ANNEXURE 4 - BMR Advisors

ANNEXURE 4
Transfer Pricing Implication on Various Entity Structures
Purchase of software by QAD India would required to comply with the arm’s length test
Undertaking the new business in a new entity would not any have significant Transfer Pricing implications
Undertaking the new business under the existing entity, would create the need for segmental reporting
Appropriate cost allocation keys would be required to be put in place for common costs amongst different
business segments
Need to document accurate functional analysis and determine appropriate Transfer Pricing methodology in
all structures
Determine an arm’s length consideration based on the functional analysis of the Indian entity in all
structures
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| 1
INTERNATIONAL FISCAL
ASSOCIATION
March 2, 2014
Mukesh Butani | Partner, BMR Legal
All rights reserved | Preliminary & Tentative
OVERVIEW OF IMPORTANT
JUDGMENTS ON INTERNATIONAL TAX
CONTENTS
All rights reserved | Preliminary & Tentative
SECTION I – PERMANENT ESTABLISHMENT
SECTION II – ROYALTY
SECTION III – OUTSOURCING
SECTION IV – TRANSFER PRICING
SECTION V - MISCELLANEOUS
Act
Income Tax Act, 1961
CG
Central Government
RBI
Reserve Bank of India
HC
High Court
LO
Liaison Office
PE
Permanent Establishment
BO
Branch Office
CoR
Certificate of Residence
PO
Project Office
CBDT
Central Board of Direct Taxes
HO
Head Office
DEPB
Duty Entitlement Pass Book
DTA
Double Taxation Avoidance Agreement
SC
Supreme Court
DTC
Direct Tax Code Bill, 2010
LTCG
Long Term Capital Gain
PBT
Profit Before Tax
CoA
Cost of Acquisition
RA
Revenue Authorities
LoB
Limitation of Benefits
DAPE
Dependent Agent Permanent Establishment
TP
Transfer Pricing
AMP
Advertising, Marketing, Promotion
TPO
Transfer Pricing Officer
DRP
Dispute Resolution Panel
FV
Face Value
Overview of important judgments on international tax
All rights reserved | Preliminary & Tentative
GLOSSARY
| 4
SECTION I – PERMANENT ESTABLISHMENT
§
LO engaged in sourcing activities
(CIT and ACIT / DCIT vs Nike Inc)
Virtual presence does not create PE
(ITO vs Right Florists Pvt Ltd)
All rights reserved | Preliminary & Tentative
§
LO ENGAGED IN SOURCING ACTIVITIES
[1/3]
CIT and ACIT / DCIT vs Nike Inc (264 CTR 508) – Karnataka HC (2013)
Facts:
(US)
Service
charge
Global
buyers
Outside India
India
Activities of LO were to identify and supervise
manufacturers, design goods as per specifications
of buyer (affiliates of the taxpayer), ensure timely
dispatch of goods, communicate decisions of the
taxpayer to the manufacturer
Goods were shipped to the buyers by
manufacturers; consideration was directly paid by
the buyers
LO
Taxpayer was remunerated in US by the buyers
Issue:
Supervision,
communication etc
Manufacturers
Whether income of the taxpayer is deemed to
accrue or arise in India?
