how to prepare for tp litigation assessments, drp, cit(a … - mr...how to prepare for tp litigation...

Samir Gandhi

Mehul Shah

Milin Thakore

4 April 2014

How to prepare for TP litigation –

Assessments, DRP, CIT(A), ITAT

© 2014 Deloitte Haskins & Sells

2

• Indian transfer pricing story so far

• Background

• Assessment proceedings

• DRP & CIT(A)

• ITAT

• Petitions for Stay of demand

• Practical tips

• Mutual Agreement Procedure (‘MAP’)

• Advance Pricing Agreement (‘APA’)

• Way forward

Contents


3

• Nine rounds of transfer pricing audits completed

• Total value of adjustments is approx. $31 billion under litigation.

• Audits for FY 2009-10 resulted in $11 billion (estimated) adjustment in the cases

audited

• Shift in focus of revenue authorities in the last few years – Issue of shares, AMP

Expenditure, PE attribution

• Dispute Resolution Panel proved not so effective, and litigation is long drawn

• No option for settlement under current law

• Multinational corporations (MNCs) opting for mutual agreement procedure (MAP) to

achieve certainty and avoid economic double taxation

• Safe Harbor Norms notified in September 2013 and safe harbor order’s have been

passed on 31 March 2014

• APA provisions were introduced in Finance Act 2012 and notified Rules on 30 August

2012

• Recently some unilateral APA’s have been concluded on 31 March 2014

• Global Developments – OECD - BEPS, Country by Country Reporting, Exchange of

Information.

Indian Transfer Pricing – Story so far


• Legal Framework for Transfer Pricing Documentation:

― Under Section 92D(1), every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed

― Certain transaction related prescribed documentation under Rule 10D(1)

Method Transaction related Information to be maintained

10D(1) (d) Nature and terms (including prices) of international transactions

entered into with each associated enterprise, details of property

transferred or services provided and the quantum and the value of

each such transaction or class of such transaction.

10D(1) (e) A description of the functions performed, risks assumed and assets

employed or to be employed by the assessee and by the

associated enterprises involved in the international transaction

10D(3) (e) Agreements and contracts entered into with associated enterprises

or with unrelated enterprises in respect of transactions similar to the

international transactions

Background

4


• Existing TP Strategy followed by majority taxpayers:

‒ Aggregation of international transactions for benchmarking such as • Import of raw materials; • Import of capital goods; • Export of finished goods; • Payment of royalty; • Payment of management services fees, etc.

‒ Identifying external comparables from public databases

‒ Comparing the profits earned at enterprise level with the arithmetic

mean of profits earned by comparables

‒ TNMM being the most popular Transfer Pricing method

Background (continued…)

5

Normal Dispute Resolution Mechanisms

6

Supreme Court

High Court

Tribunal

CIT(A) / DRP

Tax

officer

• Most tax disputes are dealt

under traditional dispute

resolution avenues

• Each level of hierarchy

involves substantial period of

time

• At times, cases at lower

levels are passed in favor of

revenue

Biggest disadvantage — It could take several years to achieve certainty in tax position!!



(A) Maintain

Contemporaneous

data / price setting /

negotiation

(B) Year end

documentation

summarizing the

outcome

( C) TP Audit

defense

Taxpayers manage (B) but

fail to maintain (A) !!

This results in:

• Surprise at the time of

assessment

• Possibility of not being

able to provide

appropriate information,

thus weakening TP

defense strategy

• Potential TP adjustment

• Revenue authorities

concluding the case in

ad-hoc manner, in

absence of required

information.

