses, local conveyance etc. incurred by
technical personnel during their stay in India
and it had no profit element in it. Moreover,
the salary paid to seconded employees
suffered TDS under section 192 of the Act
and not under section 195 of the Act
ITAT’s judgement
The ITAT held that the payment made by
assessee towards reimbursements of salary
costs and other costs for seconded employees to
its Foreign Group Co. constituted FTS. While
holding the same, it observed as under:
❑ The expenses were incurred by the service
provider and not the assessee, in order to
earn income in the form of FTS since such
expenses bore a clear nexus with the
technical services and were a part and parcel
in the process of technical services. All the
incurrence was made in connection with the
technical service agreement and such
expenses did not belong only to the service
provider
❑ The role of seconded employees was to share
the experience and skills of its employer (the
entity which was seconding) with the
assessee company.
NEWSLETTER
September
May, 2019 16- October 15, 2018
The seconded employees had to return back to
their original employer upon termination of the
secondment. Thus, their employer-employee
relationship with the parent organization did not
dilute. The payment made to foreign companies
would be the income in the nature of FTS of such
companies and not mere reimbursements
NANGIA’S TAKE
The case is an addition to plethora of judgments
existing over the issue of characterization of a
sum as reimbursement or taxable income. While
issue of reimbursement of expenses is settled by
the judgement of Supreme Court in the case of
Centrica, the judgment has given an interesting
view on reimbursement of salary. The term
“Reimbursement” denotes making payment of
amount to a person who made an expenditure
on behalf of another person. The ruling has
eliminated the scope of treatment of such
remittances as reimbursement by holding a
view that incurrence of such expenditure as
necessity for service provider in order to
effectively render such services
5. Bangalore ITAT grants treaty
exemption to 'dual-resident' US
citizen by applying 'center of vital
interest' test under article 4 of
India-USA tax treaty
Background
Shri Kumar Sanjeev Ranjan (assessee) was deputed
to India for a temporary cross border assignment
which was completed in August 2012. The
assessing officer (AO) held that the salary received
by assessee in USA for the post assignment period
during AY 2013-14 was taxable in India since the
assessee qualified as a resident of India under the
Income Tax Act, 1961 (Act) as well as article 4 of
the India-USA Double Taxation Avoidance
Agreement (DTAA). However, the Income Tax
Appellate Tribunal, Bangalore (ITAT) decided the
case in favor of the assessee following the same
principles “center of vital interest” as relied by the
AO and treated the assessee as a USA resident as
upheld by Commissioner of Income Tax (Appeals)
[CIT(A)].
Facts of the case
❑ The assessee, a citizen of the USA, was assigned
temporarily to Accenture in India from June
2006 to August 2012. The assignment was
completed on 10th August, 2012, subsequent to
which assessee moved back to USA
❑ In order to substantiate that he was not liable
to pay tax in India on his USA salary income, the
assessee applied the concept of split residency
while applying the tie breaker test to determine
the residential status under Article 4 of India-
USA DTAA as under the given set of facts he
qualified as a resident of India as well as USA.
❑ While rejecting the applicability of split
residency, the AO analyzed that the assessee
had permanent home available in both
countries and therefore, held the assessee
resident in India on the basis of closer personal
and economic relations to India in comparison
NEWSLETTER
September
May, 2019 16- October 15, 2018

to USA and taxed, in India, his post assignment NANGIA’S TAKE

salary income earned in USA. It disentitled the
assessee to claim exemption under article 16(1)
of the India-USA DTAA since he failed to furnish
Tax Residency Certificate (TRC) before him.
❑ However, the CIT(A) applied the same criteria
i.e. “center of vital interest” and determined
the residential status of the assessee in USA
for the post assignment period
❑ Aggrieved by the decision of the CIT(A), the
AO filed an appeal before the ITAT
ITAT’s judgement
The ITAT held that the salary received by
assessee in USA during post assignment period is
not taxable in India for AY 2013-14 as he would
be treated as a resident in USA under article 4 of
the India-USA DTAA. While holding the same, it
analyzed the facts of the case and observed as
under:
The ruling has laid two interesting and important
standpoints. While the tax treaties only talk about
the concept of center of vital interest, the ruling has
established certain factors which can be referred
for ascertaining the jurisdiction with which the
taxpayer has closer personal and economic
relationship. These key criteria would be vital in
understanding the intent of the second criteria of
tie-breaker test.
Another key consideration is that residential status
has to be determined for the entire year and such
status cannot be split into months. It is worthwhile
to note that concept of split residency does not find
any support either from domestic tax law or
judiciary.

