Case Details: Sanghi Industries Ltd. vs. Deputy Commissioner of Income-tax - [2025] 170 taxmann.com 716 (Hyderabad-Trib.)

Judiciary and Counsel Details

• Laliet Kumar, Judicial Member & Madhusudan Sawdia, Accountant Member
• Vartik Choksi, AR for the Appellant.
• Ms K. Haritha, CIT-DR for the Respondent.

Facts of the Case

The assessee was engaged in the manufacturing of Clinker and Ordinary Portland Cement. It had a power-generating unit that was eligible for deduction under section 80-IA. Assessee entered into specified domestic transaction of sale of power by power-generating unit to cement manufacturing unit and had not claimed deduction under section 80-IA for the year under consideration.

The case was referred to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP), and the TPO determined the adjustment to be made to the assessee’s income on account of the Specified Domestic Transactions entered into by the assessee. The TPO passed the order under section 92CA(3).

The matter reached the Hyderabad Tribunal.

ITAT Held

The Tribunal held that section 92BA requires invoking its provisions that the assessee’s transactions should be covered in any of the clauses mentioned at Sl. No. (ii) to (vi) of Section 92BA, either with it any of its associates or with any person having a close connection with the assessee.

If the assessee has the specified domestic transaction with itself or its close associate as per section 92BA, then the arm-length price in relation to the specified domestic transaction is required to be determined by following Most Appropriate Methods as mentioned in section 92C.

On a plain reading of the above sections, it is clear that to attract the rigours of section 92BA, it is required that the transaction should either fall within the realm of 80-IA(8) or 80-IA(10).

In the present case, the power-generating unit of the assessee is connected with the assessee within the meaning of section 80-IA(8) and (10), and it is not disputed that in the course of business, they had entered into the agreement for the supply of electricity. The assessee shifted the extraordinary profit to its power-generating unit.

In other words, by purchasing the power at a higher rate, the assessee increased its expenditure, reducing its income/profit. The relationship between the two is squarely covered by the provisions of sections 80-IA(8) and 80-IA(10). Hence, the transaction is a qualified transaction within the meaning of section 92BA.

It is amply clear that for the invocation of section 92BA, there is no necessity for the assessee to opt for the deduction under section 80-IA during the assessment year under consideration. The option is with the assessee to claim the deduction under section 80-IA for any 10 consecutive assessment years out of the 15 years, as per section 80-IA(2). Merely because the assessee has not exercised the option will not make the eligible transaction falling either in section 80-IA(8) or section 80-IA(10) become ineligible.

List of Cases Reviewed

• Star Paper Mills Limited v. DCIT in ITA No. 127/Kol/2021, DCIT v. M/s. Balarampur Chini Mills Ltd in ITA No.1672/Kol/2019 dated 05.05.2021 [Para 39]
• ACIT v. M/s. Philips Carbon Black Limited in ITA No.2628/Kol/2019 dt.05.07.2022[Para 40]
• ACIT v. M/s. Tamilnadu Newsprint and Papers Ltd in IT(TP)A No.47/Chny/2022 dt.30.11.2023[para 41]
• Shah Alloys Limited v. DCIT in ITA No.1417/Ahd/20190 dt.21.06.2023. [Para42]
• Godawari Power and Ispat Limited v. DCIT in ITA No.42/RPR/2022 dt.24.04.2023 [Para 43] distinguished.

List of Cases Referred to

• Star Paper Mills Limited v. DCIT ITA No. 127/Kol/2021 (para 5.1)
• CIT v. Jindal Steel & Power Ltd. [2023] 157 taxmann.com 207/[2024] 297 Taxman 253/460 ITR 162 (SC) (para 12.1)
• DCIT v. M/s. Balarampur Chini Mills Ltd ITA No.1672/Kol/2019 (para 39)
• ACIT v. M/s. Philips Carbon Black Limited ITA No.2628/Kol/2019 (para 40)
• Shah Alloys Limited v. DCIT ITA No.1417/Ahd/20190 (para 42)
• Godawari Power and Ispat Limited v. DCIT ITA No.42/RPR/2022 (para 43).

The post Sec. 92BA Applies to All Assessees Regardless of Section 80-IA Deduction Is Claimed | ITAT appeared first on Taxmann Blog.

Case Details: Beam Global Spirits and Wine (India) (P.) Ltd. vs. Principal Commissioner of Income-tax - [2025] 170 taxmann.com 407 (Delhi-Trib.)

Judiciary and Counsel Details

• Shamim Yahya, Accountant Member & Sudhir Pareek, Judicial Member
• Ajay Vohra, Sr. Adv., Deepanshu Grover, Akash Uppal & Ms Anjali Pareek, CAs for the Appellant.
• Ms Nidhi Singh, CIT(DR) & Satya Prakash Sharma, Sr. DR and for the Respondent.

Facts of the Case

During the relevant assessment year, the assessee undertook international transactions with its associated enterprises. The case was referred to the Transfer Pricing Officer (TPO), who made a transfer pricing adjustment to the value of international transactions entered into by the assessee.

Subsequently, the Principal Commissioner (PCIT) initiated revision proceedings on the grounds that the issues identified in the show cause notice had not been verified and inquired about by the Assessing Officer (AO). He held that the AO allowed the assessee’s claims and the taxability issues related to some of the assessee’s transactions without proper verifications.

Aggrieved by the order, the assessee preferred an appeal to the Delhi Tribunal.

ITAT Held

The Tribunal held that the PCIT initiated revision proceedings because the issues identified in the show cause notice had not been verified and inquired about by the AO. The PCIT held that the assessee’s claims and the taxability issues related to some transactions had been allowed by the AO without proper verifications.

It was noted that all relevant issues in question were properly examined by the AO and decided accordingly. The PCIT nowhere doubted any documents submitted and had not even undertaken any minimum enquiry. It was also relevant to mention that the PCIT had not cited cogent reasons for concluding that the assessment order was erroneous.

