Goodyear India Ltd. v. Dy. CIT

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The Tax Publishers2016 TaxPub(DT) 2883 (Del-Trib) Goodyear India Ltd. v. Dy. CIT INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPMark-up on cost for selling to foreign AE--Whether export incentive received could reduce the cost--Where assessee was exporting goods to its foreign AE and for computation of ALP, it made mark up on cost of goods sold, then such cost of goods sold could not be reduced from export incentives received because export incentive did not form part of the invoice price of goods. --Assessee exported certain finished goods to its associated enterprises (AE). Assessee had purchased the same from company 'GSA'. As per Global Transfer Pricing Policy ('GTPP'), assessee was entitled to charge a profit mark-up of 5 per cent on the inventory cost and all applicable other costs. It further provided mark-up of 5 per cent towards research and development cost. Assessee contended that for computing the mark-up from the international transactions of export, the export incentive received in respect of such purchases from GSA was to be deducted from the cost of goods sold. TPO rejecting the contention, adopted margin at 5 per cent and shortfall was added as transfer pricing adjustment. *Held:* Export incentives did not form part of the invoice price of goods sold. In such a case, it could not be reduced from the cost of goods sold. An expenditure that did not form part of the books of account could not be treated as an expense for the purpose of transfer pricing accounting. Therefore, held that export incentive could not be deducted from cost of goods sold. Income Tax Act, 1961, Section 92C *REFERRED :* FAVOUR : Against the assessee. A.Y. : 2007-08 to 2009-10 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPPayment of trademark fee--Benefit accrued to assessee or not--Where assessee was paying trademark fee, for use of licensed trademark, to its foreign AE, then TPO was not correct in analysing the transaction in isolation. As there existed direct nexus between revenue earned and royalty paid, such payment was held as at arm's length price as assessee had shown operating margin higher than that of comparables. --Assessee was subsidiary of GT, USA. AO observed that assessee had paid trademark fee to GT, for using its Licensed Trademarks, 'G'. TPO held that there was no recognizable benefit that had been passed to the assessee and therefore, determined the arm's length price of the international transactions at NIL by applying CUP method. Assessee contended that its entire business model was based on the licenses granted to manufacture the tyres which had been highly successful and renowned throughout the world, and for providing all the I.P. rights and technology necessary for the same, for which the royalty payment had been made and without such license, assessee's business would ceases to be exist. *Held:* It was found that there existed direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyse the transaction of payment of royalty in isolation. Further, authority of TPO was limited to conducting transfer pricing analysis and not to decide if such services exist or benefits did accrue to the assessee. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2016 TaxPub(DT) 2883 (Del-Trib)

Goodyear India Ltd. v. Dy. CIT

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPMark-up on cost for selling to foreign AE--Whether export incentive received could reduce the cost--Where assessee was exporting goods to its foreign AE and for computation of ALP, it made mark up on cost of goods sold, then such cost of goods sold could not be reduced from export incentives received because export incentive did not form part of the invoice price of goods. --Assessee exported certain finished goods to its associated enterprises (AE). Assessee had purchased the same from company 'GSA'. As per Global Transfer Pricing Policy ('GTPP'), assessee was entitled to charge a profit mark-up of 5 per cent on the inventory cost and all applicable other costs. It further provided mark-up of 5 per cent towards research and development cost. Assessee contended that for computing the mark-up from the international transactions of export, the export incentive received in respect of such purchases from GSA was to be deducted from the cost of goods sold. TPO rejecting the contention, adopted margin at 5 per cent and shortfall was added as transfer pricing adjustment. Held: Export incentives did not form part of the invoice price of goods sold. In such a case, it could not be reduced from the cost of goods sold. An expenditure that did not form part of the books of account could not be treated as an expense for the purpose of transfer pricing accounting. Therefore, held that export incentive could not be deducted from cost of goods sold.

Income Tax Act, 1961, Section 92C

REFERRED :

FAVOUR : Against the assessee.

A.Y. : 2007-08 to 2009-10

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPPayment of trademark fee--Benefit accrued to assessee or not--Where assessee was paying trademark fee, for use of licensed trademark, to its foreign AE, then TPO was not correct in analysing the transaction in isolation. As there existed direct nexus between revenue earned and royalty paid, such payment was held as at arm's length price as assessee had shown operating margin higher than that of comparables. --Assessee was subsidiary of GT, USA. AO observed that assessee had paid trademark fee to GT, for using its Licensed Trademarks, 'G'. TPO held that there was no recognizable benefit that had been passed to the assessee and therefore, determined the arm's length price of the international transactions at NIL by applying CUP method. Assessee contended that its entire business model was based on the licenses granted to manufacture the tyres which had been highly successful and renowned throughout the world, and for providing all the I.P. rights and technology necessary for the same, for which the royalty payment had been made and without such license, assessee's business would ceases to be exist. Held: It was found that there existed direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyse the transaction of payment of royalty in isolation. Further, authority of TPO was limited to conducting transfer pricing analysis and not to decide if such services exist or benefits did accrue to the assessee.