Nangia & Co - Tax and Regulatory Newsletter - June 16-30, 2015
Nangia & Co - Tax and Regulatory Newsletter - June 16-30, 2015
Published on: Mar 3, 2016
Transcripts - Nangia & Co - Tax and Regulatory Newsletter - June 16-30, 2015
1. Aircraft maintenance services are in the nature of FTS
though not deemed to accrue of arise in India if payment is
made to earn income from sources outside India
2. License fee and management charges not under the ambit
of ‘Head Office Expenses’ under section 44C
3. Loan-arranger fee not ‘interest’ or ‘fee for technical services
4. CBDT issues circular on condonation of delay in filing claim
for refund or carry forward of losses
5. Transactions arranged between an associated enterprise
and third party domestic manufacturer through chain of
agreements is “concerted arrangement”. Section 92B
6. Reference to TPO post issue of assessment order and
subsequently initiating re-assessments is bad in law. Rulings
in case of Sap Labs and Maximise Learning followed
7. The Tribunal grants relief, classifies the taxpayer as a ‘job
worker’; held CUP as the most appropriate method and
further deletes addition made by TPO with respect to the
risk of carriage
8. Delhi High Court (‘HC’) rules on transfer of right to use goods
1. Aircraft maintenance services are in the
nature of FTS though not deemed to accrue of
arise in India if payment is made to earn income
Lufthansa Cargo India [‘the
taxpayer’] is an Indian company
and engaged in the business of
wet-leasing of aircrafts with a fleet
of four aircrafts acquired from
outside India. The taxpayer was
granted a license by the DGCA to
operate these aircrafts on
international routes only. Further
overhaul repairs were permissible
only in workshops authorized by
the manufacturer as well as duly
approved by the DGCA and there
were no such facilities in India. The taxpayer wet-leased the aircrafts
to a foreign company, Lufthansa Cargo AG, Germany [‘LCAG’] under
The taxpayer's engineering department tracked the flying hours of
every component and before the expiry of flying hours, the
component needing overhaul/repairs or needing replacement would
be dismantled by the taxpayer's engineers and sent to a German
company i.e. Lufthansa Technik’s [‘Technik’] workshops in Germany.
The taxpayer had entered into an agreement with Technik in terms
of which Technik carried out maintenance repairs without providing
technical assistance by way of advisory or managerial services. The
repairs by way of component overhaul in the Technik workshops in
Germany and other foreign workshops were in the nature of routine
maintenance repairs. No Technik personnel were deputed to India
for rendering any technical or advisory services to the taxpayer.
Likewise, the taxpayer's technical personnel did not participate in the
overhaul repairs carried out abroad by Technik or other foreign
workshops. The taxpayer used to send components with a tag to the
workshop abroad. Technik's workshops in Germany were duly
authorized by the manufacturer, i.e. Boeing USA. Upon receipt,
Technik overhauled the component in terms of the Manufacturer's
Manual, as mandated by the DGCA.
During the course of assessment proceedings the AO held that
payments were in the nature of FTS defined in Explanation 2 to
Section 9(1)(vii)(b) of the Act, and were, therefore, chargeable to tax
on which tax should have been deducted at source under Section
195(1) of the Act. The taxpayer submitted that it was unaware of the
kind of repairs that had been carried out, as none of its employees
visited Technik's facilities in connection with the repair work. These
repairs, therefore, do not constitute 'managerial', 'technical' and
'consultancy services’ as defined under Explanation 2 to Section
9(1)(vii)(b) of the Act.
The matter came before the High Court in due course of appeal,
which observed and ruled as under –
Unlike normal machinery repair, aircraft maintenance and
repairs inherently are such that at no given point of time
it could be compared with contracts such as cleaning. Component
overhaul and maintenance by its very nature cannot be undertaken
by all and sundry entities. The level of technical expertise and ability
required in such cases is not only exacting but specific, in that, an
aircraft supplied by a manufacturer has to be serviced and its
components maintained, serviced or overhauled by designated
centers. It is this specification which makes the aircraft safe and
airworthy because international and national domestic regulatory
authorities mandate that certification of such component safety is a
condition precedent for their airworthiness. The exclusive nature of
these services lead to the inference that they are technical services
within the meaning of Section 9(1)(vii) of the Act.
The explanation to Section 9(2) of the Act is deemed to be
clarificatory and also retrospective in nature but it does not
override the exclusion of payments made under Section
9(1)(vii)(b) of the Act which was clarified by the Supreme Court
in the case of G.V.K Industries [371 ITR 453]. The ‘source rule’,
i.e. the purpose of the expenditure incurred for earning the
income from a source in India, is applicable, as stated by the
Supreme Court in the case of G.V.K Industries.