Export sales
Consideration
Revenue’s contentions:
Activities of LO were income generating and
beyond the scope prescribed by RBI regulations
Overview of important judgments on international tax
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Nike Inc
The taxpayer, a US entity, engaged in sale of
sports apparel globally, had set up a LO in India
LO ENGAGED IN SOURCING ACTIVITIES
[2/3]
CIT and ACIT / DCIT vs Nike Inc (264 CTR 508) – Karnataka HC (2013)
Revenue’s contentions (cont):
Nike Inc
(US)
Service
charge
Global
buyers
Income of taxpayer taxable under section 5;
exemption under Explanation 1(b) to section 9(1)(i)
not available as taxpayer did not purchase goods
for the purpose of export
Taxpayer’s contentions:
Outside India
LO was involved in identifying manufactures,
assisting buyers in purchase
India
LO
Transaction for purchase of goods for export
specifically exempt under section 9(1)(i)
Supervision,
communication etc
Manufacturers
HC Ruling:
Export sales
Consideration
The taxpayer was not engaged in business
activities in India
The taxpayer did not have a right in income of the
manufacturer
Overview of important judgments on international tax
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No contract was entered into between the
taxpayer and the buyers / manufacturers in India;
no payments were received by taxpayer in India
LO ENGAGED IN SOURCING ACTIVITIES
[3/3]
CIT and ACIT / DCIT vs Nike Inc (264 CTR 508) – Karnataka HC (2013)
HC Ruling (cont):
Nike Inc
(US)
Service
charge
Global
buyers
Taxpayer did not have a ‘business connection’ in
India which expressly excludes activities confined
for the purpose of export
Supervisory activities of the taxpayer are to ensure
that manufactured goods enjoy an international
market
Outside India
India
LO
All rights reserved | Preliminary & Tentative
Object of the transaction was to purchase goods
for export purposes, hence the taxpayer was
eligible to avail exemption under Explanation to
section 9(1)(i) of the Act
Supervision,
communication etc
Manufacturers
Export sales
Consideration
Overview of important judgments on international tax
| 8
VIRTUAL PRESENCE DOES NOT CREATE PE
[1/2]
ITO vs Right Florists Pvt Ltd (154 TTJ 142) – Kolkata ITAT (2013)
Facts:
The taxpayer, a florist, used advertising space on
search engines viz Google and Yahoo
Advertisements were displayed along with web
search when a user punched certain ‘key words’
Google
Yahoo
Ireland
The taxpayer made payments to Google / Yahoo
for online advertising without withholding taxes
US
India
AO disallowed under section 40(a)(ia) as taxpayer
failed to withhold taxes from payments
Payment for advertising
Taxpayer
Whether recipients of advertising charges ie
Google / Yahoo had taxable presence in India?
Taxpayer’s contentions:
Recipients did not have a PE in India, hence their
business income was not taxable in India
Advertising charges were not taxable as royalty
under the Act / India-US DTA / India-Ireland DTA
Overview of important judgments on international tax
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Issue:
VIRTUAL PRESENCE DOES NOT CREATE PE
[2/2]
Google
Yahoo
Ireland
US
India
Payment for advertising
Taxpayer
Revenue’ s contentions:
Regardless of issue of taxability in India, the
taxpayer should have approached the AO prior to
making payments to Google / Yahoo
ITAT Ruling:
Traditional PE concept stipulates physical
presence of a foreign entity in the source country
The traditional PE test fails when commercial
activities are undertaken through a virtual
presence (report of High Powered Committee)
Search engines presence through its website
cannot be a PE unless servers are located in the
same jurisdiction
Advertising charges were not royalty income of the
recipients as the hosting service did not involve
use of right to use of any industrial, scientific or
commercial equipment
Income not FTS as services rendered were
automated and did not involve human intervention
Overview of important judgments on international tax
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ITO vs Right Florists Pvt Ltd (154 TTJ 142) – Kolkata ITAT (2013)
SECTION II – ROYALTY
§
Payment for live feed – not royalty
(ADIT vs Neo Sports Broadcast Pvt Ltd)
Payment for dedicated bandwidth usage
taxable as royalty
(Verizon Communications Singapore Pte Ltd vs ITO)
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§
PAYMENT FOR LIVE FEED - NOT ROYALTY
[1/3]
ADIT vs Neo Sports Broadcast Pvt Ltd (144 TTJ 412) – Mumbai ITAT (2011)
Facts:
The taxpayer sought a Nil withholding tax
certificate for payments to be made to Nimbus for
grant of license for broadcast as it was not in the
nature of royalty
Cricket
Board
The matches were to be broadcasted on the
Indian territory and revenue from advertisement /
subscription would be received by Nimbus
Bangladesh
Nimbus
Singapore
India
License for
broadcasting
Taxpayer
Consideration for
grant of license
There was business connection between Nimbus
and receipts in India as the matches were to be
broadcasted in India and without the receipt of
signal of the matches to be played, no income
would accrue to Nimbus
Explanation 2 to section 9(1)(vi) covered payments