❑ The assessee has a permanent home in India

as well as USA. Hence, there was a tie while
applying the ‘availability of permanent home’
test.

❑ On application of 2nd tie breaker test, i.e.

center of vital interest, it held that the
personal and economic relations of assessee
were closer to USA by analyzing different
parameters such as location of dependent
members, voting rights, driving license,
country of residence, social security,
investments, settlement, better social ties.

❑ Hence, exemption under the India-USA DTAA

would be available to the assessee and he
shall be liable to pay tax only in the USA
September 16- October 15, 2018

INTERNATIONAL
TAX
NEWSLETTER
September
May,
August
2019
, 2018
16- October 15, 2018

6. New Zealand scraps capital 9. France Wants EU to Adapt Its

gains tax Crypto Regulations, Keeps 30% Tax
Prime minister Jacinda Ardern ruled out a CGT The new law that is being referred to is one
under her leadership, saying that no consensus was where French lawmakers allowed
able to be reached within the government, despite cryptocurrency operators to run their
being one of the main issues she campaigned on operations, with the caveat that they apply for a
with the view that it could make the nation's certification that would allow authorities to
taxation system fairer. The CGT was recommended determine the issuer of a new token or the
in February by the Tax Working Group, which the creators of an exchange, as well as check
government spent NZD$2m on to review inequities business plans and AML adherence. The goal is
in the nation's taxation system. to protect consumers from fraud. Crypto
companies will be taxed on their profits.
https://www.internationalinvestment.net/news/40
01904/zealand-scraps-capital-gains-tax https://www.investinblockchain.com/france-
wants-eu-to-adapt-its-crypto-regulations-keeps-
7. Mauritius puts India- 30-tax/
focused funds, others under its
regulatory lens
Mauritius has stepped up scrutiny of offshore fund
structures as the country tries to shed its image as
a quasi-tax haven and showcase its compliance
with all major international tax norms. The move
has put several global and India-focussed funds
wanting to set up structures in Mauritus under the
country’s regulatory glare.

https://www.businessstandard.com/article/market
s/mauritius-puts-india-focussed-funds-others-
under-its-regulatory-lens-119041600268_1.html

8. ICC issues taxation policy

statement for the digitalized
Economy
As the world business organization, ICC has
proposed a framework of internationally
established tax principles for consideration by
policymakers and legislators around the world. By
establishing a consistent global tax system, both
business and governments can benefit from
increased clarity and predictability, which will help
foster cross-border trade and investment.

https://iccwbo.org/media-wall/news-speeches/icc-
issues-taxation-policy-statement-digitalised-
economy/
September 16- October 15, 2018