The Tribunal had held that the overwhelming or predominant
nature of the taxpayer’s activity was to wet-lease the aircraft to
LCAG, a foreign company. The operations were abroad, and the
expenses towards maintenance and repairs payments were for
the purpose of earning an income abroad. Accordingly, these
payments are not taxable because they have been made for
earning income from sources outside India and therefore fall
within the exclusionary clause of Section 9(1) (vii)(b) of the Act.
[Source: DIT v. Lufthansa Cargo India - ITA 95/2005]
UK. i.e. the Head Office which in turn paid to the Lloyd ‘s Register UK.
During the course of assessment proceedings the Assessing Officer
[‘AO’] took the view that the expenses paid towards licence fees and
management charges was “head office expenses” under section 44C
of the Income Tax Act, 1961 [‘the Act’] despite the following
contentions/submissionsby the taxpayer -
The transaction was not between the head office and the branch
but between Lloyd’s Register UK and Lloyd’s Register Asia (India
Branch office) and thus the payment was only routed through
the head office.
Lloyd’s Register UK is filing separate income tax return in India
for the said income and the transactions had also been verified
by the TPO to be at arm’s length and, therefore, provisions of
section 44C do not arise.
The license fees and management fees cannot be held to be
covered with the definition of ‘head office expenses’ as defined
in section 44C of the Act, as the said section is only applicable to
general and administration expenditure as referred to in
Explanation (iv) to section 44C and thus “management charges
and licence fees do not fall under “head office expenditure” as it
only includes executive an general administration expenditure of
the nature enumerated in clause (a) to (d) and the payments do
not fall in them.
Section 44C, was a non obstante clause stating that in the case of
a non-resident, no allowance shall be made in respect of so much
of expenditure in the nature of head office expenditure as is in
excess of the amount computed as an amount equal to 5% of the
adjusted total income or the amount of so much of the
2. License fee and management charges not
under the ambit of ‘Head Office Expenses’
Lloyd’s Register Asia [‘the
taxpayer’], is an Indian Branch of
the UK based head office, Lloyd’s
Register Asia UK, which is a
subsidiary of a holding company,
Lloyd’s Register UK, which in turn
is engaged in the business of
survey and inspection of the ships.
Lloyd’s Register UK had entered
into license agreement in 2003
with all the subsidiaries, which
included Lloyd’s Register Asia UK
[‘the licensee’], whereby it
granted the licence to use brand “Lloyd register”. Lloyd’s Register UK
[‘the licensor’] thus provided general, technical and marketing
support services to all its products, which were collectively referred
agreement as “Intellectual Property Rights”.
Also a “Management service agreement” was entered between the
aforesaid parties them wherein various specialized services were
agreed to be provided which included corporate communications,
taxation and treasury services, corporate finance, group reporting
services and group quality assurance etc. For using the intellectual
property rights and the management services, license / royalty fees
and management charges were paid by the licensor to the licensee.
The fees, however was in turn collected by the Indian branch of
Lloyd’s Register Asia UK which was then was paid to Lloyd’s Register
expenditure in the nature of head office expenditure as is
attributable to the business of the assessee in India, whichever is
The Commissioner of Income Tax (Appeals) upon appeal held that
“royalty fees” paid was not covered under section 44C but the
“management charges “paid did attracted the disallowance under
section 44C and thus disallowed 50% of the “management charges “
claimed. Aggrieved, assessee preferred an appeal before Mumbai
ITAT which observed and ruled as under -
The “head office expenditure” enumerated in section 44C was in
the nature of executive and general administration expenditure
incurred by the assessee outside India. Further, the nature of
expenditure as enumerated in sub clause (a) to sub clause (c) of
the aforesaid Explanation if compared with the nature of
expenditure incurred by the assessee branch, showed that none
of the expenditure under the head “license fees” fell within this
category, even remotely.
The payment of ‘license fee’ is purely for using of
brand/trademark and other business intangibles, which are in
the nature of intellectual property. Nowhere such types of
expenditure fell within the scope of “head office expenditure” as
illustratedin clause (iv).
There is no CBDT clarification explaining the scope of executive
and general administration expenses and thus expenses under
the head “license fees” and “management charges “ did not fall
under the ambit of head office expenses.
With reference to the “management charges “, the ITAT held
that none of these services were in the nature of head office
expenditure as illustrated in sub clause (a) to (d). For computing
the deduction of head office expenditure, it was sine-qua-non that
the nature of head office expenses must fall within the illustration
given in clause (iv) of the Explanation. If any expenditure itself was
beyond the scope of head office expenditure then it could not be
brought within ambit of section 44C.