for broadcasting live and recorded matches, being
in the nature of royalty for transfer of ‘copyright’
Overview of important judgments on international tax
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Revenue’s contentions:
(Agent)
PAYMENT FOR LIVE FEED - NOT ROYALTY
[2/3]
ADIT vs Neo Sports Broadcast Pvt Ltd (144 TTJ 412) – Mumbai ITAT (2011)
Revenue’s contentions (cont):
The payments were covered by the definition of
copyright as defined under Copyright Act, 1957
being ‘to perform the work in public, or
communicate it to the public’
Cricket
Board
Playing cricket is akin to performing work in public,
thus payment for live broadcasting means
payment for transfer of copyright
Bangladesh
Nimbus
ITAT Ruling:
(Agent)
Singapore
India
License for
broadcasting
Taxpayer
Consideration for
grant of license
Existence of work is a pre-condition and must
precede the granting of exclusive right for doing of
such work
‘Royalty’ does not include ‘live coverage of any
event’. Copyright and live coverage are
independent of each other. DTC expressly
includes ‘live coverage of any event’
Overview of important judgments on international tax
|
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‘Copyright’ means exclusive right to use the ‘work’
in the nature of cinematography
PAYMENT FOR LIVE FEED - NOT ROYALTY
[3/3]
ADIT vs Neo Sports Broadcast Pvt Ltd (144 TTJ 412) – Mumbai ITAT (2011)
ITAT Ruling (cont):
Nimbus has no business connection in India; to
constitute business connection some business
activity must be carried out in India
Cricket
Board
Permitting a resident to exploit certain rights
vested in it on commercial basis, it cannot be said
that the non-resident had carried out any business
activity in India
Bangladesh
Nimbus
Singapore
India
License for
broadcasting
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Transaction between Nimbus and the taxpayer
was on a principal-to-principal basis hence
Nimbus had no business connection in India
(Agent)
Consideration for
grant of license
Taxpayer
Overview of important judgments on international tax
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PAYMENT FOR DEDICATED BANDWIDTH USAGE –
TAXABLE AS ROYALTY
[1/4]
Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013)
Facts:
The taxpayer, was engaged in providing
international connectivity services through
international private lease circuit (“IPLC”)
Overseas
India
}
}
Services rendered
by the taxpayer
outside in India
Customers’
Indian
premises
Services rendered
by VSNL in India
The taxpayer not being a licensed service provider
in India, entered into an agreement with VSNL to
provide the Indian leg of the services
VSNL transmits the traffic from the customer's
Indian office to a virtual point outside India; the
taxpayer transmits it therefrom to the customers’
location outside India
Issue:
Whether payment received by the taxpayer for
providing bandwidth services via IPLC was taxable
as royalty?
Taxpayer’s contentions:
The customers did not use any equipment; access
to knowledge / process deployed by the taxpayer
Overview of important judgments on international tax
|
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Customers’
overseas
premises
PAYMENT FOR DEDICATED BANDWIDTH USAGE –
TAXABLE AS ROYALTY
[2/4]
Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013)
Taxpayer’s contentions (cont):
The consideration received was for services
rendered and not for use or right to use any
equipment / process, thus consideration did not
fall within the ambit of definition of royalty
Overseas
India
}
}
Services rendered
by the taxpayer
outside in India
Customers’
Indian
premises
Services rendered
by VSNL in India
Services provided involved transmission of data
and voice in the same form through fiber cables;
no conversion of data or voice was carried out
Network equipment were under the possession,
control, operation and use of the taxpayer / VSNL
Revenue’s contentions:
There exists nexus between the user and the situs
of usage (ie India)
Cable is regarded as commercial equipment; thus
for the equipment usage and the services utilized,
the payment falls within the definition of royalty
Customers had substantial economic interest in
the equipment to the extent of the bandwidth hired
Overview of important judgments on international tax
|
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Customers’
overseas
premises
PAYMENT FOR DEDICATED BANDWIDTH USAGE –
TAXABLE AS ROYALTY
[3/4]
Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013)
HC Ruling:
In the backdrop of the agreements with VSNL, the
customers, VSNL-customers - it is clear that they
are part and parcel of a composite agreement only
split for commercial purposes
Overseas
India
}
}
Services rendered
by the taxpayer
outside in India
Customers’
Indian
premises
Services rendered
by VSNL in India
To achieve high speed connectivity, the equipment
at the customer's site must have the requisite data
exchange capacity. Such equipment at the
customer's site was provided by the taxpayer
The taxpayer provided essential equipment (viz
modem, routers etc) to ensure uninterrupted
connectivity. The contract between the customer