7

Adequate back-up documentation to be

maintained, which justifies the basis on

which price setting has been done

Challenges in assessment proceedings


Dispute Resolution Panel

(DRP)


The DRP Process

9

(Within 45 months from end of tax

year)

(Within 30 days of receipt of draft order)

(Within one month from end

of month of receiving

binding directions from

DRP)

(Within one month

from end of month in

which the period for

filing objections with

DRP expires)

(Within one month

from end of month in

which acceptance

received)

No demand to be raised by the tax authorities at the stage of draft order

TP order

prejudicial to

taxpayer

Draft order by tax

officer

Receipt of draft

order by taxpayer

Taxpayers to file appeal

with CIT within 30 days

after receipt of final order

from AO

(Within 9 months from the end

of the month in which draft

order is issued)

Taxpayer intimates

to tax officer of

acceptance of

variation

No action taken by

taxpayers

Taxpayer files

objections to

variations to DRP

and tax officer

DRP to issue

directions binding

on tax officer

Tax officer to pass

final order

Tax officer to pass

final order

Tax officer to pass

final order


DRP v/s CIT(A)

Particulars DRP CIT Appeal

Resolution of tax

disputes

Within 9 months Approx. 2 to 3 years

Payment of tax demand Stayed till disposal by DRP At least 50% demand to be paid

in most of the cases

Potential savings Saving of time and costs Lengthy and expensive

Exposure to pending

appeals

Unfavorable order leads to higher

exposure for pending appeals with

similar issues

Unfavorable order leads to

higher exposure for pending

appeals with similar issues

Penalty proceedings Payment of penalty deferred till the

disposal of the order

Immediate pressure on the

taxpayer

Apart from domestic appeals/DRP whether consider MAP?

10


Income-tax Appellate Tribunal


Appeals to the Income-tax Appellate Tribunal (‘ITAT’) –

Some ground rules

Income-tax Appellate Tribunal Rules, 1963

• Grounds of appeal need to be concise and not argumentative - Rule 8

• Filing of an affidavit for unsubstantiated facts – Rule 10

• Preparation of Paper books to be relied upon – Rule 18

• Production of additional evidence – Rule 18, 29, 30, 31

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Petitions for Stay of demand


Stay of demand

Stages of filing a Stay

Demand raised pursuant to an Assessment

Order and appeal pending before the CIT(A)

File a stay

‒ Firstly to the AO

‒ Then to the Additional CIT

‒ Then to the CIT

• Simultaneously to the CIT(A)

‒ Explore filing to the CCIT

‒ Finally Writ Petition to the High Court

Demand raised pursuant to a final

Assessment Order (post DRP directions) and

appeal pending before the ITAT and Demand

confirmed by the CIT(A)

File a stay

‒ Firstly to the AO

‒ Then to the Additional CIT

‒ Then to the CIT

‒ Explore filing to the CCIT

‒ Then to the ITAT

‒ Finally Writ Petition to the High Court

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• Rule 35A – Procedure for filing and disposal of stay petition by ITAT

• CBDT Instruction No.1914 dt. 2 Dec 1993 – Guidelines for stay


Stay proceedings before the Assessing Officer

Recovery proceedings initiated against a taxpayer only when he is in ‘default’ or

‘deemed to be in default’ in making payment of taxes

Application for stay of disputed demand must be made before the expiry of time

prescribed in the notice of demand. AO can consider an application for staying demand

even if it is filed beyond 30 days from the date of receipt of the notice

Application for stay shall include the following:

o brief facts of the case;

o issues giving rise to the demand;

o points for rectification, if any;

o reasons for which the rectified demand should be kept in abeyance;

o prima facie case;

o financial position;

o refunds due

Mere filing of an appeal does not operate as a stay or suspension of the order appealed

against – Collector of Customs v. Krishna Sales (P) Ltd. (AIR 1994 SC 1239).

Therefore, it is necessary that as soon as an order raising a demand is received,

taxpayer must make an application to the AO for keeping the demand in abeyance

15


Stay proceedings before the Assessing Officer

Pending disposal of the stay petition, tax authorities should not proceed with coercive

recovery measures – Mahindra & Mahindra v. UOI (59 ELT 505) (Bom)

Parameters / guidelines laid down by the Bombay High Court which are required to be

followed by the tax authorities in recovery matters

‒ KEC International Ltd. v. B.R. Balakrishnan (251 ITR 158) (Bom);

‒ UTI Mutual Fund v. ITO (345 ITR 71) (Bom)

Other Rulings on stay

‒ Coca Cola India (P.) Ltd. v ACIT (285 ITR 419) (Bom)