The Tribunal overturned the order of the Commissioner of Income
Tax (Appeals) holding 50% of management fees hit by Sec 44C, and
upheld its order that ‘license fee’ payment for use of
brand/trademark and other business intangibles being in the nature
of intellectual property, fells outside the ambit of Section 44C of the
3. Loan-arrangerfee not ‘interest’or ‘fee for
Idea Cellular Limited [‘the
taxpayer’], entered into a term
loan agreement with the lender,
Finnish Export Credit Limited. The
Hongkong Banking Corporation
Limited, Hongkong [‘HSBC’;
‘Arranger’], had arranged for the
loan and HSBC Bank PLC has acted
as Facility Agent . The role of the
Arranger was to liaise with the
lender and to procure the loan for
the borrower as well as to
negotiate the terms and
conditions of the facility with the
lender on behalf of the borrower. The Arranger was thus the third
party who had acted as the middleman between the borrower (the
taxpayer) and the lender (Finnish Export Credit Limited) to
achieve/negotiate the terms and conditions agreeable to both the
parties. The Arranger also could not create any binding obligation on
the borrower or the lender. Following this, Arranger had facilitated
the transaction credit facility between the lender and the taxpayer
which was agreeable to both the parties. For its services, an
“Arranger fee” was paid by the taxpayer to the Arranger.
During the course of assessment proceedings for the relevant
assessment year, the Assessing Officer [‘AO’] held the payment made
as “arranger fees” was interest u/s 2(28A) and hence taxable as fees
for technical services u/s 9(1)(vii) of the Act. The Commissioner of
Income Tax (Appeals) also held that that the payment of ‘arranger
fee’ was not only in the nature of ‘interest’ but also it is in the nature
of ‘for technical services’ within the meaning of section 9(1)(vii).
Aggrieved, the taxpayer preferred an appeal before the Income Tax
Appellate Tribunal on the question whether the fees paid to arranger
could be termed as “Interest” within the meaning of section 2(28A)
or “fees for technical services for service” within the meaning of
section 9(1)(vii). The Tribunal observed and ruled as under -
Whether the payment for “Arranger fees falls under the ambit of
“interest” u/s 2(28A)?
For a payment to classify as interest it should be in respect of the
money borrowed or debt incurred. In other words, interest is
payable by the borrower who had borrowed money from the
lender or the debt has been incurred by him in favour of the
lender who has given the money.
The Arranger was not the lender and any fee paid to him was not
in respect of the borrowing, because no debt had been incurred
by the taxpayer in favour of the Arranger vis-a-vis the money
borrowed. He was merely a facilitator who brought the lender and
borrower together for facilitating the loan/credit facility.
The second limb of the definition of interest was also analyzed and
it was observed that the definition was an inclusive definition
whereby interest encompasses to include service fee or other
charge and such fee is in respect of the money borrowed or any
debt incurred or, for unutilized credit facility. Such fee or charge is
in respect of money borrowed only i.e. given by the lender to the
borrower. Thus, the service fee or other charge did not bring
within its ambit any third party or intermediary who had not given
The element of relationship between the borrower and lender is a
key factor to bring the payment within the ambit of definition of
interest u/s 2(28A). The Arranger fee may be inextricably linked
with the loan or utilisation or loan facility but it was not a part of
interest payable in respect of money borrowed or debt incurred,
because the relationship of a borrower or a lender is missing.
Though, the fees of an Arranger may depend upon the quantum
of loan or loan facility arranged but to be included within the
meaning of term ‘interest’, it has to be directly in respect of
money borrowed, i.e. directly flowing from the consideration paid
for the use of money borrowed. It was a kind of a compensation
paid by the borrower to the lender. Thus, Arranger was only an
intermediary/third party and accordingly, any fee paid as Arranger
fee could not be termed as “interest” under both the limbs of the
definition given in section 2(28A.
Whether “Arranger fees” could be treated as “fees for technical
The term arranger fees could not be termed as “managerial” to
fall under the category of technical services. The term
‘managerial’ essentially imply control, administration and
guidance for business, day to day functioning. It includes the act
of managing by direction or regulation or superintendence. In
the present case arranging of a loan could not be equated with
lending of managerial services at all.
It was also not in the nature of ‘consultancy services’ because the
Arranger did not provide any advisory or counselling services.
The Arranger was not involved in providing control, guidance or
administration of the credit facility nor was it involved in day-
today functioning of the taxpayer in overseeing the utilisation or
administration of the credit facility. It was not in charge of entire
or part of the transaction of arranging services, hence, it could
not be termed as managerial or consultancy services within the
meaning of section 9(1)(vii) of the Act.
“Arranger fees” could not be held to be taxable u/s 9(1)(vii) and
also no TDS was deductible on such payment. Reliance was
placed on the Mumbai tribunal rulings in Credit Lyonnais vs. ADIT
[TS-205-ITAT-2013(Mum)] and DDIT (IT) vs. Abu Dhabi
Commercial Bank Ltd wherein it was held that “Arranger’s fees”
for arranging the funds does not amount to fees for managerial
or consultancy services and thus does not fall under “fees for
technical services” as defined in section 9(1)(vii).