and taxpayer ensured that the customer had a
dedicated active internet at a particular speed
There was use of equipment / cable for
transmission of data / voice, thus the taxpayer’s
view that only services were provided was
improper as the provision of service was not
possible without the use of the equipment
Overview of important judgments on international tax
|
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Customers’
overseas
premises
PAYMENT FOR DEDICATED BANDWIDTH USAGE –
TAXABLE AS ROYALTY
[4/4]
Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013)
HC Ruling (cont):
Even if payment not treated as one for use of
equipment, it tantamounts to use of the process
provided by the taxpayer
Customers’
overseas
premises
India
}
}
Services rendered
by VSNL in India
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Overseas
Services rendered
by the taxpayer
outside in India
Usage of bandwidth by the taxpayer has to be
seen in light of technology governing the process
and consideration for usage of bandwidth fell
within the ambit of ‘royalty’
Customers’
Indian
premises
Overview of important judgments on international tax
|
SECTION III – OUTSOURCING
§
Profit attribution should be based on TP
principles
(Convergys Customer Management Group Inc
vs ADIT)
Rendition of services through Indian affiliate –
does not per se constitute PE
(DIT vs eFunds Corporation)
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§
PROFIT ATTRIBUTION SHOULD BE BASED ON
TP PRINCIPLES
[1/3]
Convergys Customer Management Group Inc vs ADIT (159 TTJ 42) – Delhi ITAT (2013)
Facts:
The taxpayer was engaged in providing IT-enabled
customer management services
(US)
Employees of the taxpayer visited I Co to provide
supervision / control over the operations of I Co
Services
Outside India
India
The Indian affiliate of the taxpayer, I Co, provided
IT-enabled call-centre / back-office support
services to it on principal to principal basis
Issue:
I Co
Taxpayer’s contentions:
Does I Co constitute PE of the taxpayer in India?
What are the attributable profits to the PE?
Obtaining services is akin to procurement of goods
– fixed place for procuring services will not
constitute PE of the taxpayer in India
Existence of subsidiary company does not by itself
constitute PE of the taxpayer
Overview of important judgments on international tax
|
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Customers
Taxpayer
PROFIT ATTRIBUTION SHOULD BE BASED ON
TP PRINCIPLES
[2/3]
Convergys Customer Management Group Inc vs ADIT (159 TTJ 42) – Delhi ITAT (2013)
Taxpayer’s contentions (cont):
Basis of profit attribution by the AO were realistic
and unreasonable
(US)
India
Services
Outside India
I Co
I Co had been remunerated at ALP; thus no further
attribution required
Risk of procurement of services from I Co lay with
the taxpayer; since customers were outside India,
the aforesaid risk resided outside India – no profits
should be attributed for management of risks
Revenue’s contentions:
Keeping in view the interlinking and interlacing, the
taxpayer had a PE in India
Profit attribution exercise was reasonable
ITAT Ruling:
I Co was projection of taxpayer’s business in India
as I Co’s business was carried out under control
and supervision of employees of the taxpayer
Overview of important judgments on international tax
|
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Customers
Taxpayer
PROFIT ATTRIBUTION SHOULD BE BASED ON
TP PRINCIPLES
[3/3]
Convergys Customer Management Group Inc vs ADIT (159 TTJ 42) – Delhi ITAT (2013)
ITAT Ruling (cont):
The taxpayer’s employees had a fixed place of
business at their disposal; hence PE created
(US)
Profit attribution should be based on TP principles
Outside India
Correct approach for attributing profits:
Services
India
Methodology for profit attribution by RA not
acceptable as revenue of the taxpayer was the
starting point for arriving at the attributable profits
I Co
§ Step 1: Compute global operating income / profit
percentage as per annual report of the taxpayer
§ Step 2: Profits of I Co = percentage (computed
under step 1) * end customer revenues with regard
to contracts / projects
§ Step 3: PBT - operating income from Indian
operations (residual profits attributable between
India and US)
§ Step 4: Profits attributable to the PE should be
estimated on residual profits
Overview of important judgments on international tax
|
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Customers
Taxpayer
RENDITION OF SERVICES THROUGH INDIAN
AFFILIATE – DOES NOT PER SE CONSTITUTE PE
[1/4]
DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014)
Facts:
eFunds
IT
eFunds
Inc
The taxpayers inter alia obtained call center and
software development services from eFunds India
100%
US
Netherlands
100%
IDLX
Whether any profits were further attributable to the
Indian PE
Revenue's contentions:
Facilities viz call center services were at the
disposal of taxpayers
Professional service contract executed fully in India
Overview of important judgments on international tax
|
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Whether taxpayers have business connection/ PE
in India?