Explanation 2 of Section 263 nowhere authorised giving unfettered power to the PCIT to each and every re-examination or re-verify the issue that the AO had already properly examined during the assessment proceedings. Therefore, the order passed by the PCIT under section 263 was bad in law and deserved to be set aside.

List of Cases Reviewed

• PCIT v. Mohak Real Estate (P) Ltd. [2024] 161 taxmann.com 388 (Delhi)
• Director of Income-tax v. Jyoti Foundation [2013] 357 ITR 388 (Delhi)
• Income-tax Officer v. D.G. Housing Projects Ltd. [2012] 20 taxmann.com 587 (Delhi)
• J.P. Srivastava & Sons (Kanpur) Ltd. v. CIT [1978] 111 ITR 362 (All.)
• CIT v. Max India Ltd. [2007] 295 ITR 282 (SC)
• Chowdhury v. Addl. CIT (1977 109 ITR 229 at 243)
• Malabar Industrial Co. Ltd. v. CIT [2002] 243 ITR 83 (SC) [Para 16] followed.

List of Cases Referred to

• Pr. CIT v. Azure Retreat (P.) Ltd. [2024] 158 taxmann.com 169 (Delhi) (para 7.1)
• CIT v. Samtel Color Ltd. [2009] 184 Taxman 120 (Delhi) (para 7.5)
• Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66/243 ITR 83 (SC) (para 10)
• CIT (Central) v. Max India Ltd. [2008] 166 Taxman 188/[2007] 295 ITR 282 (SC) (para 11)
• Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 (Calcutta) (para 11)
• J.P. Srivastava & Sons (Kanpur) Ltd. v. CIT [1978] 111 ITR 362 (All.) (para 12)
• ITO v. D.G. Housing Projects Ltd. [2012] 20 taxmann.com 587/[2013] 212 Taxman 132/[2012] 343 ITR 329 (Delhi) (para 13)
• DIT v. Jyoti Foundation [2013] 38 taxmann.com 180/219 Taxman 105/357 ITR 388 (Delhi) (para 14)
• CIT v. Smt. Mukta Sridhar [2011] 161 taxmann.com 388/[2012] 205 Taxman 212 (Karnataka) (para 15).

The post No Revision Just Because AO Didn’t Conduct Any Minimum Enquiry Before Allowing a Claim | ITAT appeared first on Taxmann Blog.

Mohit Gupta – [2025] 170 taxmann.com 291 (Article)

As the fiscal year ends for multinational enterprises (MNEs) operating on a calendar-year basis, it is essential to revisit Transfer Pricing (TP) policies. For UAE businesses, this year holds special importance as they comply with the Corporate Tax (CT) Law for the first time. This makes it crucial to ensure that all related-party transactions follow the arm’s length standard and necessary year-end adjustments are made.

1. Understanding Year-End TP Adjustments

Year-end TP adjustments, also known as “true-ups” or “true-downs,” help align actual financial results with pre-determined intercompany pricing arrangements or the arm’s length standard. These adjustments are important in situations like:

• When Actual Results Differ from Target Margins Limited-risk entities, such as contract manufacturers, distributors, or service providers, may face differences due to:

1. 1. Variations between planned and actual costs.
   2. Changes in operating costs that impact billing and transfer pricing.

• When Margins Fall Outside the Acceptable Range If actual financial results fall outside the arm’s length range established through comparability analysis, adjustments are needed to bring them into compliance.

2. Key Considerations for UAE Businesses

When making year-end adjustments, UAE businesses need to address these critical points:

1. Compliance with Arm’s Length Range The financial results must align with the acceptable range (e.g., 25th percentile, 75th percentile, or median) identified during analysis.
2. Cross-Border Transactions Any adjustments must be supported in both the UAE and the other jurisdiction involved to avoid double taxation or legal disputes.
3. Impact on Customs and Indirect Taxes Adjustments that reduce prices can affect customs duties already paid or figures reported in tax filings. Businesses should evaluate if refunds can be claimed or if these costs are unrecoverable.
4. Global Minimum Tax Rules For MNEs subject to the OECD’s Pillar 2 global minimum tax, transfer pricing adjustments may influence their effective tax rate.

Click Here To Read The Full Article

The post [Opinion] Don’t Let Margins Miss the Arm’s Length Mark | True-Up Your Transfer Pricing in UAE appeared first on Taxmann Blog.

CA Rohan Sogani & Samarth Vijay – [2024] 169 taxmann.com 579 (Article)

India’s commitment to combating tax avoidance has led to the introduction of several provisions in the Income Tax Act. Among them, Section 94B, introduced vide Finance Act, 2017, is a significant measure aimed at curbing thin capitalization—a practice where businesses use excessive debt from associated enterprises to shift profits and reduce tax liabilities.

This article explores the intricacies of Section 94B, examining its implications for corporate debt practices and outlining effective strategies, businesses can adopt to ensure compliance.

1. Understanding Thin Capitalization

Typically, capital employed by a company to run its business consists of own and borrowed capital. Own capital i.e. share capital and reserves, do not have interest liability, whereas borrowed capital, whether long term or short term, requires interest to be paid to external parties. Such interest cost, unless capitalised, is debited to the profit and loss account, and generally, allowed as a deduction under the domestic tax laws applicable to a company. If a company is having very high borrowed capital as compared to own capital, it shall incur high interest cost, and such capitalisation-mix is generally referred to as ‘thin capitalisation’. Thin capitalisation has a significant impact on the profitability and the consequent taxability of the company. On the other hand, if capital is financed by shareholders’ funds, the return on share capital is in the form of the dividend, and constitutes a below the line item in the books, and is not deductible from the taxable income of the company.

Thin Capitalisation is used by the entities mainly due to the following reasons:

1. Leverage interest deductions: Interest on loans is typically tax-deductible, reducing taxable profits by claiming it as an expense in P&L.
2. Shift profits to low-tax Jurisdictions: Multinational corporations (MNCs) often take loans through their associated enterprises operating in low/Nil tax jurisdictions, minimising overall tax liabilities due to charging the interest paid as an expense in the P&L on the one hand and thereby not paying any tax in the hands of the recipient in the country of residence of such recipient (Low tax Jurisdiction).