‒ Mahindra & Mahindra Ltd. v. AO (295 ITR 42) (Bom)

‒ Valvoline Cummins Ltd v. DCIT (307 ITR 103) (Del)

‒ Deloitte Consulting India P. Ltd. v ACIT (W.P. 235 of 2014)

‒ MHADA v ADIT (S.A. 126 of 2012)

Judicial rulings have recognised that the CIT(A) has powers to grant stay

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Stay proceedings before the Tribunal

No specific provision in the Act, conferring the power on the Tribunal to grant stay ~

inherent power (also recognised by prescription of filing fees u/s 253(7))

Stay before Tribunal can be filed only where appeal to Tribunal has been file and which is

pending disposal

Rule 35A of the Income-tax (Appellate Tribunal), Rules 1963 - Procedure for filing

stay petition before Tribunal and its disposal thereof

No specific time limit within which stay application is to be filed before Tribunal. Assessee

approaches Tribunal only when coercive proceedings are initiated against him and he is

left with no alternative

Whether one stay application for more than one appeal / assessment year?

Rule 35A(1)(b) of the Income-tax (Appellate Tribunal), Rules 1963 provides that separate

applications shall be filed for stay of recovery of demands under different enactments

thereby implying that where recovery of demands sought to be stayed pertains to the

same enactment, an assessee may file a single application for stay

o Chiranjilal S. Goenka v. WTO (66 TTJ 728) (Mum ITAT);

o Elcid Co-op Hsg. Soc. Ltd. (2 SOT 553) (Mum ITAT);

o Wipro Ltd. v. ITO (86 ITD 407) (Bang ITAT) – Contrary View

17



No specific time limit for disposing stay petitions. However, as stay petitions are normally

filed when coercive action is taken for enforcing the demand, the petitions are disposed

of by the Tribunal as early as possible

Stay petition before Tribunal is maintainable despite non-filing of stay petition before

lower authorities -

Seeking stay before the lower authorities is directory and not mandatory and hence

petition for stay can be moved directly to the ITAT without approaching lower authorities

o Broswel Pharmaceutical Inc. v. ITO (3 SOT 768) (All ITAT);

o DHL Express (India) Pvt. Ltd. v. ACIT (49 SOT 112) (Mum ITAT);

o Honeywell Automation India Ltd v. DCIT (49 SOT 333) (Pune ITAT);

o Bayer Material Science Pvt. Ltd. v. ACIT (46 SOT 46) (Mum ITAT)

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Considerations which may serve as a guideline while considering a stay petition:

o prima facie case in favour of the assessee;

o amount of tax and penalty involved in appeal;

o balance of convenience qua deposit of amount;

o possibility of irreparable injury or loss that may be caused if stay is not granted;

o safeguarding the interest of revenue;

o conduct of the assessee

These were summarized by the Calcutta High Court in Golam Momen v. DCIT (256 ITR

754) (Cal). These are only illustrative considerations. Ultimately, it depends upon facts of

each case

19


Stay proceedings before the High Court / Supreme Court

Appellate Jurisdiction of the High Court / Supreme Court:

Before the High Court it arises only when the Tribunal had granted stay on the recovery

of demand, pending the disposal of the appeal and subsequently it decided the appeal

against the assessee

In such cases, alongwith the appeal to be filed before the High Court, a notice of motion

can be filed to move the High Court for an interim relief of stay of demand pending the

disposal of the appeal

Similarly under section 261 of the Act, an appeal can be filed before the Supreme Court

after taking leave from the High Court. Thereafter, the Supreme Court can be moved for

granting interim relief for staying recovery of demand

If the High Court does not grant leave to file an appeal against its order, then a Special

Leave Petition can be filed under Article 136 of the Constitution

20


Practical tips


Practical tips

Past history of the case

Maintaining a proceeding sheet - record of the discussions which took place

in each of the hearing(s)

• Recording of the same on the letter, etc., filed (Preferably scanning the same)

• Proceeding sheet(s)

• Intimating the client

Appeal Charts / Written submissions

• Use of charts is advisable:

‒ Many grounds of appeals

‒ Bulky Order(s) of the AO / CIT(A)

‒ Voluminous submissions filed alongwith paperbook

‒ Numbers & statistics

The chart only encapsulates the submissions does not replace them – the

chart should only contain a reference to the main submissions / paperbook

22


Practical tips

• Returns, reports and documents to be thoroughly checked before filing - to

ensure no contradiction.