Services
eFunds
For provision of aforesaid services, eFunds India
accessed database of the taxpayer, stored on
servers located outside India
Issue:
100%
India
The taxpayers, US entities, were inter alia engaged
in providing ATM management and professional
services to customers outside India
RENDITION OF SERVICES THROUGH INDIAN
AFFILIATE – DOES NOT PER SE CONSTITUTE PE
[2/4]
eFunds
IT
eFunds
Inc
100%
US
Netherlands
100%
IDLX
Services
100%
India
eFunds
Revenue's contentions (cont):
Terminals to which eFunds India had access
constituted fixed place PE of the taxpayers in India
Core business activities of the taxpayers conducted
in India; hence taxpayers had business connection
Taxpayers assumed risk / responsibility of the
services provided to the clients, thus the taxpayers
also undertook responsibility of the activities
performed by eFunds India
Employees of taxpayers operated from India
Taxpayers’ contentions:
Revenue generated from profession service
contract was trivial – no core business activities
carried out in India other than preparatory/ auxiliary
Taxpayers had no LO / PE or business connection
in India and premises of eFunds India were not at
the disposal of the taxpayers; terminals belonged to
eFunds India not to the taxpayers
Overview of important judgments on international tax
|
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DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014)
RENDITION OF SERVICES THROUGH INDIAN
AFFILIATE – DOES NOT PER SE CONSTITUTE PE
[3/4]
eFunds
IT
eFunds
Inc
100%
US
Netherlands
100%
IDLX
Services
100%
India
eFunds
Taxpayer’s contentions (cont):
Mere outsourcing of some work by the taxpayers
does not result in business connection in India
Employees operating in India were of eFunds India
Since eFunds India was paid at ALP – no further
attribution warranted
ITAT Ruling:
The scale of services, duration and relationship
between the taxpayers and eFunds India create
business connection of taxpayers in India
Responsibility vests with the taxpayers, significant
risk is not borne by eFunds India
Considering nature of activities carried out in India,
eFunds India constituted PE of the taxpayers
Based on the ‘Global Annual report’, the activities
carried out by eFunds India were not preparatory /
auxiliary but income generating activities
eFunds India not remunerated at ALP
Annexure
Overview of important judgments on international tax
|
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DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014)
RENDITION OF SERVICES THROUGH INDIAN
AFFILIATE – DOES NOT PER SE CONSTITUTE PE
[4/4]
eFunds
IT
eFunds
Inc
100%
US
Netherlands
100%
IDLX
Services
100%
India
eFunds
HC Ruling (cont):
No material to hold that taxpayers had right to use
premises of eFunds India
Taxpayers had business connection in India as
eFunds India provided details to taxpayers for
entering into contracts and contracts were fully /
partly executed in India – however not a sufficient
business connection or taxability
Fact that eFunds India did not bear significant risks
– irrelevant for determining PE constitution
eFunds India does not result in PE of non-resident
taxpayer – separate legal entity concept prevails
Independence of subsidiary not negated incase of
sub-contract between AEs unless generic
conditions for PE constitution are satisfied
Employees were of eFunds India – employees must
be of taxpayers to constitute service PE
No DAPE - requirements of Article 5(4) not satisfied
ITAT appropriately determined attribution of profits
Overview of important judgments on international tax
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DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014)
SECTION IV – TRANSFER PRICING
§
AMP expenses incurred for AEs warrant TP
adjustments
(LG Electronics India Pvt Ltd vs ACIT)
Share issuance to AE
(Vodafone India Services Pvt Ltd vs UoI )
All rights reserved | Preliminary & Tentative
§
AMP EXPENSES INCURRED FOR AEs WARRANT TP
ADJUSTMENTS
[1/3]
LG-K
Korea
India
100%
1% royalty
on sales
LG-I
Technical
assistance &
royalty
agreement
Facts:
LG-K and LG-I entered into an agreement that
granted LG-I inter alia right of manufacture, sales
of agreed products on payment of 1% of sales
LG-K licensed LG-I the use of its brand name and
trademarks without any consideration
During the course of TP proceedings, the TPO and
DRP held that LG-I had incurred excessive AMP
expenses vis-à-vis its comparable entities
Excessive expenditure was regarded as incurred
for brand promotion of LG-K
Issue:
Whether TPO was justified in making TP
adjustments for AMP expenditure?
