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published on 31 October 2022

Important Judicial Rulings on Transfer Pricing Matters

1. Hon'ble Income Tax Appellate Tribunal ('tribunal' or 'the ITAT') rules on the issue of computing notional interest on 'overdue receivables'

A significant ruling on the issue of computing notional interest on 'overdue receivables' came from the Visakhapatnam Bench of ITAT in the case of Devi Sea Foods Limited [I.T.A. No.75/Viz/2022] dated 15 September 2022, wherein it has held that any interest on outstanding receivables does not require a separate adjustment if an entity level benchmarking i.e. Transactional Net Margin Method (TNMM) has been adopted.


In the said ruling, Hon'ble ITAT ruled that delay in collection of receivables even beyond the agreed time limits due to a variety of factors has to be decided on case-to-case basis. Further, when TNMM is considered as the most appropriate method, the net margin thereunder subsumes such notional interest cost i.e.already factored in the pricing / profitability vis-à-vis that of its comparable.


Considering that in recent tax assessments it has been observed that the Transfer Pricing Officer(s) have proceeded to treat overdue receivables as a separate international transaction and have computed notional interest on the delayed receipts. Thus, the taxpayers can now place reliance on the said ruling in their defence during the proceedings and/ or before the Tribunals.


2. Hon'ble Pune Bench of ITAT has ruled against the requirement to satisfy the 'benefit test' from receipt of intra-group services

In an important ruling by the Pune ITAT in the case of A Raymond Fasteners India Private Limited [ITA No.2065/PUN/2019] dated 29 July 2022, the ITAT has held that benefit arising or not arising is not an essential criterion for claiming business expenditure. The mere fact that the Assessee has provided documentary evidence for actual receipt of intra-group services, enable it to claim or charge the amount as expenditure, and accordingly, the benefit test applied by the TPO in the said case cannot be approved.


Thus, the said ruling has reiterated that it is imperative on the taxpayers to collate and justify the 'actual receipt' of services with the documentary evidence, in the case of receipt of intra-group services. However, the taxpayers can now rely on the said ruling and take respite from any additional burden casted on them, to also document and justify the 'benefits' derived from receipt of such services. 


3. Hon'ble Pune Bench ruled that international transaction pertaining to 'payment of royalty' in the Assessee's case, is required to be benchmarked seperately

In another significant ruling by Pune ITAT in the case of Cummins India Limited [ITA No.2111/PUN/2019] dated 28 September 2022, the ITAT held that merely the use of technical support which eventually echoes as the manufactured product, does not simply imply that manufacturing segment of the Assessee and the payment of royalty are "inextricably" linked.


As per the said ruling, aggregation of the transaction of payment of technical fees with other international transactions under the common TNMM was not correct.


The said ruling becomes significant especially in the case of manufacturing concerns, wherein the transactions relating to payment of technical support fees and/ or royalty to group companies are generally being benchmarked on an aggregated basis.

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