Transfer Pricing News

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published on 31 January 2024 I reading time approx. 2 minutes

Important Judicial Rulings on Transfer Pricing Matters

1. Hon’ble Hyderabad Tax Tribunal upholds overdue receivables as an international transaction, and directs computing notional interest on Invoices outstanding beyond a reasonable credit period

In another recent ruling on the issue of overdue receivables, Hyderabad Income Tax Appellate Tribunal (‘ITAT’) in the case of Corteva Agriscience Services India Private Limited [ITA-TP No 78/Hyd/2022], accepted the stand of the tax authorities in holding overdue receivables from associated enterprises (‘AEs’) as an international transaction and imputed notional interest at the rate of 6 percent on the amount of such outstanding receivable invoices.

In general, the ruling has relied upon the decision of Higher Courts, wherein it has been held that the delay in receipt of receivables beyond a reasonable credit period partakes the character of an advance and therefore results in an international transaction in view of explanation to section 92B (2) of the Income-tax Act, 1961, which can be then subjected to computing notional interest.

Accordingly, the Hon’ble ITAT accepted the stand of Tax Authorities to compute a notional interest in respect of the receivables outstanding for more than 30 days, at the rate of 6 percent p.a.

2. Hon’ble Mumbai Bench of ITAT accepted the entity level benchmarking of intra-group service-related transactions under TNMM Method

In an important ruling by the Mumbai ITAT in the case of UPS Express Private Limited [ITANo.2439/Mum/2022], the Hon’ble ITAT accepted the contention of the Assessee to apply transactional net margin method (‘TNMM’) for benchmarking the transactions pertaining to intra group service payment.

As per the facts of the case, the Assessee was availing certain technology support related services from its AE, for carrying out its logistics and supply chain management business. In this connection, the Assessee benchmarked the same on an aggregated basis under TNMM. However, during the assessment proceedings, the Tax Authorities disallowed the same by holding the arm’s length price of such service fee as “Nil” under “Other method”.

As the case went before the Hon’ble ITAT, the tribunal based on the documents and the justification presented, held that as the intra-group services utilized are supporting the core activities of the Assessee, the same can be benchmarked by applying TNMM.

Further, the important point to consider in the captioned judgement is that the Hon’ble ITAT did take note of the fact that the Assessee had also submitted adequate evidences to show that the services were required for the business of the assessee and those services were rendered by the AE along with the benefits received in financial terms as well as in the operational terms.

Thus, the taxpayers can rely on the said ruling and benchmark the intra-group service transactions on an aggregated basis under TNMM, depending on the face of its case. 

However, the said ruling still reemphasises that it is imperative on the taxpayers to collate and justify the “actual receipt” and “business need” of services with the documentary evidence, in the case of receipt of intra-group services.

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