[Source: ITA NO. 1619/Mum/2011]
4. CBDT issues circular on condonation of delay
in filing claim for refund or carry forward of
The Ministry of Finance,
Government of India has
prescribed the criteria and issued
guidelines for the condonation of
a delay in filing claim for refund/
carry forward of losses. The
Central Board of Direct Taxes
[‘CBDT’] has issued a
comprehensive circular that shall
superseding all earlier circulars/
instructions/ orders in this regard.
The key highlights of this Circular are set out below:
The power to condone a delay has been delegated to various
authorities as follows:
Upto INR 10 Lacs – Principal CIT/CIT
More than INR 10 lacs and up to INR 50 lacs - Principal CCIT/CCIT
More than INR 50 lacs – CBDT
The Application is to be made within six years from the end of the
relevant assessment year.
Such an application will be examined for acceptance/ rejection by
the authority, based on the following criteria:
The claim is correct and genuine;
There is a case of genuine hardship on merits;
Income is not assessable in the hands of any other person under
the Income-tax Act;
The refund has arisen as a result of excess tax deducted or tax
collected at source, advance tax or self-assessmenttax.
Authorities have been empowered to direct the jurisdictional Tax
Officer to make necessary inquiry or scrutiny to ascertain the
correctness of the claim. Taxpayers can claim an additional refund
even after completion of the assessment. No interest would be
admissiblein case of belated claim of refunds.
The application should be ideally disposed of by the authorities
within six months from the end of the month in which the
application was received.
A guideline has been prescribed for cases involving refund claim
pursuant to a Court Order. The time limit of six years to exclude the
period for which the proceedings were pending before any Court of
Law. In such a case, the condonation application should be filed
within six months from the end of the month in which Court order
was issued or the end of financial year, whichever being later. Time
limit of six years does not apply in the case of tax deducted at
source by banks on interest in relation to 8% Savings (Taxable)
Bonds, 2003 at the time of maturity, resulting in mismatch between
the year of recognition of income by the taxpayer (on mercantile
basis, if any) and tax deducted at source.
[Source: CBDT Circular No. 9/2015 dated June 9, 2015]
5. Transactions arranged between an
associated enterprise and third party domestic
manufacturer through chain of agreements is
“concerted arrangement” Section 92B
Facts of the case
Novo Nordisk India Private Limited
[“the Taxpayer”], is engaged in
trading of high purity insulin
formulation, insulin delivery
system and other specified
pharmaceutical products. A brief
overview of facts is critical for the
sake of better understanding.
Facts of the case
Taxpayer is a subsidiary of Novo Investments Pte. Ltd., Singapore
(“Novo Singapore”) and Novo Nordisk region International
Operations A/S, Denmark (“Novo Denmark”). Novo Nordisk A/S
(“Novo A/S”) is the ultimate holding company.
Several transactions viz. purchase of excipients, purchase of
finished goods, quality testing fee, receipt for admin services,
receipt of subvention fee are aggregated for the purpose of
manufacture the Novo products.
Agreement 4: Facility Establishment agreement whereby TPL will
create facility exclusively for insulin production in terms of the
insulin formulation supply agreement. TPL to earn fixed margin
as stated in the said agreement.
Agreement 5: Quality control testing whereby Novo A/S
undertakes to perform quality control testing of insulin
manufactured by TPL.
Agreement 6: Subvention agreement between Novo A/S and the
taxpayer whereby the taxpayer is the distributor and marketer
of insulin and pharmaceutical products in India. Novo A/S to
extend financial support to the taxpayer with no specific services
to be rendered by the taxpayer in return.
Agreement 7: Insulin crystals and excipients supply agreement
between TPL and taxpayer whereby TPL will exclusively purchase
raw materials from Novo A/S and finished formulations to be
sold only to the taxpayer.
During the course of the transfer pricing (“TP”) assessment
proceedings, with the above background, the Transfer Pricing Officer
(“TPO”) re-characterised the taxpayer as a “manufacturer” instead
of a “distributor”. TPL is considered as “captive contract
manufacturer” earning a fixed margin as per Agreement 4.
Accordingly the transaction between the taxpayer and TPL is also
considered as an “international transaction” by the TPO under the
deeming provisions of section 92B(2)(i) of the Income-tax Act, 1961
Considering the entirety of the agreements and chain of transactions
dominated by the terms of Novo A/S the TPO concluded that
introduction of TPL and treatment of the taxpayer as a trader, is
merely to avoid the incidence of the provisions of Chapter X.
benchmarking analysis. Collectively considered as “Distribution
activity” by the taxpayer.
Apart from above transactions, taxpayer has also given advance
to the third party domestic manufacturer viz. Torrent
Pharmaceuticals Ltd. (“TPL”) to be adjusted against purchase of
manufactured goods by the taxpayer.