Whether TPO was justified in holding that LG-I
should have earned a mark from LG-K for brand
promotion (ie excessive expenditure on AMP)
incurred on behalf pf LG-K?
Overview of important judgments on international tax
|
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LG Electronics India Pvt Ltd vs ACIT (152 TTJ 273) – Delhi ITAT - SB (2013)
AMP EXPENSES INCURRED FOR AEs WARRANT TP
ADJUSTMENTS
[2/3]
LG-K
Korea
India
100%
1% royalty
on sales
LG-I
Technical
assistance &
royalty
agreement
Taxpayer’s contentions:
TPO could not suo-moto assume jurisdiction over
AMP matter in the absence of reference by AO
AMP expenses were incurred for LG-I’s business
In the absence of agreement between LG-K and
LG-I, AMP expenses could not be regarded as
brand building
AMP not to be split into parts for LG-I and LG-K
AMP expenses were not ‘international transaction’
as payment for AMP was made to third parties
Bright Line Test (“BLT”) not prescribed method for
determining ALP in relation to AMP expenses
ITAT-SB Ruling:
Suo-moto assumption of jurisdiction by the TPO
covered by sub-section 2B to section 92CA
No agreement required between AEs for brand
promotion – LG-I had incurred AMP expenses for
brand legally owned by LG-K
Overview of important judgments on international tax
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LG Electronics India Pvt Ltd vs ACIT (152 TTJ 273) – Delhi ITAT - SB (2013)
AMP EXPENSES INCURRED FOR AEs WARRANT TP
ADJUSTMENTS
[3/3]
LG-K
Korea
India
100%
1% royalty
on sales
LG-I
Technical
assistance &
royalty
agreement
ITAT-SB Ruling (cont):
When licensed manufacturers incur AMP
expenses for brand promotion and MP expenses
exceed that of comparables – manufacturer
deemed to render service to the brand owner
By incurring excessive AMP expenses by LG-I,
there was a transaction of creating, improving
marketing intangibles for LG-K – such transaction
was in the nature of service rendered to LG-K
BLT – a tool to measure the cost of unusual
marketing expenses – not a method for stating
ALP of such transactions
RA used mark-up over non unusual cost to arrive
at the value of brand promotion service by using
cost plus method
Applied by:
Canon India Pvt Ltd vs DCIT (24 ITR 694)
Distinguished by:
BMW India Pvt Ltd vs Addl CIT (157 TTJ 36)
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LG Electronics India Pvt Ltd vs ACIT (152 TTJ 273) – Delhi ITAT - SB (2013)
SHARE ISSUANCE TO AE
[1/3]
Vodafone
Mauritius
India
100%
Issue of
equity shares
Consideration
for issue of
shares
Taxpayer
Facts:
The taxpayer, issued equity shares of FV INR 10
at a premium of INR 8,591 to its holding company
in FY 2008-09
The transaction was reported in Form 3CEB
Adjustments of TPO enhanced value per share to
– INR 53,775 on NAV basis
The difference between NAV and issue price was
treated as a deemed loan to the holding company
and notional interest was charged thereon
Taxpayer approached DRP on quantum of
adjustments made by the AO / TPO
Issue:
Whether TP regulations are applicable on issue of
shares?