• Notices and communications from the department should be promptly replied to.

• If the AO is not present or available on the appointed day, record should be

maintained in the file noting this fact.

• If it is felt that the assessing authority is of an adversarial attitude all oral

submissions should be reproduced in writing.

• All submissions relating to facts, undertakings and declarations should be

signed only by an assessee unless otherwise specifically required to be signed

by the representative.

• Alternative pleas and claims to be made promptly.

• In the era of e-filing of returns, it may be advisable to immediately file a letter

(after e-filing) stating the positions, assumptions & claims in the return, to avoid

penalty.

23


Practical tips

• If a particular addition is agreed to buy peace that fact should be explicitly

brought out in the submission.

• Even if all the requirements of the department’s notice cannot be complied with,

the assessee must try to comply with a majority of them.

• If there is any delay or infringement then the default should be explained, both

on merits and on technical grounds.

Always keep a window open – for filing further details, if called for

24


Practical tips

Personality of the Officer

• Background

‒ Education

‒ Place of Posting

• Experience

‒ Posts held

• Approach

‒ Speed, details, adjournments

• Personal behaviour pattern

• Appreciate the circumstances in which

Authorities work

• Reference to Orders passed – Same Case /

Others

Case History

• Department’s stand in earlier years

• Result of the appeal

‒ CIT(A)

‒ ITAT

‒ Courts

• Is the action due to audit objection

‒ Legal position

‒ Stand of the department

25


Practical tips

Authorities' impression on submissions:

• A Mixed bag - wide variation

• Some prepared diligently

• Some verbose with no substance

• Some prepared in a hurry without necessary analysis

• Some are more legal than factual

• Some display cut-and-paste marks:

‒ E.g. in respect to selection of comparables

26


Practical tips

Preparation – technical

• Thorough knowledge of facts and issues.

• Case records.

• Discussions with client.

• Analysis of relevant case laws.

• Fall back options.

• Time Schedule.

27


Practical tips

Making the representation:

• Punctuality.

• Lucid language.

• Brief facts, earlier proceedings, legal issues arguments, case laws.

• Reference to sections, circulars, orders, paper book, copies of case laws and

chart.

• Simple numerical examples.

• Be careful in use of analogies.

• Distinguish or rebut cases/ incorrect facts relied upon by the opposite side.

28


Practical tips

• No point should be conceded without prior consent of client.

• Always summarize at the end.

• Suggest – do not insist.

• Let the other person feel that the idea is his.

• Try to see things from the authority’s point of view.

• Resist getting personal.

• Be moderate in criticism.

• Make the fault seem easy to correct.

• Make the other person feel important.

• Repeat wherever necessary.

• Pause from time to time.

• Observe the reactions of the authority.

• Be a good listener yourself.

• Wait when the authority’s are preoccupied.

• Be time conscious.

29


Mutual Agreement Procedure

(MAP)


MAP process in India

India transfer pricing adjustment

Move application with Overseas CA

File copy with Indian CA, Overseas CA

admits application and intimates Indian CA

Meeting between India and overseas CA to

explain case

Strategize and evaluate settlement options

Meeting between CAs to reach settlement

Is the

settlement

acceptable

Continue domestic

appeal process

Withdrawal of

domestic appeal

No Yes

Invoke MAP under tax

treaty

Statutory timeline – as

per respective

treaty/domestic law

Demand stayed till

dispute resolved, subject

to provision of bank

guarantee (US, UK and

Denmark)

31


MAP vis-à-vis domestic appeal process

Criteria MAP Appeal

Time frame Generally 2 to 3 years; having given that the

CAs have reached a settlement on similar

cases for other companies, the time frame

may be shorter

Can range from 7 to 12 years, depending

upon level

Approach More scope for negotiation/compromise Legalistic approach, no negotiations