Receipt of ITeS service fees and towards provision of
administrative services are other international transactions
Crux of the matter is with regards to the Distribution segment. The
segment is further divided into two parts i) sale of products
purchased locally; and 2) direct import and sale of products from
Novo A/S and Novo Healthcare AG.
It is imperative to highlight the chain of agreements entered into by
the taxpayer with its AE and TPL with regards to the Distribution
Agreement 1: Know-how license agreement between Novo A/S
and taxpayer. Novo A/S grants the taxpayer the exclusive rights
and license to use or sub-license the use of the Novo Nordisk
Agreement 2: Trade Mark Master License Agreement between
Novo A/s and the taxpayer. Wherein taxpayer is given the
Master License to exclusively use and sob-license the use of the
Trade Marks of the Novo products.
Agreement 3: Insulin Formulation Supply agreement whereby
the taxpayer and the third party domestic manufacturer i.e. TPL
is given the license to use Novo Nordisk know- how and
TPO applied TNMM as the most appropriate method (“MAM”),
undertook a fresh benchmarking analysis and introduced comparable
companies and considered the subvention fee received by the
taxpayer as non-operating. Resultant an adjustment of 33.78 crores.
Hence, the dispute arose as to whether the supply of raw materials
by Novo A/S to TPL to manufacture and its subsequent sale to the
taxpayer at prices controlled by Novo A/S be considered as an
Aggrieved by the findings of the TPO, taxpayer approached the
Dispute Resolution Panel (“DRP”). The DRP upheld the approach of
the TPO of recognising TPL as merely a pass-through entity. DRP
concluded that the transaction between taxpayer, TPL and Novo A/S
is an international transaction. DRP went further to apply PSM as the
MAM and eventually enhanced the adjustment by 3.14 crores after
adopting an adhoc ratio of 50:40 profit split amongst Novo A/S and
Aggrieved by the decision of the DRP, Taxpayer approached the
Tribunal to adjudicate the matter. Out of 47 grounds filed before the
Tribunal, broadly they can be split as under:
I. Whether transaction by which the taxpayer engages services of
TPL to manufacture the raw material supplied by Novo A/S into
finished goods ultimately sold to the taxpayer can be
considered as “International transaction” between “AEs”
attracting the provisions of section 92(1) of the Act?
II. Whether the approach adopted by the transactions pertaining
to supply of raw materials to taxpayer and direct import from
Novo A/S towards purely distribution function can be
Contentions of the Taxpayer before the Tribunal:
Pre-requisites for considering a transaction as an “International
transaction” are i) there should be a transaction between two
or more AEs and ii) either or both of them should be non-
In present case, the supply of raw material between Novo A/S
and TPL is a case where though one of the entities is a non-
resident however, they are not AEs. Subsequently, by virtue of
provisions of section 92B(2)(i) TPL and taxpayer could be
considered as AEs, however, both entities are “resident” and
hence, does not satisfy the pre-requisites to be regarded as
Provisions of section 92B(1) of the Act does not dispense of the
requirement to satisfy the conditions for a transaction to be
termed as “international transaction”. Section 92B(2) only
controls the definition of “Associated Enterprises”.
With regards to the pure distribution function, the taxpayer
contended that the transactions were interconnected and
ought to be benchmarked at entity level by considering the
taxpayer as a “distributor” and not a “manufacturer”.
Contentions of the revenue before the Tribunal:
The departmental representative (“DR”) contented that all the
agreements have to be read together and accordingly, its clear
that the arrangement between the taxpayer, TPL and Novo A/S
depicts that the manufacture and sale of Novo products through
TPL is an international transaction since taxpayer and Novo A/S
are AEs whilst the latter is a non-resident which satisfies the
conditions of section 92B(1) of the Act.
Referring to the various agreements DR contended that the
arrangement starts with supply of raw materials and ends with
manufacture of finished goods for the taxpayer to sell in Indian
With regards to the distribution function the DR contended that
purchase of raw material and its manufacture and sale are inter-
connected. The distribution of products imported from Novo A/S
are not closely linked transaction with the sale of manufactured
The Tribunal duly considered the facts of the case and arrived at the
The sum and substance of all the agreements is the supply of raw
material by Novo A/S to taxpayer to enable it to manufacture
and sell in India. It is a concerted action apparently intended and
framed so as to not attract the provisions of Section 92B of the
Act but in substance is a transaction between Novo A/S, TPL and
the taxpayer where Novo A/S is a non-resident. The said
transaction is an “international transaction”.
If the cost of raw material supplied to TPL is not subjected to test
of arm’s length price (“ALP”) then it could result in erosion of tax
base in India.
The transaction between TPL and the taxpayer for manufacture
of Novo products cannot fall within the ambit of provisions of
section 92(1) of the Act since income of TPL and taxpayer, being
residents, are subjected to tax in India. 11
The products sold by the taxpayer is also subjected to tax in India.