TRANSFER
PRICING
NEWSLETTER
September
May,
August
2019
, 2018
16- October 15, 2018
10. Appropriate database and
relevant filters to be considered
while benchmarking the
transaction of Royalty Payment
Facts of the Case
❑ During the assessment year (“AY”) 2009-10 to AY
2012-13 (“years under consideration”), Vodafone
India Limited (“the taxpayer”) paid royalty fee at a
rate of 0.15% and 0.30% to its associated
enterprises (“AEs”) viz. Vodafone Ireland
Marketing Ltd and Rising Group Ltd for the use of
brand name ‘Vodafone’ and ‘Essar’ respectively.
❑ For the purpose of benchmarking, the taxpayer
used ‘PowerK’ database under comparable
uncontrolled transaction (“CUP”) method as the
most appropriate method (“MAM”) and arrived at
only one comparable wherein the royalty
payment was made by Forward Industries
Incorporation, USA to Motorola Incorporation,
USA at the rate of 7% for the use of signature and
logo of ‘Motorola’;
❑ However, during the course of assessment
proceeding, the Transfer Pricing Officer (“TPO”)
rejected the aforementioned benchmarking
adopted by the taxpayer, owning to the following
reasons:
➢ There are functional dissimilarities
➢ The taxpayer was not paying any royalty
earlier;
➢ Absence of any cost benefit analysis and
➢ The taxpayer derived no economic benefit.
❑ Accordingly, TPO determined the ALP of the
transaction at nil and proposed an upward TP
adjustment.
❑ Aggrieved by the order of AO/TPO, the taxpayer
filed an appeal before the Dispute Resolution
Panel (“DRP”). The DRP upheld the TPO’s order.
Aggrieved by the same the taxpayer filed an
appeal before the Income tax appellant tribunal
(“ITAT/ Tribunal”).
❑ The ITAT rejected the lower authorities
appeal against ‘Nil’ ALP determination. In
addition, the Tribunal rejected the taxpayer
foreign comparable and opined that the
transaction between two foreign parties
cannot be considered for comparing
international transaction with Indian tested
party.
❑ Aggrieved by the order of the Tribunal, the
taxpayer filed an appeal before the High
Court (“HC”).
Proceeding before HC
❑ High Court noted that the ITAT’s opinion of
not benchmarking the international
transaction of royalty payment by comparing
the transaction with that entered into
between two foreign parties was made
through stray sentences and was not
warranted. Further, HC held that the
comparables used by the taxpayer i.e. two
foreign parties shall not be treated as
conclusive.
❑ In view of the above, the HC remitted the
issue of ALP determination of royalty
payment back to the Tribunal with a direction
that ITAT may make a limited remand to TPO,
if required.
Proceedings before ITAT – 2nd Round (“the
tribunal”)
ITAT made the following observations:
❑ ITAT held that the “selection of database
itself is devoid of any merit” since the
taxpayer could not justify the use of
“PowerK” database before the lower income
tax authorities and whereas there is an
existence of a number of other Royalty
payment specific softwares like RoyaltyStat,
RoyaltySource and ktMINE.
NEWSLETTER
September
May,
August
2019
, 2018
16- October 15, 2018

❑ ITAT held that the qualitative and quantitative NANGIA’S TAKE

filters like use of percentage of gross sales
(whereas payment for royalty by the taxpayer
was at a certain percentage over net service
revenue) and rejection of certain specific codes
and adoption/rejection of certain filters applied
by the taxpayer, are devoid of any justification
and hence the same deserved to be rejected.
❑ Additionally, ITAT noted that the royalty paid in
the comparable transaction was 50 times more
than the royalty paid by the taxpayer and
accordingly opined that such a massive difference
in the comparable price made the comparability
analysis unjustified and devoid of any reasoning;
The instant case is one of its kind wherein the
appellant authority has gone ahead and
accepted the presence of certain specific
databases like RoyaltyStat, RoyaltySource and
ktMINE that can be used by the taxpayer to
identify the external potential comparables to
benchmark the transaction of Royalty Payment.
Further, this judgement has led down certain
parameters in terms of application of
quantitative and qualitative filters for rejection
of the comparable agreements/arrangements
while benchmarking the transaction of Royalty
Payment.