Taxpayer

involvement

CAs generally involve the taxpayers during

the stage of fact finding, information gathering

and explanations. However, the taxpayers are

not the part of the bilateral negotiations

between the CAs

Significant involvement – proceedings

take place in presence of company and its

advisors

Binding

nature

Binding on Revenue; Taxpayer need not

accept if detrimental, can continue with

domestic tax law appeal

Binding, but sequential appeals can be

made to higher judicial authorities

Double tax

mitigation

Correlative relief typically available Double tax exposure if appeal is against

taxpayer

Collection of

taxes

India has MOU with US, UK and Demark for

suspending collection of taxes

Stay of demand at the discretion of the

Revenue and Appellate Authorities

Finality Decision of CA is binding on Revenue Revenue can prefer further appeal if order

is in taxpayer’s favor

32


What After MAP?

• If the MAP settlement is favourable to the Group, then:

‒ MAP accepted

‒ Domestic appeals withdrawn

‒ for that year the litigation is settled

‒ Penalty proceedings are not part of the MAP settlement but it is expected that

the Indian authorities will not press for these

• If MAP settlement in not favourable, then:

‒ MAP can be rejected by the Group

‒ Domestic appeals to be the only remedy available

‒ The cover of stay of demand no longer available

‒ The tax demand will include interest

‒ Penalty proceedings will be held in abeyance till the CIT(A) level is in progress

• For the company, the TP percentage proposed in MAP is not a benchmark for

future years but will have persuasive value

33


APA scheme in India

34


Snapshot

About 146 applications filed in the first year and close to 250 filed in the second year

Maximum anywhere in the world for the first year

Mostly for unilateral APA – some with option for bilateral

Recently some unilateral APAs concluded

Position paper for some of the bilateral APAs also finalized

To fastrack the bilateral APA process, one more CA appointed

35


Key features

• Agreement between

taxpayer and the Indian

Revenue

• Provisions are effective

from 1st July, 2012

• Binding on taxpayer and tax

authority for the transaction

covered by APA

• APA will be declared as

void, if obtained by fraud

or misrepresentation

• APA will be cancelled if

critical assumptions are

violated

• Use of any method

(whether specified or not)

with adjustments/

variations as necessary

• Valid for the maximum

period of 5 consecutive

years

• Can be unilateral,

bilateral, or multilateral

• Freedom from TP

assessments and limited

compliance post APA

• Broadly similar to APA

Schemes of other

countries

36

Overview of India APA programme


Critical decision points - GO or Not Go for an APA

Transaction amount is high

• Cash flow locked up in disputed tax demands • High tax provisioning impacting India books

The transfer pricing issue is complex

• Examples – Intra group services, royalty rates, economic adjustments, guarantee fees, business restructuring

There is large difference from tax authority’s position

• Examples – Gaps between benefit test and tangible evidence available, functional characterization of the Indian entity

There is contentious and expensive prior audit history

• Several years already under audit/litigation for the same issue then APA might be helpful in alleviating the situation

Facts are expected to remain stable over the next few years

• Helpful for continuation and renewal of the APA

Bilateral versus Unilateral APA

• Unilateral APA’s take much less time as compared to bilateral APA which might take more than a year to be agreed

37


Way forward

• Involve operational teams in tax / TP planning and documentation process

• Ensure contractual arrangements are aligned with business models and to TP

policy

• Harmonize TP documentation with other regulatory requirements

(eg customs, corporate governance)

• Consistency with global TP approach and positions adopted in other countries

• Imperative to maintain a robust transaction level documentation in respect of all

the individual transactions documenting:

‒ Functional analysis for each transaction

‒ Commercial rationale for entering into a transaction with AEs

‒ Pricing mechanism used in such transaction

‒ the benefit in case of receipt of services

• Framing a guideline to maintain documentary evidences in connection with

each transaction

• Periodic review of margins – review of transfer prices

38


Before entering into transaction After the time of entering into

transaction After entering into transaction

• Detailed documentation of terms

and conditions

• Price setting mechanism in case of

imports: evaluation of policy for

Group Companies vis-à-vis pricing

policy followed for third parties

• Evaluation of prices charged by

AE’s to third parties and evaluation

of third party supplies

• Compliance roadmap – compliance

with other laws ( e.g. customs etc.)