The tax base erosion can happen only at the point of time of
supply of raw material by Novo A/S.
Tribunal adjudicated that the sale of imported products is a
trading activity whilst the purchase of raw material would be
part of manufacturing activity and ought to be benchmarked
separately. Accordingly the approach of the TPO and the DRP of
applying PSM as the MAM is erroneous.
The matter is remitted back to the TPO to determine the ALP of i)
supply of raw materials; ii) import of products directly from Novo
A/S and its sale; iii) Quality testing fee are to be tested
Subvention fee received by the taxpayer not to be subjected to
ALP test and will need to be set off against any transfer pricing
adjustment to reduce the additions, if any.
The decision also covers other grounds pertaining to ALP
computation of ITeS services and Administrative support services
provided by the taxpayer alongwith few direct tax disallowances
which are not covered in detail herein.
This is yet another case the importance of “substance” over “form” is
seen forthcoming. Revenue department has frequently adopted this
macro level approach to analyse a given chain of transactions which
has led to humongous adjustments eventually.
Even the TPOs extend their reach to external sources viz. articles
published in business magazines, as in the present case, which
highlighted that group was planning to make India a hub for
manufacturing insulin in partnership with TPL in order to characterise
the taxpayer. This evidence was sufficient enough for the TPO to
consider the entire arrangement as an “eye wash” and treated the
taxpayer as a manufacturer rather than a distributor.
Maintenance of robust documentations and supporting are of
paramount importance in order to portray true and correct
functional profile. It is imperative for taxpayers to embark upon an
appropriate course of action based on the current ruling and carve
out a more robust transfer pricing policy to safeguard its
international transactions from future litigation.
[Source: Novo Nordisk India Private Limited]
(ITA No. 122/Bang-2014);
6. Reference to TPO post issue of assessment
order and subsequently initiating re-
assessments is bad in law. Rulings in case of
Sap Labs and Maximise Learningfollowed
Lister Petter India Private Limited,
(‘the taxpayer’), company
incorporated in India, is engaged
in the business of manufacture
and trading of I C Engines,
components and provides related
services. During the year 2007-08
the taxpayer had filed its return of
income and the assessment was
concluded vide order dated 19
November 2009 Subsequently, the
assessing officer referred
the matter to the transfer pricing officer (“TPO”). TPO vide order dated
21 October 2010 proposing an adjustment of Rs. 1.05 crores (approx.
USD 175,000). Based on the TPO’s order, the assessing officer initiated
re-assessment proceedings and proposed the adjustment to the income
of the taxpayer.
Aggrieved by the impugned order, the taxpayer approached the Dispute
Resolution Panel (‘DRP’). But DRP confirmed the action of the TPO.
Taxpayer aggrieved, knocked the doors of the Hon’ble Tribunal to
adjudicate the transfer pricing issue pertaining to the alleged re-
opening of the assessment based on the invalid reference made to the
TPO. The chronologies of the proceedings before the Tribunal are:
Key contentions of the taxpayer are:
Chronology of events in brief:
• 29 October 2007 = Return of income is filed
• 19 November 2009 = Assessment completed by the AO
• 18 December 2010 = Reference made to the TPO
• 21 October 2010 = Order passed by the TPO
• 14 January 2011 = Re-assessment notice issued to
• 22 November 2011 = Draft order issued by the AO.
The Taxpayer vehemently contended that the reference made to
the TPO pursuant to the issuance of the assessment order was
bad in law and out of jurisdiction.
When no return is pending for consideration before the AO,
reference made to the TPO is invalid.
Accordingly, the resultant re-assessment initiated by the AO is
also without jurisdiction. Even otherwise, no new incriminating
material was found against the taxpayer.
On the other hand the departmental representative (‘DR’) supported
the AO’s order. The DR contended that the action of the AO is
justified. Legislature does not lay the condition that reference can be
made only during pendency of assessment proceedings.
The Tribunal duly considered the facts of the case and arrived at the
Tribunal referred to the relevant section under the Act and
observed that on bare reading of the clause, it shows that the 13
reference to the TPO can be made by the AO only when the
assessmentis open before him.
Once the assessment is passed the AO cannot make a reference
to the TPO.
Tribunal relied on the decisions of the Karnataka High Court in
the case of Sap Labs (P.) Ltd. and another decision of the co-
ordinate bench in the case of Maximise Learning (P.) Ltd.
wherein similar issue arose and it was held that the once the
assessment stood terminated, there was no occasion for the AO
to make reference to the TPO for determination of arm’s length
price of the international transactions.
[Source: Lister Petter India Pvt. Ltd. (ITA 2171/PN/2012]
Further, the TPO treated the reimbursement of freight and insurance
to the taxpayer as income with respect to the risk of carriage of gold
and made another TP adjustment of INR 1.76cr by assuming risk
factor of 1%. The taxpayer contended that according to Dubai laws,
insurance cannot be done for an overseas transaction; therefore the
taxpayer on the behalf of the AE has taken insurance policies.