For instance, imagine an Indian subsidiary borrowing extensively from its parent company operating in a low-tax jurisdiction. The resulting interest payments significantly reduce the Indian subsidiary’s taxable income by claiming interest payment as an expense while increasing the profits of the parent company which is already situated in a low tax jurisdiction, affecting the tax collection in India.

Click Here To Read The Full Article

The post [Opinion] Limitation on Interest Deduction in Certain Cases (Section 94B) appeared first on Taxmann Blog.

Shefali Shah & Darshak Pandya – [2024] 169 taxmann.com 199 (Article)

1. Global value chains and Intra-group Services (IGS)

In the recent competitive environment, Multinational Enterprises (MNEs) in the financial services industry (FSI) have been striving to attain several business objectives, amid volatile macro-economic conditions. Globalization has led to the formation of global value chains where services and functions are often centralised or shared among different entities within MNE groups. Services provided by one or more members of the MNE group, for the benefit of other members, are commonly referred to as Intra-Group Services (‘IGS’) in a Transfer Pricing (‘TP’) context.

The FSI sector is highly regulated across the globe. The components of the value chain in the FSI sector, as depicted below, are inextricably linked. Arguably more so in the FSI sector compared to other industries and sectors, IGS are integral to FSI MNEs’ ability to operate, compete, survive, and grow. Globally, IGS is one of the most contentious and commonly litigated topics in the TP arena. This article focuses on TP considerations for centralised shared services in the FSI.

Diagrammatic representation of typical global value chain in the FSI sectors:

2. Nature of Shared services in the FSI

IGS in the FSI sector can be either core, value-adding services or non-core, low-value-adding support services. To ensure regulatory compliance and uniform functioning, MNEs develop in-house expertise on various core functions such as treasury, cash pooling, centralised financing, software products/algorithms, regional research, fund accounting, captive insurance etc. These specialised core technical functions are provided by regional/group headquarters to group entities, to ensure consistent quality service to all group entities when required. Often, the provision of such services may involve utilising or creating intangibles, and the service provider may bear significant risks attached to those functions and activities.

Non-core, low value adding services on the other hand, are services which are supportive in nature, are not integral to the core business of the group, do not involve intangibles and do not give rise to significant risks. Examples of such services include HR, legal, Information Technology (IT), and general administrative assistance.

Click Here To Read The Full Article

The post [Opinion] Transfer Pricing Nuances of Intra Group Services in the Financial Services Industry appeared first on Taxmann Blog.

Parag Gor – [2024] 168 taxmann.com 493 (Article)

Insurance plays a critical role for global economies. The ecosystem comprising Life Insurance, General Insurance, Re-insurance, Retrocession, and Insurance Intermediaries enables efficient and balanced risk transfer. The Insurance and re-insurance sector contribute to national GDP through rationalized investments of insurance premium collected from large-sized insured population base. The Government of India has been proactive in taking positive policy measures such as increasing the Foreign Direct Investments (“FDI”) limit from 49% to 74% and permitting 100% FDI in Insurance Intermediaries under the automatic route subject to verification of conditions laid down by the Insurance Regulatory Development Authority of India (‘IRDAI’).

The insurance/re-insurance business is highly regulated and locally controlled. While traditional insurance entities (Life and non-Life) are incorporated as Joint Ventures (‘JV’) with global insurance players because of the maximum 74% FDI limit, global re-insurance companies have been permitted to establish branches, commonly known as Foreign Re-insurance Branches (‘FRBs’), after the regulatory amendment in 2015.

FRBs are required to file income tax returns and undertake Transfer Pricing (“TP”) compliances, being non-resident constituent entities of multinational groups. TP issues in insurance/reinsurance sector have been gaining prominence with liberalised inbound cross-border investments, stringent corporate governance norms, complex issues such as attribution of profits to permanent establishments (‘PE’), integrated transactions, role of intangibles and due to global practices/controversies. The timeless principles of insurance such as indemnity and subrogation, also have an interplay with TP issues as they deal with the quantum of liability on the part of the insurer.

In recent times, the IRDAI has granted licenses to new generation “InsureTech” start-ups aiming towards building innovative product solutions and distribution through technology-led platforms. The Indian government has also been promoting offshore financial operations in the IFSC GIFT city. Efforts have been made to bring in global insurance/re-insurance players and offshore funds for starting operations in the IFSC GIFT city, by offering favorable tax regime and fiscal benefits. The International Financial Services Centres Authority (‘IFSCA’) has notified various regulations to achieve the objective of developing IFSC GIFT city as a hub for global re-insurance. Separate regulations are notified to provide framework1 for the recognition and operation of Global In-house Centres (‘GICs’) in IFSC.

Multinational enterprises (‘MNEs’) in the insurance sector leverage their positions to tap worldwide market potential. Typical business models adopted in the insurance sector are:

• Hub and Spoke: The ‘Hub and Spoke model’ is adopted with the objective to effectively manage capital, compliances, streamline operations and for the consolidation of underwriting into a single platform for reducing cost and attain efficiencies. The global/regional HO (‘Hubs’) are responsible for setting overall business strategies and underwriting framework within which local entities operate. The role of subsidiaries or branches (‘Spokes’) may include maintaining customer relationship, delegated underwriting authority arrangements to bind customers within underwriting limits/framework authorised by the Hubs.
• Managing General Agent (‘MGA’): The HO/principal insurer is responsible for overall strategic and underwriting functions. MGAs or cover holders are delegated underwriting authorities to conclude insurance contracts on behalf of the insurer with full or limited authority. MGAs may also undertake support functions as claim management under delegated authority basis.

Click Here To Read The Full Article

The post [Opinion] Insurance and Reinsurance Sector – Transfer Pricing Interplay appeared first on Taxmann Blog.

Ashwath S Pai, Sameer & Surya – [2024] 167 taxmann.com 591 (Article)

The issue of AMP expenditure has been an issue which has had the judiciary divided. While there are certain rulings which have ruled in favour of the Tax Department and advocated the use of ‘Bright Line’ Test, there are other rulings which have held that the Bright Line Test cannot be applied.