• Agreement for ‘long – term supply

arrangements’

• Adherence to the terms decided

• Adherence to pricing policies

• Price negotiations correspondence

attached with invoice / PO

• Clear definition of functions and risks of

each of the transaction party

• Analysing similar transaction, if any

• Review of Budget vs. Actual

• Review of margins through external

benchmarking

• Re- nogotiations, price escalations,

changes in terms of sale / purchase

etc. to be documented

• Check price of raw materials against

price declared in customs database

– TIPS software

• Year – end TP Documentation

TPO’s prefer CUP method over TNMM method

Defense strategy Import of raw material / consumables

39


Before entering into a

transaction

At the time of entering into a

transaction

After entering into a

transaction

• Detailed documentation of

terms and conditions

• Price setting mechanism in

case of exports

• Evaluation of prices

charged to AEs and

evaluation of sales to third

party

• Agreements for ‘long-term

supply arrangements’

• Adherence to the terms

decided

• Adherence to pricing

policies

• Price negotiations

correspondence attached

with invoice / PO

• Clear definition of

functions and risks of

each of the transacting

party

• Analysing similar

transaction, if any

• Review of Budget vs.

Actual

• Review of margins

through external

benchmarking

• Re-negotiations, price

escalations, changes in

terms of sale/ purchase

etc. to be documented

• Year- end TP

documentation

Defense strategy Export of Finished Goods

40


Defense strategy Trading Activity – Import of Goods


transaction


transaction


transaction

• Margins earned by AEs on

goods exported to taxpayer

– whether comparable to

third party sale?

• Analysing mark –up earned

by distributors of similar

goods in India

• Determination of functions,

Assets and risks i.e. full

fledged distributor or limited

risk distributor etc.

• Determined based on

functions who undertakes

significant people function

with respect to advertising,

marketing and distribution

• Relevant extract of

“Standard Pricing List” of

AEs

• Invoicing, POs and other

back-up documents

• SVB valuation to be

preserved and to be

consistent with price

setting analysis

• Evaluating the need for

re-negotiating mark up

• Year end TP

documentation

41


Defense strategy Sales Agency Commission


transaction


transaction


transaction

• Determining price – setting

mechanism - “percentage of

sales” or “cost-plus” based

on evaluation of functional

and risk profile

• Negotiations relating to

commission percentages

• Evaluation of PE exposure

• “Dos” and “Don’ts” to be

documented

• Adherence to mutually

agreed terms

• Evidence of negotiations/

communication with the

third party customer

• Evidence of negotiations/

communication with the

AEs

• Elaborative computation of

sales commission

• “DOs” and “DON’ts” to be

followed

• Analysing profitability

from sales agency

activities, especially

under “percentage of

sales” mechanism

• Evaluating the need for

revisiting commission

percentages

• Adherence to and

Documentation of “DOs”

and “DON’Ts”

• Year end TP

Documentation

42


• Management Service Fee charged by AEs are investigated by Tax Authorities

in great detail

• “Benefits Test” – enquiry into nature and value of benefits received by taxpayer

as a result of availing Management Service Fees

• Inability to satisfy the “benefits test” – the arm’s length value determined at a

substantially lower amount and in some cases even as NIL

• Tax Authorities also enquire into whether a similar charge is levied on other

group entities and rates thereof are also called for and examined

Defense strategy Management Service Fees

43


Defense strategy Questionnaire issued by Tax Authorities for Management Service Fees

44


Defense strategy Questionnaire issued by Tax Authorities for Management Service Fees

45


Yes

Costs Charge relevant

affiliates

Charge to affiliates by

appropriate method

Incurred to develop

intangibles?