The taxpayer filed its objections before the Dispute Resolution Panel
[“DRP”]. The DRP rejected the objections of the taxpayer and upheld
the TP adjustment of INR 11.26cr made by the TPO.
Aggrieved by the above stated additions the taxpayer filed an appeal
before the Income Tax Appellate Tribunal [“ITAT”].
The taxpayer is a ‘job worker’ and not a ‘manufacturer’
The ITAT observed that the taxpayer imports pure gold bars of .999
or .995 fineness on free of cost [“FOC”] basis from its AE and is
required to convert the gold received into jewellery and send it back
to AE such that the quantity of pure gold content in jewellery
supplied including permissible wastage equals the quantity of pure
gold received. ITAT also observed that the taxpayer exclusively
works for its AE and no consideration has been passed by the
taxpayer for the value of gold imported from its AE and is only
entitled to making charges at the rate of $0.65 per gram of gold.
ITAT referred to the judgement rendered by Bombay High Court in
CIT Vs. Gopal Purohit 336 ITR 287 (Bom) wherein the Court held that
the substance of the transaction has to be seen rather than form of
transaction. Thus, ITAT held that just because the taxpayer has
passed memorandum/ notional entries in its books of account, it
cannot be said that the international transaction is of ‘purchase and
sale’. ITAT also noted that the cost of raw materials was not passed
between the parties to the transaction.
7. The Tribunalgrants relief,classifiesthe
taxpayeras a ‘job worker’;held CUP as the most
appropriatemethod and furtherdeletes
additionmade by TPO with respectto the risk of
Kailash Jewels Pvt. Ltd., [“the
taxpayer”], is engaged in the
business of manufacturing and
trading of Gold & Silver Jewellery
etc. During AY 2010-11, the
taxpayer entered into
international transaction with
Associated Enterprises [“AE”] viz.
M/s AL-MOWAI-JI Jewellers LLC of
Dubai (UAE). The taxpayer
benchmarked its international
transaction using Comparable
Uncontrolled Price [“CUP”] method as the most appropriate method.
During the course of the assessment proceedings, the Transfer
Pricing Officer [“TPO”] considered the international transaction
pertaining to the undertaking of job work done by the taxpayer for
its AE to be the ‘purchase and sale’ of jewellery and while calculating
Arm’s Length Price [“ALP”] added the cost of gold into the cost base.
The TPO rejected the adoption of CUP method since some of the
companies were located in different geographical locations and
applied Transactional Net Margin Method [“TNMM”] by selecting 12
comparables with average margin of 8.88% and made TP adjustment
of approximately INR 9.50cr.
. The ITAT also mentioned that the AE did not pass any financial entry
in its books of account while carrying out the subject transaction with
the taxpayer and hence, the transaction cannot be classified as of
‘purchase and sale’. ITAT was of the view that the import and export
invoices were on FOC basis which were duly verified by the custom
authorities and also no custom duty was required to be paid by the
taxpayer or by its AE for the value of gold imported and jewellery
In addition to the above, the ITAT held that the taxpayer was not the
owner of the gold imported and jewellery exported and was not
entitled to any profits on the same. ITAT referred to the judgement
in the case of R.B. Jodha Mal Kuthiala Vs. CIT 1971 82 ITR 570 (SC)
and held that gold sent cannot have two owners. A reference to the
Sale of Goods Act, 1930 was also made by the ITAT in respect of
which the ITAT mentioned that since no consideration was passed for
the value of gold between the taxpayer and its AE and therefore, the
transaction between both the parties cannot be termed as ‘sale’.
ITAT relied on the ruling in the case of DCIT Circle 3(1), New Delhi
Vs. M/s Cheil Communications India Pvt. Ltd. ITA No. 712/Del/2010
and held that the value of gold imported and exported is only a pass
through cost and cannot be part of the operating cost while
computing the margin. At last ITAT observed that the taxpayer also
does not separately invoice the jewellery items exported to AE.
TNMM can only be applied when direct methods are incapable of
determining the ALP
The ITAT referred to the comparable invoices provided by the
taxpayer and observed that the nature of business of the
comparables was similar to that of the taxpayer and prices charged
by the taxpayer was at arm’s length. ITAT held that the taxpayer
correctly applied CUP method and TNMM being an indirect method 15
cannot be applied in the case of the taxpayer. ITAT further held that
in a situation where the taxpayer has followed one of the standard
methods of determining ALP, such a method cannot be discarded in
preference over transactional profit methods unless the revenue
authorities are able to demonstrate the fallacies in application of
direct standard methods.
