TaxTMI 
TaxTMI 
2020 (11) TMI 1137
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....he overseas market is distributed by the assessee through its Associated Enterprises (AEs) in each of the following countries :- (1) United Kingdom; (2) Canada; (3) United States of America; and (4) Malaysia Separate distribution and master agreements were executed with each of the AEs. The same are available at pages 179 to 206 of the Paper Book. The ld. Authorized Representative of the assessee contended that a perusal of said agreements, would show that the AEs shall be responsible for distribution activities, appointing advertising agencies, negotiating contracts with overseas customers, etc. The service liability risk shall be borne by the assessee. As per the terms of agreement, the AEs for their services (distribution activities) are compensated for operating expenses (i.e. front office cost) incurred for undertaking distribution activities. The revenue earned from the customers after deducting such expenditure( at arm's length) is transferred to the assessee. The ld. Authorized Representative of the assessee further pointed that a close examination of the agreement would clearly show that the risk of the AEs as distributors is mini....
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....ized Representative of the assessee referred to transfer pricing order in the case of Mastek Ltd. for assessment year 2014-15 at page 766 of the paper book. The ld.Authorized Representative of the assessee submitted that Mastek Ltd. carried offshore insurance business since assessment year 2006-07 upto assessment year 2014-15. Throughout this period Mastek Ltd. selected foreign AEs as tested party and the same was never questioned by the Revenue. It is only when offshore insurance business was carried by the assessee, the Revenue raised objection in treating foreign AEs as tested party. The ld. Authorized Representative for the assessee asserted that even during the intervening period when offshore insurance business was conducted by Majesco Ltd. for short period after demerger, the Revenue raised no objection on foreign AEs being selected as tested party. The ld.Authorized Representative of the assessee pointed that for the period starting from 01/04/2014 to 31/10/2014 in the financial year 2014-15, offshore insurance business was carried by Majesco Ltd. for the benefit and in trust for the assessee. The income earned from offshore insurance business during the said period was ....
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....ke it evident that the service liability risk is borne by the assessee. In furtherance to the service liability, the assessee may issue performance guarantee to the customers. The ld. Authorized Representative of the assessee referred to the performance guarantee agreements at page 179 to 206 of the Paper Book executed by Mastek Ltd.(demerged entity) with its AEs. The ld. Authorized Representative of the assessee pointed that a perusal of the sample agreement would show that the guarantor i.e. Mastek Ltd. shall be liable as a primary obligor. The customer shall not be bound to seek or exhaust recourse against the AEs. The guarantee shall continue to be in effect notwithstanding termination or expiry of the Master Agreement with the AEs. Thus, from perusal of the guarantee agreement it can be deduced that performance guarantee is for the services provided by the Mastek Ltd. itself to the customer and there is no benefit received by the AEs. The ld.Authorized Representative of the assessee further referred to communication dated 16/04/2010 at page 1048 of the Paper Book to show that Mastek Ltd. has guaranteed irrevocably and unconditionally for due performance of the agreement entere....
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....ever, foreign comparables are also considered as tested party, where foreign AE is least complex entity. The ld. Authorized Representative of the assessee further referred to OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2017 with respect to choice of tested party which states that least complex party should be selected as tested party. The ld. Authorized Representative of the assessee further referred to the following decisions, where foreign AE was accepted as tested party. - General Motors India Pvt Ltd v DCIT [2013] 37 taxmannn.com 403 (Ahd. Trib.) - ITO v WNS Global Services Pvt Ltd [TS-474-ITAT-2018(Mum) -TP] - Yamaha Motor India (P.) Ltd. v ACIT [2014] 50 taxmann.com 444 (Delhi - Trib.) - Development Consultants (P.) Ltd v. DCIT [TS-3-ITAT-2008(Kol)] 11. We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. We have also examined the material and case laws referred by both the sides during the course of their submissions. The assessee in appeal has raised five grounds. The ground No.1to 3 are general in nature and hence, required no a....