The above issue was again placed for determination before the Delhi HC in the Case of Samsung India1, wherein the major issues which were taken up before the HC was as follows:

1. Whether advertisement, marketing and promotion (‘AMP’) expenditure constitutes as an international transaction?
2. Whether foreign exchange gain/loss arising from international transactions was to be considered as an item of operating revenue/cost and not as a non-operating revenue/cost?

Background

The appellant Samsung India Electronics Pvt. Ltd. (SIEL or Appellant) was a company primarily engaged in the business of manufacture and sale of consumer electronics and home appliances goods. The appellant company is a part of the Samsung group of companies and a wholly owned subsidiary of Samsung Electronics Co. Ltd. Korea (‘SEC’).

The Appellant incurred certain AMP expenditure during the year concerned and failed to disclose the same in Transfer pricing report. The Transfer Pricing Officer (‘TPO’) had determined the Arm’s Length Price (‘ALP’) of the transaction stating it as International Transaction with the help of Bright Line Test (‘BLT’).

Aggrieved by the same, the appellant had filed appeal before the First Appellate Authority and then subsequently before the Income Tax Appellate Tribunal (ITAT). ITAT had issued order in favour of the Appellant and thereafter the Tax Department challenged this order before the Delhi High Court (Delhi HC).

Here are the key questions of law placed before the Delhi HC:

1. Whether the ITAT was justified in holding that the Advertising, Marketing, and Promotion (AMP) expenditure does not constitute an international transaction?
2. Whether the ITAT was correct in stating that the Brightline Test is not mandated by law and cannot be used to determine price but can only be used as an economic tool for determining costs in transfer pricing?
3. Whether the ITAT was right in observing that under the Transactional Net Margin Method (TNMM), AMP expenditure cannot be segregated for benchmarking?
4. Whether the ITAT was correct in stating that a protective adjustment to preserve revenue interests cannot be made when the issue of AMP is still pending before the Supreme Court?
5. Whether the ITAT erred in not appreciating that the ALP should remain unaffected by foreign exchange fluctuations and other post-transaction events?
6. Whether the ITAT erred in not recognizing that the TPO followed Rule 10B(3) by treating foreign exchange fluctuations and provisions as non-operating costs/revenues to ensure a consistent basis for comparison?

The Hon’ble High Court with regard to the Question of facts stated in Sl. No 1 to 3 hereinabove relied on the judgement in the case of Sony Ericsson Mobile Communications India Pvt Ltd. (‘Sony India’) v. Commissioner of Income-Tax 2015 SCC OnLine Del 8083.

Click Here To Read The Full Article

The post [Opinion] Delhi High Court Ruling on Transfer Pricing Implications of AMP Expenditure and Forex Losses appeared first on Taxmann Blog.

CA Deepak Kakkar – [2024] 166 taxmann.com 650 (Article)

In India, the transfer pricing regulations are governed by Sections 92 to 92F of the Income Tax Act, 1961.

These provisions ensure that transactions between related parties are conducted at an arm’s length price, which is the price that would be charged between independent parties in similar conditions.

The objective of the transfer pricing regulations is to prevent the shifting of profits to low-tax jurisdictions and to ensure that multinational enterprises (MNEs) report appropriate taxable income in India.

The key elements of the Indian transfer pricing regime include the determination of the arm’s length price (ALP), maintenance of comprehensive documentation, and mandatory reporting through the Form 3CEB, which is to be certified by a Chartered Accountant.

Transfer pricing provisions apply to a wide range of transactions, including the sale of goods, provision of services, intellectual property transfers, loans, and even cost-sharing arrangements. The regulations cover both international transactions and specified domestic transactions between related parties, emphasizing transparency and fairness in cross-border dealings to protect the Indian tax base.

However, there are certain aspects that are often overlooked by both taxpayers and tax auditors. This article will focus on two such commonly neglected areas:

• non-reporting of deemed international transactions under Section 92B(2) of the Income Tax Act, and
• incorrect consideration of Associated Enterprise definitions.

1. Non-reporting of Deemed International Transactions (Section 92B(2))

A major gap observed in transfer pricing audits is the non-reporting of deemed international transactions. Under Section 92B(2), even if a transaction is technically domestic, it may still qualify as an international transaction if it involves an arrangement between an Indian entity and another party via a third-party associated enterprise (AE).

Section 92B(2) of the Act states that:

“A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if

(a) there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or

(b) the terms of the relevant transaction are determined in substance between such other person and the associated enterprise where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not”

As an auditor, to ensure that, you have covered all necessary aspects, review any potential deemed international transactions that may have arisen in common global arrangements such as:

• Global procurement or supply contracts
• Global service agreements
• Contracts related to common computer software or technology-related common contracts etc.

These kinds of arrangements often create deemed international transactions that could impact your TP compliance.

For instance, suppose a domestic subsidiary enters into a transaction with a third party, but that third party is either controlled or significantly influenced by the foreign parent or another AE.

In such cases, the transaction should be treated as a deemed international transaction. Unfortunately, many taxpayers overlook this provision, leading to underreporting or misclassification in transfer pricing documentation.

As a Transfer pricing auditor, it is mandatory to report in Form 3CEB read with Rule 10E whether the particulars required to be furnished under section 92E are given in the Annexure to that Form. Further, you have to opine to the best of your information and according to the explanations given to you, the particulars given in the Annexure are true and correct.

Clause 20 of Form 3CEB itself requires the assessee to report whether any deemed international transaction is entered or not as follows:

It is also worthwhile to note that, the transaction entered into by assessee falling in any of the two mentioned conditions will be treated Deemed International transaction irrespective of:

• Whether or not the associated enterprises have retained any benefit/discount from third party vendors in India/outside India
• Whether or not the transaction carried out by assessee is fair and arm’s length price

Click Here To Read The Full Article

The post [Opinion] Two Most Overlooked Aspects of Transfer Pricing Audits appeared first on Taxmann Blog.