Further, ITAT held that the method adopted by the TPO was ex facie
incorrect as all the comparables were engaged in retail business who
sell directly to the consumer and on the other hand the taxpayer is
engaged in a business to business model whose profitability cannot
be compared to companies which are in business to consumer
model. Based on above, the ITAT deleted the first TP addition of INR
9.5cr made on account of applicability of most appropriate method.
Insurance and freight is only a reimbursement and is not a source
of income to the taxpayer
The ITAT ruled out that the taxpayer has placed on record the three
insurance policies taken by the taxpayer on behalf of its AE. ITAT
also noted that it was clear that in case on any loss, the same would
be recovered from the insurance company and paid to the AE. The
ITAT further observed that the taxpayer was only reimbursed by its
AE of the freight and insurance charges at the rate of $350
consignment. ITAT further referred to the judgement in the case of
Vodafone Vs. UOI W.P(c) 871/2014 and agreed with the contention
of the taxpayer that reimbursements can never come with the scope
of charging Section 4 of the Income Tax Act, 1961 [“the Act”] and
therefore, income cannot be deemed under the TP provisions under
Chapter X of the Act. ITAT thus, deleted the second TP adjustment of
INR 1.76cr on account of provision of facility, freight and insurance.
[Source: Kailash Jewels Pvt. Ltd. Vs. ITO [ITA No. 101/Del/2015]
latter on the routes and as per schedule specified, qualifies as
transfer of right to use of goods so as to be liable to VAT under
Section 2(zc)(vi) of DVAT Act.”
The Revenue contended that the effective control of the buses was
transferred by the assessee to DTC. In support, the Revenue relied
upon the various clauses in the agreement such as - exclusive use of
the bus on DTC routes; exclusive right to collect advertisement
revenue by the DTC; the entire revenue being collected by DTC
employees (i.e. its conductor); maintenance or repairs not at the
choice of the assessee/ owner but after approval of the DTC;
restriction upon right to terminate the contract under pain of
Ruling of the Delhi High Court
The HC, while ruling in favour of the assesee, inter-aliaheld as under:
That DTC has control over ticket collections or absolutely collects
all the revenues or that bus maintenance and repair is subject to
its prior approval, are ipso facto, not decisive either by
themselves or cumulatively in concluding that there was a
transfer of the right to use the vehicles;
In the present case, the assessee/ owner bears responsibility for
any mis-happening or accident. It commits to be the bus owner
at all times; the registration and licenses are in its favour and
most importantly, DTC has limited use for these buses, i.e. to ply
them (of course through driver provided by the assessee/ owner)
at the scheduled routes, in terms of the contract;
The various terms of the contract, summarized above, make it
vividly clear that the possession has always remained with the
8. Delhi High Court (‘HC’) rules on transfer of
rightto use goods
The assessee is a partnership firm
approved by the Government of
India as a tourist operator
engaged in the business of
providing vehicles on rental basis.
The assessee is registered under
the Delhi Value Added Tax Act
2004 (‘DVAT Act’). The assessee
had entered into agreements with
the Delhi Transport Corporation
(‘DTC’) for providing buses to it on the terms and conditions mutually
agreed. For rental of the buses, the assessee received certain amount
from DTC on account of hire charges for running its buses. The DVAT
Authorities imposed VAT on the said receipts under the DVAT Act
treating the transaction as a ‘deemed sale’ on account of transfer of
right to use the goods from the assessee to DTC.
The assessee challenged, the said order issued by the DVAT Authorities
before the Adjudication and the Appellate Authority, however both
failed. Aggrieved, the assessee filed an appeal before the HC.
The issue before the HC was as follows:
“Whether the agreement between the assessee and the DTC for giving
on hire two Deluxe buses for being plied as per requirement of the
assessee/owner. Undoubtedly, it is the obligation of the
registered owner to make the vehicles available, with
their respective drivers, for being deployed on routes, and
as per schedule, specified by DTC. The assessee/ owner
cannot withdraw the buses unilaterally nor send them for
repairs and nor can alienate their ownership in favour of a
third party, except by incurring penalties. The goods are
specified, the right to deploy them is conferred on the
third party, but the custody of the goods is retained by the
assessee/ owner who remains responsible for keeping
them fit for use in terms of the contractual obligations.
The registration certificate and the permits continue to be
in the control and possession of the assessee/ owner. The
assessee/ owner remains responsible for maintenance,
repairs, etc. and also keeps the other party indemnified
against any claim for loss or damage on account of
operations. The rights conferred on DTC by such contract,
therefore, do not result in the goods (vehicles) being
"delivered" to DTC at any stage.
Thus, the contract in question does not pass the
muster of Article 366(29A)(d) of the Constitution of
India and cannot be treated as ‘transfer of a right to
use the goods’ or a ‘deemed sale’.
[Source: Hari Durga Travels v Commissioner of Trades
and Taxes, Delhi (2015-TIOL-1300-HCDEL-VAT)]
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