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.... The Hon'ble Bombay High Court vide order dated 30/04/2015 (at page 305 of Paper Book) and Hon'ble Gujarat High Court vide order dated 15/05/2015 (at page 423 of the Paper Book), respectively approved the scheme of arrangement w.e.f. 01/06/2015. Consequent to demerger, insurance products and services business was transferred from Mastek Ltd. to Majesco Ltd. w.e.f. 01/04/2014. The offshore insurance business was conducted by demerged company i.e. Majesco Ltd. Thereafter, ensuing slump sale of offshore insurance operations by Majesco Ltd. to the assessee, w.e.f. 01/11/2014 the said business was conducted by the assessee. Thus, during the period relevant to the assessment year 2015-16, for the part of the financial year 2014-15 i.e. from 01/04/2014 to 31/10/2014 offshore insurance business was carried by Majesco Ltd. and for the later part of the financial year 2014-15 starting from 01/11/2014 the offshore insurance business was conducted by the assessee. The evolution of assessee company from Masktek Ltd. can be easily understood with the help of following chart :- 15. In so far as the facts relating to the business of the assessee and germination of assessee from demerger....
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....re proceeding further, it would be relevant to refer to the meaning of 'Tested Party' and manner of selecting 'Tested Party'. The term Tested Party has not been defined under the provisions of Income Tax Act or the Rules framed thereafter. The Tested Party has been defined in the OECD guidelines as: "The OECD Guidelines defines 'tested party' as "the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparable can be found, i.e. it will most often be the one that has the less complex functional analysis." UN Manual defines tested party in the similar manner. A Tested party should have the following attributes on bases of these definitions: 1. Available of reliable and accurate data for comparison 2. Least Complex (amongst the parties to the transaction) 3. Data available can be used with minimal adjustments." 18. The selection of 'Tested Party' is an important step in determination of Arm's Length Price. Therefore, selection of 'Tested Party' become significant in Transfer Pricing study. The basic requirement for selecting a 'Test....
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....cross a threshold and contain stringent penalty implications in case of non-compliance. The primary onus of proving the arm's length price of the transaction lies with the taxpayer. The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprise is the less or least complex entity and requisite information is available about the tested party and comparables." 20. The Tribunal in one of the early decisions on the issue of foreign entity being selected as 'tested party' rendered in the case of Ranbaxy Laboratories Ltd. vs. Addl. CIT reported as 110 ITD 428 (Delhi)/167 Taxman 30 (decided on 22/1/2008), recognised that foreign AE can be taken as tested party to determine ALP of the transaction subject to certain conditions. The relevant extract of the Tribunal order reads as under: "58. We have also given careful thought to the other submissions of Shri Vohra. The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or fore....
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....d majority of them were in favour of selecting the 'tested party' either from local or foreign party and the United Nation's Practical Manual on transfer pricing for developing countries had observed that 'It may be the local or the foreign party', we tend to agree with the same." 22. In the case of GKN Driveline (India) Ltd. vs. DCIT in ITA No. 278/Del/2017 for AY 2012-13 decided on 28/3/2018, the Coordinate Bench after considering various decisions of the Tribunal and OECD Guidelines reiterated that foreign entity can be selected as 'tested party'. The relevant extract of the order is reproduced herein below for ready reference: "10.5. We have perused the submissions advanced by both the sides in the light of the records placed before us. There is no dispute regarding the possibility of foreign AE to be tested party for the purposes of determining ALP of international transaction. However this can be allowed subject to fulfilment of certain conditions being: - the tested party should be the one on which the transfer pricing can be applied in the most reliable manner; - the tested party should be the one for which reliable ....
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....ting foreign entities as tested party. In the decisions favouring selection of Tested Party, OECD guidelines as well as the United Nations Manual on Transfer Pricing for developing nations were considered. The other decision on which ld. DR has placed reliance is in the case of Nivea India Pvt. Ltd. (supra). We find that in the said case, the issue has been decided on the facts of the case. The assessee therein failed to substantiate that foreign entity is less complex. The Tribunal in principle has not rejected selection of foreign AE as tested party. Hence, both the decisions relied by ld. DR are distinguishable. 25. In the present case assessee's parent company from which the assessee has acquired offshore insurance activities selected foreign AEs as tested party in its Transfer Pricing study to determine arm's length price of the international transaction. As has been pointed earlier, the Revenue accepted selection of foreign AEs as tested party in the case of assessee's parent company i.e. Mastek Ltd. After demerger of offshore insurance business by Mastek Ltd. to Majesco Ltd. the said company for the intervening period i.e. the period before offshore insuran....