Taxpayer’s contentions:
Earning income is sine non qua to invoke TP
provisions
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Vodafone India Services Pvt Ltd vs UoI (264 CTR 30) – Bombay HC (2013)
SHARE ISSUANCE TO AE
[2/3]
Vodafone
Mauritius
India
100%
Issue of
equity shares
Consideration
for issue of
shares
Taxpayer
Taxpayer’s contentions (cont):
Intent of TP provisions was to ensure avoidance of
tax with respect to taxable income
Consideration for issue of shares – capital receipt
and was not income of the taxpayer
Transaction of issuance of shares - creation of an
asset and not a transfer of an asset
Invoking TP provisions on share issuance –
implied taxation of hypothetical income
Section 56(2)(viib) – not applicable for the subject
FY; Section 92 was not a charging provision
Revenue’s contentions:
Disparity in ALP computed by TPO - part of
notional income; statutory provision not required to
tax the same
Share issuance – an international transaction; thus
differential between issue price and ALP impacted
income of the taxpayer
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Vodafone India Services Pvt Ltd vs UoI (264 CTR 30) – Bombay HC (2013)
SHARE ISSUANCE TO AE
[3/3]
Vodafone India Services Pvt Ltd vs UoI (264 CTR 30) – Bombay HC (2013)
HC Ruling:
Matter remanded to DRP – to determine
applicability of TP provisions on share issuance
transaction
DRP to consider whether income of the taxpayer
was impacted by the subject transaction
Vodafone
Mauritius
India
100%
Issue of
equity shares
Consideration
for issue of
shares
Taxpayer
Earning income from an international transaction
sine non qua for application of TP provisions, else
exercise of determining the ALP only academic in
nature
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AO bound to grant opportunity of hearing to the
taxpayer before referring the matter to TPO where the taxpayer objects to the applicability of
TP regulations
SECTION V – MISCELLANEOUS
§
Capital gain tax rate in off-market sale of
shares by non-residents
(Cairn UK Holdings Ltd vs DIT)
Indirect transfer of shares not taxable under
India-France DTA
(Sanofi Pasteur Holding SA vs DoR)
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§
CAPITAL GAIN TAX RATE IN OFF-MARKET SALE OF
SHARES BY NON-RESIDENTS
[1/2]
Taxpayer
M Co
Malaysia
UK
India
Equity
shares
Transfer
of shares
I Co
Facts:
The taxpayer transferred its equity shareholding
held in an Indian listed company, to M co in an offmarket transaction
The taxpayer computed its capital gains tax liability
@ 10% as per proviso to section 112(1)
Issue:
Whether the proviso to section 112(1) was
applicable to a non-resident taxpayer?
Revenue’s contentions:
Tax rate of 10% under proviso to section 112(1) is
available to taxpayers who were eligible for
indexation benefit under section 48
If lower rate is applied, it would result in double
benefit - protection against currency fluctuation
and lower tax rate of 10%
If lower rate is applied, then 20% rate on LTCG
would become redundant, which was not the intent
of the statute
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Cairn UK Holdings Ltd vs DIT (359 ITR 268) – Delhi HC (2013)
CAPITAL GAIN TAX RATE IN OFF-MARKET SALE OF
SHARES BY NON-RESIDENTS
[2/2]
Taxpayer
M Co
Malaysia
UK
India
Equity
shares
Transfer
of shares
I Co
Taxpayer’s contentions:
Proviso to section 112(1) does not mandate
applicability of second proviso to section 48
Shares transferred were listed, no indexation
benefit availed - proviso to section 112(1) thus
applicable [Relied on Timken France SAS (AAR)]
HC Ruling:
First and second proviso to section 48 operate
independently and have different purposes
Section 112(1) did not restrict a taxpayer who
availed the benefit of neutralization of foreign
exchange risk from claiming 10% tax rate
Section 112(1) benefit could not be denied merely
because the indexation benefit was not applicable
to a non-resident taxpayer
Legislative intent is to tax LTCG on listed shares at
10% without availing the benefit of indexation
If the legislature intended to deny the benefits, it
would have explicitly provided for in the statute
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Cairn UK Holdings Ltd vs DIT (359 ITR 268) – Delhi HC (2013)
INDIRECT TRANSFER OF SHARES NOT TAXABLE
UNDER INDIA-FRANCE DTA
[1/3]
Sanofi
Aventis
100%
MA
GIMD
Sanofi
Pasteur
19.63%
80.37%
Transfer of shares
ShanH
France
India
80%
SBL
Facts:
Sanofi Pasteur had acquired shares of ShanH
The AAR held that transaction was taxable in India;
Sanofi liable to withhold tax from consideration
The buyer/ sellers filed a writ petition before the HC
Issue:
Whether ShanH was a colourable device /
arrangement was a sham for avoidance of capital
gains tax under the Act?
