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CASE LAWS

2017-TII-20-SC-TP

DCIT Vs LE PASSAGE TO INDIA TOURS AND TRAVELS PVT LTD: SUPREME COURT OF INDIA (Dated: September 22, 2017)

Income tax - AMP expenses - overseas agent - representative fee & outbound business segment

The assessee is engaged in the business of organising tours and arrangements for foreign tourists coming to India and going out of India. In order to promote business in foreign countries the assessee had appointed agents in various countries to market its services and in lieu thereof representation charges was paid to them. When the matter reached before the TPO, he held that assessee was creating market intangibles in favour of associate entrepreneur and accordingly he made adjustment in the outbound business segment by applying the bright line test and by comparing AMP expenses incurred by comparables engaged in inbound business segment. When the matter reached before High Court, it was held that mere reporting of AMP expenses in regard to outbound business, was not sufficient to conclude existence of international transaction warranting ALP adjustment.

Having heard the parties, the Supreme Court condones the delay and grants leave to the Revenue Department to defend their case on the issue of 'existence of international transaction' on account of outbound business.

Leave granted

 

2017-TII-76-HC-DEL-TP

AVENUE ASIA ADVISORS PVT LTD Vs DCIT: DELHI HIGH COURT (Dated: September 18, 2017)

Income tax - ALP - investment advisory service - outstanding receivables from AE - notional interest - international transaction - TNMM.

The Assessee company is engaged in providing non-binding investment advisory services to its AE viz., Avenue Asia Capital Management LP, New York. According to agreement, the consideration was cost plus 20% mark up of the services rendered by Assessee which included providing research reports and other material to assist the AE in carrying out assessment of potential investment opportunities in India. The Assessee thereafter filed its return declaring a total income of Rs.5,87,81,405/-, pursuant to which, a reference u/s 92CA(2) was made to the TPO, who passed an order recommending an upward adjustment of Rs.3,20,29,913/-. In addition, the TPO also recommended an adjustment of Rs. 51,34,309/- being the notional interest at 15.77% on the outstanding receivables from its AE on the basis that the same constituted an international transaction. Pursuant to the TPO’s order, the AO passed a draft assessment order and assessed the income of Assessee at Rs. 9,59,45,630/- as against the return income of INR 5,87,81,405/-.

On appeal, the ITAT remanded the matter to the TPO in respect of a few comparables for further analysis. Insofar as the adjustments for receivables were concerned, the ITAT upheld that the outstanding receivables constitute an international transaction. The ITAT, thus, restored the matter of computation of the adjustment to outstanding receivables, to the TPO with a direction to compute the interest for receivables on a day to day basis beyond the period available as per the industry standard and apply LIBOR rate of interest.

On appeal, the ITAT held that,

Whether broad functionality is sufficient to find the comparable entity, even though TNMM method allows broad flexibility tolerance in the selection of comparables - NO: HC

+ the first and the foremost issue that arises in this case is with respect to the applicability of tests laid down in Rampgreen Solutions case. This decision has clearly laid down the various principles on the basis of which determination of comparables needs to be undertaken while fixing the ALP and the margin that needs to be assigned. This Court had specifically rejected the proposition that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables. This proposition having been rejected, the Court in Rampgreen Solutions has held that the Principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted; Comparable transactions must be selected on the basis of a similarity with the controlled transaction/entity; Rule 10B (2) of the Income Tax Rules, 1962 ought to be borne in mind while choosing the factors of comparability in respect of uncontrolled transactions; Even while adopting the TNMM method, the standard for selection of the comparable transactions/entitles cannot be diluted; and wide deviation in the PLI would require further investigation/analysis. Broadly, therefore, the dictum by this Court was that though in the TNMM method, there is sufficient tolerance, mere broad functionality is by itself insufficient;

Whether an entity engaged in rendering pure investment advisory services, can be compared to those engaged in merchant banking - NO: HC

+ in the backdrop of the principles laid down in Rampgreen Solutions case and the analysis of the ITAT’s order with respect to each of the comparables disputed by the Assessee, it appears that the ITAT has gone on the usage of several terms such as debt syndication, debt financing, IPO advisory, corporate restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that the Assessee and the said comparables perform similar functions. The analysis at such a broad level, based upon the appearance of such similar terminologies, does not by itself make the functions similar in nature. The argument of the Assessee appears to be that while the Assessee was merely advising on these issues and providing advisory services to its AE, these three comparables appear to be actually involved in the providing of services relating to debt restructuring, debt financing, issuance of IPOs, mergers and de-mergers, etc. There is a difference between giving advice on these matters and actually undertaking the said services. Thus, it requires a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP. In this backdrop, when sub-advisory agreement along with the addendum thereto, is examined, the services of the Assessee cannot be termed as that of merchant banking though there may be some overlap in the advisory segment of the services provided by merchant bankers. In view of the above discussion, in order to not brook any further delay, this matter may be placed before the CIT(A) to consider as to whether these three companies can be held to be comparables in the light of observations made in Rampgreen Solutions and in this order. The CIT(A) would, thereafter, pass a comprehensive order and determine the ALP for the international transactions;

Whether every outstanding receivables from AEs, could be characterized as an 'international transaction', without verifying the nature of such receivables - NO: HC

+ as far as the question of notional interest in concerned, it was incorrect on the part of the ITAT to hold that the entire outstanding receivables constitute an international transaction. The reliance by the Assessee on the decision of this Court in Pr. Commissioner of Income Tax v. Kusum Health Care Pvt. Ltd - 2017-TII-28-HC-DEL-TP is apt. There are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the Assessee. Applying the decision in Kusum Health Care, this question is answered in the affirmative and the CIT (A) is directed to study the impact of the receivables appearing in the accounts of the Assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions.

Assessee's appeal allowed