Case Details: Principal Commissioner of Income-tax vs. Stanley Black and Decker India Ltd. - [2024] 166 taxmann.com 381 (Karnataka)

Judiciary and Counsel Details

• S.G. Pandit & C.M. Poonacha, JJ.
• E.I. Sanmathi., Adv. for the Appellant.
• T. Suryanarayana, Senior Counsel & Smt. T. Tanmayee Rajkumar, Adv. for the Respondent.

Facts of the Case

Assessee-company was engaged in trading power tool products. During the year under consideration, it entered into international transactions, and the matter was referred to the Transfer Pricing Officer (TPO) for determination of the arm’s length price (ALP) in respect of the international transactions. The TPO, after analysing the advertisement and sales promotion expenditure incurred by the comparables, suggested a transfer pricing adjustment. Thereafter, a draft order under section 144C was passed.

The assessee raised objections to the draft order, which the DRP rejected in its order on the ground that the specific details with relevant information had not been furnished to enable them to examine the matter.

On appeal, the assessee submitted that it had placed on record specific details and facts on the nature of alleged expenses before the TPO as well as during a personal hearing before the DRP. The DRP, in its order passed under section 154, accepted the contention of the assessee and rectified its order directing the TPO to exclude trade discounts, sales discounts, warranty expenses and packing expenses from the ambit of advertisement and marketing and promotion (AMP) expenses for transfer pricing comparison and adjustment.

ITAT Held

ITAT also upheld the rectification order passed by the DRP. The matter then reached before the Karnataka High Court.

The Court held that Section 154 empowers the Income-tax Authority referred to in section 116 to rectify any mistake apparent from the record. It was not disputed that the assessee, though, had not filed any objection or explanation before the TPO while raising objections to the draft order under section 144(c) had placed before the DRP, the necessary and specific details on the nature of alleged AMP expenses, selling expenses such as trade and other discount on sales, sales discounts, warranty expenses and packing expenses, which should be excluded in the determination of AMP expenses.

If an order is passed without taking note of the materials on record and subsequently, if it is brought to the notice of the Income-tax Authority under section 154, it would be open for the Income-tax Authority to rectify such mistake apparent from the record. While considering the application under section 154, if the material that was not considered while passing the original order is considered, the Authority would be at liberty to arrive at a just conclusion considering such material.

In the instant case also, the authority, i.e., DRP, on consideration of materials that were not considered earlier, has concluded that it was a case to exclude trade discounts as well as discount warranty expenses and packing expenses from the ambit of advertisement and marketing and promotion expenses for transfer pricing comparison. The Appellate Tribunal, on examination of the entire material, has concluded that it is a case of non-consideration of material on record, which would constitute a mistake apparent from the record and has held that the DRP was justified in assuming jurisdiction under section 154.

Accordingly, the revenue’s appeal failed, and substantial questions of law were answered in favour of the assessee.

List of Cases Reviewed

• Order dated 07.03.2016 in ITA.No.967/Bang/2015 passed by the Income Tax Appellate Tribunal, “A” Bench, Bengaluru[Para 9] affirmed

The post DRP Was Justified in Assuming Jurisdiction Under Sec. 154 to Rectify Its Earlier Direction | HC appeared first on Taxmann Blog.

The UAE Transfer Pricing (TP) regulations, established under Cabinet Decision No. 44 of 2022, set out comprehensive guidelines for businesses on pricing transactions between related and connected parties to adhere to the "arm's length" principle. These regulations are part of the UAE's efforts to align with international tax compliance standards, specifically the OECD guidelines. Companies engaged in both cross-border and certain domestic transactions must maintain detailed documentation, including a Master File, Local File, and potentially a Country-by-Country Report for larger multinationals. The regulations aim to prevent tax avoidance and ensure tax transparency, requiring businesses to reassess and possibly adjust their transfer pricing practices to avoid substantial penalties for non-compliance. The Federal Tax Authority provides additional guidance on implementation, making it crucial for affected businesses to seek expert advice to navigate these requirements effectively.

BY CA Ajit Jain – Partner | AJMS LG & CA Darshika Agrawal – Consultant & Tax Advisor

Table of Contents

1. Tax Base Erosion
2. UAE TP Regulations – Historical Background
3. UAE TP Regulations – Regulations & Guides
4. UAE TP Regulations
5. Applicability of TP Regulations
6. Related Parties – Article 35
7. Intra-group Services
8. Transfer Pricing Methods
9. Low Value Adding Intra-group Services
10. Selection of Most Appropriate Method
11. Arm’s Length Application – Five Comparability Factors
12. Developing a Robust TP Policy and Documentation
13. Case Study
14. Key Takeaways

1. Tax Base Erosion

• Revenue Loss: Tax base erosion costs governments an estimated $240 billion annually
• Economic Distortion: Over $1 trillion is held in offshore financial centers
• Global Impact: Developing countries lose around $100 billion a year due to tax base erosion
• Compliance Challenges: More than 60% of tax authorities report difficulties in addressing profit shifting
• International Cooperation: The OECD’s BEPS initiative has been endorsed by over 135 countries

2. UAE TP Regulations – Historical Background

• 2019: UAE joined the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS)
• 2019: UAE introduced Economic Substance Regulations (ESR)
• 2020: UAE introduced Country-by-Country Reporting (CbCR) requirements
• 2022: UAE announced the introduction of Federal Corporate Tax including transfer pricing
• 2022: Ministry of Finance (MoF) released public consultation documents on proposed Corporate Tax law
• 2023: UAE Cabinet approved the Federal Decree-Law on Taxation of Corporations and Businesses
• 2023 onwards: Businesses in the UAE are required to comply with the new TP regulations, transfer pricing documentation in line with OECD BEPS Action 13 recommendations

3. UAE TP Regulations – Regulations & Guides

• UAE Corporate Tax Law (Decree-Law No. 47 of 2022): Chapter VII Article 34 to Article 36
• Decision No. 97 of 2023 Requirements for Maintaining Transfer Pricing Documentation
• Cabinet Resolution No. 44 of 2020 on the Requirements for Country-by-Country Reporting
• FTA Transfer Pricing Guidelines October 2023

4. UAE TP Regulations

• Article 34 establishes the Arm’s Length Principle, which mandates that transactions between related parties must be conducted under conditions that would apply if the parties were independent entities dealing at arm’s length.
• Article 35 provides a clear definition of related parties and control relationships.
• Article 36 addresses payments to connected persons, stipulating that such payments must adhere to the arm’s length standard.
• Article 55 mandates the maintenance of detailed transfer pricing documentation. Businesses must prepare and keep both a master file and a local file, as prescribed.