❑ Furthermore, with respect to the taxpayer’s
contention that product similarity is not an issue
while applying CUP method, ITAT observed that it
is an accepted fact that even a minor change in
the properties of the products, circumstances of
the trade may have a significant effect on the
prices
❑ Lastly, as directed by the HC, the Tribunal studied
the functional profile of the comparable company
and noted that the same was engaged in distinct
business operations than that of the taxpayer. In
view of the same, ITAT held that “the transfer
pricing study (“TP”) document prepared by the
taxpayer for benchmarking the royalty payment
does not inspire any confidence but merely
eyewash”. Further, ITAT held that the taxpayer
has narrowed down the comparability analysis to
reach at a single agreement in the whole world of
trademark license fees comparable;
Also, the ruling considers the well accepted fact
that the similarity of the product is a vital
ingredient for the application of CUP method as
even a minor change in the properties of the
products or circumstances of the trade may
have a significant effect on the prices.
In view of the aforesaid ruling, the taxpayers
are advised to maintain a well-documented TP
study containing the transaction under review
in a comprehensive manner which would serve
the purpose of negating the TPO’s allegation at
the higher forums.
Source: Vodafone India Limited [TS-181-ITAT-
2019(DEL)-TP]

In view of the above, ITAT posted the matter for final

hearing on 3rd June, 2019 by remitting the issue back
to the file of lower authorities and directing the
taxpayer to submit a fresh comparability analysis
before the TPO for re-determination of the ALP of
the royalty payment.
NEWSLETTER
September
May, 2019 16- October 15, 2018

11. TPO has no jurisdiction to make suo motu adjustment on

the SDTs not referred by AO, clarified by the Bombay HC

Outcome: Partially in favour of taxpayer

Category: Jurisdiction of TPO to examine Specified Domestic Transactions (“SDTs”) in absence
of AO’s reference

Facts and Contentions

❑ Times Global Broadcasting Company Ltd (“taxpayer”) is a wholly owned subsidiary of Benett,
Coleman and Company Limited (“BCCL”) and engaged in the business of distribution of
television channels for the Times Group entities and also provides support services to its
Group entities in the area of finance, legal, human resources, commercial, administration
and technical & broadcasting.

❑ During the Assessment Year (“AY”) 2015-16 (“year under consideration”), taxpayer has
entered into certain SDTs with its associated enterprises (“AEs”) and for benchmarking such
transactions Transactional Net Margin Method (“TNMM”) was selected as the Most
Appropriate Method (“MAM”). In addition, the taxpayer also demerged one of its business
undertakings into BCCL which was approved by Bombay High Court (“HC”) during the year
under consideration.

❑ During the assessment proceedings, the Assessing Officer (“AO”) made a reference to the
Transfer Pricing Officer (“TPO”) under section 92CA of the Income Tax Act, 1961 (“the Act”)
for determining the arm's length price (“ALP”) of the SDTs reported in Form "3CEB".

❑ The TPO benchmarked the SDTs undertaken by taxpayer with its AEs and made a total
adjustment of INR 84.09 crores.

❑ The total adjustment comprised of the ALP adjustment of INR 26.55 crores towards payment
of subscription fees (reported in Form 3CEB) on account of variation in the margins of the
taxpayer vis-à-vis Comparables and ALP adjustment of INR 57.54 crores representing the
creditors transferred through demerger process (not reported in Form 3CEB and moreover
the same was not referred by AO but came to notice of TPO during his assessment).

❑ Aggrieved by the same, the taxpayer filed a writ petition before Bombay HC challenging the
adjustments made by TPO on various grounds.
NEWSLETTER
September
May, 2019 16- October 15, 2018

Contentions

Transactions Taxpayer’s Contentions Revenue’s Contentions

Payment of ✓ The taxpayer did not even ✓
creditors in accept this transaction as
demerger SDT as there was no such
Process payment in the process of
demerger. ✓ The taxpayer had not
✓ In addition, the said
transaction was not referred
by the AO to TPO and in
absence of any specific ✓
reference of this transaction,
it was not competent for the
TPO to make any sue motu
adjustment.
The TPO can examine any
SDTs even if not specifically
referred by the AO.
reported the aforesaid
transaction though it was a
SDT.
TPO had correctly examined
the transaction after issuing
notice to the taxpayer.

✓ The taxpayer further

contended that even on
merits, the adjustment is
wholly impermissible, since
in the demerger process, no
expenditure was made and
the transaction would not be
covered under the Section
92BA(i) of the Act.