Exclude from

allocation

Possibly exclude

from allocation

Set aside for

royalty charge

No

No

Yes

To acquire or develop

new business?

No

Yes

Performed for specific

affiliates?

On behalf of

shareholders?

Yes

No

46

Defense strategy

Management Service Fees – Flow chart analyzing need for charging costs


Defense strategy Management Service Fees - Documentation

Invoice

Service Agreement Cost allocation

calculations

Policy document with:

• Functional analysis (Benefit Test)

• Justification of allocation keys

• Rationale for mark-up

Audit statement confirming invoice in line with policy document

Benchmark of mark up

Management fee to be corroborated at TNMM level

Service Agreement Cost allocation

calculations

Invoice

Policy document with:

• Functional analysis (Benefit Test)

• Justification of allocation keys

• Rationale for mark-up

Audit statement confirming invoice in line with policy document

Benchmark of mark up

47


Description of

the service

Explanation in brief on the type of services

received

How are

these

services

received

Benefits derived

Financial Administration services

Assistance on

general

accounting

methods, cost

accounting

methods,

preparing and

monitoring

periodic

profitability

analysis;

budgeting and

business

planning

methods; capital

expenditure

requirements;

and financial

forecasts

PQRL is provided templates for overall control of all

revenues and expenses. These include

a) Centralized capital expenditure budgeting system and

monitoring of expenses against budget

b) Forward plan calendar year budget & three revisions

are there to take cognizance of change in the

environment & its effect on the business plan.

Centralized extensive annual budget preparation

exercise for each calendar year, including manpower

numbers & updating the same.

c) Monthly & quarterly accounting information directly

into Hyperion.

d) Comparison with budget and seeking sensible

commentaries on variations.

e) Assisting & examining accounts receivable based on

data submitted & raising queries where amounts are

substantially old.

f) Input of unit profitability data for each division into

Khalix on a monthly basis

g) Preparing client profitability as per the Khalix format

for Hyperion clients.

E-mails,

presentations,

meetings,

phone

conferences,

workshops

and online

access

This assistance helps

PQRL in improving

corporate

governance,

transparency and

effective reporting

systems along with

assisting in aligning

with international

accounting standards

Defense strategy

Template for documenting Benefits Test at time of receipt of management service

48


There is no clear jurisprudence on this matter. However, above cases highlight the importance of maintaining

documentary evidence to demonstrate the nature of services received and the benefits thereof.

Judicial Precedents - Management service

49

In favour Not in favour

• Dresser Rand India Pvt Ltd

• AWB India Private Limited

• McCann Erickson India Pvt. Ltd

• TNS India Pvt Ltd

• Gemplus India Private Limited

• Knorr-Bremse India Private Limited


Judicial Precedent Synopsis

Dresser Rand India Pvt Ltd

• Commercial expediency of the assessee cannot be questioned ;

• Basis of allocation of cost should be on actual costs incurred ;

• Benefit need not be always in monetary/tangible terms ;

• Evidences in the nature of e-mails, reports, guidance notes sufficient to prove the

receipt of services ; and

• TNMM accepted as an appropriate method.

AWB India Private Limited

• CUP method for benchmarking cannot be applied without examining the

comparable’ and ‘uncontrolled’ transactions ;

• Commercial expediency of the assessee cannot be questioned ; and

• Assessee has demonstrated benefits received through documentary evidences in

form of e-mail correspondences

McCann Erickson India Pvt. Ltd

• Entity level benchmarking on TNMM considered appropriate given there are no

distinct business segments ;

• Detailed charts showing cost benefit documentation has been submitted reflecting

clearly the benefits received ; and

• Benefit derived to the company must be considered from the angle of a prudent

businessman.

TNS India Pvt Ltd

• TNMM accepted as an appropriate method ;

• Difficult to place concrete evidences regarding advice provided by AE’s on daily

basis;

• Necessary to observe /perceive the way of conducting business to determine the

benefits from services; and

• Allocation of costs for similar services is consistent across group companies.