4.1 UAE TP Regulations – ALP

Article 34(2) of the CT Law states that:

“A transaction or arrangement between Related Parties meets the arm’s length standard if the results of the transaction or arrangement are consistent with the results that would have been realized if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances.”

5. Applicability of TP Regulations

• Associated Person: Natural Person (Individual) and Juridical person (established legal entity)
• Transactions and arrangement between related parties or connected person
• Transfer pricing regulations applicable to all the persons including entities claiming small business relief, exempted entities, qualifying free zones
• Transfer pricing documentation (local file and master file) not applicable to exempted entities and entities claiming small business relief

Exempt person:

• Govt entity
• Govt controlled entity
• Extractive business
• Non-extractive natural resource business

6. Related Parties – Article 35

Related Parties under UAE Corporate Tax Law

Article 35 defines Related Parties as associated Persons based on a specified degree of association:

Pre-existing relationship through:

• Kinship (for natural persons)
• Ownership
• Control

Residency status in the UAE is not a determining factor for Related Party classification

6.1 Related Parties – Article 35 (1) (a) to (f)

• Fourth Degree of Kinship
• Parent/Subsidiary/Branches
• Entities under common Control
• Partners in Unincorporated Partnership
• Permanent Establishment
• Exempt and non-exempt business activities of the same group

6.2 Forth Degree of Kinship – Article 35 (1) (a)

Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship.

• 1st Degree: Parents, children, and those of spouse.
• 2nd Degree: Adds grandparents, grandchildren, siblings, and those of spouse.
• 3rd Degree: Further includes great-grandparents, great-grandchildren, uncles, aunts, nieces, nephews, and those of spouse.
• 4th Degree: Adds great-great-grandparents, great-great-grandchildren, grand uncles/aunts, grandnieces/nephews, first cousins, and those of spouse.

Two natural persons related within fourth degree kinship:

Example: Company owned by brother paying royalties to company owned by sister.

Two natural persons related by adoption:

Example: Adopted son’s company providing services to adoptive mother’s business.

Two natural persons related by guardianship:

Example: Guardian’s firm managing investment portfolio of their ward and charging fees.

6.3 Ownership Interest and Control – Natural Person and Juridical Person [Article 35 (1) (b)]

For the purposes of this Decree-Law, “Related Parties” means any of the following:

A natural person and a juridical person where:

1. The natural person or one or more Related Parties of the natural person are shareholders in the juridical person, and the natural person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the juridical person; or
2. The natural person, alone or together with its Related Parties, directly or indirectly Controls the juridical person.

6.4 Ownership Interest and Control – Juridical Person [Article 35 (1) (c)]

For the purposes of this Decree-Law, “Related Parties” means any of the following:

Two or more juridical persons where:

1. One juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the other juridical person;
2. One juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or
3. Any Person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in or Controls such two or more juridical persons;

6.5 Ownership Interest and Control – Natural Person [Article 35 (1) (b)]

• Company A and Company B are related to each other
• Individual A and Company are related to each other
• Individual B and Company are related to each other

Individual X B Ltd and C Ltd are related parties

6.6 Ownership Interest – Juridical Person [Article 35 (1) (c)]

Subsidiary 1 and Subsidiary 2 are related
Parents and both subsidiaries are related

A, B and C are related parties

Ownership should be more than 50%. Whether direct or indirect. Whether one or more entities

6.7 Control: Control – [Article 35 (1)]

• Exercise 50% or more of the voting rights of another person
• Determine the composition of 50% or more of the Board of directors of another person
• Receives 50% or more of the profits of another person
• Exercise significant influence over the conduct of the business and affairs of another person

6.8 Control: Significant Influence – [Article 35 (1)]

• Loan Constitutes 50% or more of the Total Capital
• Entitlement to Profit Share of 50% or more
• Entitlement to Profit Share of 50% or more

Responsible for:

• Management of day-to-day operations
• Development of strategies, and
• Formulation of the key market decisions

KSA LLC and UAE LLC are related to each other

KSA LLC is entitled to 50% of Profits of XYZ LLC

The loan constitutes 50% of the total capital of UAE LLC

6.9 Permanent Establishment – [Article 35 (1) (d)]

Branches, Agent in UAE are related parties to its parent/parent/principal entities. Transfer pricing regulations are applicable

6.10 Payment to Connected Persons – Article 36

Any payment made to “Connected Persons” is not deductible if:

• Not occurred wholly and exclusively for the business; and
• Not at market value/arm’s length.

1. Individual with direct/indirect ownership interest or control
2. Director or Officer
3. Related to owner/director/officer to the fourth degree of kinship
4. Partners in unincorporated partnership
5. Related Party of any of these [Article 35 (1)]

6.11 Connected Persons – Article 36 (Exemption)

Article 36(6) specifies the categories of Taxable Persons where the deduction of payments or benefits provided to their Connected Persons is not restricted to the Arm’s Length Price. These Taxable Persons would include any of the following:

• A Taxable Person whose shares are traded on a recognised stock exchange;
• A Taxable Person that is subject to the regulatory oversight of a competent authority in the UAE; and
• Any other Person as may be determined in a decision to be issued by the Cabinet.

7. Intra-group Services

• Service should provide the related party with economic or commercial value that enhances its commercial position.
• One of the tests is to determine whether a third party would be willing to pay for the same service that the related party has received.
• For an intra-group service fee to be arm’s length, prove with verifiable evidence that services received are adequately charged.