Payment of ✓ The adjustment towards ✓ The TPO had undertaken a

subscription payment of subscription fees
fees was made without proper
notice.
✓ The adjustment is even
otherwise ex facie bad and ✓
against the judgments of the
HC.
detail analysis and the same
can be contested by the
taxpayer before the Revenue
Authorities.
The HC should not entertain
this petition and the appeal
route should be followed by
taxpayer.
NEWSLETTER
September
May, 2019 16- October 15, 2018
Bombay HC’s Ruling
Payment of creditors in demerger process
❖ HC stated by analyzing the statutory provisions
of the Act that if any person has entered into an
international transaction or SDT in any previous
year and the AO considers it necessary or
expedient so to do, he may, with the previous
approval of the Principal Commissioner or
Commissioner refer the computation of ALP in
relation to such transactions under section 92C
of the Act to the TPO.
❖ Further, HC noted that a new sub-sections has
been added in the Act which provides that
where any other international transaction other
than an international transaction referred by
AO or any international transaction that has not
been reported by the taxpayer in Form 3CEB
comes to the notice of the TPO during the
course of the proceedings, the provisions of this
Act would apply as if such other international
transaction was an international transaction
referred to him by AO. Such introduction by the
legislature is made in order to overcome the
limitation of the TPO to examine an
international transaction which has either not
been referred by the AO or which the taxpayer
has omitted to report as required. The
common feature of both this sub-sections is
that they take within the sweep only an
international transaction. The group of words
“or SDT” were conspicuously not added in both
the sub-sections.
❖ HC pointed out that Central Board of Direct
Taxes (“CBDT”) in its instructions1 clarified that
if the AO does make a report/reference, only
then TPO can undertake further steps as
envisaged in the Act. The legislature while
expanding the scope of the TP study by the TPO
to a transaction not referred/reported by the
AO, has restricted the applicability thereof only
to international transactions. The TPO
exercising such powers suo motu in relation to
a SDT would be disobeying his jurisdiction and
in the process would render the requirement of
reference to TPO redundant.
_____________________________
1
CBDT Instruction No. 3 of 2003 dated 20.05.2003
❑ HC also stated that “if a jurisdictional error
is pointed out or it is shown that an
authority has acted wholly without
jurisdiction, the Court can, without
relegating the taxpayer to the
departmental or even statutory remedies,
strike down exercise of such powers.”
❑ On the basis of above circumstances, HC
thus held that “the TPO had no jurisdiction
to make any adjustments and it is not
inclined to examine the adjustment on
merits though it was argued before HC by
the learned counsel for the taxpayer.”
Payment of subscription fees
❑ HC pointed out that all the contentions on
merits raised by the taxpayer in relation to
the adjustment require minute
examination of documents & materials on
record & accounts and it is not inclined to
undertake this exercise.
❑ Further HC referred to the decision of the
Supreme Court in the case of CIT vs.
Chhabil Dass Agarwal2 and observed that
“When a statutory forum is created by law
for redressal of grievances, a writ petition
should not be entertained ignoring the
statutory dispensation”.
❑ On account of above observations, the HC
held that “even though the taxpayer may
have certain arguable points that by itself,
it would not enable us to bypass the entire
statutory scheme of assessment, appeal
and revision. When a statute that too, fiscal
statute makes detail provisions for
assessment, appeals and revisions,
ordinarily the Court would not examine the
issues on merits bypassing such statutory
remedies.”
_____________________________
2
[2013] 357 (SC)
NEWSLETTER
September
May, 2019 16- October 15, 2018
In view of the above observation, HC quashed the
impugned order of TPO in relation to adjustment
made towards payment of creditors in demerger
process amounting to INR 57.54 crores and the rest
of the order stands as it is.
NANGIA’S TAKE
The instant ruling of the HC again reiterates the
basic principle that where the interpretation of the
law is sufficiently clear, in such cases, the tax
authorities cannot proceed with their own version
of interpretation that will benefit them. In view of
the same, the said ruling supports that the TPO
cannot suo-motu assume jurisdiction to determine
the ALP of SDT not referred to AO.
Additionally, the ruling also emphasizes that when
a statutory forum is created by law for redressal of
grievances, a writ petition should be entertained
ignoring the statutory dispensation only in cases
where the statutory authority has not acted in
accordance with the provisions of the enactment in
question, or in defiance of the fundamental
principles of judicial procedure or when an order
has been passed in total violation of the principles
of natural justice.
Source: Times Global Broadcasting Company Ltd
[TS-178-HC-2019(BOM)-TP]
12. Outstanding receivables
from Associated Enterprises
beyond a reasonable period to
be considered as an
international transaction
Outcome: Both; Partially allowed
Category: Outstanding receivables
Facts and Contentions