Synopsis of key judicial precedents

50


Judicial Precedent Synopsis

Gemplus India Private Limited

• The cost has been apportioned by the AE for different country centers on a mutual

agreed basis and not on the basis of actual services rendered;

• No details were available on record in respect of services rendered by the AE to

the assessee;

• The assessee has not proved any commensurate benefits against the payments of

management charges to its AE.

Knorr-Bremse India Private Limited

• Rule 10D(1) mandates the maintainability of record of uncontrolled transactions to

be taken into account in analysing the comparability of the international functions

entered into by the assessee. It, therefore, is obligatory on part of the assessee to

maintain such record and produce the same before the TPO to show that it had

benchmarked the international transaction at ALP. This obligation, however, had

not been discharged by the assessee;

• The assessee has also not shown to be willing to pay any amount for such

services, if it were, so provided by an independent enterprise or if the same would

have been performed in house.

Synopsis of key judicial precedents

51


Defense strategy Questionnaire issued by Tax Authorities for Royalty / Fees for technical services

52


Defense strategy Questionnaire issued by Tax Authorities for Royalty / Fees for technical services

(continued)

53


Defense strategy


transaction

At the time of entering

into a transaction


transaction

• Royalty agreement to be

entered into

• Rationale of entering into

royalty agreement

• Evaluating group policy

for royalty transactions

• Determining the arm’s

length royalty rate using

databases such as

RoyaltyStat, Lexis-Nexis

etc.

• Clear documentation of

benefits received on

account of the use of

technical know-how /

brand name

• Computation of royalty

as per agreement to be

kept on record

• Collating documents

evidencing benefits

received during the year

Royalty

54


Defense strategy

In respect of reimbursement / recovery of expenses paid to AEs

• Not in the nature of any chargeable services

• To confirm whether these are charged without any mark-up

• Back up of adequate third party invoices

Other transactions

55


Appeals to the Income-tax Appellate Tribunal (‘ITAT’)

Income-tax Appellate Tribunal Rules, 1963

• Concise grounds - Rule 8

“8. Every memorandum of appeal shall be written in English and shall set forth,

concisely and under distinct heads, the grounds of appeal without any

argument or narrative; and such grounds shall be numbered consecutively.

Filing of affidavits – Rule 10.

“10. Where a fact which cannot be borne out by, or is contrary to, the record is

alleged, it shall be stated clearly and concisely and supported by a duly sworn

affidavit.”

57


Appeals to the Income-tax Appellate Tribunal

Preparation of paper books, etc – Rule 18:

18. (1) If the appellant or the respondent, as the case may be, proposes to refer or

rely upon any document or statements or other papers on the file of or referred to

in the assessment or appellate orders, he may submit a paper book in duplicate

containing such papers duly indexed and paged at least a day before the date of

hearing of the appeal along with proof of service of a copy of the same on the other

side at least a week before:

Provided, however, the Bench may in an appropriate case condone the delay and

admit the paper book.]

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Production of additional evidence

18 (4)The additional evidence, if any, shall not form part of the same paper book. If

any party desires to file additional evidence, then the same shall be filed by way of

a separate paper book containing such particulars as are referred to in sub-rule (3)

accompanied by an application stating the reasons for filing such additional

evidence.

29. The parties to the appeal shall not be entitled to produce additional evidence

either oral or documentary before the Tribunal, but if the Tribunal requires any

document to be produced or any witness to be examined or any affidavit to be filed

to enable it to pass orders or for any other substantial cause, or , if the income-tax

authorities have decided the case without giving sufficient opportunity to the

assessee to adduce evidence either on points specified by them or not specified by

them, the Tribunal, for reasons to be recorded, may allow such document to be

produced or witness to be examined or affidavit to be filed or may allow such

evidence to be adduced.

Rules 30 & 31

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Additional evidence

30 Such document may be produced or such witness examined or such evidence

adduced either before the Tribunal or before such income-tax authority as the

Tribunal may direct.

31. If the document is directed to be produced or witness examined or evidence

adduced before any income-tax authority, he shall comply with the direction of the

Tribunal and after compliance send the document, the record of the deposition of

the witness or the record of the evidence adduced, to the Tribunal.

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