7.1 Intra-group services – Arm’s length analysis

• Whether intra-group services rendered
• Type of intra-group services
• Services which do not justify the intra-group charge
• Functional analysis
• Direct vs Indirect charge and allocation keys
• Identification of cost base
• Section of most appropriate method
• Low value adding intra-group services
• Pass through cost

7.2 Benefits of Intra-group Services

• Cost efficiency: By availing intra-group services from specialized entities within the group, UAE entities can benefit from economies of scale and cost savings compared to outsourcing services to third parties.
• Access to expertise: UAE entities can leverage the specialized knowledge and expertise of other group entities in areas such as IT, marketing, or R&D, without having to develop these capabilities in-house.
• Flexibility and scalability: Intra-group service arrangements can be more easily adapted to the changing needs of the UAE entity, providing greater flexibility and scalability compared to third-party contracts.
• Alignment with group strategy: By availing intra-group services, UAE entities can ensure alignment with the overall group strategy and benefit from a unified approach across the organization.
• Reduced administrative burden: By availing intra-group services, UAE entities can streamline their operations and reduce the administrative burden associated with managing multiple external service providers.
• Improved service quality: Intra-group service providers have a deep understanding of the group’s business and can tailor their services to meet the specific needs of the UAE entity, resulting in higher-quality services.

7.3 Types of Intra-group Services

• Management services
• Technical services
• R&D services
• Marketing support services
• Sourcing support services
• Procurement services
• Business support services
• Low value adding support services

7.4 Pricing an Intra-group Service

Was an intra-group service rendered?

What is an arm’s length charge?

7.5 Was an Intra-group Services Rendered

• The benefit test entails that an intercompany service can be acknowledged, when it is expected to benefit the entity receiving the service.
• A service benefits an entity when
• the activity performed adds economic or commercial value for group member(s)
• for which an independent enterprise would have been willing to pay (to a third party), or
• In case an independent third party would perform the activity in house. If an entity would not be willing to pay for the activity, or perform the activity itself, the activity should not be considered an intercompany service based on the arm’s length principle.

7.6 Services that do not justify intra-group charge

7.6.1 Shareholding services

Shareholder activities are activities undertaken to provide an economic benefit only to the shareholder company (ultimate parent company or any other shareholder such as an intermediary holding company, depending on the facts of the case) in its capacity of shareholder

• Preparation and filing of reports of the parent company
• Appointment and remuneration of parent company directors
• Meetings of the parent company’s board of directors
• Parent company’s preparation and filing of consolidated financial reports,
• Raising funds used to acquire share capital in subsidiary companies.

7.6.2 Duplicative services

Duplicative services

• Services provided to an associate that has already incurred costs for the same activity
• Usually not chargeable, determined case-by-case

When Duplication May Be Justified

• Independent party would pay for duplicated service in similar circumstances
• e.g. Obtaining a second opinion to minimize non-compliance risk

Avoiding Mischaracterization of Duplication

• Services with same name but at different levels (group, regional, local) are not duplicative
• e.g. Group-level strategic marketing vs subsidiary’s local market analysis

Acceptable Duplication

• May occur during transition phases like centralization of a function
• Parallels outsourcing to third party with temporary overlap

Evaluating Duplicative Services

• Conduct thorough functional analysis
• Determine if the duplicated activity provides a benefit that meets the arm’s length standard
• Absent a benefit, the duplicated service fails the benefit test and is not chargeable

Passive association

7.6.3 Passive association

Benefits arising from mere membership in an MNE group, without active intervention. Not a chargeable service within the MNE group

Examples

• Discounts from suppliers hoping for future group sales
• Improved credit rating due to group membership

Contrast: Active interventions (e.g., formal guarantees) are chargeable

Incidental Benefits:

• May arise from services primarily benefiting one entity
• Chargeable only if independent parties would pay for them

Importance: Distinguishes between passive benefits and active, chargeable services in transfer pricing

7.7 Application of Arm’s Length Principle

Four Key Steps:

1. Identify Related Parties, Connected Persons, relevant transactions, and perform comparability analysis
2. Perform Functional Analysis
3. Select the most appropriate transfer pricing method
4. Determine the arm’s length price

Comparability analysis: Heart of the arm’s length principle

7.8 Functional analysis

• Conducted to determine appropriate arm’s length service charges for transfer pricing
• Value of service to recipient and what an independent party would pay
• Routine/admin services: compensate at cost plus small markup
• Unique/high-value services: can command prices with significant profit
• Functional analysis examines:
• Functions performed, assets used, risks borne by service provider
• Involvement and use of the services by the recipient
• Economic benefit to recipient
• Reliability of available comparables
• More complex analysis if services tied to know-how or intangibles

Example: Functional analysis of marketing services

• Analyze activities, skills, time of provider’s staff
• Assets used (premises, equipment)
• Intangibles (ad firm knowledge, customer lists, know-how)
• Risks in predicting campaign outcomes

7.9 Direct and Indirect Charge Method

Direct Charge

• ABC Group: Multinational company with subsidiaries in UAE (ABC UAE) and UK (ABC UK)
• ABC UK provides specialized IT services to ABC UAE
• Services directly charged to ABC UAE at arm’s length prices

(a) Based on time spent by ABC UK’s IT professionals
(b) Prevailing market rates for similar services in the UAE

• Preferred method when service provider renders similar services to both related and independent parties

Indirect Charge

• XYZ Group: Multinational company with a subsidiary in UAE (XYZ UAE) and global headquarters in the US (XYZ US)
• XYZ US provides centralized marketing services to all group entities, including XYZ UAE
• Costs of marketing services allocated to group entities (along with mark-up) based on allocation keys

(a) Allocation keys: Revenue, headcount, or other relevant metrics
(b) XYZ UAE’s share of costs determined based on its proportion of the allocation key

7.10 Determination of the cost base

Pool Costs: Aggregate annual costs for each service category across the Group Include direct, indirect, and allocated operating expenses