❖ Bridal Jewellery Mfg Co (“the taxpayer”) is
engaged in the business of manufacturing and
exporting jewellery from its unit situated in
Noida special economic zone. In the
assessment year (“AY”) 2011-12, the taxpayer
exported jewellery to its Associated
Enterprise (“AE”) in United Kingdom (“UK”).
❖ During the assessment proceedings, the
Transfer Pricing Officer (“TPO”) found two
additional international transactions viz.
interest on grant of loan to AE & Interest on
unrealized export proceeds of receivables.
Consequently, the TPO determined the arm’s
length price (“ALP”) of the aforesaid
transactions by benchmarking the interest
rate on the basis of prime lending rate of the
State bank of India (“SBI”) and accordingly
worked out an average rate of interest at
12.26%. Further, the TPO considered the
receivables outstanding for more than 60 days
from the date of the invoice, thereby,
resulting into upward Transfer Pricing (“TP”)
adjustment.
❖ Aggrieved by the same, the taxpayer filed an
appeal before learned Dispute Resolution
Panel (“DRP”).
DRP directions
❖ The DRP relied on the decision of the Hon’ble
High Court (“HC”) in case of CIT vs Cotton
Naturals (I) Pvt. Ltd. and accordingly directed
the TPO to apply LIBOR of the currency
involved (i.e. Great Britain Pound) in the case
of both the international transactions viz.
NEWSLETTER
September
May, 2019 16- October 15, 2018
interest on grant of loan to AE & Interest on
unrealized export proceeds of receivables for the
purpose of determining the ALP of the interest to
be charged for transfer pricing adjustment.
❑ Further, the DRP upheld the consideration of
the unrealized receivables beyond 60 days.
❑ Aggrieved by the directions of the DRP, the
taxpayer filed an appeal before the Income
Tax Appellant Tribunal (“ITAT/ Tribunal”).
ITAT’s Ruling
❑ In relation to interest on unrealised export
proceeds, ITAT noted that the proceeds of
export to AE’s were received by the taxpayer
after a delay of substantial period.
Accordingly, ITAT upheld the order of DRP
and accordingly confirmed that interest on
account of delayed receivables from AE
qualifies as an international transaction.
❑ In regard to the taxpayers request for allowing
90 days’ credit period as against 60 days
(allowed by TPO), ITAT considered the
taxpayer’s contention that in AY 2015-16 the
TPO himself has considered receivables
beyond 90 days. Accordingly, the Tribunal
(following the rule of consistency) held that
the period of 90 days’ credit is found to be
reasonable in the trade of the taxpayer and
accordingly directed the AO/TPO to
recompute the TP adjustment.
❑ Additionally, in relation to the taxpayer’s
argument of not charging interest on similar
transactions with non AE’s, the Tribunal held
that the taxpayer has not brought on record
comparability of the transactions carried out
with AEs like country to which export has been
made, agreement with parties etc., therefore,
the transaction with the non AE’s cannot be
considered for benchmarking interest on
receivables from AE’s Further, the Tribunal
noted that the TPO has applied the LIBOR rate
of the US dollar instead of the foreign
currency involved in case of receivables for AE
i.e. Great Britain Pound. In relation to the
same, the ITAT relied on the HC
decision in case of Cotton Naturals (supra)
wherein it was held that the interest rates should
be the market determine interest rate applicable
to the currency concerned in which the loan has
to be repaid and directed the lower authorities to
verify the currency in which invoices were raised
by the taxpayer on AE and accordingly apply
LIBOR of the said currency.
❑ In relation to the TP adjustment on account of
interest on loan granted to AE, the taxpayer
could not controvert the LIBOR+400 basis
points applied by the Ld. DRP, therefore, the
grounds raised in this respect was dismissed as
infructuous.
NANGIA’S TAKE
Transfer Pricing Provisions are about to
complete two decades in India, however, there
are still a number of transactions which are
struggling at an infant stage i.e. whether such
transactions should be considered under the
preview of international transaction or not. The
instant judgment is one more addition to the
plethora of judgments on the need of charging
interest on the outstanding receivables by the
Indian counterpart from the foreign AEs. In the
former rulings (like rulings of Nimbus
Communication Limited, Indo American
Jewellery Limited, Kusum healthcare limited,
Microink limited etc.), outstanding receivables
were kept outside the framework of
international transactions and the same was
considered as the part of the main operation.
However, unlike the earlier rulings, Tribunal in
the instant ruling considers the outstanding
receivables beyond a certain reasonable period
under the purview of international transaction
and accordingly directed the lower level
authorities to compute interest on delayed
receivables in the light of arm’s length principle
as embodied in the Indian Transfer Pricing
regulations. In light of the aforementioned
judgement and since the matter of outstanding
receivables is still pending before the Apex
Court, accordingly, the taxpayers are advised to
keep a check on the receivables in a manner that
the risks on account of such transfer pricing
adjustments are minimized.
Source: Bridal jewellery Mfg Co (TS-252-ITAT-
2019(DEL)-TP]
NEWSLETTER
September
May, 2019 16- October 15, 2018