Whether the retrospective amendments to the Act
impact the provisions of the DTA?
Whether the transaction was taxable in India?
Taxpayer’s contentions:
Transfer of shares of ShanH does not tantamount
to transfer of shares of SBL
As per DTA , capital gains taxable only in France
An asset of an entity is not an asset of shareholder
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Sanofi Pasteur Holding SA vs DoR (354 ITR 316) – Andhra Pradesh HC (2013)
INDIRECT TRANSFER OF SHARES NOT TAXABLE
UNDER INDIA-FRANCE DTA
[2/3]
Sanofi Pasteur Holding SA vs DoR (354 ITR 316) – Andhra Pradesh HC (2013)
100%
MA
GIMD
Sanofi
Pasteur
19.63%
80.37%
Transfer of shares
ShanH
shares of SBL as a nominee
§ ShanH did not make payment for acquiring shares of
France
India
80%
SBL – it was not a party to the resolution for
purchase of shares of SBL
§ ShanH is the alter ego of MA / GIMD, the beneficial
and legal owner of shares
SBL
Retroactive amendments to section 2(47) deems to
have always included direct / indirect disposal of an
asset
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Sanofi
Aventis
Taxpayer’s contentions (cont):
Since the CoA of the controlling interest is not
determinable, the capital gain computation
mechanism fails thus the gain, if any, cannot be
regarded as chargeable to tax
Revenue’s contentions:
Share transfer was effected to gain control /
management in SBL
Corporate veil should be lifted on account of:
§ ShanH has no commercial substance and holds
INDIRECT TRANSFER OF SHARES NOT TAXABLE
UNDER INDIA-FRANCE DTA
[3/3]
Sanofi
Aventis
100%
MA
GIMD
Sanofi
Pasteur
19.63%
80.37%
Transfer of shares
ShanH
France
India
80%
SBL
HC Ruling:
ShanH was an investment vehicle
ShanH held shares of SBL since inception, thus
was the legal and beneficial owner of shares
ShanH continues to be shareholder of SBL after
transfer of shares by MA / GIMD
France was not a tax haven, the tax liability of the
transaction being higher in France, hence the
transactions undertaken were not abusive and
lifting the corporate veil is not permitted
Even if corporate veil is pierced, the transaction
was for sale of shares of ShanH by MA and GIMD
and the case was not that of transfer of shares of
SBL
Retroactive amendments under the Act do not have
a bearing on the provisions of DTA
Transfer of shares of ShanH not taxable under
Article 14(5) of the DTA, hence Sanofi not liable to
withhold taxes from consideration paid
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Sanofi Pasteur Holding SA vs DoR (354 ITR 316) – Andhra Pradesh HC (2013)
ANNEXURE 4
Transfer Pricing Implication on Various Entity Structures
Purchase of software by QAD India would required to comply with the arm’s length test
Undertaking the new business in a new entity would not any have significant Transfer Pricing implications
Undertaking the new business under the existing entity, would create the need for segmental reporting
Appropriate cost allocation keys would be required to be put in place for common costs amongst different
business segments
Need to document accurate functional analysis and determine appropriate Transfer Pricing methodology in
all structures
Determine an arm’s length consideration based on the functional analysis of the Indian entity in all
structures
C and
h aFor
ldistribution
l eUndertaking
n g e U activities
s Sales and
Alternate ModesProposed
of India Presence
Distribution Activities
sales
in India
|
ANNEXURE
Mechanism to compute profits attributable to eFunds India:
Determination of proportion of Indian assets to Global assets ie including eFunds India’ s assets
Aggregate of global profits of Group (inclusive of eFunds India’ s profits)
Working of total profits attributable to India out of global profits in same proportion as above
Aggregate India attributable profits of group - X
Less: Indian subsidiary’s international assessed Profits - Y
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Profits attributable to taxpayers Indian PE is Z = (X-Y)
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