Refine Pool:

• Exclude costs benefiting only the performing entity
• Remove shareholder activity costs
• Eliminate costs for services between specific entities

Allocate Remaining Costs:

• Use appropriate allocation keys linked to expected benefits
• Examples: Headcount for HR services, User count for IT services

Key Considerations:

• Ensure consistency in allocation methods
• Document rationale for chosen allocation keys
• Review and adjust annually for changing business conditions

7.11 Allocation Keys

Proxies for estimating proportional share of expected benefits from intra-group services Allocate costs/value of services within MNE group after satisfying benefit test

Key Requirements

• Measurable, Relevant to service type , Consistently applied, Well-documented

Common Examples

• Sales, profit, units produced/sold , Employees, salaries, IT users, Capital, operating expenses

Service-Specific Keys:

• IT: Number of PCs, HR: Number of employees , Marketing: Sales to independent customers

Considerations:

• Nature of services and their use, avoid keys significantly affected by other intra-group transactions

Intra-group services

8. Transfer Pricing Methods

8.1 CUP

• Compare prices and not cost or mark-up;
• If reliable internal or external comparables available, the preferred method;
• Difficult to apply in practice.

8.2 CPM

• One-sided analysis;
• Compare gross services profit mark-up charged between independent parties;
• Cost base includes direct costs and indirect costs.

8.3 TNMM

• Alternative when cost plus is difficult to apply;
• Compare net profit margin on costs;
• Cost base includes direct costs and indirect costs.

8.4 PSM

• Two-sided analysis;
• Splits profit from a controlled transaction.
• Highly integrated transactions & sharing of risks;
• Unique & valuable contributions to the value chain by more than one entity.

9. Low value adding intra-group services

In general, low value-adding intra-group services should meet the following criteria:

• The services are of a supportive nature;
• They are not part of the core business of the MNE Group (i.e. not creating the profit earning activities or contributing to economically significant activities of the MNE Group);
• They do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; and
• The services do not involve the assumption or control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider

Certain low value-adding intra-group services may be charged out at a cost-plus 5% mark-up without the need for a detailed benchmarking analysis

9.1 Low Value-adding Services

WOULD QUALIFY

• Accounting & Auditing
• HR
• Regulatory issues
• Internal & external communications & PR support
• IT (when not part of principal activities)
• Legal services
• Tax support
• Administrative & clerical support

WOULD NOT QUALIFY

• R&D
• Manufacturing
• Sales, Marketing & Distribution
• Financial transactions
• Exploration or extraction
• Purchasing of raw materials
• Insurance
• Corporate senior management

10. Selection of Most Appropriate Method

11. Arm’s Length Application – Five Comparability Factors

12. Developing a Robust TP Policy and Documentation

• Align transfer pricing policy with UAE’s specific requirements and global best practices
• Tailor policy to the nature and complexity of intra-group services
• Determine appropriate pricing methods (e.g., CUP, cost-plus, TNMM)
• Consider UAE’s preference for local comparables and prescriptive approach
• Develop comprehensive documentation package – Local file and Master file
• Contemporaneous documentation to demonstrate arm’s length nature of transactions
• Maintain robust evidence to support transfer pricing positions
• Intercompany agreements, invoices, and proof of services rendered
• Benchmarking studies and functional analysis to justify pricing
• Regularly review and update policy and documentation
• Keep pace with evolving UAE transfer pricing landscape and business changes
• Proactively address potential gaps and inconsistencies

13. Case Study

Global Tech Solutions (GTS) is a multinational enterprise with operations in countries A, B, C, and D.

Group Structure and Services:

• GTS Parent Co. (Country A): Provides management, R&D, and IT services
• GTS Manufacturing (Country B): Produces high-tech products
• GTS Distribution (Country C): Handles sales and marketing
• GTS Support (Country D): Provides customer support and back-office services

Intra-group Services for FY2023:

• Management services from Parent Co. to all subsidiaries
• R&D services from Parent Co. to Manufacturing
• IT services from Parent Co. to all subsidiaries
• Marketing strategy services from Distribution to Manufacturing and Support
• Back-office services from Support to all group members

Financial Information (in millions USD):

• Parent Co.: Revenue $500, Operating Profit $150
• Manufacturing: Revenue $800, Operating Profit $120
• Distribution: Revenue $1,000, Operating Profit $80
• Support: Revenue $200, Operating Profit $20

Task
Determine appropriate transfer pricing methodologies and calculate arm’s length charges for each service, considering the benefit test, charging approaches, and potential use of safe harbors.

14. Key Takeaways

• Benefit Test and Payment Willingness: Taxpayers should evaluate if intra-group services rendered pass the benefit test and willingness to pay test to determine chargeability.
• Non-chargeable Services: Services such as shareholder activities, duplicative services, and passive association do not qualify for an arm’s length charge.
• Documentation Importance: Maintaining detailed transfer pricing documentation is crucial for compliance and reducing dispute risks.
• Allocation Keys for Charging: Use relevant metrics like revenue or headcount for indirect charging of intra-group services when direct charging isn’t possible.
• Local Compliance: Policies should adhere to UAE’s transfer pricing requirements, use local comparables, and incorporate low value-adding services for simplified compliance.
• Policy Review: Regular updates to transfer pricing policies and documentation are necessary to reflect changes in regulations and business dynamics in the UAE.
• Functional Analysis: Conduct a thorough functional analysis, considering factors like allocation keys and the global value chain to establish arm’s length prices.

Resources for Further Learning and Guidance

1. UAE Corporate Tax Law (Decree-Law No. 47 of 2022): Chapter VII Article 34 to Article 36
2. Decision No. 97 of 2023 Requirements for Maintaining Transfer Pricing Documentation
3. Cabinet Resolution No. 44 of 2020 on the Requirements for Country-by-Country Reporting
4. FTA Transfer Pricing Guidelines October 2023

The post [Analysis] UAE Corporate Tax – Navigating Intra-group Services and Transfer Pricing appeared first on Taxmann Blog.