13. ITAT held incurring of AMP- ❑ The TPO ignoring the aggregation approach
as laid down by the Hon’ble Delhi High Court
expenditure by a low-risk/no- in the case of Sony Ericsson Mobile
Communications India Pvt Ltd & Ors [TS-96-
risk distributor as an HC-2015(DEL)-TP], assessed the AMP
international transaction; transaction under segregation approach by
benchmarking the aforesaid transaction and
distinguishes from full-fledged proposing an adjustment amounting to INR
4.57 crores following ‘Bright Line test’
manufacturer (“BLT”) on protective basis by selecting 10
comparables. TPO further proposed an
Outcome: Partially in favour of both
adjustment amounting to INR 9.67 crores
Category: International Transaction; Aggregation
following ‘Cost Plus Method’ (“CPM”) on
of Transactions; Marketing Intangibles/AMP
substantive basis.
adjustment; Benchmarking of international
transaction
❑ Aggrieved by the same, the taxpayer filed an
appeal before Dispute Resolution Panel
Facts of the Case
(“DRP”). The DRP also upheld the TPO’s view
and confirmed the upward adjustment
❑ Olympus Medical Systems India Pvt. Ltd (“the
made by him but rejected few comparables
taxpayer”) incorporated as a private limited
out of the set of comparables proposed by
company, is engaged in import and resale of
the TPO having AMP expenses similar to
medical equipments and installation, repair &
those incurred by the taxpayer.
maintenance of these equipments in India.
❑ Aggrieved by the same, the taxpayer filed an
❑ During the course of assessment proceedings,
appeal before Delhi Income Tax Appellant
the Assessing Officer (“AO”) noticed that the
Tribunal (“ITAT”/ “the Tribunal”).
taxpayer has entered into international
transactions with its Associated Enterprises
ITAT’’s Ruling
(“AE”) and therefore, the AO made reference
to the Transfer Pricing Officer (“TPO”) for
❑ ITAT rejected the taxpayer’s reliance on the
determining the arm’s length price (“ALP”) of
tribunal’s judgement in the case of PepsiCo
the international transactions under section
India Holding Private Limited [TS-1250-ITAT-
92CA of the Income Tax Act, 1961 (“the Act”).
2018(DEL)-TP] with regard to the taxpayer’s
contention that the transaction of incurring of
❑ The TPO on reference made by the AO,
AMP expenses is not an international
observed that the taxpayer had incurred
transaction. In regard to the same, ITAT held
Advertisement, Marketing and Promotion
that the assessee in the PepsiCo case was a
expenses (“AMP expenses”) to promote the
full-fledged manufacturer incurring all kinds of
brand/trade name which is owned by the
risks associated with its business functions and
Foreign AE and to create the awareness of the
was also reaping all the benefits out of its
products bearing the brand/trade name of its
business whereas the taxpayer functions were
AE, which has majorly benefitted the AE by way
similar to a distributor.
of more sales to ultimate consumers.
❑ Further, ITAT also noted that prior to 2009,
❑ The TPO also observed that the AMP expenses
the parent entity of the taxpayer was trading
incurred by the taxpayer were much higher
its products through a third party, the
than that of its comparables and thus applying
agreement of which was not produced before
the principles of BLT, the expenses over and
the DRP
above the Bright line shall constitute as an
international transaction.
NEWSLETTER
September
May, 2019 16- October 15, 2018

