Goodyear India Ltd. v. Dy. CIT

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The Tax Publishers2013 TaxPub(DT) 0726 (Del-Trib) : (2013) 143 ITD 0035 : (2013) 152 TTJ 0458 : (2013) 083 DTR 0233 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Treatment of export incentive--Assessee-company during relevant previous year, inter alia, entered into international transaction of export of finished goods to its AEs. Assessee had purchased finished goods, viz., certain varities of tyres from GSATL for export to AEs. Assessee had exported finished goods, viz., tyres purchased from GSATL to AEs at mark up of 5 per cent over cost of goods sold. Assessee submitted before TPO that for computing GP margin or mark up from such international transactions of export of traded goods to AEs, export incentive and relate/discount received in respect of such purchasers from GSAGL in terms of agreement was to be deducted from cost of goods sold. TPO, however, did not accept this contention. *Held:* Rightly so, export incentives do not form part of invoice price of goods sold thus, it could not be reduced from cost of goods sold. An expenditure that does not form part of books of accounts could not be treated as expenses for purpose of transfer pricing. The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentive was available to the assessee only after trading exports made by the assessee. Global transfer pricing policy of the group company mentions cost in inter-company transfer before the goods and services are dispatched from the premises of a company to the other company. In the global transfer pricing policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose of providing uniform return to each and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provides tax incentive or other incentive to compensate its taxpayers on the basis of the economic situation, then this benefit is available to Indian taxpayers and the same cannot be transferred or traded to other entity which is not located in India. This kind of shifting of economic and tax incentives offered to local company will disturb the fiscal structure of a country and will result in shifting of profits from one tax jurisdiction to other tax jurisdiction. The economic and tax incentives offered to Indian entities are not meant to subsidize the entity in foreign jurisdiction. Since the assessee is involved in controlled transaction, this approach actually results in transferring benefit from Government granted incentives to AE. Moreover, the entities' transfer pricing policy cannot override the basic fundamental of transfer pricing analysis. If assessee's method of calculation of cost of goods sold is followed, it would tantamount to a claim of benefit, which has not yet accrued at the time of sale of goods being treated as a component of cost of goods sold. [Para 11.5] The TPO's reference to the OECD Guidelines is also germane. In this regard, we find that in the said guidelines gross profits are defined as 'the gross profits from a business transaction are the amounts computed by deducting from the gross receipts of the transactions the allocable purchase or production costs of sales, with due adjustment for increases or decreases in inventory or stock-in-trade, but without taking account of other expenses'. [Para 11.6] From the above, it follows that while determining the gross profits from sale of goods such incentives cannot be adjusted to determine the cost of goods sold. TPO has rightly observed that export incentives do not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. [Para 11.7] Assessee's reliance on Accounting Standard (AS)11: Verification of inventories issued by Institute of Chartered Accountants of India (ICAI), for the purpose of determining the cost of purchase is not cogent as the reference to cost of purchase in this is not in the context of ALP in transfer pricing. [Para 11.8] Assessee's reliance on the decision of the Tribunal in Sony India (P) Ltd. v. Dy. CIT 2009 TaxPub(DT) 886 (Del-Trib): (2009) 315 ITR 150 (Del-Trib) is not applicable on the facts of the present case. The portion of this decision referred by the assessee's counsel was in the context of manufacturing of export to utilize idle facilities to enable the company to improve recovery of its fixed assembly cost. Moreover, in the present case, one is concerned with computation of cost plus mark-up which was not the case in the Sony India decision (Supra). [Para 11.6] In the background of the aforesaid discussion, TPO has rightly held that export incentive amounting to Rs. 78,72,603 cannot be deducted from cost of goods sold. [Para 11.9] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0726 (Del-Trib) : (2013) 143 ITD 0035 : (2013) 152 TTJ 0458 : (2013) 083 DTR 0233

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Treatment of export incentive--Assessee-company during relevant previous year, inter alia, entered into international transaction of export of finished goods to its AEs. Assessee had purchased finished goods, viz., certain varities of tyres from GSATL for export to AEs. Assessee had exported finished goods, viz., tyres purchased from GSATL to AEs at mark up of 5 per cent over cost of goods sold. Assessee submitted before TPO that for computing GP margin or mark up from such international transactions of export of traded goods to AEs, export incentive and relate/discount received in respect of such purchasers from GSAGL in terms of agreement was to be deducted from cost of goods sold. TPO, however, did not accept this contention. Held: Rightly so, export incentives do not form part of invoice price of goods sold thus, it could not be reduced from cost of goods sold. An expenditure that does not form part of books of accounts could not be treated as expenses for purpose of transfer pricing.

The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentive was available to the assessee only after trading exports made by the assessee. Global transfer pricing policy of the group company mentions cost in inter-company transfer before the goods and services are dispatched from the premises of a company to the other company. In the global transfer pricing policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose of providing uniform return to each and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provides tax incentive or other incentive to compensate its taxpayers on the basis of the economic situation, then this benefit is available to Indian taxpayers and the same cannot be transferred or traded to other entity which is not located in India. This kind of shifting of economic and tax incentives offered to local company will disturb the fiscal structure of a country and will result in shifting of profits from one tax jurisdiction to other tax jurisdiction. The economic and tax incentives offered to Indian entities are not meant to subsidize the entity in foreign jurisdiction. Since the assessee is involved in controlled transaction, this approach actually results in transferring benefit from Government granted incentives to AE. Moreover, the entities' transfer pricing policy cannot override the basic fundamental of transfer pricing analysis. If assessee's method of calculation of cost of goods sold is followed, it would tantamount to a claim of benefit, which has not yet accrued at the time of sale of goods being treated as a component of cost of goods sold. [Para 11.5] The TPO's reference to the OECD Guidelines is also germane. In this regard, we find that in the said guidelines gross profits are defined as 'the gross profits from a business transaction are the amounts computed by deducting from the gross receipts of the transactions the allocable purchase or production costs of sales, with due adjustment for increases or decreases in inventory or stock-in-trade, but without taking account of other expenses'. [Para 11.6] From the above, it follows that while determining the gross profits from sale of goods such incentives cannot be adjusted to determine the cost of goods sold. TPO has rightly observed that export incentives do not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. [Para 11.7] Assessee's reliance on Accounting Standard (AS)11: Verification of inventories issued by Institute of Chartered Accountants of India (ICAI), for the purpose of determining the cost of purchase is not cogent as the reference to cost of purchase in this is not in the context of ALP in transfer pricing. [Para 11.8] Assessee's reliance on the decision of the Tribunal in Sony India (P) Ltd. v. Dy. CIT 2009 TaxPub(DT) 886 (Del-Trib): (2009) 315 ITR 150 (Del-Trib) is not applicable on the facts of the present case. The portion of this decision referred by the assessee's counsel was in the context of manufacturing of export to utilize idle facilities to enable the company to improve recovery of its fixed assembly cost. Moreover, in the present case, one is concerned with computation of cost plus mark-up which was not the case in the Sony India decision (Supra). [Para 11.6] In the background of the aforesaid discussion, TPO has rightly held that export incentive amounting to Rs. 78,72,603 cannot be deducted from cost of goods sold. [Para 11.9]