as the same was asked to be produced for NANGIA’S TAKE

comparing the terms of agreement with regard to
remuneration/functions entered between the
third party and the AE vis-à-vis taxpayer and the
AE. In the absence of the same, the ITAT relied on
the paper book produced before it which stated
that the risk associated with legal dispute related
to products (i.e. products liability risk) sold in
India, is assumed by the AE.
❑ In view of the above, ITAT held that the AE
shall be interested in increasing the technical
awareness among its ultimate consumers, the
benefit of which shall be available to the AE
and the expenses incurred by the taxpayer
should be accordingly remunerated by the AE
to the taxpayer. Thus, the incurring of AMP
expenditure shall constitute an international
transaction.
❑ The ITAT deleted the protective adjustment
proposed by the TPO and confirmed by the
DRP in view of the decision of the Hon’ble
Delhi HC in the case of Sony Ericsson wherein
it was held that no adjustment can be made
following the BLT for routine and non-routine
expenses.
❑ The Hon’ble Delhi HC in case of Sony Ericsson
also emphasized on the difference between a
pure distribution company and a Marketing &
Distribution company by stating that the pure
distribution company assumes lower risk as
compared to the marketing & distribution
company. Thus, AMP expenses incurred by a
pure distribution company must be
appropriately remunerated by the risk bearing
AE. Thus remuneration/reimbursement shall
constitute a valid international transaction.
In the instant ruling, the tribunal held incurrence
of AMP expenses as an international transaction
for taxpayers engaged in distribution of medical
equipment. Further, the same is in line with the
jurisdictional HC ruling in Sony Ericsson case
which is distinguishable from PepsiCo India
ruling. The basic difference being that in the
latter, the taxpayer was a full‐fledged
manufacturer who bore all associated risks.
The Function, Assets and Risk Analysis holds
specific importance in the Transfer Pricing
regulations as it clearly analyses the quantum of
risks assumed by the respective AEs. Further, the
AMP issue still continues to be in a litigative
stage as there is still no consensus adjudication
by the apex court on the matter. One can expect
that the apex court of India may lay out certain
parameters which might provide a broad
framework on how to proceed in cases of
marketing intangibles. Furthermore, there are
various categories of taxpayers seeking
resolution, therefore it will be wait and watch to
see that whether the ruling of apex court will be
able to provide a final position that shall be
applicable to each category of taxpayer.
Source: Olympus Medical Systems India Pvt. Ltd
[TS-232-ITAT-2019(DEL)-TP]

❑ Further, ITAT has referred the matter back to

the file of TPO for fresh decision in line with
the jurisdictional HC ruling in the case of Sony
Ericsson to benchmark the AMP expenses
under the aggregation approach using TNMM
or in a segregated manner after taking into
account appropriate comparables or applying
Cost Plus Method or Resale Price Method
keeping in view the finding of Hon’ble Delhi
HC.
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